Hold ONGC; target of Rs 240: ICICI Direct

ONGC declared its Q1FY17 results, which were above our estimates on the profitability front. The topline declined 22.1% YoY to Rs 17784.8 crore and came in above our estimate of Rs 18296.3 crore. The reported PAT declined 25% YoY to Rs 4232.5 crore and came in above our estimate of Rs 3306.9 crore, mainly due to lower than estimated operating expenses. The net realisation came in marginally higher at $46.1/bbl than estimated $45.8/bbl. There was nil subsidy during the quarter.

OVL reported a net loss of Rs 2094 crore in FY16 against PAT of Rs 1904 crore in FY16. OVL’s profitability continues to be a cause of concern for ONGC at lower crude oil prices. On the gas pricing front, as per the formula set by the government the APM gas prices are scheduled to be revised on October 1, 2016 and further lowering of the prices (20% estimate) from current $3.4/mmbtu levels (GCV) will pressurise the company’s operating performance. We assume government proposed subsidy sharing mechanism in our estimates, where it decided to cap its sharing of kerosene subsidy at Rs 12/litre and LPG at Rs 15/kg, with the rest being borne by oil PSUs. We have assumed the above subsidy sharing mechanism for the long term to arrive at a target price of Rs 240/share with EPS of Rs 18.7 and Rs 19.1 for FY17E and FY18E, respectively assuming Brent crude price at US$45/bbl. However, if Brent crude price increases to US$ 50/bbl for the remaining period of FY17E and FY18E, ONGC’s target price would change to Rs 264/share. We have a HOLD rating on the stock at the current levels. For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.