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Published on 16/08/2022 2:36:53 PM | Source: JM Financial Institutional Securities Ltd

Buy ONGC Ltd For Target Rs 210 - JM Financial Institutional Securities Ltd

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Domestic results in line; OVL earnings hit by sanctions on Russia

ONGC’s 1QFY23 standalone EBITDA was in line at INR 259bn (vs. JMFe/consensus of INR 258bn/ INR 256bn) while PAT was slightly lower at INR 152bn due to higher interest cost and lower other income but this was partly offset by lower dry well write off. Domestic crude and gas sales volume was slightly lower while crude and gas realisation was largely in line. However, OVL’s earning was impacted in 1QFY23 due to sanctions on Russia, resulting in its crude/gas output declining by 18%/4.5% QoQ. We reiterate BUY (TP of INR 205) as CMP is discounting only ~USD 50/bbl of net crude realisation while our TP is based on FY24 net crude realisation of USD65/bbl. Further, ONGC is a major beneficiary of the sharp jump in domestic gas price in FY23 given the spike in global gas prices. At CMP, ONGC trades at 4.3x FY24E EPS and 0.5x FY24E BV (3-year avg. of ~0.6x).

* Domestic business operational performance and earnings largely in line: ONGC’s 1QFY23 standalone EBITDA was in line at INR 259bn (vs. JMFe/consensus of INR 258bn/ INR 256bn) while PAT was slightly lower at INR 152bn (vs. JMFe/consensus of INR 155bn/ INR 153bn) due to higher interest cost and lower other income but this was partly offset by lower dry well write off. In 1QFY23, domestic crude sales volume was 2.8% lower than JMFe at 5.03mmt (down 1.2% YoY and down 2.1% QoQ) though crude production was in line. Gas sales volume was 1.2% lower than JMFe at 4.15bcm (up 1.4% YoY and 1.5 % QoQ) while VAP sales volume was in line at 0.66mmt. Further, overall crude realisation at USD 108.3/bbl was in line with JMFe while overall gas realisation was higher at USD 6.6/mmbtu due to JV gas realisation being higher at USD 12.6 /mmbtu (vs. USD 9.9/mmbtu) while domestic gas realisation was in line at USD 6.2/mmbtu.

* OVL production and earnings hit due to sanctions on Russia: In 1QFY23, OVL reported crude production volume of 1.5mmt (down 18.2% QoQ and 25.5% YoY) and gas production volume of 1.0bcm (down 4.5% QoQ and 4.8% YoY) due to the impact of sanctions on Russia. Hence, OVL’s PAT declined to INR 1.bn in 1QFY23 (vs. INR 9.2bn in 1QFY22 and INR 15.9bn in FY22). In its press release, the company has given an update on its three Russian assets: a) Sakhalin-1 project (ONGC has 20% stake): Transition of operatorship in progress after ExxonMobil’s decision to exit the project; output has been impacted since May’22 because of logistics constraints on evacuation due to sanctions and production is gradually expected to recommence from Oct’22; b) JSC Vankorneft (ONGC has 26% stake): Output continues as per business plan 2022; dividend due till Sept’21 has been received but dividend for subsequent period Oct-Dec’21 is expected to be received soon; c) Imperial Energy (100% subsidiary): Output continues as per business plan except price of crude oil sales is lower due to the prevailing discount on Russian crude.

* Maintain BUY as ONGC at CMP discounting only ~USD 50/bbl of net crude realisation: We have cut ONGC’s FY23/FY24 EBITDA estimate by 4%/1% to account for lower OVL output and earnings; our TP has been revised to INR 205 (from INR 210). We reiterate BUY rating on ONGC as CMP is discounting only ~USD 50/bbl of net crude realisation while our TP is based on FY24 net crude realisation of USD65/bbl. Every USD5/bbl reduction in net crude realisation results in our EPS and valuation changing by ~-10% - refer Exhibit 7 for valuation sensitivity to crude realisation and gas price.. ONGC is also a major beneficiary of the sharp jump in domestic gas price in FY23 given the spike in global gas prices. At CMP, ONGC trades at 4.3x FY24E EPS and 0.5x FY24E BV (3-year avg. of ~0.6x)

 

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