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At compelling valuations
Post an in line performance in Q2, we maintain BUY on ONGC. Adjusting for its investments (OVL+ other) the stock is trading at 5.8x Sep-21E standalone EPS. We believe that such pessimism is unwarranted.
HIGHLIGHTS OF THE QUARTER
* Q2 sales were down 12.5% YoY to Rs 244.93bn owing to 1.2% fall in crude oil sales volume to 5.4mmt and 17.1% decreased in oil realisation to Rs 4,242/bbl (USD 60.3). EBITDA was down 15.8% YoY to Rs 132.90bn while APAT was down 24.2% to Rs 62.63bn. The latter is attributable to higher depreciation and exploration cost (31.9/21.3% YoY jump) and lower tax rate (31% in Q2FY20 vs 35% in Q2FY19).
* The company revised its production target down a tad to 25bcm (from 26.3) for gas for FY20. Gas production is expected to increase at CAGR of 7.7% (excluding JV) over FY19-22E to 30.8bcm. However we expect gas production to increase at CAGR of 5.3% to 28.84bcm.
* Natural Gas sales volume was down 2.6/1.6% YoY/QoQ to 4.9bcm while NG realisation up 25/0.3% YoY/QoQ to USD 3.87/mmbtu. Oil price realisation was Rs 4,242/bbl (USD 60.3/bbl vs our est. of USD61), down 17.1% YoY and 8.0% QoQ. Crude oil sales volume was at 5.4mmt, down 1.2% YoY but up 2.2% QoQ
* We expect crude oil production volumes (excluding JV) to increase at CAGR of 1.4% over FY19-22E to 21.94mmt as against company’s target of 23.59mmt. The surge in oil supply from US coupled with fall in global oil demand owing to trade war between USChina will result in subdued oil prices in the near term. Thus, we expect oil realisation to fall from USD 63.3/bbl in 1HFY20 to <USD 60bbl in 2HFY20.
* Key monitorable: Crude oil price movement.
ONGC generates OCF yield of almost 28% and divided yield of 7.4% over FY20/21E. Despite realising market price for oil in the absence of any subsidy sharing, upstream companies have remained unfavourable. Stake sale from government to achieve its disinvestment targets remains a key overhang on the stock (in last 2 years GoI’s shareholding shrunk from 68.02% to 62.98%). We maintain BUY with a TP of Rs 187/sh (8x Jun-21E standalone core EPS (adj. for dividend income) + OVL EPS and Rs 34 from other investments).
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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