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Result Highlights‐ Higher crude oil prices shore up earnings     

* 4QFY21 Profitability: Operating Profit and PAT stood at Rs 81.5bn (+47% YoY; +25% QoQ) and Rs 67.3bn (+388% QoQ), vs an after‐tax loss of Rs 31bn in 4QFY20. While operating profits for the 4Q, missed our and street estimates, the PAT nevertheless reported a ‘beat’ on a) higher other income of Rs 31.3bn and b) exceptional gain of Rs 26.1bn, stemming from reversal of impairment taken last year. While QoQ and YoY higher crude oil realization at USD 58/bbl, aided profitability, a weak natural gas (NG) realization at ~USD 2/mmbtu coupled with weaker crude and NG production acted as a drag.  

* FY21 Profitability: Ebitda & PAT stood at Rs 264.3bn (‐35% YoY) and Rs 115bn (‐ 13% YoY). The profitability in FY21 was impacted by double whammy of weaker crude oil/NG realization coupled with decline in production. While crude & NG realizations stood lower by 27% YoY and 38% YoY respectively, the production declined by 3.5% YoY and 8% YoY, respectively, during the FY21. Weaker operating profit was offset by 7.5% YoY higher other income and an exceptional gain of Rs 9.2bn (vs loss of Rs 90.3 bn in FY20).   

* Crude Oil Production: Crude oil production continued to slide through the year, clocking at 5.55mmt in 4QFY21, 5% YoY lower. The production for FY21 at 22.5mmt, as a result stood 3.5% YoY lower.  

* Natural Gas production: Like the trend seen in crude oil production, natural gas production as well declined by 8% YoY during the quarter, clocking in at 62mmscmd. The FY21 production at 62.5mmscmd, also stood lower by 8% YoY,   with the decline in 1HFY21 at 10% YoY being sharper, on account of lower demand in aftermath of pandemic, than 6.7% decline seen over 2HFY21.

* OVL: The crude oil and NG production for OVL at 2.03mmt and 1.12, also stood weaker by 4% YoY and 13% YoY respectively. For the FY21, the crude & NG production profile at OVL, broadly followed the trend seen in domestic business and stood 13% YoY lower at 8.5mmt & 4.53bcm, respectively.  

* Capex: ONGC incurred a capital expenditure of Rs 280bn in FY21, as against a budgeted amount of Rs 325bn; delays induced by Covid pandemic impacted ONGC’s investment during the year. The estimated amount for FY22 stands at Rs 295bn

* Dividend: ONGC declared a final dividend of Rs 1.85/sh, in addition to interim dividend of Rs 1.75/sh declared earlier

View & Valuation

A recovery in crude oil prices shored up profitability for ONGC for 4QFY21 and FY21, otherwise the production in both domestic and overseas business suffered a decline through the FY21 on a YoY basis. While ONGC has guided for stabilization and subsequently improvement in production over FY22 to 48.7mmtoe, followed by 49mmtoe in FY23 and 52mmtoe in FY24, but continual declined observed over past several quarters remains a cause of concern for us.

Most of ONGC’s field are ageing and on a decline, with incremental production expected either from either marginal or HPHT (KG—98/2) fields. Therefore, in absense of growth in production, earnings/profitability remain highly levered to commodity prices (crude oil & natural gas). Assume coverage with an ADD rating and a TP of Rs 140/sh, as we consider ONGC a value pcik trading at P/BV of 0.6x FY23e BV.

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