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Robust quarter; strong dividend play

ONGC’s 2QFY23 standalone EBITDA was higher at INR 188bn (vs. JMFe/consensus of INR 168bn/ INR 182bn) due to higher net crude realisation and lower opex. Net crude realisation, adjusted for windfall tax of USD 21.7/bbl (or INR 64.5bn), was higher at USD 74.1/bbl (vs. JMFe of USD 70.4/bbl). However, OVL’s production and earnings continue to be weak due to the impact of sanctions on Russia. The board declared an interim dividend of INR 6.75/share for FY23 while the management reiterated plans to maintain a dividend payout of 40-55% for FY23. We reiterate BUY (TP of INR 205) given strong dividend play and also because 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 high domestic gas price. At CMP, ONGC trades at 4.5x FY24E EPS and 0.5x FY24E BV (3-year avg. of ~0.6x).

* Domestic business operational performance robust led by higher net crude realisation: ONGC’s 2QFY23 standalone EBITDA was higher at INR 188bn (vs. JMFe/consensus of INR 168bn/ INR 182bn) due to higher net crude realisation (at USD 74.1/bbl vs. JMFe of USD 70.4/bbl) and lower other expenditure (at INR 44bn vs. JMFe of INR 48bn). PAT was significantly higher at INR 128bn (vs. JMFe/consensus of INR 92bn/ INR 100bn) further aided by: a) lower DDA and dry well write-off (of INR 53bn vs. JMFe of INR 59bn); b) higher other income (at INR 35.3bn vs. JMFe of INR 22bn); and c) lower taxes (21.6% tax rate vs. JMFe of 26%). In 2QFY23, domestic crude sales volume was 4.2% below JMFe at 4.8mmt (down 4.4% YoY and down 5.1% QoQ) though crude production was down only 2.6% below JMFe. However, computed gross crude realisation was higher at USD 95.8/bbl and net crude realisation, adjusted for windfall tax of USD 21.7/bbl (or INR 64.5bn), was also higher at USD 74.1/bbl (vs. JMFe of USD 70.4/bbl). Gas sales volume was 2.0% above JMFe at 4.2bcm (down 1.8% YoY but up 0.6% QoQ) and overall realisation was slightly higher at USD 6.7/mmbtu; VAP sales volume was slightly lower at 0.64mmt.

* OVL production and earnings continue to be hit due to sanctions on Russia: In 2QFY23, OVL crude production continued to be muted at 1.5mmt (vs. quarterly run-rate of over 2mmt in FY22) and gas production was lower at 0.9bcm (vs. quarterly run-rate of 1.1bcm in FY22). Hence, OVL reported net loss of INR 4.6bn in 2QFY23 vs. PAT of INR 1.1bn in 1QFY23 (vs. PAT of INR 15.9bn in FY22). Update on the three Russian assets: a) Sakhalin-1 project (ONGC has 20% stake): ONGC has got approval to retain its interest in the project; b) JSC Vankorneft (ONGC has 26% stake): dividends for 1HCY22 expected to be received in Nov’22; production continues as per business plan: c) Imperial Energy (100% subsidiary): operations continue as per business plan, crude realisation hit due to prevailing discount on Russian crude.

* BUY on strong dividend play and because CMP discounting only ~USD 50/bbl of net crude realisation; We have raised our FY23 EBITDA by 1.9%, accounting for 2QFY23 results, while our FY24 estimate largely remains unchanged; TP has been revised to INR 205 (from INR 200). We reiterate BUY given strong dividend play, and 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. ONGC is also a major beneficiary of the sharp jump in domestic gas price. Every USD 5/bbl reduction in net crude realisation results in cut in our EPS and valuation changing by ~8.5-10% — Exhibit 7-8. At CMP, ONGC trades at 4.5x FY24E EPS and 0.5x FY24E BV (3-year avg. of ~0.6x).

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