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ONGC’s 4QFY23 standalone EBITDA was significantly lower at INR 163bn (vs. JMFe/consensus of INR 210bn/ INR 205bn) primarily due to: a) sharp jump in dry well writeoff (including survey cost) at INR 44.7bn (vs. JMFe of INR 18bn) — dry well write-off tends to be volatile on a quarterly basis and, hence, gauging the sustainable trend is difficult, and b) net crude realisation at USD 71.8/bbl was also USD 3/bbl lower than JMFe. Further, there was a huge exceptional expense of INR 92.4bn in 4QFY23 as ONGC conservatively created the provision for disputed service tax and GST on royalty from Apr’16 till Mar’23 along with interest (it was earlier treating this as contingent liability, though it has been paying the same under protest). OVL’s production has recovered gradually; further, PAT was higher on reversal of impairment charge. Hence, final dividend was limited at only INR 0.5/share, taking the total FY23 dividend to only INR 11.25/share or 40% payout (vs. FY22 dividend of INR 10.5/share or 33% payout). We have cut our FY24 PAT estimate by 5% and FY25 PAT estimate by 15% to factor in higher continued provision for SC/GST on royalty, higher dry well write-off, and weak FY23 results. Hence, we reduce our TP to INR 200/share (from INR 220/share). However, we maintain BUY given the strong dividend play (of 6-8%) and as CMP is discounting only ~USD 55-60/bbl of net crude realisation while our TP is based on FY25 net crude realisation of USD65/bbl.

* Disappointing performance due to higher dry well write-off, lower net crude realisation and a huge exceptional provision: ONGC’s 4QFY23 standalone EBITDA was significantly lower at INR 163bn (vs. JMFe/consensus of INR 210bn/ INR 205bn) primarily due to: a) sharp jump in dry well write-off (including survey cost) at INR 44.7bn (vs. JMFe of INR 18bn) — dry well write-off tends to be volatile on a quarterly basis and, hence, gauging the sustainable trend is difficult, and b) net crude realisation at USD 71.8/bbl was also USD 3/bbl lower than JMFe of USD 74.8/bbl. Further, there was a huge exceptional expense of INR 92.4bn in 4QFY23 as ONGC conservatively created provision for disputed service tax and GST on royalty from Apr’16 till Mar’23 along with interest. Earlier, ONGC was considering this as contingent liability (and not creating any provision for the same), though it has been regularly paying the disputed service tax and GST on royalty under protest, amounting to INR 11.6bn up to 31st Mar’23. However, the management said it will continue to contest such disputed matters before various forums based on legal opinion. Hence, ONGC’s standalone net loss was INR 2.5bn in 4QFY23 vs. JMFe/consensus of net profit INR 111bn/ INR 106bn.

* Crude sales volume was a tad higher though crude net realisation was USD 3/bbl lower at USD 71.8/bbl: In 4QFY23, domestic crude sales volume was 1% above JMFe at 4.7mmt (flattish QoQ, but down 8.9% YoY) though crude production was 2% below JMFe at 5.23mmt (down 3.0% QoQ and down 2.9% YoY). Computed gross crude realisation was slightly lower at USD 77.2/bbl and net crude realisation, adjusted for windfall tax of USD 5.4/bbl (or INR 15.6bn), was lower at USD 71.8/bbl (vs. JMFe of USD 74.8/bbl). Gas sales volume was in line at 4.1bcm (down 2.0% QoQ but up 1.0% YoY) and overall realisation was in line at USD 9.0/mmbtu.

* OVL production recovers gradually; PAT higher on reversal of impairment charge: In 4QFY23, OVL’s crude production recovered 5% QoQ to 1.6mmt (vs. quarterly run-rate of ~2mmt in FY22) and gas production rose 3.3% QOQ to 0.97bcm (vs. quarterly run-rate of ~1.1bcm in FY22). However, share of profit of equity accounted investees (net of tax) was negative INR 10.9bn (vs. +INR 7.2bn in 3QFY23). OVL reported PAT of INR 14.6bn in 4QFY23 (vs. PAT of INR 5.5bn in 3QFY23) due to reversal of impairment of INR 17.9bn in 4QFY23.

* Sharp reduction in our FY24-25 PAT estimate and TP; but maintain BUY on strong dividend play and as CMP discounting ~USD 55-60/bbl of net crude realisation: We have cut our FY24 PAT estimate by 5% (partly offset by upgrade in PAT estimate for ONGC’s subsidiary, HPCL, given current strong marketing margin) and FY25 PAT estimate by 15% to factor in higher continued provision for SC/GST on royalty, higher dry well write-off, and weak FY23 results. Hence, we reduce our TP to INR 200/share (from INR 220/share). However, we maintain BUY given strong dividend play (of 6-8%) and as CMP is discounting only ~USD 55-60/bbl of net crude realisation while our TP is based on FY25 net crude realisation of USD65/bbl. ONGC is also a major beneficiary of the high domestic APM gas price of USD 6.5/mmbtu. Every USD 5/bbl rise/fall in net crude realisation results in increase/decrease in our EPS and valuation by 8.5-10% — Exhibit 8-9. At CMP, ONGC trades at 4.9x FY25E EPS and 0.6x FY25E BV (3-year avg. of ~0.6x).

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