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Steady quarter; BUY on strong dividend play

ONGC’s 3QFY23 standalone EBITDA was a tad lower that JMFe at INR 204bn (vs. JMFe/consensus of INR 211bn/ INR 203bn) due to crude sales volume being 4.8% below JMFe (though crude production volume was slightly higher than JMFe). Net crude realisation, adjusted for windfall tax of USD 10.2/bbl (or INR 29.4bn), was higher at USD 75.8/bbl (vs. JMFe of USD 73.1/bbl). OVL’s production continues to be weak but earnings has partly recovered. The board declared a second interim dividend of INR 4.0/share (had paid dividend of INR 6.75/share along with 2QFY23 results); total FY23 dividend could be around INR 16- 20/share (assuming 40-50% payout on consolidated EPS of ~INR 41). We reiterate BUY (revised TP of INR 220) 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 3.8x FY24E EPS and 0.5x FY24E BV (3- year avg. of ~0.6x).

* Steady performance for domestic business: ONGC’s 3QFY23 standalone EBITDA was marginally lower that JMFe at INR 204bn (vs. JMFe/consensus of INR 211bn/ INR 203bn) due to crude sales volume being 4.8% below JMFe (though crude production volume was a tad higher than JMFe). PAT was also lower than JMFe at INR 110bn (vs. JMFe/consensus of INR 118bn/ INR 109bn) aided by: a) higher exploration and survey cost write-off at INR 16.1bn vs. JMFe of INR 13.1bn, and b) higher DDA of INR 49bn (vs. JMFe of INR 46bn). In 3QFY23, domestic crude sales volume was 4.6% below JMFe at 4.7mmt (down 7.9% YoY and down 1.9% QoQ) though crude production was up 0.7% above JMFe. However, computed gross crude realisation was higher at USD 86.1/bbl and net crude realisation, adjusted for windfall tax of USD 10.2/bbl (or INR 29.4bn), was also higher at USD 75.8/bbl (vs. JMFe of USD 73.1/bbl). Gas sales volume was 1.4% above JMFe at 4.2bcm (down 2.6% YoY but up 0.9% QoQ) and overall realisation was slightly higher at USD 9.0/mmbtu

* OVL production continues to be hit due to sanctions on Russia; however, earnings recovers partly: In 3QFY23, OVL’s crude production continued to be muted at 1.4mmt (vs. quarterly run-rate of ~2mmt in FY22) and gas production was lower at 0.8bcm (vs. quarterly run-rate of ~1.1bcm in FY22). Operating expenses (including provisions and write-offs) was lower at INR 15.6bn (vs. INR 20.7bn in 2QFY23 and INR 17bn in 3QFY22) Hence, OVL reported net profit of INR 5.6bn in 3QFY23 vs. net loss of INR 4.6bn in 2QFY23 (vs. PAT of INR 9.3bn in Q3FY22).

* BUY on strong dividend play and also as CMP discounting only ~USD 50/bbl of net crude realisation: We have raised FY23 EBITDA by ~3% to align with 9MFY23 results and raised our FY24-25 EBITDA estimate by 9-10% due to increase in our domestic gas price assumption to USD 6.5/mmbtu as per the ceiling price recommended by the Parikh committee (vs. USD 5.6/mmbtu assumed earlier); we have revised our TP to INR 220/share (from INR 210, partly offset by lower P/E multiple to 5.5x from 7.0x assumed earlier in line with global peers). We reiterate BUY 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. 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 a cut in our EPS and valuation changing by 8.5-10% — Exhibit 7-8. At CMP, ONGC trades at 3.8x FY24E EPS and 0.5x FY24E BV (3-year avg. of ~0.6x).

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