Buy ONGC Ltd For Target Rs.140 - Emkay Global
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In-line numbers, management reiterates output growth ahead
* Q1FY22 standalone revenue/EBITDA/PAT stood at Rs230.2bn/110.0bn/43.3bn. EBITDA was 3% above our estimate on lower-than-expected Other Expenditure at Rs34.7bn. Higher DD&A (10% above est.) and tax rate of 36% (33% est.) led to a 4% miss on PAT.
* Revenue was aided by better crude, partly offset by weaker gas sales. Nom. Block (NB) crude output rose 1% yoy/fell 3% qoq to 4.81mmt (in line), while gas was down 6%/5% to 5.05bcm (4% miss). VAP rose 9% yoy/3% qoq. NB crude realization was USD65.6/bbl.
* OVL reported consol. EBITDA/PAT of Rs26.2bn/9.1bn with total volumes down 9% yoy/flat qoq at 3.14mmtoe. EPS contribution to ONGC was Rs0.7/sh. OPaL reported EBITDA/PAT of Rs9.7bn/650mn in Q1. ONGC’s consol. EPS was Rs4.76 vs. S/A of Rs3.45.
* We retain our assumptions and estimates, and our Sep’22E TP of Rs140 is unchanged. Management reiterated that FY22 will see production growth despite the weak Q1 print, which was due to Covid and Cyclone Tauktae. Reiterate Buy and OW stance on EAP.
Highlights:
NB oil realization discount to Brent expanded to USD3.1/bbl from USD2.6/bbl in Q4FY21. However, better-than-expected output and sales led to an 8% beat in NB crude revenue. JV crude sales also rose 11% qoq to Rs26.3bn (5% beat). NB rupee gas realization was slightly better than expected, though volumes were weaker.
LPG volumes/revenues were also a miss, while profit petroleum was higher at 66% of JV operating profit. DD&A was higher due to a rise in depletion (WO, Ahmedabad, Assam & RJ JV). Both interest and other income were higher than expected. Q1 standalone/OVL capex as per PPAC was Rs52.0bn/17.5bn.
Guidance:
Gas production was affected by Covid and Cyclone Tauktae, with local industries reducing offtake. However, the FY22/23 target is 24.8/27.4bcm with 3bcm from 98/2 in FY23. Covid risk is there, but ONGC expects 98/2 to produce 3mmscmd+ with 2 more wells by Dec’21. It plans to further ramp up 98/2 from Jun’22, including oil output. Peak oil/gas would be 45kbpd/14.5mmscmd with 2-3 year plateau each. The bidding stay is currently sub-judice.
ONGC aim’s to have a conservative 65% share of India’s production. It expects APM prices to reach USD2.8/mmbtu+ in October and significantly higher next fiscal. The capex target for FY22 is Rs298-324bn. ONGC will be more aggressive in exploration, betting outside conventional basins. Hence, it is making alliances with international majors. It believes renewables do make business sense and will look at inorganic growth, but fossil fuels will also grow. It intends to have a consultant do an ESG study and will have an upgraded plan soon.
Valuation: We value ONGC on a DCF-based SOTP, comprising standalone, KG 98/2, OVL and Mozambique upsides. Investments are valued at our TP or CMP and with a 30% holdco discount. Key downside risks: Adverse oil-gas prices, adverse policies, cost-capex overruns and significant dry holes.
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