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Higher realisation drives earnings…

About the stock: Oil & Natural Gas Corporation (ONGC) is primarily engaged in exploration, development and production of crude oil and natural gas.

* ONGC’s crude oil production has been in the range of 54-63% of total domestic oil production in FY11-21

* ONGC also has a play on refining sector via its subsidiaries

Q3FY22 Results: ONGC’s Q3FY22 profitability was above estimates on account of lower-than-expected DD&A costs and other expenses.

* Revenue grew 16.9% QoQ to | 28472.9 crore (our estimate: | 28318.8 crore)

* EBITDA was at | 15969.1 crore, up 20.7% QoQ (estimate: | 14975.9 crore)

* PAT was at | 8763.7 crore, down 52.2% QoQ (estimate of | 7932 crore) as the company reported negative tax outgo in previous quarter

What should investors do? ONGC’s share price has underperformed the benchmark over the past four years due to a decline in domestic oil & gas production. Due to lower production growth on a sustainable basis, despite cheaper valuation, we do not recommend that long term investors add the stock as it is a play on commodity prices

* We retain our HOLD rating on the stock

Target Price and Valuation: We value ONGC at | 185 i.e. | ~164 for core oil & gas business and | ~21 for subsidiaries and other investments.

Key triggers for future price performance:

*Sustained higher crude oil prices and gas realisations can result in better profitability. If prices sustain at higher levels, there is further upside potential to earnings and our target price  Ramp-up in oil & gas production from newer fields

* Value unlocking from subsidiaries and other investments & lower holding company discount on investments

* High dividend yield and payout ratio

Alternate Stock Idea: Apart from ONGC, in our oil & gas coverage we also like Gail.

* Gail is India’s leading gas transmission company, which is a beneficiary of increasing gas consumption. Stable volume growth along with higher profitability from gas trading, petchem and LPG segment due to higher oil prices will add value

* BUY with a target price of | 180

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