Hold Oil and Natural Gas Corporation Ltd For Target Rs.185 - ICICI Direct
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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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