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Recovery under focus; Outlook remains positive

Oil and Natural Gas Corporation Limited specializes in the exploration and production of crude oil and gas. The Company has joint ventures in oil fields in Vietnam, Norway, Egypt, Tunisia, Iran and Australia.

* ONGC’s Q4FY21 standalone revenue inched down by 1.2% YoY to Rs. 21,189cr mainly affected by lower realization and weak demand for Natural Gas segment.

* Reduction in material costs and other expenses aided growth in EBITDA (+64.1% YoY to Rs. 11,282cr). Resultantly, PAT also rose 144.6% YoY, further helped by lower D&A and interest costs.

* With sharp recovery in crude oil prices in FY21, we expect the segment to witness further growth in coming quarters. Upward revision in Gas prices and any improvement in demand scenario should boost the performance further. Therefore, we reiterate our BUY rating on the stock with a revised TP of Rs. 145 based on SOTP valuation.

Crude oil recovery aids topline; Gas offtake remains weak

ONGC’s Q4FY21 standalone revenue decreased marginally by 1.2% YoY to Rs. 21,189cr mainly due to lower contribution from Gas and VAP sales. Crude oil production was down by 3.7% YoY to 4.8 MMT while average realized price rose 18.4% YoY to USD 58.0/bbl. Natural Gas production stood at 5.4 BCM, (- 8.1% YoY), with average realization reported at USD 1.8/mmbtu (on GCV basis- being one of the lowest in recent times). ONGC’s Offshore and Onshore revenue for the quarter stood at Rs. 13,899cr (-3.7% YoY) and Rs. 7,290cr (+3.9% YoY), respectively.

Reversal of impairment loss aided reported

PAT In Q4FY21, EBITDA grew 64.1% YoY to Rs. 11,282cr, primarily on account of reduction in raw material, exploratory costs incurred and also due to lower EBITDA base in Q4FY20. Net profit turned positive YoY (Rs. 6,734cr vs Rs. 3,214cr loss in Q4FY20). Based on the assessment of future crude oil and natural gas prices, the Company recorded a reversal of net impairments to the extent of Rs. 2,613cr in Q4FY21 (vs. impairment loss of Rs. 4,899cr in Q4FY20).

Key concall highlights

* Management reiterated the necessity for an upward revision in Gas prices and expect a 50-60% hike in the next revision cycle (October 2021).

* FY22 consolidated capex guidance is at Rs. 29,500cr. Separately, board approved a final dividend of Rs. 1.85 per share for FY21.

Valuation

Considering the full recovery in crude volumes and realization, ONGC’s topline performance now largely depends on movement in gas prices and its offtake. Revenue growth from Natural gas and Value-Added products is expected to improve as the impact from partial lockdowns mitigates. Also, possible hike in natural gas prices could drive the performance further. Therefore, we reiterate our BUY rating on the stock with a revised target price of Rs. 145 based on SOTP valuation.

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