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MOSL: ONGC (Buy) - Higher other income leads to in-line PAT - Sector reforms to be key catalysts




Motilal Oswal Securities Ltd.


14 Nov 2013





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ONGC (ONGC IN, Mkt Cap USD36.2b, CMP INR268, Buy) Harshad Borawake (HarshadBorawake@MotilalOswal.com) / Kunal Gupta (Kunal.Gupta@MotilalOswal.com) ONGC’s reported revenues at INR223b (+13% YoY, +16% QoQ) were marginally lower than estimates despite lower than expected subsidy sharing due to lower gross oil realizations. Reported EBITDA at INR120b was thus marginally lower than estimated INR123.8b. However, led by higher other income of INR15.9b (est INR13.3b, -21% YoY, +23% QoQ), 2QFY14 PAT was in line at INR60.6b (+3% YoY, +51% QoQ). Net realization at USD44.8/bbl: Gross realization stood at USD109/bbl (-1% YoY and +6% QoQ) v/s est of USD111/bbl and post the subsidy of USD 64.2/bbl, net realization stood at USD44.8/bbl (v/s 46.8 in 2QFY13 and 40.2 in 1QFY14). Management expects ~10% production increase in FY15 v/s FY13: 2QFY14 oil production (incl JV) stood at 6.49mmt (-1% YoY and flat QoQ) while the gas production (incl. JV) was at 6.21bcm (-2% YoY and +1% QoQ). ONGC had guided FY14/FY15 standalone production of oil at 24.1/25mmt (we model 22.8/23.8) and gas (incl JV) at 25.1/26.2bcm (we model 23.6/24.7). The production growth would primarily come from B-193, Cluster 7 series D-1 field in Mumbai High. ONGC Videsh reported 1HFY14 PAT at INR18.9b (+14% YoY) v/s INR39b in FY13. 1HFY14 production is up 18% YoY to 4.2mmtoe (2.7mmtoe of oil and 1.4mmtoe of gas). Management indicated that the interest cost on the Mozambique acquisition related debt will be capitalized till the production start in 2018 We model upstream sharing at INR686b for FY14: ONGC’s 2QFY14 subsidy share stood at INR138b computed by multiplying the per barrel subsidy of USD56/bbl with the oil production volume (for ONGC, even condensate volume is accounted). We model upstream sharing at INR686/650b for FY14/15 (adj for capping of GAIL’s subsidy at INR14b for FY14, earlier we were modeling INR700b for FY14). Valuations attractive; maintain Buy: Key things to watch: (1) Continuance of diesel reforms, (2) Clarity on benefit of gas price hike, (3) Subsidy sharing and (4) Visibility on production growth. ONGC currently trades at ~40% discount to its global peers on EV/BOE (1P basis) and timely execution of diesel reforms and passing on of benefits of gas price hike could lead to stock's re-rating. Implied dividend yield of FY14 dividend stands at ~4%. The stock trades at 7.5x FY15 EPS of INR36. Our SOTP-based target price for ONGC stands at INR387/sh. Buy.

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