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ONGC (ONGC) - Qtr. Update - Dated - November 13, 2013




Axis Capital Limited


14 Nov 2013





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ONGC’s Q2FY14 PAT at Rs 60 bn was lower than our estimate (Rs 66 bn) due to lower oil and gas production (~3% lower vs. estimate) and higher dry well write-off (Rs 21 bn vs. Rs 15 bn expected). Delay in ramp-up of new fields (D-1, B-1, B-193) impacted production. Play reforms through upstream stocks (ONGC, OINL) Despite 50% upstream subsidy share in FY15E (vs. 38% in FY13), ONGC/ OINL would show EPS CAGR of 21%/ 5% over FY13-15E. Earnings will also benefit from (a) gas price hike, (b) production growth, and (c) weak INR. Hence we recommend playing fuel reforms through upstream. We prefer ONGC over OINL due to better production growth visibility, OVL contribution. Maintain BUY on ONGC with TP of Rs 360 (34% upside). At CMP of 268, the stock trades at 8x FY14E EPS of Rs 34 and 6x FY15E EPS of Rs 42. ONGC – Production growth finally coming Our detailed project-by-project analysis reveals ONGC would realize crude oil production growth of 0.7%/ 3.7% in FY14E/15E. Despite missing ONGC’s aggressive guidance (4.3%/5.5% in FY14/15), reversal of production decline is positive. Medium term earnings will be driven by gas price hike, weak INR and higher production from OVL. Valuation is attractive with 1-year forward P/E of 6x. Key Assumptions: Crude at US$ 110/ bl for FY14 and US$ 105/ bl for FY15. INR/USD at 62 for FY14 and 64 for FY15. Regards, Amit Mishra, CFA (Sr VP – Energy) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1142 Prashant Tarwadi (VP – Energy) Institutional Equity Research Axis Capital Limited Tel: +91 22 4325 1113

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