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Oil and Natural Gas Corporation Ltd. (ONGC) | Q3FY14 First Cut Analysis




IndiaNivesh Securities Pvt Ltd


13 Feb 2014





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Oil and Natural Gas Corporation Ltd. (ONGC) | Q3FY14 First Cut Analysis Adjusted PAT below expectation | ONGC reported Q3FY14 PAT (Standalone) was above our expectation on back of lower other expenditure; decline in exploration cost and higher other income. However, Adjusted Profit (ex exceptional item and higher other income) stood at Rs. 52 bn (below our expectation of Rs 60 bn). Net sales decreased by 1.2% y-o-y and 7% q-o-q to Rs 207.44 bn (lower than our expectation of Rs 223 bn) dragged by lower volume along with muted net realization. The company also wrote back tax provisions amounting to 25 billion, it had made in earlier quarters on crude oil discounts it offers refiners. Net realization stood at USD 45.98/bbl v/s USD 44.84/ bbl in Q2FY14 and USD 47.94/bbl in Q3FY13. However, net realization in Rupee terms increased by 9.8% YoY to Rs. 2852 per barrel due to significant Rupee depreciation. ONGC shared subsidy burden of Rs. 137.64 bn (vs. Rs. 137.96 bn in Q2FY14). Upstream share stood at 40% to Rs159.37 bn, and within upstream ONGC share stood at 86% to Rs.137.64 bn. On operational front, crude oil production declined marginally 0.82% y-o-y to 6.05 MMT and natural gas production increased by 0.94% y-o-y 6.34 BCM. EBITDA margin expanded 643 bps YoY to 50.4% led by lower other expenditure and decline in exploration cost due to change in accounting policies. During the quarter the company has got the benefit of Rs. 6.17 bn due to change in accounting policies towards exploratory and development wells cost. Reported net profit increased by 28% y-o-y and 17.5% QoQ to Rs. 71.25 bn on account of higher EBITDA and other income. Adjusted Profit (ex exceptional item and higher other income) stood at Rs. 52 bn (below our expectation of Rs 60 bn). The company has made four new discoveries in Q3FY14. Valuation: Though the Indian govt. continued on its promised path of increasing diesel retail prices and also increased natural gas prices as expected, announcement of higher subsidy sharing by upstream companies is a concern for investors. However, we believe that the recent reforms undertaken by the Indian government in pricing of petroleum products is expected to be significantly value-accretive for ONGC and significant material benefits accrue in FY15. At CMP of Rs 273 ONGC is trading 7.1x FY15E EPS, lower than of historical average PE of 11x. Given that there have been delays in production ramp up, and the balance sheet leverage is increasing on consolidated level, we would assign lower PE multiple. We reduce our target multiple to 9x of FY15E and revised downward target price to Rs 342 (earlier target was Rs. 390). We will come out with detailed analysis after the con-call.

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