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MOSL: ONGC (Buy) - EBITDA largely in-line despite higher subsidy due to lower expenses and higher revenues




Motilal Oswal Securities Ltd.


30 May 2014





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ONGC 4QFY14: EBITDA largely in-line despite higher subsidy due to lower expenses and higher revenues; key beneficiary of gas price hike and likely subsidy rationalization (ONGC IN, Mkt. Cap USD54.3b, CMP INR374, TP INR435, 16% Upside, Buy) Reported EBITDA in-line: ONGC’s reported EBITDA was largely in-line at INR111b (+8% YoY, -9% QoQ) despite higher subsidy at INR162b (est INR141b) due to (a) lower opex at INR33b (est INR43b; -30% YoY) and (b) higher oil and gas revenues by INR8b and (c) lower staff cost at INR4.5b (est. INR6b, -38% YoY). Difference at PAT level increased due to higher D,D&A at INR59.7b (est. INR51b) partly compensated by higher other income at INR18b (est INR15.6b). Full year standalone (SA) PAT stands at INR221b and EPS at INR25.8 (+5% YoY) and adj. consolidated PAT at INR264b and EPS at INR30.8 (+9% YoY). Higher consolidated EPS growth is led by OVL and MRPL returning back to black. 4QFY14 net realization at USD32.8/bbl: 4QFY14 gross realization stood at USD107/bbl (-6% YoY and -1% QoQ) and post the subsidy stood of USD73.9/bbl net realization stood at USD32.8/bbl (-36% YoY, -29% QoQ). Expect under recoveries to halve by FY16 v/s FY14: We expect gross under recoveries to reduce by ~48% by FY16 to INR729b. We expect government to first take benefit of lower subsidy and hence model upstream subsidy reduction of only 27% by FY16. Maintain Buy: We remain positive on ONGC due to (1) likely increase in net realization due to lower subsidy driven by continued diesel price hikes, (2) significant beneficiary of scheduled gas price hike in FY15, (3) attractive valuations. Upside potential to our FY15 gas price assumption: We model gas price of USD6.3/mmbtu from FY15 v/s likely new gas price of USD8.4/mmbtu, to factor in likely subsidy towards power/fertilizer sector. However, if the full gas price benefit is passed to Oil India then FY15E EPS will further increase by 16%. Implied dividend yield at ~3% on FY15E. The stock trades at 9.3xx FY16 EPS of INR40.2. Our SOTP-based target price for ONGC stands at INR435/sh. Buy.

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