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Analyst Research Report Snapshot


Oil & Natural Gas Commission (ONGC) - Qtr. Update - Dated - May 29, 2014




Axis Capital Limited


30 May 2014





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ONGC reported Q4FY14 PAT at Rs 49 bn, in line with estimate as higher dry-well write offs at Rs 24 bn (Rs 20 bn expected) offset strong operational performance (firm volumes, realization). Policy reforms to boost earnings: Reduced under-recoveries on the back of Diesel deregulation would drive ONGC’s (Bloomberg: ONGC IN) net crude realization to US$ 60/bl in FY16E (US$ 41/bl in FY14). We expect ONGC to report production growth in FY15, after a decade of flat production. Higher realization, gas price hike, and production growth would drive FY16E EPS to Rs 47 (Rs 31 in FY14). Favorable policy environment and visible volume growth will rerate valuation multiple (current 1-yr fwd P/E at 8x; last 8-year average at 10x). Maintain BUY with TP of Rs 485 (at long-term net realization of US$ 60/bl, gas price at US$ 7.5/mnbtu), which implies 29% upside from CMP of Rs 375. At CMP, the stock trades at 10x FY15E EPS of Rs 39 and 8x FY16E EPS of 47. Q4FY14 performance  ONGC has announced final dividend of Rs 0.25/sh, in addition to interim dividend of Rs 9.25/sh  Oil and gas production remained firm at 12.7 mnte (oil volume at 6.5 mnte; gas volume at 6.2 bcm)  Net oil realization declined to US$ 33/bl (US$ 46/bl in Q3FY14) due to higher subsidy burden at US$ 74/bl Key Assumptions: Crude at US$ 105/ bbl for FY15 and FY16. Net realization at US$ 42/bl in FY15 and US$ 60/bl in FY16. Gas price at US$7.5/mnbtu for FY15 and FY16. INR/USD at 60.1 for FY15 and 58.5 for FY16. Regards, Amit Mishra (Sr VP – Energy) amit.mishra@axiscap.in; 91 22 4325 1142 Prashant Tarwadi (VP – Energy) prashant.tarwadi@axiscap.in; 91 22 4325 1113

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