ONGC reported weak results in 1QFY17 mainly led by lower oil (-22% YoY) and gas (-34% YoY) realisations. EBITDA stands at Rs 93.9bn (-23% YoY) and APAT was Rs 42.3bn (-23% YoY). FY16 has been a mixed year for ONGC. A 43% drop in oil prices has reduced ONGC’s share towards oil UR by 97% to Rs 11bn. However, it negatively impacted the revenues of JV, OVL and other petroleum products. The benefits from lower oil UR don’t exist below the crude price of ~US$ 50/bbl. In fact, a lower price reduces JV/OVL and ONGC’s earnings.

ONGC’s share price will closely follow crude prices. Strong Shale oil supplies and a rise in output in Iran will act negatively. However, the talks between Russia and Saudi Arabia to cut supply will check the downside. The outlook for domestic gas prices remains bleak in line with the global gas realisations. We have raised our EBITDA for FY17/18 by ~7% factoring lower cess rate. Earlier understanding was that changed cess would be 20% of crude prices. However, the effective rate is only 16.7% (20/120).At current crude prices, risk-reward is unfavourable. Their TP is Rs 255/sh (10x FY18E standalone + OVL EPS and Rs 31 from investments). Maintain NEUTRAL