Oil And Natural Gas Corporation Ltd. share price target

30 June 2020 Standalone revenue of INR214.6b (-20% YoY, -10% QoQ) was marginally higher than our estimate. The YoY decline was primarily due to lower oil price realization (at USD49/bbl in 4QFY20). However, EBITDA came in lower than estimate at INR85.9b (~-30% YoY/QoQ), impacted by higher other expenditure. ONGC recorded INR11.1b on account of exchange loss and INR3.7b on account of Ind-AS 116 related adjustment. If adjusted for the above stated two charges, EBITDA stands at INR101b (in line v/s est. DDA stood at INR80.4b (v/s est. Higher DDA and lower other income resulted in PBT of INR10.1b (lower ~82% YoY/QoQ).

Opec+ output cut deal not enough; oversupply to continue From the start of 2020, Brent oil prices have declined ~60% while WTI oil prices went below zero. In March, a disagreement between Opec and Russia regarding production cut led to a price war in the global market. This led Brent oil prices to drop to ~US$30/bbl. In April, finally Opec+ announced a deal to reduce oil output by 9.7 million barrels per day (mbpd). As per IEA, global oil demand could drop by ~23 mbpd in Q1FY21E amid spread of Covid-19, which meant that even if a 9.7 mbpd output cut takes place in May,...

Key takeaways from our recent interaction with the ONGC management.

Crude prices witnessed a sharp decline in March due to spread of Covid-19 across the globe and Opec deal failure. A likely increase in oil output by both Saudi Arabia and Russia from Q1FY21E and lower demand are expected to lead to a sizeable oversupply in the oil market. Subsequent low oil prices are expected to significantly affect ONGC's profitability....

The volatility in crude oil prices is expected to continue in short-term, while the new block should provide necessary uptick in production from FY21 onwards. We maintain our HOLD rating on the stock with a roll forward target price of Rs. 107 using SOTP valuation. Topline adversely impacted by weaker realizations In Q3FY20, standalone revenue fell 14.4% YoY to Rs. 23,710cr, on the back of a continued decline in crude oil prices in the global markets. Offshore business revenue dropped 16.8% YoY to Rs. 15,765cr, while Onshore business decreased to Rs. 7,945cr...

ONGC declared its O3FY20 results that were below our estimates on the profitability front, mainly due to higher depreciation & amortisation costs and lower other income. Revenues declined 3.2% QoQ at | 23710.1 crore (our estimate: | 22823.2 crore) on account of marginally lower realisations as well as sales volume QoQ. The oil & gas production was largely in line with our estimates. As per expectations, the quarter witnessed nil subsidy burden while net realisations were at US$59.7/bbl. EBITDA during the quarter declined 7.5% QoQ and came in at | 12298.3 crore (our estimate:...

profit to Rs 15655.46 crore. Other income of the company fell 34% to Rs 1744.44 crore. Interest cost rose 14% to Rs 1536.55 crore. Depreciation (includes Depletion, Amortization and impairment losses) cost increased 25% to Rs 7514.45 crore. PBT before EO fell 35% to Rs 8348.9 crore. The company had nil EO income/expense during the quarter compared to EO expense of Rs 10.26 core. PBT after EO fell 35% to Rs 8348.9 crore. Tax expenses fell 12% to Rs...

Despite production cut from OPEC and non-OPEC countries, we expect the oil prices to remain muted owing to the robust supply from US Shale and weakening global macros. Thus, we do not foresee subsidy sharing in FY21/22E as well. Besides, ONGC will generate OCF yield of 32.1/35.1% and dividend yield of 9.7% over FY21/22E. Though the stock has remained out of flavor given GoI's stake sale to achieve its disinvestment target, it still remains a key overhang on the stock (in the last 2 years, GoI's shareholding shrank from 67.7% to 62.8%). We value ONGC at Rs 173/sh (8x Dec-21E standalone core EPS (adj. for dividend income) + OVL EPS and Rs 31 from other investments) vs the consensus TP of Rs 184. We maintain BUY on ONGC following an inline performance with our PAT estimate in 3QFY20. The current valuations after adjusting for investments (OVL and others) for FY21/22 are 1.5/1.3x EV/EBITDA, 3.6/3.1x PER. Such pessimism is unwarranted in our opinion.

Ambitious Rs 102tn infra push funding holds the key

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