We retain overweight rating on Oil & Natural Gas (ONGC) and target price of R350 per share. While domestic production may recover in FY15, higher gas prices and oil realisations may matter more for FY15-17e EPS. ONGC should benefit from the recent price hike decision even if the government takes certain offsetting measures. Lower FY15 subsidy risk should also help. Valuation looks attractive relative to peers and its own history. At <10x FY13-14 P/E, ONGCs share appears to be ignoring the benefits of higher gas prices from FY15.
With FY15e valuations at a ~20% discount to its historical average, little of this potential uplift appears priced in, even as ONGC performed in line with the broader markets in 2013. ONGC also stands out on risk-reward in large cap global energy stocks and in Asia.
We build in a $1.2 per mmBtu hike and c8.5% y-o-y output growth to model a 30% EPS growth in FY15, but it could well be another 42% higher if gas prices double (as the government approval suggests) and oil realisations settle at $65 per barrel.