Buy ONGC on gas price hike, reforms

Mar 22 2014, 05:26 IST
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SummaryWe maintain ‘buy’ on ONGC and remain positive on the stock due to (a) likely increase in net realisation because of lower subsidy

We maintain ‘buy’ on ONGC and remain positive on the stock due to (a) likely increase in net realisation because of lower subsidy; (b) ONGC being the significant beneficiary of a scheduled gas price hike from April 1, 2014; and (c) attractive valuations. The stock trades at 8.8x FY15e EPS of R36. Our SOTP-based target price is R385.

The company management remains upbeat on a scheduled gas price hike as well as ongoing diesel reforms and the likelihood of a subsidy reduction. Diesel reforms (under-recoveries set to halve by FY16), a proposed gas price hike (from April 1 ) and >4% CAGR (FY14-16e) in group production over the next two years are key positives, in our view.

The scheduled doubling of gas price from April 1 to ~$8.4 per mmbtu will boost ONGC’s FY15e EPS by ~30%. Of the additional revenue from gas price hike, the government receives ~50% through levies and taxes. Hence, any additional subsidy burden on ONGC is unlikely.

However, with clarity yet to emerge, we conservatively model gas price of $6.3/mmbtu (only 50% pass-through) from FY15 in our base-case scenario to factor in likely subsidy towards power/fertilisers. If the full gas price benefit is passed on to ONGC, our FY15E EPS will further increase by ~16%. ONGC expects standalone oil production to increase from 22.6mmt in FY14e to 24.9mmt, led by IOR/EOR and redevelopment of fields like D-1, B-193 and Cluster-7.

Motilal Oswal

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