ONGC Rating – Buy: Delay in O&G output ramp-up the only concern

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November 22, 2021 2:15 AM

Q2 consolidated EPS up 64%; FY22-23e EPS raised by 24-8% given positives; valuation’s attractive; ‘Buy’ retained with TP of Rs 230

Thus, there is all-round good news except delay in oil & gas output ramp-up. Reiterate Buy.Thus, there is all-round good news except delay in oil & gas output ramp-up. Reiterate Buy.

ONGC’s Q2FY22 consolidated and standalone EPS were up 64-134% y-o-y on oil and product realisation jump. Company has moved to a lower tax rate of 25%, cut its oil & gas output estimates, and its H1 interest and DD&A were lower and other income higher than estimated. Factoring in these changes, surprises in H1 and upgrade in EPS estimates of subsidiaries HPCL, MRPL and OVL leads to upgrade in FY22e-FY23e EPS by 24-8% and TP to Rs 230 (49% upside). Higher oil, gas and LPG prices based on latest futures would mean 16-35% upside to FY22-FY23e EPS and 7% upside to FV to Rs 247. Recent surge in GRM may mean upside to HPCL and MRPL’s EPS if recovery sustains. Thus, there is all-round good news except delay in oil & gas output ramp-up. Reiterate Buy.

Q2 EPS up 2.3x y-o-y on oil & product price jump: Q2FY22 standalone recurring EPS was up 2.3x y-o-y driven by rise in realisation on oil by 67% y-o-y, products by 29-77% y-o-y, other income by 41% y-o-y and fall in tax due to move to lower tax rate; reported profit (including deferred tax write-back of Rs 85.4 bn and prior-period tax refund of Rs 4.5 bn) is up 6.7x y-o-y at Rs 183.5 bn. Q2 oil and gas sales volumes were down 1-7% y-o-y. Consolidated recurring EPS was up 64% y-o-y; consolidated reported as well as recurring profit was lower than standalone given loss of MRPL and dividend from HPCL and OVL exceeding ONGC’s share in their profit in Q2.

FY22E-FY23E EPS up 24-8%: We have upgraded FY22e-FY23e EPS by 24-8%; this is a net impact of: (i) cut in tax rate to 25%; (ii) cut in FY23E oil & gas sales volumes by 4% as start of oil and ramp-up of gas output from KG-DWN-98/2 was delayed; (iii) upgrade in FY22e-FY23e consolidated other income by 19-11%; (iv) cut in FY22e-FY23e DD&A by 6-3%; (v) interest cost for FY22E being raised by 14% and for FY23e cut by 11%; (vi) upgrade in HPCL’s FY22e-FY23e profit by 41-14%; (vii) upgrade in OVL’s FY22E-FY23E profit by 42-38%; and (viii) cut in MRPL’s FY22E loss by Rs 3 bn, but rise in FY23e loss by Rs 4 bn. The share price discounts LT Brent of $52/bbl and is attractive at FY22e-FY23e P/BV of 0.8-0.7x and dividend yield of 6.0-8.1%.

16-35% upside to FY22e-FY23e EPS: Based on latest futures: (i) FY22e-FY23e Brent at $77-76.7/bbl is 10-18% above our estimate; (ii) FY23E APM gas price at $8.4/mmbtu is 29% above our estimate; (iii) FY23e deepwater gas price at $12.6/ mmbtu based on spot LNG is 26% above our estimate; and (iv) FY22e-FY23e LPG at $716-636/t is 10-4% above our estimate. Upside to FY22e-FY23e EPS factoring these prices is 16-35%. Upside to HPCL and MRPL’s FY22e-FY23e EPS is likely if the strength in Singapore GRM sustains. Severity of winter in Europe and Asia is likely to determine price of gas, oil, spot LNG and GRM in rest of FY22e and FY23e.

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