Prices to impact near-term earnings
Q3 saw a miss; stock the cheapest among upstream stocks globally; FY20-21e EPS cut by ~11% with TP down to Rs 172
ONGC reported a miss in Q3. While production has stabilised, lower crude and gas prices should impact near-term earnings. The stock is trading at 4.2x P/E (consensus) and is the cheapest stock globally among upstream energy stocks. Continued government stake sale down remains the key near term overhang. We expect a large dividend for Q4.
Earnings miss on sharply lower Dividend income, but production stabilising: ONGC missed estimates with standalone PAT at Rs 41 bn vs. consensus at Rs 54 bn. Most of the miss was driven by sharply lower other income which declined by 48% q-o-q with Ebitda at Rs 123 bn vs. consensus at Rs 127 bn. Dividend income tends to be lumpy and we would expect large Q4 Other Income (ONGC’s big stakes are in GAIL and IOCL).
The key positive in our view was stable to slightly higher crude production at the standalone entity (+1% q-o-q). However gas production was slightly lower q-o-q. Crude realisation was ~$59.7/bbl. Lower gas prices impacted gas revenues (down Rs 6 bn q-o-q). OVL reported strong q-o-q improvement in profitability. Q3 reported PAT stood at Rs 9.8 bn vs. Rs 3 bn in Q2. Reported Ebitda increased to Rs 32.7 bn vs. Rs 23.3 bn in Q2. Profitability at its refining subsidiary, MRPL, also improved materially, with MRPL reporting a breakeven quarter vs. a loss of Rs 5.75 bn in Q2.
Q4 to be impacted by lower crude, but sharply higher other Income, and possibly lower tax rate: ONGC has not taken a call on the new tax regime, and should make a decision in the coming few weeks, and there is a very real possibility of lower tax rate in Q4.
We build in more conservative costs, price and volume assumptions: We build in lower crude assumptions (slightly lower than previous $60/bbl assumptions), sharply lower volume assumptions and higher costs. This leads to our EPS cut of ~11% over FY20-21 and revised PT of Rs 172 (FY21) vs. Rs190 (FY20) earlier. Admittedly these are not ‘stressed’ assumptions, but conservative assumptions and assume no meaningful improvement in the production profile either in India or overseas assets and crude at current levels.
Even on such earnings assumptions, ONGC would be comfortably able to pay out DPS of Rs 8/share, after executing its large organic capex programme of ~Rs 490 bn at the consolidated level. This implies a dividend yield of ~8%. On Bloomberg consensus valuations, ONGC trades at a headline PE of 4.2x, and among the global upstream peer group, it is the cheapest stock. Admittedly, ONGC historically has traded at a discount vs. global peer group, but over the last 12 months, the discount has widened materially, and in our view the ‘on tap’ Govt sell down is the key reason.