ONGC stock: Retain ‘buy’ with lowest target price of Rs 170

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Published: November 16, 2019 3:28:03 AM

Production performance, although preannounced, remains tepid, however, with domestic gas production now 10% off the late 2018 peaks and oil production languishing near 30-year lows.

ONGC stock, ONGC share, ONGC news, ONGC videsh, HPCL, MRPL, OPAL, OMPL, ongc buy, ongc target price, market newsIndeed, the gap between oil sales and production narrowed to 5.4% with gas sales a tad better too as were oil realisations for its own assets.

ONGC’s Q2FY20 standalone earnings rose 6% q-o-q to Rs 6,300 crore, missing JEFe by 13% on higher taxes, forex losses and DD&A. Ebitda was 3% lighter too, though, on lower product sales but we are more disappointed by the soft consolidated earnings that were 16% lower than standalone. The downstream ventures (HPCL, MRPL, OPAL, OMPL) were expectedly weak but so was OVL. We cut FY20-22E EPS by 8-12%, largely driven by arms & JVs, but keep our ‘buy’ noting ~7.5x P/E & ~5.5% yield. ONGC’s standalone Q2FY20 net inline with consensus but 13% lower than JEFe despite higher other income. Higher tax rates (37% excluding dividend) hurt as did higher dry-well writeoffs (Rs 1,420 crore), a Rs 450 crore impairment and Rs 400 crore in forex losses with the AS-116 impact also wider at Rs 200 crore.

Yet, Ebitda (Rs 13,300 crore) was also 3% lighter falling 9% q-o-q despite lower than estimated operating expenses (flat y-o-y, $9.3/boe) driven largely lower LPG and C2/C3 volumes with oil & gas revenue inline. Indeed, the gap between oil sales and production narrowed to 5.4% with gas sales a tad better too as were oil realisations for its own assets.

Production performance, although preannounced, remains tepid, however, with domestic gas production now 10% off the late 2018 peaks and oil production languishing near 30-year lows. Indeed, production at OVL fell 2.4% q-o-q too also leaving consolidated output 2.4% q-o-q lower at 1.16mboepd and 5% off peaks.

Indeed, production is unlikely to rebound soon, ONGC’s optimism notwithstanding, but we were more disappointed by the weak consolidated earnings, which came 16% below standalone. While wider losses at MRPL, OMPL & OPAL and HPCL’s soft quarter were well known, OVL did poorly too with net profits falling 76% q-o-q to Rs 300 crore hurt by soft Vankor production, higher taxes and likely forex losses. We reflect this forecasts cutting FY20-22E EPS by 8-12%, primarily driven by weaker outlook for the downstream ventures and lower OVL earnings, with our standalone EPS, which still factor in $60 in net oil realisations as also a ~25% fall in APM gas prices in FY21E on softer NA & Europe prices, just 2-3% lower than before. In turn, this leaves consolidated earnings at ~Rs 17/sh in FY20-22E EPS presuming ONGC stays under the old tax regime like it did this quarter. With its adjusted cash tax rate at 30.4% in H1FY20, though, it may well transition to the new regime, perhaps with a lag as it runs down its credits, likely lifting earnings by ~10%.

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