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Oil and Natural Gas Corporation
Neutral
ONGC.BO, ONGC IN
Relative stability; maintain Neutral
• Lower susceptibility to subsidy shocks; maintain Neutral: We
maintain our Neutral rating on ONGC with a revised Sep-11 price target
of Rs1,375. We are more positive on ONGC than on its peer OIL (UW)
given its lower leverage to subsidy policy changes following the rise in
gas prices in May 2010. We estimate the earnings impact of a 10%
lower subsidy to be 3% for ONGC, compared to 5% for OIL.
• Continue to be wary of policy direction: There is still no clarity on the
subsidy-sharing formulation for the current year. We are not hopeful of
any major steps towards diesel deregulation until mid-2011 due to sticky
inflation and the political calendar (West Bengal elections) in 1H11. We
have lowered our estimates on subsidy-sharing for FY11 (due to
favorable exchange moves) and FY12, building in positive policy action.
For ONGC our subsidy share estimate falls by 10-26% over FY11-12E.
• Catalysts, share price drivers: ONGC stock price will continue to be
driven by policy announcements on subsidy sharing/deregulations, in
our view. Likely FPO in early 2011 could lead to a positive policy
stance from the government and lead to higher weightings in
benchmarks which should be positive for ONGC.
Sep-11 and narrow our discount assumption for ONGC to regional peers
to 10% (from 20% earlier). We believe Indian SOE upstream companies
merit a discount to regional peers on account of the ad-hoc policy
environment in which they function. Our new PT is based on 4x
EV/EBITDA (3.8x EV/EBITDA earlier). Upside risks to our PT include
progressive policy announcements by the government, and new E&P
discoveries. A key downside risk is if oil prices trend below $70/bbl.
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