ONGC: Strong results despite dry wells in monsoons:: Kotak Sec

Visit http://indiaer.blogspot.com/ for complete details �� ��


Oil & Natural Gas Corporation (ONGC)
Energy
Strong results despite dry wells in monsoons. ONGC reported 2QFY11 standalone
EBITDA at `113 bn (+38% qoq, +28% yoy) versus our estimate of `106 bn. The higherthan-
expected EBITDA reflects (1) lower subsidy burden at `30.2 bn versus our estimate
of `34.1 bn and (2) higher-than-expected oil and gas sales. However, 2QFY11 net
income at `53.9 bn (+47% qoq, +6% yoy) was modestly lower versus our estimate of
`55.6 bn due to higher-than-expected DD&A expenses. We maintain our BUY rating on
the stock noting 15% potential upside to our target price of `1,500.


2QFY11 net income at `53.9 bn (+6% yoy and +47% qoq); our estimate was `55.6 bn
ONGC reported lower-than-expected 2QFY11 net income (standalone) at `53.9 bn versus our
estimate of `55.6 bn. ONGC’s 2QFY11 EBITDA was at `113 bn (+38% qoq and +28% yoy). The
yoy improvement in net income reflects (1) higher gas price post revision in APM gas prices, (2)
higher net realization at US$62.8/bbl versus US$56.4/bbl in 2QFY10 and (3) higher crude oil sales
volumes at 5.91 mn tons (+6.5% yoy). This was partially offset by (1) lower gas sales volumes at
5.04 bcm (-2.9% yoy) due to shutdown of production from Panna-Mukta fields and (2) higher
DD&A expenses at `44 bn (+87% yoy).
Clarity on FY2011E subsidy-sharing awaited but low cause of concern for upstream companies
We do not see meaningful risk from higher-than-expected subsidy burden for the upstream
companies. The government has not finalized the subsidy-sharing scheme for FY2011E, but the
upstream companies have borne 33.3% of the gross under-recoveries in 1HFY11. We note that
upstream companies have borne 30-33% of the under-recoveries in FY2008-10. We see no reason
for upstream companies being asked to bear a higher share given that the gross under-recoveries
for FY2011E will likely be manageable at `621 bn.

Valuations attractive with 15% potential upside to our 12-month fair valuation of `1,500
We find ONGC’s valuations attractive with the stock trading at 9.5X FY2012E EPS and 5X FY2012E
DACF. We maintain our BUY rating on the stock and target price of `1,500 based on 10X
FY2012E EPS plus value of investments. We see significant upside to our earnings and fair
valuation for ONGC in a blue-sky scenario case of (1) full deregulation of auto fuel prices and (2)
government bearing 100% of the under-recovery on cooking fuels (see Exhibit 3).
Fine-tuned FY2011-13E EPS estimates
We have revised our FY2011-13E EPS to `115 (-1.4%), `138 (+0.7%) and `155 (+0.6%) to reflect
(1) higher crude oil price assumption (+ve impact), (2) stronger rupee (-ve impact), (3) lower share
of ONGC in subsidy sharing (+ve impact) and (4) other minor changes.