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We recently revised up our FY12 and FY13 crude price estimates to USD 90/bbl (USD 85/bbl) and USD 95/bbl (USD 90/bbl), respectively (refer to our report,‘Outlook on crude remains buoyant’, dated December 20, 2010). The revision was to factor in our view of rising crude prices due to reducing spare capacity, robust growth in demand in emerging economies like China and increased speculative activity. We, however, retain our FY11 crude price estimate of USD 80/bbl and long-term crude price assumption at USD 90/bbl.
n FY12E under-recoveries at INR 730 bn; ONGC’s share at INR 201 bn
Higher crude price estimates have led to upward revisions of industry under-recovery estimates to INR 507 bn in FY11E and INR 730 bn in FY12E, assuming no increase in diesel/LPG/SKO prices. Assuming upstream share of under-recoveries are maintained at 33% (INR 243 bn) of the total and ONGC shares 82% of upstream share, we estimate ONGC’s FY12E subsidy burden at INR 201 bn (27.3% of total gross under-recoveries).
n Improvement in realisation offset by higher under-recovery burden
At higher crude prices, ONGC’s FY12E net crude realisation and earnings remain the same, as higher gross realisation is offset by greater under-recovery burden on the company. We expect ONGC to report net crude realisation at USD 63/bbl in FY11 to USD 64/bbl for FY12, despite gross realisation rising by 11.3% to USD 91.5/bbl in FY12 (USD 82.2/bbl in FY11). Standalone earnings are, thus, maintained for FY12E and FY13E; at consolidated level, the company is likely to benefit from higher contribution by OVL. Overall, our FY12E EPS is revised up by 1.4% to INR 135, while FY11E is maintained at INR 124.
n Outlook and valuations: Negative impact on SOTP; maintain ‘HOLD’
A historical trend analysis (refer Chart 1) indicates that ONGC has underperformed the Index in a high crude price regime due to lack of clarity on government sharing and higher absolute subsidy burden on the company. Since the company reports only standalone numbers in its quarterly results, the market starts factoring in increased volatility in earnings whenever under-recoveries rise. Although gross crude realisation seems favourable with our positive outlook on crude, higher under-recovery burden is likely to offset the gains, resulting in earnings estimates remaining the same. Our target SOTP value for the company has been revised down to INR 1,424 from INR 1457 earlier, indicating only a 9% upside from here. At CMP of INR 1300, ONGC is trading at P/E of 9.6x FY12E and EV/EBITDA of 4.6x FY12E, which is at a higher end of its historical P/E and EV/EBITDA (refer charts 4 & 5). Hence, we maintain ‘HOLD/Sector Underperformer’ on the stock.
