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India Equity Research Reports, IPO and Stock News
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Valuations are undemanding especially given likely
improving earnings from 2Q and evolving risks to crude
price from slower global demand growth
Earnings CAGR of 12% over FY11-14E has upside risk
from lower-than-expected subsidy contribution.
Price target is based on PER of 10x FY12E, imputing longterm
net realisation of US$68/bbl on 2P reserves.
Maintain Outperform. ONGC is our top pick in the sector.
Buy into concerns and ride the favourable risk-reward.
Current valuations factor in net crude realisation of US$54/bbl
(incl. JV) till perpetuity (lower than the FY11 net realisation),
thus offering an excellent entry point. We believe the overhang
of the follow on offer (32% of current free float) will subside
given (i) earnings improvement from 2Q onwards and (ii) likely
range-bound crude with potential downside risks from a global
slowdown. Stock is trading at bottom-end of the historical PER
and P/BV. Dividend yield of 4% also provides some support.
Upside to earnings and stable/weaker crude will be key
catalysts. Earnings could face upside from lower subsidy
burden against our assumption of 40%. We have incorporated
the reduction in royalty burden towards Rajasthan crude (6%
upside to FY13E earnings). However, the overall earnings
increase is marginal as we also incorporate FY11 annual report
details. Potential weakness in crude arising out of a prolonged
global slowdown would contain the under-recoveries and hence
reduce the fears on ad-hoc subsidy sharing for upstream.
OVL gaining momentum. ONGC’s 100% overseas subsidiary,
on the back of production growth from new fields is expected to
post 11% CAGR growth in earnings to Rs37bn for FY14E
(Rs27bn for FY11). With realisation closely tied to crude prices
(avg. of 12% discount to Brent prices for last 6 yrs), unlike
domestic production, firm crude prices will support earnings as
reflected in 1Q results, profits up 70% yoy at Rs14.4bn. We
estimate OVL to contribute 17% of consol EPS in FY12E vs.
12% in FY11.
Production growth will remain steady, OVL/JVs to provide
the delta. Even as ONGC’s own domestic production growth
remains muted, volume growth continues at OVL and
Rajasthan JV production. Led by aggressive capex, reserve
accretion stands impressive at 1.5x over the past five years.
Valuation – Buy into the concerns
ONGC’s current valuation offers a good entry point given market concerns on FPO pricing. We
believe subsidy uncertainty is well in the price at imputed long-term net realisation of US$54,
which is even lower than the FY11 realisation (US$57.6/bbl). Volume uptick in JVs and OVL will
offset the lacklustre outlook in domestic production. Recent crude oil demand downgrade by IEA
and OPEC poses downside risk to crude price in 2H FY12, which could help ease concerns on
under recoveries and upstream payout.
ONGC’s consolidated earnings are set to increase at 12% CAGR over FY11-14E despite
factoring in
1. Higher upstream share of 40% vs. last 8 years average of ~34% and 33.3% for 1Q FY12
2. No further reforms / price hike on diesel, LPG and kerosene despite 27% hike in retail prices
of diesel and LPG since FY10 and 55% hike in kerosene over last 2 years. Any success in
implementing direct cash subsidy transfer scheme for LPG/SKO can result in further upside.
We have incorporated the reversal in the royalty outgo on Rajasthan crude from FY12 onwards
which uplifts the earnings by 5-7%. The overall earnings upgrade (2-5% for FY12-13E), however,
is marginal as we also incorporate the FY11 annual report details.
At the current price, the stock trades at close to its bottom valuation (refer charts below) on P/B
and PER. We find current stock valuations of EV/EBITDA of 3.2x FY12E and P/B of 1.8x (ROE @
24.6%) attractive. Stock is currently discounting net realisation of US$54/bbl till perpetuity, which
is even lower than the FY11 blended net realisation. Impressive dividend yield of 4% provides
downside support.
ONGC’s stock price has corrected on news of impending follow on share issue (5% of paid up
capital or 32% of current free float) and the resulting offer price which in our view offers an
excellent entry point. Postponement of the FPO provides some relief, but we believe the
overhang will subside anyway given (i) earnings improvement from 2Q onwards and (ii) likely
range-bound crude with evolving downside risks from a global slowdown.
Our PT is based on 10x FY12E, which imputes long-term net realisation (incl. JV) of US$68/bbl.
Stock is imputing net realisation of US$54/bbl at current levels.
Demand moderation by IEA and OPEC could keep crude price in check
OPEC and IEA have recently downgraded global crude oil demand outlook for 2011/12 given
weakening demand at OECD countries. While IEA has downgraded crude oil demand by
0.2/0.4mbpd, OPEC has moderated demand by 0.15/0.18mbpd for 2011/12. OPEC expects weak
US driving season and financial crisis impacting demand for rich nations to eat into global oil
demand.
Even as demand outlook moderates, IEA expects supplies to improve given likely resumption of
Libyan crude production. In light of demand-supply uncertainties, we expect crude price to remain
range bound with a downward bias.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Valuations are undemanding especially given likely
improving earnings from 2Q and evolving risks to crude
price from slower global demand growth
Earnings CAGR of 12% over FY11-14E has upside risk
from lower-than-expected subsidy contribution.
Price target is based on PER of 10x FY12E, imputing longterm
net realisation of US$68/bbl on 2P reserves.
Maintain Outperform. ONGC is our top pick in the sector.
Buy into concerns and ride the favourable risk-reward.
Current valuations factor in net crude realisation of US$54/bbl
(incl. JV) till perpetuity (lower than the FY11 net realisation),
thus offering an excellent entry point. We believe the overhang
of the follow on offer (32% of current free float) will subside
given (i) earnings improvement from 2Q onwards and (ii) likely
range-bound crude with potential downside risks from a global
slowdown. Stock is trading at bottom-end of the historical PER
and P/BV. Dividend yield of 4% also provides some support.
Upside to earnings and stable/weaker crude will be key
catalysts. Earnings could face upside from lower subsidy
burden against our assumption of 40%. We have incorporated
the reduction in royalty burden towards Rajasthan crude (6%
upside to FY13E earnings). However, the overall earnings
increase is marginal as we also incorporate FY11 annual report
details. Potential weakness in crude arising out of a prolonged
global slowdown would contain the under-recoveries and hence
reduce the fears on ad-hoc subsidy sharing for upstream.
OVL gaining momentum. ONGC’s 100% overseas subsidiary,
on the back of production growth from new fields is expected to
post 11% CAGR growth in earnings to Rs37bn for FY14E
(Rs27bn for FY11). With realisation closely tied to crude prices
(avg. of 12% discount to Brent prices for last 6 yrs), unlike
domestic production, firm crude prices will support earnings as
reflected in 1Q results, profits up 70% yoy at Rs14.4bn. We
estimate OVL to contribute 17% of consol EPS in FY12E vs.
12% in FY11.
Production growth will remain steady, OVL/JVs to provide
the delta. Even as ONGC’s own domestic production growth
remains muted, volume growth continues at OVL and
Rajasthan JV production. Led by aggressive capex, reserve
accretion stands impressive at 1.5x over the past five years.
Valuation – Buy into the concerns
ONGC’s current valuation offers a good entry point given market concerns on FPO pricing. We
believe subsidy uncertainty is well in the price at imputed long-term net realisation of US$54,
which is even lower than the FY11 realisation (US$57.6/bbl). Volume uptick in JVs and OVL will
offset the lacklustre outlook in domestic production. Recent crude oil demand downgrade by IEA
and OPEC poses downside risk to crude price in 2H FY12, which could help ease concerns on
under recoveries and upstream payout.
ONGC’s consolidated earnings are set to increase at 12% CAGR over FY11-14E despite
factoring in
1. Higher upstream share of 40% vs. last 8 years average of ~34% and 33.3% for 1Q FY12
2. No further reforms / price hike on diesel, LPG and kerosene despite 27% hike in retail prices
of diesel and LPG since FY10 and 55% hike in kerosene over last 2 years. Any success in
implementing direct cash subsidy transfer scheme for LPG/SKO can result in further upside.
We have incorporated the reversal in the royalty outgo on Rajasthan crude from FY12 onwards
which uplifts the earnings by 5-7%. The overall earnings upgrade (2-5% for FY12-13E), however,
is marginal as we also incorporate the FY11 annual report details.
At the current price, the stock trades at close to its bottom valuation (refer charts below) on P/B
and PER. We find current stock valuations of EV/EBITDA of 3.2x FY12E and P/B of 1.8x (ROE @
24.6%) attractive. Stock is currently discounting net realisation of US$54/bbl till perpetuity, which
is even lower than the FY11 blended net realisation. Impressive dividend yield of 4% provides
downside support.
ONGC’s stock price has corrected on news of impending follow on share issue (5% of paid up
capital or 32% of current free float) and the resulting offer price which in our view offers an
excellent entry point. Postponement of the FPO provides some relief, but we believe the
overhang will subside anyway given (i) earnings improvement from 2Q onwards and (ii) likely
range-bound crude with evolving downside risks from a global slowdown.
Our PT is based on 10x FY12E, which imputes long-term net realisation (incl. JV) of US$68/bbl.
Stock is imputing net realisation of US$54/bbl at current levels.
Demand moderation by IEA and OPEC could keep crude price in check
OPEC and IEA have recently downgraded global crude oil demand outlook for 2011/12 given
weakening demand at OECD countries. While IEA has downgraded crude oil demand by
0.2/0.4mbpd, OPEC has moderated demand by 0.15/0.18mbpd for 2011/12. OPEC expects weak
US driving season and financial crisis impacting demand for rich nations to eat into global oil
demand.
Even as demand outlook moderates, IEA expects supplies to improve given likely resumption of
Libyan crude production. In light of demand-supply uncertainties, we expect crude price to remain
range bound with a downward bias.
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