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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Still a bargain
ONGC’s prospectus for the impending US$2.5bn offer-for-sale confirms that the
retail fuel subsidy sharing framework will remain uncertain. While this is not
surprising and earnings impact of an adverse change is limited for the upstream
SOEs, it is still disappointing. Nonetheless, based on our discussions and media
comments, we expect upstream to share a third of FY12 under-recoveries driving
ONGC’s net realisations to US$72/bbl and consol earnings at to Rs34/sh; indeed
monthly standalone earnings in July-11 annualised at Rs41/sh. We are cutting our
target to Rs340/sh but maintain our BUY reco given undemanding valuations.
Subsidy sharing to remain uncertain
The government’s proposal to divest a 5% stake in ONGC had raised hopes that the
subsidy sharing framework would be formalised allowing earnings for the upstream
SOEs to become predictable. Much like the earlier Mar-2004 ONGC FPO and the Sep-10
Oil India IPO, though, the RHP for the current stake sale indicates that the framework
will remain uncertain. This is not surprising given the peculiar nature of the framework
that straddles the Ministry of Finance (MOF) and the Ministry of Petroleum (MOPNG).
Not surprising given the lack of a coordinated policy response
In our opinion, a formal framework requires the MOF to prescribe the cash support for
the downstream SOEs upfront in the budget. It has been reluctant to do this unless
there is a formal tax on the upstream SOEs to garner additional revenues in lieu of the
current intra-MOPNG sharing between upstream and downstream SOEs. In turn, the
MOPNG appears to be reticent about additional taxation instead preferring the
flexibility (and influence) that the current ad-hoc policy allows to dictate SOE earnings
annually. Nonetheless, it is still disappointing and will remain a valuation headwind.
We model one-third upstream share; strong earnings pick up from July
Based our discussions and media comments, we model upstream SOEs sharing a third
of under-recoveries in FY12, similar to that in 1QFY12. Given the end-June policy
interventions, this will drive ONGC’s net realisations to US$75-80/bbl in the rest of
FY12 (US$49/bbl in 1Q) driving a 30% rise in standalone net profits to Rs29/sh. This
should start showing up from 2QFY12; indeed July-11 monthly standalone earnings
annualised at Rs41/sh. Further, while investors are right to be sceptical about the
validity of the framework, we note that every 1ppt change impacts EPS by just 0.5%.
Undemanding valuations; retain BUY
ONGC’s poor production trajectory precludes a secular investment case for the stock
but we expect the stock to re-rate given undemanding valuations (7x Mar12 PE, 3.2x
EV/Ebitda), the strong earnings pick-up from 2QFY12 and likely earnings upgrades
from the potential cap on subsidized LPG availability (+4-5% on EPS under a 4-
cylinder cap) and a change in the contract terms at Cairn’s Rajasthan block (+6-10%
on EPS). We are cutting our target to Rs340/sh to factor in lower global peer multiples
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Still a bargain
ONGC’s prospectus for the impending US$2.5bn offer-for-sale confirms that the
retail fuel subsidy sharing framework will remain uncertain. While this is not
surprising and earnings impact of an adverse change is limited for the upstream
SOEs, it is still disappointing. Nonetheless, based on our discussions and media
comments, we expect upstream to share a third of FY12 under-recoveries driving
ONGC’s net realisations to US$72/bbl and consol earnings at to Rs34/sh; indeed
monthly standalone earnings in July-11 annualised at Rs41/sh. We are cutting our
target to Rs340/sh but maintain our BUY reco given undemanding valuations.
Subsidy sharing to remain uncertain
The government’s proposal to divest a 5% stake in ONGC had raised hopes that the
subsidy sharing framework would be formalised allowing earnings for the upstream
SOEs to become predictable. Much like the earlier Mar-2004 ONGC FPO and the Sep-10
Oil India IPO, though, the RHP for the current stake sale indicates that the framework
will remain uncertain. This is not surprising given the peculiar nature of the framework
that straddles the Ministry of Finance (MOF) and the Ministry of Petroleum (MOPNG).
Not surprising given the lack of a coordinated policy response
In our opinion, a formal framework requires the MOF to prescribe the cash support for
the downstream SOEs upfront in the budget. It has been reluctant to do this unless
there is a formal tax on the upstream SOEs to garner additional revenues in lieu of the
current intra-MOPNG sharing between upstream and downstream SOEs. In turn, the
MOPNG appears to be reticent about additional taxation instead preferring the
flexibility (and influence) that the current ad-hoc policy allows to dictate SOE earnings
annually. Nonetheless, it is still disappointing and will remain a valuation headwind.
We model one-third upstream share; strong earnings pick up from July
Based our discussions and media comments, we model upstream SOEs sharing a third
of under-recoveries in FY12, similar to that in 1QFY12. Given the end-June policy
interventions, this will drive ONGC’s net realisations to US$75-80/bbl in the rest of
FY12 (US$49/bbl in 1Q) driving a 30% rise in standalone net profits to Rs29/sh. This
should start showing up from 2QFY12; indeed July-11 monthly standalone earnings
annualised at Rs41/sh. Further, while investors are right to be sceptical about the
validity of the framework, we note that every 1ppt change impacts EPS by just 0.5%.
Undemanding valuations; retain BUY
ONGC’s poor production trajectory precludes a secular investment case for the stock
but we expect the stock to re-rate given undemanding valuations (7x Mar12 PE, 3.2x
EV/Ebitda), the strong earnings pick-up from 2QFY12 and likely earnings upgrades
from the potential cap on subsidized LPG availability (+4-5% on EPS under a 4-
cylinder cap) and a change in the contract terms at Cairn’s Rajasthan block (+6-10%
on EPS). We are cutting our target to Rs340/sh to factor in lower global peer multiples
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