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Oil & Natural Gas Corp. (ONGC)
N: Higher cess after offer for sale of shares to create
overhang
We resume coverage of ONGC after the offer for the sale of
shares on 1 March 2012
We believe near-term triggers like fuel price hikes are offset
by headwinds from the 80% hike in cess on production of
oil; the stock is likely to remain range-bound
Neutral rating with a TP of INR285, based on a PE multiple of
9.3x FY13e EPS
We resume coverage of ONGC after the offer for the sale of shares on 1 March 2012.
The government, the majority owner of ONGC, which is the largest listed public sector
company in India, sold 5% of its holding through the first ever auction route. The floor
price of the issue was set at INR280/share. After the sale, the free float for ONGC has
increased to 31% from 26%, which is likely to increase the weighting of the stock in
equity indices. This could provide some support, as passive funds may increase their
holdings to match the stock’s index weighting.
Transparency in pricing, rather than quantum is the main concern. ONGC’s net
profit of USD14/boe in FY11 was higher than the average of the top five major oil
companies in CY10. Therefore, we believe that investors’ concerns about the government
asking ONGC to provide unduly higher discount to refiners are overblown.
Ad-hoc subsidy sharing – a headwind. The uncertainty related to the amount of discount
offered by ONGC to oil marketing companies will remain an overhang on the stock, in
our view. We believe that a 40% share of subsidy contribution by government-owned
upstream companies is a fair assumption (please see our detailed analysis of the subsidy
administration in our note “India Oil & Gas – overblown subsidy concerns bring
opportunity”, 16 February 2012), which would keep the net oil price realisation at ONGC
high enough to meet its operating cost and capital cost requirements.
Recent increase in cess to impact ONGC’s earnings by 10%. The government has
increased cess on domestic production of crude oil to INR4,500/t from INR2,500/t. This
increase will likely shave off almost 10% of ONGC’s earnings from FY13 onwards.
Valuation and risk. We value ONGC on an earnings multiple basis. We value the shares
at 9.3x FY13e core EPS, which is in line with emerging market peers and generates a
target price of INR285. Reforms in retail fuel pricing, new discoveries, and possible
overseas acquisitions are potential catalysts. Upside and downside risks include a higher
share of the subsidy and higher or lower long-term oil and gas prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Oil & Natural Gas Corp. (ONGC)
N: Higher cess after offer for sale of shares to create
overhang
We resume coverage of ONGC after the offer for the sale of
shares on 1 March 2012
We believe near-term triggers like fuel price hikes are offset
by headwinds from the 80% hike in cess on production of
oil; the stock is likely to remain range-bound
Neutral rating with a TP of INR285, based on a PE multiple of
9.3x FY13e EPS
We resume coverage of ONGC after the offer for the sale of shares on 1 March 2012.
The government, the majority owner of ONGC, which is the largest listed public sector
company in India, sold 5% of its holding through the first ever auction route. The floor
price of the issue was set at INR280/share. After the sale, the free float for ONGC has
increased to 31% from 26%, which is likely to increase the weighting of the stock in
equity indices. This could provide some support, as passive funds may increase their
holdings to match the stock’s index weighting.
Transparency in pricing, rather than quantum is the main concern. ONGC’s net
profit of USD14/boe in FY11 was higher than the average of the top five major oil
companies in CY10. Therefore, we believe that investors’ concerns about the government
asking ONGC to provide unduly higher discount to refiners are overblown.
Ad-hoc subsidy sharing – a headwind. The uncertainty related to the amount of discount
offered by ONGC to oil marketing companies will remain an overhang on the stock, in
our view. We believe that a 40% share of subsidy contribution by government-owned
upstream companies is a fair assumption (please see our detailed analysis of the subsidy
administration in our note “India Oil & Gas – overblown subsidy concerns bring
opportunity”, 16 February 2012), which would keep the net oil price realisation at ONGC
high enough to meet its operating cost and capital cost requirements.
Recent increase in cess to impact ONGC’s earnings by 10%. The government has
increased cess on domestic production of crude oil to INR4,500/t from INR2,500/t. This
increase will likely shave off almost 10% of ONGC’s earnings from FY13 onwards.
Valuation and risk. We value ONGC on an earnings multiple basis. We value the shares
at 9.3x FY13e core EPS, which is in line with emerging market peers and generates a
target price of INR285. Reforms in retail fuel pricing, new discoveries, and possible
overseas acquisitions are potential catalysts. Upside and downside risks include a higher
share of the subsidy and higher or lower long-term oil and gas prices.
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