We assume coverage with a Neutral rating and an Rs300 Sep-13 PT.
Elevated subsidies (~US$33bn–$9.2bn ONGC) despite reforms will impact
profitability. Muted near-term production growth (~2% CAGR over FY13-
14E) will be a drag on earnings, and incremental reserve accretion
overseas is likely to be return dilutive, in our view. While we believe
ONGC is fairly valued, we acknowledge its resilience to adverse policy
moves, and its counter-cyclicality with crude. We would look to add the
stock at Rs250 (implying 20% upside).
Reform, but is it enough? Despite the reforms carried out recently, we
expect subsidy losses of Rs1.77tn (~$33bn) in FY13. We build in a drop
in domestic crude realizations (to ~$53/bbl) at a 34% upstream share – a
higher share or higher subsidy could negatively impact earnings.
Slowing production a drag: Muted domestic production (~2% CAGR
over FY13-14) remains a drag. Marginal fields are to be tapped to
augment production (particularly gas), but we do not expect a significant
impact over FY13-14. Overseas output remains stressed with continuing
Imperial (Russia) issues and Sudan stoppages. Reserve accretion
overseas is unlikely to reverse the declining trend of return ratios.
Resilience to policy is attractive, gas price hike would be positive:
ONGC is also more resilient to adverse policy moves – a 10% increase
in subsidies reduces our FY13/14 EPS by 12%/9% - led by a better
production mix of crude vs. gas, and domestic vs. overseas. Any hike in
administered gas price would be a positive – an $1/mmbtu hike would
add 7% to our FY13E/14E EPS
Neutral, with PT at Rs300: We see risk-reward as well balanced, with a
Sep-13 PT of Rs300. Our PT is based on 3.5x EV/EBITDA (in-line with
regional peers). Upside risks are higher than expected production/lower
subsidies. Downside risk is adverse policy leading to higher subsidies.
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