Modest expectations
■ Estimating implied expectations. ONGC stock has fallen 20% since its
recent peak and has given up almost all outperformance earned during the
recent rally. We use global comparable multiples to estimate implied FY15
EBITDA, which helps estimate 'implied subsidy' payments by ONGC under
various oil price and USD-INR assumptions.
■ Pricing in status quo. At Rs270/sh, we estimate ONGC is broadly pricing in
1) no net gains from higher gas prices, 2) oil prices (in INR terms) close to
current levels, 3) minimal further retail diesel price increases (or LPG
distribution savings) and 4) Govt. subsidy payments of around Rs600 bn in
FY15 (FY12/13 actual payments between Rs835 bn and Rs1,000 bn). The
stock would then have downside risks if rupee crude prices increased
materially, or if the govt. stopped price hikes and attempted to reduce its
payments in FY15 to below amounts it has paid historically. Lower rupee
crude prices and continued / meaningful diesel price increases could drive a
material upside, however.
■ Low downside, option on continued diesel reforms. Other than for large
volatility in USD-INR/Brent, these expectations have low downside. Govt.
discipline on monthly diesel price increases can now be a catalyst. ONGC’s
domestic crude production could increase to 29.9 MT in FY15 from 26.4 MT
in FY13, with improving momentum in 2H14, which is likely to help the stock
in the near term.
■ Upgrade to OUTPERFORM. Our target price of Rs345/sh is based on 4.1x
FY15 EBITDA. Consensus numbers are higher than ours – but are not in the
stock price anymore. As ONGC volumes improve, earnings could nonetheless
grow c.25% from FY13 lows. Upgrade ONGC to OUTPERFORM.
��
■ Estimating implied expectations. ONGC stock has fallen 20% since its
recent peak and has given up almost all outperformance earned during the
recent rally. We use global comparable multiples to estimate implied FY15
EBITDA, which helps estimate 'implied subsidy' payments by ONGC under
various oil price and USD-INR assumptions.
■ Pricing in status quo. At Rs270/sh, we estimate ONGC is broadly pricing in
1) no net gains from higher gas prices, 2) oil prices (in INR terms) close to
current levels, 3) minimal further retail diesel price increases (or LPG
distribution savings) and 4) Govt. subsidy payments of around Rs600 bn in
FY15 (FY12/13 actual payments between Rs835 bn and Rs1,000 bn). The
stock would then have downside risks if rupee crude prices increased
materially, or if the govt. stopped price hikes and attempted to reduce its
payments in FY15 to below amounts it has paid historically. Lower rupee
crude prices and continued / meaningful diesel price increases could drive a
material upside, however.
■ Low downside, option on continued diesel reforms. Other than for large
volatility in USD-INR/Brent, these expectations have low downside. Govt.
discipline on monthly diesel price increases can now be a catalyst. ONGC’s
domestic crude production could increase to 29.9 MT in FY15 from 26.4 MT
in FY13, with improving momentum in 2H14, which is likely to help the stock
in the near term.
■ Upgrade to OUTPERFORM. Our target price of Rs345/sh is based on 4.1x
FY15 EBITDA. Consensus numbers are higher than ours – but are not in the
stock price anymore. As ONGC volumes improve, earnings could nonetheless
grow c.25% from FY13 lows. Upgrade ONGC to OUTPERFORM.
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