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India Equity Research Reports, IPO and Stock News
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At bargain value
We were positively surprised by the sweep of the interventions by the government
last week and have upgraded ONGC’s EPS by ~30%. In contrast, ONGC’s stock
price reaction was relatively tepid; perhaps due to continued uncertainty on the
subsidy framework. Using global peer multiples and ONGC’s own historical
averages as fair value benchmarks, however, we infer that the current price is
factoring in a rise in upstream sharing to ~50-80%. This is unlikely; indeed we
expect near-term newsflow to be supportive given ONGC’s impending FPO. BUY.
30% EPS upgrades on policy interventions. While we had anticipated adhoc policy
interventions by the government on the back of rising crude prices, we were positively
surprised by their sweep (9-20% price hikes, duty cuts). We have upgraded ONGC’s
FY12-13 earnings by ~23-36% to factor this in and now expect its domestic crude
price realisations to rise to US$72/bbl in FY12 and US$78/bbl in FY13 based on onethird upstream subsidy sharing. We now model Rs36-38/sh as FY12-13 earnings.
Relatively tepid stock price reaction. In contrast, ONGC’s 4% stock price up-move
on Monday was relatively tepid despite its recent weak performance (-15% since May-
11). Our investor interactions suggest widespread scepticism on earnings indicating,
therefore, that the lack of clarity on the subsidy framework is an overhang. The
adverse change in FY11 (upstream-sharing rose from one-third to 38.8%) is hurting.
Concerns on subsidy share overdone. These concerns appear overdone, though, in
our view. For example, using global peer averages (10x Dec12 PE) and ONGC’s own
historical averages (9.7x PE, 4.1x EV/Ebitda) as fair value benchmarks, we impute that
the current market price is discounting Rs28-30/sh in FY12-13 earnings. This will
require upstream-sharing to rise to 50% in FY12 and even higher to 70-80% in FY13.
While the framework will stay uncertain; such a sharp rise is unlikely, in our view.
Stronger crude price leverage. Indeed, we expect near-term newsflow here to be
supportive given ONGC’s impending US$2.5-3bn divestment. The government, for
example, has guided the SOEs to assume one-third upstream subsidy sharing for their
1Q cashflow. Further, ONGC’s sensitivity to the subsidy framework is also lower now
(1ppt = 0.5% for FY13, 1% for FY12 due to high under-recoveries in 1QFY12) making
it less susceptible to adverse changes. Further, we are also enthused by increase in the
threshold sweet-spot for ONGC to US$95/bbl (from US$75/bbl, US$1 = Re0.5/sh); this
should allow ONGC to feature in more global E&P investment consideration sets.
Maintain BUY. ONGC’s mature assets precludes strong production growth (FY12 is off
to a bad start with crude output down 2.4%YoY in April-May and gas output down
1.3%) making it difficult to justify a secular multi-year investment theme but with
valuations at bargain levels (~3x EV/Ebitda, 7.5x PE, 4.4% yield), we remain BUYers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
At bargain value
We were positively surprised by the sweep of the interventions by the government
last week and have upgraded ONGC’s EPS by ~30%. In contrast, ONGC’s stock
price reaction was relatively tepid; perhaps due to continued uncertainty on the
subsidy framework. Using global peer multiples and ONGC’s own historical
averages as fair value benchmarks, however, we infer that the current price is
factoring in a rise in upstream sharing to ~50-80%. This is unlikely; indeed we
expect near-term newsflow to be supportive given ONGC’s impending FPO. BUY.
30% EPS upgrades on policy interventions. While we had anticipated adhoc policy
interventions by the government on the back of rising crude prices, we were positively
surprised by their sweep (9-20% price hikes, duty cuts). We have upgraded ONGC’s
FY12-13 earnings by ~23-36% to factor this in and now expect its domestic crude
price realisations to rise to US$72/bbl in FY12 and US$78/bbl in FY13 based on onethird upstream subsidy sharing. We now model Rs36-38/sh as FY12-13 earnings.
Relatively tepid stock price reaction. In contrast, ONGC’s 4% stock price up-move
on Monday was relatively tepid despite its recent weak performance (-15% since May-
11). Our investor interactions suggest widespread scepticism on earnings indicating,
therefore, that the lack of clarity on the subsidy framework is an overhang. The
adverse change in FY11 (upstream-sharing rose from one-third to 38.8%) is hurting.
Concerns on subsidy share overdone. These concerns appear overdone, though, in
our view. For example, using global peer averages (10x Dec12 PE) and ONGC’s own
historical averages (9.7x PE, 4.1x EV/Ebitda) as fair value benchmarks, we impute that
the current market price is discounting Rs28-30/sh in FY12-13 earnings. This will
require upstream-sharing to rise to 50% in FY12 and even higher to 70-80% in FY13.
While the framework will stay uncertain; such a sharp rise is unlikely, in our view.
Stronger crude price leverage. Indeed, we expect near-term newsflow here to be
supportive given ONGC’s impending US$2.5-3bn divestment. The government, for
example, has guided the SOEs to assume one-third upstream subsidy sharing for their
1Q cashflow. Further, ONGC’s sensitivity to the subsidy framework is also lower now
(1ppt = 0.5% for FY13, 1% for FY12 due to high under-recoveries in 1QFY12) making
it less susceptible to adverse changes. Further, we are also enthused by increase in the
threshold sweet-spot for ONGC to US$95/bbl (from US$75/bbl, US$1 = Re0.5/sh); this
should allow ONGC to feature in more global E&P investment consideration sets.
Maintain BUY. ONGC’s mature assets precludes strong production growth (FY12 is off
to a bad start with crude output down 2.4%YoY in April-May and gas output down
1.3%) making it difficult to justify a secular multi-year investment theme but with
valuations at bargain levels (~3x EV/Ebitda, 7.5x PE, 4.4% yield), we remain BUYers.
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