ONGC - "Results inline, upgrading estimates" ::LKP

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Ø  While ONGC’s topline for Q1 FY12 was above our estimates due to higher gross realization for crude, production volumes and net profit were in line with our estimates.

Ø  Total sales for the quarter stood at Rs 164,019 mn, 7% above our estimate of Rs 153,025 mn.

o   Crude sales for the quarter stood at Rs 110,930 mn, up 18% y-o-y. While sales from nominated blocks was up 1.4% y-o-y, sales from JV jumped by ~140% y-o-y.

o   Gas sales for the quarter stood at Rs 33,460 mn, up 31.2% y-o-y but down 3% q-o-q. Sales rose in spite of lesser production due to the APM gas price hike to $4.2/mmBtu.

o   VAP sales of Rs 18,290 mn was up 7.4% q-o-q & 3.6% y-o-y due to improved realizations.

Ø  Crude oil & gas production from nomination & JVs during Q1 FY12 were similar to our estimates.

o   Crude oil: Nomination output at 5.933 MMT was down 0.08 MMT q-o-q & 0.12 MMT y-o-y. JV output at 0.825 MMT was up 0.04 MMT q-o-q & 0.28 MMT y-o-y.

o   Natural gas: Nomination output at 5.605 bcm was down 0.13 bcm q-o-q & 0.16 bcm y-o-y. JV output at 0.557 bcm was down 0.02 bcm q-o-q & 0.09 bcm y-o-y.

o   VAP: VAP production of 720 MMT trailed our estimate of 741 MMT and was lower by 108 MMT q-o-q & 49 MMT y-o-y.

Ø  However, improved realizations have resulted in the company posting growth in sales.

o   Q1 FY12 subsidy burden of Rs 120,462.6 mn ($72.5/bbl) was higher compared to subsidy/bbl of $70.1/bbl in Q4 FY11 & $32.8/bbl in Q1 FY11.

o   As the gross realization for Q1 FY12 was $121.3/bbl, net realization stood at $48.8/bbl, higher than $38.7/bbl in Q4 FY11 & $48.1/bbl in Q1 FY11.

o   The hike in APM gas price to $4.2/mmBtu in Jun 2010 has led to a significant jump of 43.3% in natural gas sales from nomination fields.

Outlook and Valuation

The upstream sector’s share of the gross under recoveries, which was fixed at ~33% during FY08-10, has been increased suddenly to ~39% in FY11. Since our FY12 & FY13 estimates of gross under-recovery at Rs 792 bn & Rs 722.3 bn are similar to gross under recovery of ~Rs 782 bn in FY11, we don’t foresee a return to the 33% sharing mechanism in the near term. Accordingly, we assume 39% of the subsidy burden to be borne by the upstream sector in perpetuity. We estimate post-subsidy realization for ONGC to be $64/bbl and $62.2/bbl respectively in FY12 & FY13. As per our estimates, ONGC’s crude realizations are capped at ~ $67/bbl going forward.

We estimate consolidated topline growth of 11.4% and 4.7% in FY12 & FY13 respectively. We estimate net sales of Rs 1,310 bn & Rs 1,371.3 bn in FY12 & FY13. We estimate EPS of Rs 33.6 and Rs 35.1 in FY12 & FY13 respectively. We reiterate our BUY recommendation on ONGC with SOTP target price of `353. Our price target translates into EV/boe of $6.2/boe and FY12E & FY13E P/E of 10.5x and 10.1x respectively.