ONGC (Q1 FY12)

CMP Rs227, Target Rs330, Upside 15.7%

• Net sales remain increase 18.7% yoy driven by higher crude oil volumes (Rajasthan field) and higher realizations for natural gas and VAP products
• Gross realizations for ONGC increased by 50.1% yoy to US$121/bbl, while net realizations rose marginally by 1.5% to US$48.8/bbl in Q1 FY12
• Natural gas realization was at Rs6,859/tscm as compared to Rs4,951/tscm on back of hike in APM gas price
• Increase in production from JV fields and OVL would be key to earnings growth in near term
• We maintain our BUY recommendation with a 9-month target price of Rs320   

Result table

(Rs m)	Q1 FY12	Q1 FY11	% yoy	Q4 FY11	% qoq
Net sales	164,019	138,230	18.7	161,079	1.8
Purchases (Trading)	(6)	(43)	(85.3)	(33)	(80.7)
Raw material	(783)	(430)	82.2	(2,405)	(67.4)
Personnel costs	(3,098)	(2,789)	11.1	(4,270)	(27.5)
Statutory levies	(37,306)	(28,671)	30.1	(33,021)	13.0
Other overheads	(28,127)	(24,365)	15.4	(41,628)	(32.4)
Operating profit	94,700	81,932	15.6	79,723	18.8
OPM (%)	57.7	59.3	(154) bps	49.5	824 bps
Depreciation	(41,225)	(31,143)	32.4	(47,877)	(13.9)
Interest	(40)	(28)	45.3	(160)	(74.9)
Other income	7,270	4,072	78.5	5,856	24.2
PBT	60,704	54,834	10.7	37,542	61.7
Tax	(19,755)	(18,223)	8.4	(9,633)	105.1
Effective tax rate (%)	32.5	33.2		25.7
Adjusted PAT	40,949	36,611	11.8	27,909	46.7
Adj. PAT margin (%)	25.0	26.5	(152) bps	17.3	764 bps
Ann. EPS (Rs)	38.3	34.2	11.8	26.1	46.7

Source: Company, India Infoline Research

Net sales increase 18.7% yoy on back of higher crude volumes for JV fields and rise in realizations for natural gas and VAP
Oil and Natural Corporation Ltd (ONGC) reported 18.7% yoy growth in net to Rs164bn (including income from operations). Crude oil revenues were higher by 18% yoy as revenues from JV fields jumped 141% yoy (30% stake in Cairn’s Rajsthan field, which has seen a marked increase in production on yoy basis), while that from its own fields rose 1.4% yoy. Gas revenues were higher by 31.2% yoy owing to 38.5% yoy jump in realizations on back of the APM gas price hike implemented in June 2010. However, gas volumes were lower by 5.3% yoy. Realizations for VAP were higher across all products.

Subsidy burden substantially higher
Subsidy incidence at Rs120bn was higher than our estimates. Gross realizations for ONGC increased by 50.1% yoy to US$121/bbl, while net realizations rose marginally by 1.5% to US$48.8/bbl in Q1 FY12. ONGC’s contribution to upstream subsidy share was higher at 83% in Q1 FY12 as compared to 82% in Q1 FY11.
Higher royalty results in 154bps yoy fall in OPM
During Q1 FY12, ONGC reported 16% yoy increase in operating profit compared to 18.7% increase in revenues and 154bps yoy fall in OPM to 57.7%. One of the main reasons for the fall in margins was 200bps yoy increase in statutory levies as a percentage of revenues. This was owing to the fact that ONGC was bearing 100% royalty on crude oil production from Cairn’s Rajasthan field despite having only 30% share in production. Additionally subsidy burden was also substantially higher on yoy basis.

PAT rises 11.8% yoy to Rs41bn
Other income was higher by 78.5% yoy owing to near doubling of interest income on bond deposits. Depreciation and depletion was higher by 32.4% yoy owing to 114% jump in dry well expenditure, which was partly offset by 28% yoy fall in survey expenses. These factors resulted in only 10.7% yoy rise in PBT compared to 16% increase in operating profit. PAT was higher 11.8% yoy to Rs41bn.

Maintain BUY, considering steep valuation discount to global peers
ONGC trades at steep discount to global peers on the basis of EV/boe of proved reserves. Considering the subsidy overhang, we believe that a discount is warranted. However, with government already de-regulating petrol prices and having plans to de-control diesel prices, we believe overall burden will reduce and should lead to reduction in valuation discount. Furthermore, higher gas prices has turned around the loss making natural gas business leading to improved cash flows. We maintain our BUY recommendation with a 9-month price target of Rs320.

Cost Analysis

As a % of net sales	Q1 FY12	Q1 FY11	bps yoy	Q4 FY11	bps qoq
Purchases (Trading)	0.0	0.0	(3)	0.0	(2)
Raw materials	0.5	0.3	17	1.5	(102)
Personnel Costs	1.9	2.0	(13)	2.7	(76)
Statutory levies	22.7	20.7	200	20.5	225
Other overheads	17.1	17.6	(48)	25.8	(869)
Total costs	42.3	40.7	154	50.5	(824)

Source: Company, India Infoline Research

Financial summary

Y/e 31 Mar (Rs m)	FY10	FY11	FY12E	FY13E
Revenues	1,034,389	1,219,293	1,288,726	1,389,323
yoy growth (%)	(1.1)	17.9	5.7	7.8
Operating profit	461,177	527,550	549,850	583,194
OPM (%)	44.6	43.3	42.7	42.0
Reported PAT	194,035	224,559	240,634	251,208
yoy growth (%)	(2.0)	15.7	7.2	4.4
EPS (Rs)	11.3	26.2	28.1	29.4
P/E (x)	24.3	10.5	9.8	9.4
Price/Book (x)	2.3	2.0	1.8	1.6
EV/EBITDA (x)	4.5	3.9	4.1	4.0
Debt/Equity (x)	0.1	0.1	0.2	0.2
RoE (%)	19.8	20.5	19.3	17.7
RoCE (%)	23.3	23.7	22.0	19.0

Source: Company, India Infoline Research