ONGC (Q3 FY12)

CMP Rs283, Target Rs320, Upside 13.1%

• Netsales decline 11% yoy driven by sharp fall in net crude oil realizations,partially offset by higher gas and VAP realizations

• Grosscrude oil realizations for ONGC increased by 25.4% yoy to US$112/bbl, but netrealizations plummeted 31% yoy to US$45/bbl in Q3 FY12

• Naturalgas realization was at Rs7,561/tscm as compared to Rs6,809/tscm in Q3 FY11

• Highersubsidy impact was offset by extra-ordinary income of Rs31bn (Royalty paid onbehalf of Cairn India)

• As perthe 9m subsidy sharing announcement, upstream contribution works out to ~38%,which is higher than our expectation 

• Wemaintain our BUY recommendation with a 9-month target price of Rs320  

Result table

Source: Company, India Infoline Research

Net sales fall 11% yoy on back of lower net cruderealizations

Oil and Natural Corporation Ltd (ONGC) reported11% yoy growth in net to Rs185bn (including income from operations). Crude oilrevenues were lower by 7.8% yoy as revenues from the domestic fields slumped by23.3% yoy mainly on account of a 30.6% yoy fall in net realizations. Revenuefrom the JV fields jumped 82% yoy mainly on account of a Rs6.8bn incomeaccounted for royalty paid by ONGC on behalf of Cairn India. Gross realizationsfor crude oil increased by 25.4% yoy to US$112/bbl, but net realizations plummeted31% yoy to US$45/bbl in Q3 FY12. Gas segment revenues were higher by 8.6% yoyon the back of 11.5% higher realizations. Revenues for the VAP segment werealso higher by 16.1% yoy.

Subsidy burden substantially higher

Subsidy incidence at Rs125bn was higher than ourestimates. As per the government notification for the 9m subsidy sharingpattern the total upstream contribution will be at Rs369bn, which contributesto about 37.9% of the gross under recoveries. ONGC’s contribution to upstreamsubsidy share was back to 82% after falling to 80% in Q2 FY12.

OPM falls 536bps yoy and 343bps qoq

During Q3 FY12, ONGC reported 18% yoy fall inoperating profit compared to 11% fall in revenues leading to 536bps yoy fall inOPM to 59.7%. The primary reason for the fall in operating profit and declinein OPM has been the fall in net realizations. Statutory levies as a percentageof sales was higher by 222bps yoy while other overheads were higher by 295bpsyoy.

PAT falls 5% yoy to Rs67bn

Other income was higher by 43% yoy owing to 75%yoy jump in interest income on bond deposits. Depreciation and depletion washigher by 24.5% yoy owing to 33% jump in depletion and 51% jump in dry wellexpenditure. Further, the company reported an extraordinary income of Rs31.4bn whichwas on account of payment received from Cairn India in lieu of the royalty paidon its behalf from August 2009 to September 2011. These factors resulted in aflat PBT compared to 18.3% decline in operating profit. With tax rate beinghigher by 360bps yoy owing, PAT declined by 4.8% yoy.

Maintain BUY, considering steep valuationdiscount to global peers

ONGC trades at steep discount to global peers onthe basis of EV/boe of proved reserves. Considering the subsidy overhang, webelieve that a discount is warranted. However, with government alreadyde-regulating petrol prices and having plans to de-control diesel prices, webelieve overall burden will reduce and should lead to reduction in valuationdiscount. Furthermore, higher gas prices has turned around the loss makingnatural gas business leading to improved cash flows. We maintain our BUYrecommendation with a 9-month price target of Rs320.

Cost Analysis

Source: Company, India Infoline Research

Financial summary

Source: Company, India InfolineResearch