CMP Rs256, Target Rs320, Upside 25.0%
Net sales rise 23% yoy on back of better net crude realizations
Oil and Natural Corporation Ltd (ONGC) reported 22.8% yoy growth in net to Rs193bn (including income from operations). Crude oil revenues were higher by 19.4% yoy driven by sharp increase in revenues from the JV field especially the Rajasthan block. Additionally this led to higher net realizations as proportion of non-subsidy crude increased in the total production. Net crude oil realizations were at US$44.3/bbl as compared to US$38.7/bbl in Q4 FY11. Gas segment revenues were higher by 18.4% on the back of 5% higher sales volumes and 12.8% rise in realizations. Revenues in VAP segment also rose as realizations were higher in line with crude oil prices.
Subsidy burden substantially higher
Subsidy incidence at Rs141bn was lower than our estimates. As per the government notification for FY12 subsidy sharing pattern the total upstream contribution will be at Rs550bn, which contributes to about 40% of the gross under recoveries. ONGC’s contribution to upstream subsidy share was at 78.3% much lower than 82% in recent times.
OPM improves 1154bps yoy and 86bps qoq
During Q4 FY12, ONGC reported 52% yoy jump in operating profit compared to 22.8% rise in revenues leading to 1154bps yoy surge in OPM to 59.9%. The primary reason for the better profitability was the increase in net realizations of crude oil and a sharp fall in overheads on yoy basis.
PAT better than expectations at Rs56bn
Other income was higher by 4.5% yoy owing to jump in interest income on bond deposits. Depreciation and depletion was higher by 2.5% as reduction in depletion and depreciation was more than offset by 57% jump in dry well write-offs.
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, we do not expect any further increase in contribution from upstream as they have been already burdened with higher cess. Furthermore, higher gas price 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.