• Net sales rise 24% yoy driven by 1) higher JV crude oil sales, 2) higher nominated blocks gas sales, 3) higher rupee net realizations for crude oil and 4) higher realizations for gas
• Steep 21% rupee depreciation on yoy basis more than offsets net crude oil realization decline of 4.3% yoy to US$46.6/bbl
• Natural gas realization was at Rs8,141/tscm as compared to Rs6,859/tscm in Q1 FY12
• For Q1 FY13 upstream contribution towards under recoveries is at 31.5% and ONGC share among upstream companies is at 82%
• We maintain our BUY recommendation with a 9-month target price of Rs320   

Net sales rise 23% slightly lower than expectations

Oil and Natural Corporation Ltd (ONGC) reported 23.9% yoy growth in net to Rs202bn (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. While the net realizations on nominated blocks sales volumes of crude oil reduced owing to increased subsidy burden, higher contribution from JV field (non subsidized oil) helped offset the impact to some extent. Net crude oil realizations were at US$46.6/bbl as compared to US$48.7/bbl in Q1 FY12. 21.3% yoy depreciation in rupee against the US Dollar also helped reduce the impact of net realizations decline. Gas segment revenues were higher by 24.5% yoy on the back of 5% higher sales volumes and 18.7% jump in realizations. Revenues in VAP segment also rose as realizations were higher in line with crude oil prices.

Subsidy burden increases 2.5% yoy

Subsidy incidence at Rs124bn was higher than our estimates. As per the government notification for Q1 FY13 subsidy sharing pattern, the total upstream contribution was at Rs150bn, which contributes to about 31.5% of the gross under recoveries. ONGC’s contribution to the upstream subsidy share was at 82% higher than 80.9% average in FY12.

OPM falls 228bps yoy and 470bps qoq

During Q1 FY13, ONGC reported 19% yoy rise in operating profit but a 228bps yoy fall in OPM to 55.2%. The primary reason for the fall in profitability was the increase in cess on crude oil production. On a qoq basis apart from higher impact of cess substantial jump in overheads caused 470bps fall in OPM.

PAT better than expectations at Rs63bn

Other income was higher by 18% yoy owing to jump in interest income on bond deposits and 65% surge in miscellaneous income. Depreciation and depletion was lower by 22.4% mainly on account of 36% fall in dry wells and survey charges. This led to higher than expected PAT of Rs62.7bn up 53.2% yoy.

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.