• Net sales (adjusted for one-offs) rise 13.2% yoy driven by higher production of oil from JV fields and rupee depreciation causing higher realizations for gas and oil

• Discount on crude oil remained flat on yoy basis at US$62.2/bbl and declined 3.1% on qoq basis

• Natural gas realization was at Rs9,706/tscm v/s Rs8,353/tscm in Q3 FY13

• For 9m FY14 upstream contribution towards under recoveries is at 48% and ONGC share among upstream companies is at 83.7%

• We maintain our BUY rating with a 9-month target price of Rs330 as steep discount to global peers in EV/BOE terms more than adequately factors in the risk of higher subsidy and possibilities of limited gas price hike  

One time adjustments

Based on directives issued by MoP&NG and PPAC, refineries had started making deductions from payments to ONGC towards Octroi/VAT/CST on discounts allowed by the company to refineries on supplies of crude oil wef April 01, 2012. The company made representations to MoP&NG to review the decision to which no communication has been received. Pending a reply, ONGC has decided to revise the sales revenue and write back provisions made.

Adjusted net sales better than expectations, up 13.2% yoy

Oil and Natural Corporation Ltd (ONGC) reported 13.2% yoy increase in net sales (adjusted) to Rs238bn (including income from operations). Crude oil production was down 0.5% yoy on the back of 2% yoy decrease in crude oil and condensate production from nominated blocks of ONGC. Production from JV fields was up 8.8% yoy (mainly Cairn's Rajasthan field). Gas production was down by 0.9% yoy mainly on account of 0.3% yoy fall in production from nominated blocks and 9.4% yoy fall in JV production. Crude oil revenues (adjusted) surged 15.2% yoy and 4.1% qoq driven by 1) 14.6% yoy rupee depreciation and 2) higher contribution of non-subsidized crude oil. Net realizations on sales volumes of crude oil from nominated blocks fell to US$45.98/bbl as compared to US$47.97/bbl in Q3 FY13 as crude prices were lower while discounts remained flat in absolute terms. Gas segment revenues rose 13.4% yoy as 2.4% yoy fall in sales volumes were more than offset by 16.2% yoy surge in rupee realizations. Revenues for the VAP segment increased by 6.3% as decline of 3.1% yoy in volumes was more than offset by strong rupee realizations of most products led by rupee depreciation.

Subsidy burden at Rs138bn

Subsidy incidence at Rs138bn was slightly higher than our estimates. As per the government notification for Q3 FY14 subsidy sharing pattern, the total upstream contribution was at Rs159bn. For 9m FY14 upstream contribution to total under recoveries was at 48%. During Q3 FY14, ONGC's contribution to the upstream subsidy share was at 86.3% as compared to 82.4% in Q3 FY13 as GAIL was removed from the subsidy sharing mechanism.

OPM (adjusted) increases 451bps yoy

During Q3 FY14, ONGC saw 22.7% yoy jump in operating profit (adjusted) leading to a rise of 451bps yoy in OPM (adjusted) to 58.3%. The key reason for the surge was 356bps yoy fall in overheads. With crude oil revenues being denominated in dollar terms and cess payments being rupee denominated, 12.5% depreciation caused the decline in statutory levies as % of sales. Adjusted other income was lower by 15% owing to lower interest income on deposits. PAT was better than expectations on superior operating performance.

Maintain BUY

ONGC has traded at a steep discount to its global peers over the past few years on the back of issues such as 1) subsidy burden and 2) government controlled gas prices (which are much lower than industry levels). However, of late government is trying to set right these issues by taking measures such as 1) partial de-regulation of diesel prices, 2) capping of sale of subsidised LPG cylinders and 3) showing intent to raise gas prices to about US$8/mmbtu as compared to current price of US$4.2/mmbtu. These steps, we believe, will lead to re-rating of ONGC towards its global peers. The recent correction has been on the back of concerns on the impact of gas price hike as the consumer price is yet to be determined. Nevertheless, we maintain our BUY rating with a 9-month price target of Rs330.