ONGC: Concerns overdone

Analysts feel that the markets have over-reacted to the developments and suggest that the stock has limited downside from current levels

Rupee depreciation coupled with lower Brent oil prices dented ONGC’s performance in the June 2013 quarter. Revenue at Rs 19,218 crore came in lower than the Street estimate of Rs 20,090 crore and Rs 20,178 crore recorded in the previous corresponding quarter.  

While on one hand, the company had to bear higher subsidy burden of Rs 12,622 crore (at the gross level) compared to Rs 12,346 crore in the June’12 quarter; realisations, too, were lower thereby impacting EBIDTA (Earnings before interest Tax depreciation and Amortization). The stock has declined more than 20% from Rs 340 in May’13 to lows of Rs 267.75 in August 2013 with most of the fall (almost 18%) in July’13 on the back of rupee depreciation.

During the recently concluded quarter, Brent crude price averaged at two-year low of around $103 a barrel. This marked a decline 9% sequentially and 5% on year-on-year basis. ONGC’s EBITDA declined 23.7% year-on-year (y-o-y) to Rs 8,488 crore. This was again lower than market expectations of Rs 10,457 crore. However, the company has provided Rs 1,611 crore towards post retirement benefits during the quarter and another Rs 314 crore towards deferred taxes. Adjusting for the same, EBIDTA margin at 53.9% dropped 123 bps compared to 55.2% in the June'12 quarter.

Depreciation expense increasing by 16.8% y-o-y further dented profits and net profit at Rs 4,016 crore marked a decline of 33.9% y-o-y. The bottom-line, too, was much below the street expectations of Rs 4,995 crore.

Outlook

While the June’13 quarter performance may have been below expectations analysts feel that stock has already been hammered more than what was desired.

Rupee depreciation has led the overall under recoveries estimates for FY14 increasing to Rs 1.3 – 1.4 lakh crore now compared to Rs 80,000 crore being estimated in the start of FY14. However, this is still lower than Rs 1.61-lakh crore in FY13.

The fuel price hikes, though in a staggered manner, have accrued benefits. While upstream oil companies as ONGC, OIL India had borne Rs 600 crore in subsidies during FY13 (ONGC bearing maximum around 82.5% of the same), analysts see the subsidy burden coming in at similar levels as of now.

The government has cleared for gas price hikes applicable w.e.f 1st April 2014. The prices are set to double to $8.4 per mmbtu (million British thermal units) from current levels of $4.2 per mmbtu.
ONGC is likely to ramp-up its production to 29.9 million tonnes (MT) in FY15 from 26.4 MT in FY13. Though analysts are divided in their opinion on the quantum of jump, a ramp up will surely be positive for volume growth.

In this backdrop, analysts feel that the stock has limited downside from current levels of Rs 272.

Bhavesh Chauhan, an analyst with Angel Broking maintains a ‘buy’ rating on the stock post results. Vivek Gujrati of Anand Rathi points out that the stock is quoting at 7x of FY 15e (Bloomberg) EPS and attractive divided yield of almost 3.5%.

Analysts at Credit Suisse in their latest report have recommended target price of Rs 345 based on 4.1x FY15 EBITDA and have upgraded ONGC to ‘outperform’. They add that as ONGC volumes improve, earnings could nonetheless grow c.25% from FY13 lows.