Axis Capital starts coverage on ONGC with 'Sell'; sees 14% downside

Axis Capital has initiated coverage on ONGC with a 'Sell' rating, citing concerns over production, oil prices, and subsidiary debt

ONGC share price today: Domestic brokerage Axis Capital has initiated coverage on Oil and Natural Gas Corporation (ONGC), India's largest government-owned energy company, with a 'Sell' rating, citing concerns over production, oil prices, and subsidiary debt. 

 

According to analysts, the Sell call is based on three key factors, including continuous production decline despite BP's intervention, a muted oil price outlook driving a 20 per cent fall in standalone PAT over FY25-FY27E, and high debt levels in subsidiaries ONGC Videsh (OVL) and ONGC Petro additions Limited (OPaL), likely requiring parental support.

 

The stock trades at 10.5x FY27E P/E (standalone), 30 per cent premium to its ten-year average. The brokerage's profit after tax (PAT) estimates for FY26-28E are 25-30 per cent below the Bloomberg consensus. It has set a target price of ₹205, implying a downside potential of 14 per cent from the December 12, 2025, closing price of ₹238 on the NSE.

 

 

At 01:50 PM on Monday, December 15, the ONGC stock was trading at ₹233.89, down 1.75 per cent from the previous session's close. The stock fell over 3.4 per cent to hit an intraday low of ₹229.94. In comparison, the NSE Nifty50 was down 16 points or 0.06 per cent at 26,030 levels. The company's total market capitalisation stood at ₹2.94 trillion. 

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Here’s why Axis Capital recommends selling ONGC:

Continuous decline in production: According to Axis Capital, ONGC's domestic oil and gas production comes largely from ageing fields, which face a natural decline of 7 to 7.5 per cent per annum. Around 63 per cent/ 74 per cent of its production of oil/natural gas in FY25 came from Mumbai Offshore, which was discovered over 50 years ago. While the company's partnership with BP as the Technical Services Provider (TSP) for the Mumbai High field holds promise, Axis Capital projects its standalone production to still decline at a 1.3 per cent/0.4 per cent compounded annual growth rate (CAGR) for oil/natural gas over FY25-30E. 

 

Muted earnings outlook: Axis Capital said crude oil prices should remain under pressure due to rising supply and muted demand. The International Energy Agency (IEA) has estimated global oil supply to rise by 3.1 million barrels per day (mbpd) in the calendar year 2025 (CY25) and by 2.5 mbpd in CY26 due to a ramp-up in both non-OPEC and OPEC+ production, the brokerage said.

 

However, global demand growth is expected to remain muted at 0.79 and 0.77 mbpd in 2025 and 2026, respectively, it said. "We build in Brent crude price of $66 per barrel in FY26E and $65 per barrel in FY27E in our model. Due to the weak oil price outlook, we estimate ONGC’s standalone PAT to decline 20 per cent over FY25-27E," the brokerage said in its note.

 

Subsidiaries with unsustainable leverage: OVL and OPal have an estimated net debt of ₹31,100 crore (10x of Ebitda) and ₹25,200 crore (53x of Ebitda), respectively, for FY26, the brokerage said. For OPal, cash flows are insufficient to meet even interest payments. Due to high leverage, Axis Capital estimated the equity value to be negative ₹162 billion (₹13 per share) for OVL (including the value of Mozambique) and negative ₹189 billion (₹15 per share) for OPaL. Analysts believe ONGC will have to infuse equity in both subsidiaries in the coming years to meet debt obligations. 

 

On the valuation front, Axis Capital said it valued ONGC on a sum-of-the-parts (SOTP) basis, using a discounted cash flow approach for the core upstream business in India and overseas operations, a 6x EV/Ebitda multiple for the petrochemicals business, and a 20 per cent discount to market prices for listed investments such as HPCL and Indian Oil Corporation. The brokerage said higher crude oil prices remained the key upside risk to its thesis.   Disclaimer: Target price and stock outlook has been suggested by Axis Capital. Views expressed are their own.