Stock Market Update on ONGC for 4QFY2011

Stock Market Update on ONGC for 4QFY2011 with a Buy recommendation and a Target Price of `328 (12 months).

For 4QFY2011, ONGC’s bottom line dipped by 26.1% yoy to `2,791cr (`3,776cr), lower than our expectation, on account of higher subsidy burden and higher-than-expected operating expenditure. We recommend Buy on the stock.

    Operating performance hit by higher subsidy payout: ONGC’s top-line performance during the quarter was marred by higher subsidy burden as the government increased upstream subsidy-sharing burden. The company’s top line during the quarter was flat yoy at `16,108cr despite registering higher gross realisations. Gross realisations during the quarter stood at US$108.9/bbl (US$79.2/bbl), up 38% yoy. The company shared a subsidy burden of `12,135cr vs. `4,999cr of subsidy shared in 4QFY2010. Thus, a substantial increase of 143% in subsidy burden resulted in around 25% dip in net realisations for the company. Thus, net realisations during the quarter stood at US$38.7/bbl (US$51.4/bbl). ONGC’s OPM during the quarter contracted by 936bp yoy to 49.5% (58.9%), resulting in operating profit registering a 15.4% yoy decline to `7,972cr (`9,418cr). DD&A cost was higher by 7.6% yoy to `4,788cr (`4,448cr), higher than our estimates, on account of higher dry wells written off during the quarter. Other income during the quarter also came in above our estimates, increasing by 24.8% yoy to `586cr as against `469cr registered in 4QFY2010.

    Outlook and valuation: We believe the risk-reward ratio is now favourable with limited downside from current levels. Although, there is an FPO overhang on the stock in the near term, we believe increased volumes and net realisation should offset these concerns. We maintain Buy on the stock with a target price of `328, translating into an upside of 16.5% from current levels.