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ICICI Securities
ONGC (Buy)
Target: ₹124
CMP: ₹80.25
Oil and Natural Gas Corporation’s Q1-FY21 standalone and consolidated EPS was down 92-98 per cent y-o-y, hit by fall in oil & gas realisation, sales volumes and other income. Consolidated EPS fall was steeper at 98 per cent y-o-y due to share of loss of associates of ₹560 crore (profit of ₹270 crore in Q1-FY20) and subsidiary OVL of ₹330 crore (₹1,250 crore profit in Q1-FY20).
What is encouraging is ONGC remained in the black despite low oil & gas prices, which was due to 40 per cent ($11.3/boe) y-o-y decline in operational expenditure. We believe oil is out of the woods and will gradually rise.
Recent indications from the Government of India, that it is unlikely to divest its stake in PSUs like ONGC, are encouraging as divestment via ETFs has hurt ONGC’s stock performance.
Under the prevailing gas pricing formula, gas prices would be about $2.2/mmbtu in FY21E. Deregulation of gas prices could improve investor sentiment in ONGC and its earnings; spot LNG price, which was at $2.1/mmbtu in Q1-FY21, is over $4/mmbtu now.
The recent launch of gas trading exchange, and the oil minister’s comments on gas price deregulation, are encouraging.
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