Recommendations » India

ONGC 3QFY2012 performance highlights and results update

Contributed by Angel Broking

For 3QFY2012, ONGC’s EBITDA and adjusted PAT decreased by 18.3% yoy and 49.2% yoy on account of higher subsidy burden. We recommend Accumulate on the stock.

Net crude oil realization dips by 30.9% yoy: ONGC’s top line decreased by 2.5% yoy to Rs.18,124cr. The company’s crude oil net realization declined by 30.9% yoy to US$44.8/bbl on account of higher subsidy burden. The company shared a subsidy burden of Rs.12,536cr in 3QFY2012 vs. Rs.4,222cr of subsidy shared in 3QFY2011 and Rs.5,713cr in 2QFY2012.

Higher depreciation further dents the bottom line: During the quarter, EBITDA margin slipped by 1,183bp yoy to 61.0% and EBITDA decreased by 18.3% yoy to Rs.11,051cr. Depreciation and amortization expenses increased by 24.5% yoy to Rs.4,532cr due to higher dry well write-offs during the quarter. The company reported one-time gain of Rs.3,142cr related to royalty reimbursed by Cairn India. Excluding this one-time gain, adjusted net profit decreased by 49.2% yoy to Rs.3,599cr.

Oil and gas production guidance: ONGC aims to increase its oil and gas production (including JVs) to 28.8mn tonnes (+4.0% yoy) and 27bcm (+7.0% yoy), respectively, for FY2013.

Outlook and valuation: We expect robust volume growth from ONGC Videsh (OVL), which aims to increase its production at a CAGR of 12.4% during FY2011-13. Also, a concrete subsidy-sharing formula by the government could make ONGC’s cash flows more predictable. The stock is currently trading at 9.4x and 8.5x FY2012E and FY2013E PE, respectively, compared to its five-year average forward PE of 10.2x. Considering the anticipated growth in volumes from OVL, we recommend Accumulate on the stock with an SOTP target price of Rs.323.