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ONGC 3QFY2014 performance highlights and results update
For 3QFY2014, Oil & Natural Gas Corporation (ONGC) reported profitability which was higher than our estimates. We recommend Buy rating on the stock.
Lower gas volumes drag top-line: ONGC’s 3QFY2014 net sales decreased 1.2% yoy to Rs.20,745cr (below our estimate of Rs.21,643cr) due to lower gas volumes (down 2.4% to 4.9mmscm), which although were partially offset by higher net realizations in INR terms (+9.9% to Rs.2,852/bbl) due to INR depreciation in the quarter. The company shared a subsidy burden of Rs.13,764cr in 3QFY2014, compared to Rs.12,330cr in 2QFY2014 and Rs.13,796cr in 3QFY2013.
EBITDA jumps on lower other expenses: The EBITDA increased by 8.6% yoy to Rs.12,318cr due to lower other expenses (down 22.2% to Rs.191cr) while the other income increased 107.8% yoy to Rs.2,662cr and the net profit grew by 28.1% yoy to Rs.7,126cr (above our estimate of Rs.5,558cr).
Other updates: In an another development the Supreme court has overruled the Gujarat High Court’s decision directing ONGC to retrospectively pay the arrears of royalty to the state of Gujarat amounting to ~Rs.10,000cr. However, the Supreme Court has now ordered the company to pay royalty at a pre-discounted rate from February 2014 and no retrospective payment needs to be made. The case is however still into arbitration and hence we have not modeled a higher royalty into our financials.
Outlook and valuation: We remain positive on ONGC from a long-term perspective due to potential reserve accretion from its large exploration and production (E&P) acreage. Further, we expect the government to progressively raise diesel prices during CY2014 and CY2015, which is expected to result in lower subsidy burden for ONGC. Also, a concrete subsidy-sharing formula by the government could make ONGC’s cash flows more predictable. The stock is currently trading at an inexpensive valuation of 8.8x FY2014E and 7.5x FY2015E PE. Hence, we recommend a Buy rating on the stock with a SOTP target price of Rs.318.
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