>ONGC (GOLDMAN SACHS)

OIL & NATURAL GAS CORPORATION
Action - SELL

Five structural issues that concern us about ONGC; reiterate Sell

Source of opportunity
We re-visit the fundamental premise for our outlook on ONGC and highlight our five top concerns, which, in our view, will likely keep ONGC stock unattractive over the medium term. Our key concerns are:
(i) Overseas growth strategy has not been very effective
(ii) Unexciting execution track record in domestic business,
(iii) Limited focus on cost control,
(iv) Corporate governance issues with cash withdrawals by promoter, and
(v) ONGC being structurally unattractive with downside from lower oil price but limited upside from price rebound.
Also the key positive stock catalysts are in government hands – hence unpredictable.

Catalyst
1) Downgrades to FY10E-11E consensus estimates, which remain high,
2) lack of meaningful domestic exploration successes,
3) production decline in overseas assets;
4) price cuts in retail fuel, and
5) announcement of any expensive overseas acquisition.

Valuation
We reiterate Sell on ONGC, with P/B-based 12-month target price of Rs574, implying potential downside of 14%. Our target multiple of 1.4x FY09E P/BV, based on 2003 trough multiple, is actually generous (mainly due to ONGC’s net cash position), since ONGC’s FY10E ROE is likely to be much lower than FY03-04 levels. We have cut FY09E-11E EPS by 6%-15% primarily driven by lower volume and higher costs. Though some investors like ONGC for its large government holding and for not being widely owned by institutional investors, we find it hard to own the stock, given that it has hardly any catalysts to surprise on the upside but has downside risk from adverse government action.

To see full report: ONGC