>ONGC (RELIANCE MONEY)

Price target achieved
During the past 2 weeks the markets are in an uptrend and in the process, prices of extremely beaten down stocks seem to be catching up with their fundamentals. ONGC, since our Buy recommendation on 30th January 2009 after Q3 FY09 results has given a return of 24%. At current levels, we advise our clients to book profits and enter at lower levels.

Our investment argument in ONGC was basically linked to the cheap valuations and attractive dividend yield. At our recommended price of Rs 640, the stock was earlier trading at extremely cheap valuations of 6.2x FY10 EPS estimates, and dividend yield at that point in time was at attractive 5%. In our view, the valuations at that point of time didn't capture various positives like low oil prices leading to lower subsidy burden, depreciating rupee which contributes substantially to bottom-line and extreme pessimism of market which was extrapolating poor net realizations at $34 per barrel in Q3 FY09 in future also. We expect net realization of ONGC to remain at $45-$50 per barrel mark irrespective of oil price movements.

However, at the current market price of Rs 794, the stock is trading at FY10 P/E multiple of 7.5x, which we believe captures most of the positives. Though over the long term in view of the company's ability to generate significant free cash flows and debt free status we continue to like the stock, but believe that at higher levels, market will again start focusing on lack of pricing power above $50 per barrel of oil prices and uncertainty regarding subsidy burden. Keeping in view the uncertain market conditions, we advise our clients to book profits and re-enter at lower levels.

Valuations
The stock is currently trading at FY09 and FY10 P/E multiple of 7.9x and 7.5x respectively. ONGC continues to generate significant amount of free cash flows to support its future investment needs, and the company has a strong balance-sheet with almost a zerodebt position and healthy cash flows. However, in view of lack of support of valuations and uncertain market conditions we advise our clients to book profits and re-enter below Rs 765 levels.

To see full report: ONGC