>ONGC (CITI)

Sell: US$60-70 Crude Reduces Deregulation Hopes

■ Oil forecasts revised — We are adjusting our global oil (Brent) forecasts tovUS$56/bbl (US$48) for 2009E, US$65 (US$55) for 2010E, and US$65 (US$60/bbl) for 2011E. Our LT assumption (2012E+) stays at US$65/bbl.

■ Modestly increasing FY10-11E earnings — Our assumptions for ONGC are increased marginally, by 1-5% over FY10-11E. The FY10E estimate change is primarily on account of the APM gas price hike (15-20%) that we are now assuming, in line with the likely Cabinet proposal. This however falls short of the market’s heightened expectations ($4.2/mmbtu). For FY11E, while our crude assumption increases from US$60 to US$65, the EPS increase is more subdued at 5%, as net realisations on domestic crude remains flat at ~US$50.

■ Subsidy burden to increase in FY11 — Our earlier FY11E assumptions incorporated only LPG/SKO under-recoveries (Rs319bn total; 1/3rd sharing) at US$60 crude, which we now expect to rise to Rs466bn (incl. auto fuel losses) at US$65 crude, suppressing net realisations. While full deregulation of auto fuels could lead to a lower figure (Rs374bn), our assumption is premised on some losses on auto fuels as well, as the quantum of price hikes will likely lag the required increases as long as crude is between US$60-70.

■ Maintain Sell; Rs910 target price — We maintain Sell with a target price of Rs910 (Rs820 earlier) as we roll forward to Sep-10E (Mar-10E) while maintaining our 10x target P/E. The stock trades at 11x P/E, the upper end of its historical 7-11x trading band. Any move by the government to fully deregulate auto fuel will be a positive surprise and upside risk to our estimates.

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