>ONGC (INDIABULLS)

Lower subsidy burden: a reason to cheer
For Q4’09, Oil and Natural Gas Corporation Ltd.'s (ONGC)’s net sales declined 12.3% yoy to Rs. 137 bn, triggered by lower crude oil prices (at around USD 40-45 per barrel), coupled with the Government of India’s (GoI's) subsidy-sharing arrangement that compensates the oil marketing
companies (OMCs) for their under-recoveries. However, going forward, we expect an improvement in the Company’s top-line, driven by a substantial reduction in the Company’s subsidy burden, a result of the recent price hike in auto fuel prices and the new subsidy-sharing regime. According to this regime, the GoI will absorb the entire subsidy burden of OMCs on the sale of cooking fuel. However, we believe that the current market price (CMP) of Rs. 999 factors in most of these positives. Hence, we give a Hold rating to the stock.

Waiver of the subsidy-sharing regime to add value: On July 1, 2009, the Oil Secretary RS Pandey announced the ruling that upstream oil companies will not be required to share the subsidy on LPG and kerosene. The underrecoveries on the sale of LPG and kerosene will be taken care of by the Government. ONGC contributes more than 30% of the total domestic production of natural gas, and such a move is clearly going to boost the Company’s top-line.

Fuel price hike to reduce subsidy burden on auto fuel sales: Further, the GoI announced an increase in the petrol and diesel prices by Rs. 4 per litre and Rs. 2 per litre, respectively, in an attempt to reduce the underrecoveries borne by the OMCs. ONGC, which shares a substantial portion of these under-recoveries, stands to benefit from this hike in the form of lower subsidy burden.

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