>ONGC: Government likely to take up policy measures to tackle subsidies

• ONGC’s consolidated production to fare better as its IOR/EOR initiatives and marginal fields development bear fruit. Expect 6% CAGR over FY12-15E to 73mtoe
• Declining crude oil price scenario augurs well for ONGC as it has a positive impact on its oil net realization. Expect ONGC’s net realizations to improve to US$55.7/bbl in FY13 and US$58.5/bbl in FY14
• Current government finances point towards fuel price hikes as the only solution. Declining oil prices to further aid policy reforms to tackle the subsidy issue
• Given its improving production profile, lower oil prices and possibility of price hikes, we recommend Accumulate rating for ONGC with a PT of Rs327

Consolidated production to improve at 6% CAGR over FY12-15E
ONGC is expected to have a consolidated production growth of 6% CAGR over FY12-15E in oil and gas over 2012-15 to 73mtoe on the back of new field development efforts, IOR/EOR efforts on existing domestic fields and increase in oil production from Rajasthan JV field. This is in contrast to its flat production at 61mtoe during FY07-12.


ONGC to realize higher oil prices from decline in crude oil
The current decline in crude oil prices is beneficial for ONGC as its realization on crude oil goes up. We have factored net realization of US$56/58.5bbl in FY13/14 as against US$54.7/bbl for FY12. At 40% share of upstream share in subsidies, ONGC’s net realization on crude oil ranges between US$64/bbl-US$53/bbl for a crude oil price range of US$80/bbl-US$120/bbl


Government likely to take up policy measures to tackle subsidies
Given the precarious financial status of the government, it has no choice but to take up policy measures to tackle subsidy issue. The recent decline in crude oil prices provides government an opportunity to bring in favorable policy measures to tackle subsidies. We expect oil prices to remain subdued ahead on the back of weak oil demand fundamentals globally. Any price hike will have a substantial impact on ONGC and provide valuation upsides.


Valuations
We initiate coverage on ONGC with Accumulate rating given its production growth ahead and likely government action on the fuel subsidy front. Our target price for ONGC works out to Rs327/share, with the standalone business contributing Rs224/share at 4xEV/EBIDTA and OVL, Rs68/share at 5xEV/EBIDTA on FY14 estimates. The balance contribution comes from MRPL (Rs9/share) and cash and investments of Rs26/share. ONGC also offers an attractive dividend yield of ~3.5%.


RISH TRADER