Tuesday, March 20, 2012

>ONGC: Adverse subsidy sharing would make us bearish

■ FY13-14 EPS cut by 11% and PO by 17% to Rs298
The cess on crude oil has been raised from Rs2,575/ton (US$6.9/bbl) to Rs4,635/ton (US$12.4/bbl) in the FY13 budget. It has meant a cut in ONGC’s FY13-14 EPS by 11%. We have also cut ONGC’s PO by 17% to Rs298/share from Rs358/share earlier. ONGC’s revised PO implies 9% potential upside. We downgrade ONGC to Neutral given the hit from rise in cess and also as hope of reforms are fading after the recent state election results.

■ EPS cut due to rise in cess by 80% (US$5.5/bbl)
Cess would increase on production from ONGC’s nomination blocks and the pre-NELP Rajasthan block. The increase in cess on crude oil by 80% (US$5.5/bbl) to Rs4,635/ton (US$12.4/bbl) has meant a cut in ONGC’s FY13-14 EPS by 11%. If there is no diesel price hike or only a modest hike ONGC’s FY13 EPS is likely to be YoY lower. Share in subsidy of ONGC and its upstream peers is another crucial factor, which will influence its earnings outlook.

■ Cut PO on rise in cess; PO at 10% discount to fair value
ONGC’s fair value is down by 7% to Rs332/share due to the rise in cess on crude. ONGC trades at discount to its fair value when there is no progress on reforms, there is uncertainty on subsidy sharing and earning outlook is poor. We are skeptical on reforms in the remaining 2-year term of this government. When there is no progress on reforms risk of adverse subsidy sharing also rises. We have therefore fixed ONGC’s PO at 10% discount to its fair value at Rs298/share.

■ What would make us bullish or bearish on ONGC?
Hefty hike in subsidized products or steep fall in oil price and favorable subsidy sharing, which improves earnings outlook would make us bullish. Sharply higher oil price and adverse subsidy sharing would make us bearish on ONGC.

To read full report: ONGC