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We maintain ‘buy’ on ONGC and remain positive on the stock due to (a) likely increase in net realisation because of lower subsidy; (b) ONGC being the significant beneficiary of a scheduled gas price hike from April 1, 2014; and (c) attractive valuations. The stock trades at 8.8x FY15e EPS of R36. Our SOTP-based target price is R385.
The company management remains upbeat on a scheduled gas price hike as well as ongoing diesel reforms and the likelihood of a subsidy reduction. Diesel reforms (under-recoveries set to halve by FY16), a proposed gas price hike (from April 1 ) and >4% CAGR (FY14-16e) in group production over the next two years are key positives, in our view.
The scheduled doubling of gas price from April 1 to ~$8.4 per mmbtu will boost ONGC’s FY15e EPS by ~30%. Of the additional revenue from gas price hike, the government receives ~50% through levies and taxes. Hence, any additional subsidy burden on ONGC is unlikely.
However, with clarity yet to emerge, we conservatively model gas price of $6.3/mmbtu (only 50% pass-through) from FY15 in our base-case scenario to factor in likely subsidy towards power/fertilisers. If the full gas price benefit is passed on to ONGC, our FY15E EPS will further increase by ~16%. ONGC expects standalone oil production to increase from 22.6mmt in FY14e to 24.9mmt, led by IOR/EOR and redevelopment of fields like D-1, B-193 and Cluster-7.