We raise Oil & Natural Gas Corp (ONGC) shares rating to 'outperform with a target price of Rs 345 per share, which is based on 4.1x FY15 Ebitda. As ONGC volumes improve, earnings could nonetheless grow c25% from FY13 lows.
ONGC shares have fallen 20% since its recent peak and has given up almost all outperformance earned during the recent rally. We use global comparable multiples to estimate implied FY15 Ebitda, which helps estimate ‘implied subsidy’ payments by ONGC under various oil price and $-INR assumptions.
At Rs 270 per share, we estimate ONGC is broadly pricing in (a) no net gains from higher gas prices; (b) oil prices (in rupee terms) close to current levels; (c) minimal further retail diesel price increases (or LPG distribution savings); and (d) government subsidy payments of around Rs 60,000 crore in FY15 (FY12/13 actual payments between Rs 83,500 crore and R1,00,000 crore).
The stock would then have downside risks if rupee crude prices increased materially, or if the government stopped price hikes and attempted to reduce its payments in FY15 to below amounts it has paid historically. Lower rupee crude prices and continued/ meaningful diesel price increases could drive a material upside, however.
Other than for large volatility in $-INR/Brent, these expectations have low downside. The government discipline on monthly diesel price increases can be a catalyst. ONGC’s domestic crude production could increase to 29.9 MT in FY15 from 26.4 MT in FY13, with improving momentum in 2H14.