ONGC Rating: Neutral; High write-off impacted earnings

Q4 standalone EBITDA at Rs 186 bn (+16% q-o-q, +84% y-o-y) was 2% above consensus, but came in 5% below our estimate on higher other expenses (+35% q-o-q, +17% y-o-y). Standalone Q4 PAT at Rs 89 bn (+2% q-o-q, +86% y-o-y) was 18-19% below our/consensus estimates due to high exploratory write-off of Rs 18 bn (+33% y-o-y, +116% q-o-q). For FY22, standalone Ebitda at Rs 599 bn was up 83% y-o-y, driven by ~80% y-o-y higher net oil realisations, while oil/gas production continued the y-o-y declining trend (-4%/-5% y-o-y).

Standalone FY22 PAT (adjusted for lower tax rate adoption) at Rs 306 bn was up sharply by 184% y-o-y, driven by highest ever net oil realisation in FY22 as there was no under-recovery burden sharing or windfall taxes (yet!). ONGC’s FY22 consolidated Ebitda at Rs 858 bn was up 52% y-o-y and adjusted PAT at Rs 354 bn was up 116% y-o-y. ONGC declared a final dividend of Rs 3.25/share, leading to an overall dividend of Rs 10.5/share for FY22 (implying ~7.3% dividend yield and ~33% dividend payout).

Production continues on declining trend, exploration capex to rise by 1.5x

Q4 oil production at 5.4mmt (-1% q-o-q) and gas production at 5.3 bcm (-4% q-o-q), continued to record y-o-y declining trend and were down 3% and 4% y-o-y, respectively. Q4 oil sales were at 5.1mmt (-2% y-o-y, +1% q-o-q) while gas sales were at 4.1bcm (-7% y-o-y, -5% q-o-q). In the near-term, ONGC’s volume growth hinges on production ramp-up from the much delayed KG-98/2 block in Eastern offshore. Recently, ONGC has also announced an increase in exploration capex to Rs 310 bn over FY22-25F (vs Rs 207 bn over FY19-22) and also plans to leverage international collaboration with global majors.

Higher O&G prices boost profitability

ONGC’s profitability was boosted by ~79% y-o-y increase in oil realisations in FY22. We note, oil prices have inched up further to above $110/bbl, since the onset of the Russia-Ukraine conflict and could remain elevated in the near term. Similarly, domestic gas prices were up ~62% in H2FY22. Domestic gas prices were hiked by further 111% to $6.1/mmbtu from Apr’22 and could increase further to $9.5-10/mmbtu in the next revision from Oct’22.

Clarity on windfall taxes is key trigger

Higher oil and gas prices could potentially further boost ONGC’s profitability in FY23F. However, we note several European countries have announced windfall taxes on oil and gas companies. As per recent media reports, GoI is also considering windfall taxes on oil and gas producers. On our estimates, every $5/bbl change in oil realisation may impact ONGC’s FY23F standalone EPS by 8% (Rs 2.67/sh) and every $0.5/mmbtu change in gas realisation, could impact ONGC’s FY23F standalone EPS by 4% (Rs 1.3/sh).

Despite no under-recovery sharing and /or windfall taxes, ONGC has de-rated sharply over past five years. Aclarity on the amount of windfall taxes (if any) would improve the earnings visibility and potentially ease some of our concerns on ONGC.

Valuation: We use a SOTP methodology to derive our TP, valuing ONGC’s standalone domestic business at 0.8x FY24F price/book. We value OVL at 6x FY24F P/E. We value its stake in listed investments at a 20% holding company discount to CMP to arrive at our TP of Rs 185. We maintain Neutral. The stock currently trades at 3.5x FY24F P/E and 0.62x FY24F P/B.

Nomura