8 May 2017
Update
| Sector:
Oil & Gas
BSE SENSEX
29,859
S&P CNX
9,285
ONGC
Buy
CMP: INR183
TP: INR233 (+27%)
Crude price dip an opportunity to buy
Demand growth to tighten oil prices in 2HCY17
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
ONGC IN
12,833
212/133
-1/-7/12
2,442.3
35.7
1438
31.9
Financials Snapshot (INR b)
Y/E Mar
FY17E FY18E
1408
1683
Sales
549
689
EBITDA
196
257
NP
15.3
20.0
EPS (Rs)
12.2
31.1
EPS Gr. (%)
150
158
BV/Sh. (Rs)
10.4
13.0
RoE (%)
9.0
10.8
RoCE (%)
12.0
9.2
P/E (x)
1.2
1.2
P/BV (x)
EV/EBITDA (x)
5.2
4.2
Div. Yield (%)
4.3
5.6
Brent has declined by ~5% to a five-month low due to concerns on oversupply, led
by production growth in the US.
However, compliance by OPEC has been strong at 98% since January 2017. Russia
has also been complying, though not fully. Both OPEC and non-OPEC have resolved
to continue with production cuts beyond the current mandate.
This coupled with demand growth of 1.4mnbopd in 2017 is expected to result in
tightening of oil prices in 2HCY17.
Assuming Brent of USD55/60/bbl in FY18/19, we estimate ONGC’s EPS at
INR20.3/22.9. Every USD5/bbl change in oil price causes ~10% change in EPS.
Valuing the stock at 10x FY19E EPS and adding the value of investments, we arrive
at a target price of INR233 (unchanged). Buy.
FY19E
1905
801
294
22.9
14.5
167
14.1
11.6
8.0
1.1
3.6
6.4
Brent declines to five-month low
Since September 2016, US oil production has been steadily increasing by an
average of 0.08mnbopd every month.
From 8.9mnbopd in 2016, US oil production is expected to rise to 9.2mnbopd
in 2017 and to 9.9mnbopd in 2018.
As a result, despite almost full OPEC compliance and partial non-OPEC
compliance, Brent has declined to USD47/bbl.
However, demand growth a strong 1.4mnbopd
Shareholding pattern (%)
As On
Dec-16 Sep-16 Dec-15
Promoter
68.9
68.9
68.9
DII
11.7
11.9
11.5
FII
5.8
5.4
6.0
Others
13.6
13.8
13.6
Note: FII Includes depository receipts
Stock Performance (1-year)
ONGC
Sensex - Rebased
220
200
180
160
140
120
Unlike 2009, when oil demand fell by 1.2mnbopd, oil demand is expected to
grow at 1.4mnbopd in 2017.
For a balanced market, demand for OPEC crude oil production is 33.1mnbopd,
which is slightly higher than current production of 32.6mnbopd by OPEC. If
OPEC and non-OPEC maintain their production cuts in 2HCY17, it would result
in a tighter demand-supply, in turn resulting in higher oil prices.
According to International Energy Agency (IEA), global oil and gas discoveries
have declined to a 70-year low due to reduced expenditure. This would have a
further positive impact on oil prices.
Reiterate Buy on ONGC
Our recent note
highlighted cost efficiencies and expected growth in oil and
gas production for ONGC.
Assuming Brent of USD55/60/bbl in FY18/19, we estimate EPS at
INR20.3/22.9. Every USD5/bbl change in oil price causes ~10% change in EPS.
Valuing the stock at 10x FY19E EPS and adding the value of investments, we
arrive at a target price of INR233 (unchanged). We reiterate
Buy.
Swarnendu Bhushan
(Swarnendu.Bhushan@MotilalOswal.com); +91 22 6129 1529
Abhinil Dahiwale
(Abhinil.Dahiwale@MotilalOswal.com); +91 22 6129 1566
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Investors are advised to refer through important disclosures made at the last page of the Research Report.