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RESULTS REVIEW 1QFY15 14 AUG 2014

ONGC
BUY








Regulatory clarity is key
ONGC reported EBITDA of Rs 126.9bn (+50% YoY) led
by higher net oil realisation (+25%) and lower
operating expenses (-37%). Higher exploration write-
off of dry wells (+2.4x YoY) resulted in below
estimate PAT of Rs 47.8bn (+19%).
We see multiple triggers for ONGC (1) Govts focus on
energy will lead to stable policy regime (2) Gas price
hike, our base case assumption for new gas price is
USD 7.2/mmbtu from 1 Oct 2014 (3) Increase in
production (4) Lower absolute under recovery
sharing due to regular diesel price hike (5) Volume
growth at OVL. We are cautious on subsidy sharing
and have modelled that Govt would keep maximum
benefits of declining UR. In our base case ONGCs
share in UR is rising from 40% in FY14 to 55% in FY16.
Our SOTP target for ONGC is Rs 470/sh (11x FY16E
standalone EPS + Rs 64/sh for OVL at 10x FY16E EPS
of Rs 6.4/sh and Rs 21/sh for other investments). We
feel that the overhang related to disinvestment is a
buying opportunity. Maintain BUY.
1QFY15 highlights
Oil realisation (net of subsidy sharing) was US$
47.2/bbl (+17% YoY, +44% QoQ). In INR terms it was Rs
2,818/bbl (+25% YoY, +44% QoQ). Higher crude price
and weak INR favoured ONGC.
Subsidy sharing for the quarter was $ 62.3/bbl (flat
YoY, -16% QoQ). Subsidy was Rs 132 bn (5% YoY, -19%
QoQ).
Standalone oil sales volumes were 5.9 mmt (-0.5% YoY,
-0.4% QoQ). Gas sales volumes were 4.7 BCM (-5% YoY,
3% QoQ).
OVL : Oil volumes were 1.4 mmt (+6% YoY) and gas
volumes were 0.87 BCM (+7% YoY).
Under recovery overhang subsiding
We expect that oil under recovery to decline from Rs
1.4tn in FY14 to Rs 1.0tn/0.9tn in FY15/16 due to
regular price hikes in diesel. We feel that there is an
adequate room for govt to reduce their subsidy burden
and to give higher returns to ONGC/OIL (Please refer
chart on page-2).
FINANCIAL SUMMARY (STANDALONE)
Year Ending March (Rs bn) 1QFY15 1QFY14 YoY (%) 4QFY14 QoQ (%) FY13 FY14 FY15E FY16E
Net Sales 218.51 193.09 13.2 213.13 2.5 830.05 838.89 926.32 1,053.68
EBITDA 126.92 84.89 49.5 115.80 9.6 436.05 444.90 498.12 580.94
PAT 47.82 40.16 19.1 48.89 (2.2) 209.26 220.95 244.57 299.56
Diluted EPS (Rs) 5.6 4.7 19.1 5.7 (2.2) 24.5 25.8 28.6 35.0
P/E (x)

16.4 15.6 14.1 11.5
EV / EBITDA (x)

7.8 7.6 6.8 5.8
RoE (%)

17.7 16.9 17.0 18.7
Source: Company, HDFC sec Inst Research
INDUSTRY OIL & GAS
CMP (as on 13 Aug 2014) Rs 402
Target Price Rs 470
Nifty 7,740
Sensex 25,919
KEY STOCK DATA
Bloomberg/Reuters ONGC IN/ONGC.BO
No. of Shares (mn) 8,555
MCap (Rs bn) / ($ mn) 3,439/56,176
6m avg traded value (Rs mn) 2,316
STOCK PERFORMANCE (%)
52 Week high / low Rs 472/234
3M 6M 12M
Absolute (%) 7.9 47.0 46.2
Relative (%) (0.7) 18.6 11.4
SHAREHOLDING PATTERN (%)
Promoters 68.94
FIs & Local MFs 10.59
FIIs 6.92
Public & Others 13.55
Source : BSE





Satish Mishra
satish.mishra@hdfcsec.com
+91-22-6171-7334

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

ONGC : RESULTS REVIEW 1QFY15


Diesel deregulation is win-win for all
We expect total oil under recovery to decline from Rs
1.4tn in FY14 to Rs 1.0tn and Rs 0.9tn respectively in
FY15 and FY16.
Benefits to Government : Considering current tight
fiscal condition, we believe that govt would like to
keep maximum benefits. We have modelled govt
contribution to decrease from Rs 708bn in FY14 to Rs
371bn and Rs 312bn in FY15 and FY16 respectively.

Govt subsidy contribution to decline

Source: Company, HDFC sec Inst Research



Benefits to ONGC : Despite rise in ONGC share in
total contribution from 40% to 55%. We expect that
Rs/bbl realisation will rise from Rs 2,478/bbl in FY14
to Rs 2,718/bbl and Rs 2,982/bbl in FY15 and FY16
respectively.




ONGCs absolute realisation (Rs/bbl) to increase

Source: Company, HDFC sec Inst Research









We have assumed crude price at
$ 105/bbl and INR-US$ at 60 for
both FY15 and FY16







Govts subsidy share will reduce
by ~50% in FY15



ONGCs realization (Rs/bbl) to
increase by ~10%/yr in FY15 and
FY16
274
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564 524 500 466
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ONGC (Rs bn) Govt (Rs bn)
Others (Rs bn) ONGC % Share
Rs bn %
38
16
36
63 63 66
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48
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Discount ($/bbl) Post discount ($/bbl)
Post discount (Rs/bbl)
Page | 2

ONGC : RESULTS REVIEW 1QFY15


QUARTERLY FINANCIALS - SNAPSHOT
(Rs bn) 1QFY15 1QFY14 YoY (%) 4QFY14 QoQ (%)
Net Sales 218.51 193.09 13.2 213.13 2.5
Statutory Levy 58.27 55.72 4.6 55.18 5.6
Employee Expenses 4.07 5.90 (31.0) 4.53 (10.1)
Other Operating Expenses 29.26 46.59 (37.2) 37.63 (22.2)
EBIDTA 126.92 84.89 49.5 115.80 9.6
Exploration write off 38.28 15.68 144.1 23.94 59.9
Depreciation, depletion 25.62 23.33 9.9 35.80 (28.4)
Interest Cost 0.00 0.00

0.00

Other Income 8.95 11.96 (25.2) 13.72 (34.7)
PBT 71.97 57.84 24.4 69.77 3.1
Tax 24.15 17.68 36.6 20.88 15.7
PAT 47.82 40.16 19.1 48.89 (2.2)
EPS 5.6 4.7 19.1 5.7 (2.2)
Source: Company, HDFC sec Inst Research
MARGIN ANALYSIS

1QFY15 1QFY14 YoY (bps) 4QFY14 QoQ (bps)
Statutory levy as % of Net Sales 26.7 28.9 (219) 25.9 77
Employee Expenses as % of Net Sales 1.9 3.1 (119) 2.1 (26)
Other Operating Expenses as % of Net Sales 13.4 24.1 (1,074) 17.7 (426)
EBIDTA Margin (%) 58.1 44.0 1,412 54.3 375
Net Profit Margin (%) 21.9 20.8 108 22.9 (106)
Tax Rate (%) 33.6 30.6 300 29.9 363
Source: Company, HDFC sec Inst Research
PHYSICAL PERFORMANCE

1QFY15 1QFY14 YoY (%) 4QFY14 QoQ (%)
Oil sales volumes from nominated blocks (mmt) 4.7 4.8 (1.6) 4.7 (0.1)
Oil sales volumes from JV (mmt) 1.2 1.1 4.3 1.2 (1.3)
Total Oil (mnT) 5.9 5.9 (0.5) 5.9 (0.4)
Gas sales volumes from nominated blocks (bcm) 4.4 4.6 (4.4) 4.6 (3.9)
Gas sales volumes from JV (bcm) 0.3 0.3 (7.6) 0.3 5.3
Total Gas (BCM) 4.7 4.9 (4.6) 4.9 (3.3)
Oil realisation pre UR (US$/bbl) 109.5 103.1 6.2 106.7 2.7
Oil realisation post UR (US$/bbl) 47.2 40.3 16.9 32.8 43.8
Oil realisation post UR (Rs/bbl) 2,818 2,256 24.9 2,025 39.1
Source: Company, HDFC sec Inst Research

Higher crude price, higher net
oil realisation and weaker INR
resulted in 25% YoY growth in
the oil realisation

Exploration writeoff on dry well
more than doubled

















Mgt has guided for sequential
growth in volumes in coming
quarters

Page | 3

ONGC : RESULTS REVIEW 1QFY15


ASSUMPTIONS
Particulars FY11 FY12 FY13 FY14 FY15E FY16E FY17E
ONGC Standalone



Sales Volumes




Crude - nominated (mnT) 20.4 19.7 19.2 18.9 19.5 20.1 20.5
Crude - JV (mnT) 2.5 3.4 4.5 4.7 4.7 5.1 5.2
Gas - nominated (BCM) 18.2 18.2 18.4 18.3 18.8 19.4 20.0
Gas - JV (BCM) 2.0 2.0 1.8 1.3 1.5 1.5 1.5
Value added product (mnT) 3.2 3.1 3.1 3.0 2.9 2.9 2.9



Nominated block



Gross oil realisation (US$/bbl) 89 117 111 107 105 105 105
Subsidy sharing (US$/bbl) 36 63 63 66 60 55 50
Net oil realisation (US$/bbl) 54 55 48 41 45 50 55
Net oil realisation (Rs/bbl) 2,451 2,623 2,605 2,478 2,718 2,982 3,271



UR Subsidy sharing by ONGC (Rs bn) 249 445 494 564 524 500 466
Gross capex (Rs bn) 273 278 283 356 350 350 350

Gas realisation (US$/mmbtu) 3.9 4.2 4.2 4.2 5.7 7.2 7.2
INR-USD 45.6 48.0 54.4 60.5 60.0 60.0 60.0
Source: Company, HDFC sec Inst Research
OVL DETAILS

FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Crude oil production volumes (mnT) 6.8 6.2 4.3
5.5
5.9 6.3 6.7
Gas production volumes (BCM) 2.7 2.5 2.9 2.9 2.9 3.0 3.0
Revenue (Rs bn) 184.11 223.47 175.58 217.77 243.76 260.04 277.45
EBITDA (Rs bn) 91.91 93.10 101.91 124.27 144.56 155.55 167.32
PAT (Rs bn) 26.91 27.21 39.29 44.45 51.12 54.42 57.85
Source: Company, HDFC sec Inst Research


Building increasing in volumes






Even with higher proportion of
UR sharing, Rs/bbl realization
will increase by ~10%/yr




We have assumed $3/mmbtu
increase in gas price for ONGC



Building increasing in volumes

Page | 4

ONGC : RESULTS REVIEW 1QFY15


CHANGE IN ESTIMATES (Standalone)
(Rs bn) FY14 FY15
Old New % Change Old New % Change
Revenues 926.32 926.32 0.0 1,053.68 1,053.68 0.0
EBITDA 498.12 498.12 0.0 580.94 580.94 0.0
PAT 244.57 244.57 0.0 299.56 299.56 0.0
EPS (Rs/sh) 28.6 28.6 0.0 35.0 35.0 0.0
Source: HDFC sec Inst Research

VALUATION

FY16E EPS
(Rs/sh)
Target
Multiple
Value
(Rs/sh)
Basis
ONGC standalone 35.0 11.0 385 x EPS
OVL 6.4 10.0 64 x EPS
Traded investment

0.8 21 at 20% discount to CMP
Target Price

470

Source: Company, HDFC sec Inst Research


PEER VALUATIONS

CMP
(Rs)
Mcap
(Rs bn)
Rating
EPS (Rs) P/E P/BV ROE (%)
FY13 FY14 FY15E FY16E FY13 FY14 FY15E FY16E FY13 FY14 FY15E FY16E FY13 FY14 FY15E FY16E
Cairn India 315 590 NEU 63.8 66.3 53.8 52.3 4.9 4.7 5.9 6.0 1.3 1.0 0.9 0.8 24.9 23.6 16.4 14.2
ONGC 402 3,439 BUY 24.5 25.8 28.6 35.0 16.4 15.6 14.1 11.5 2.8 2.5 2.3 2.0 17.7 16.9 17.0 18.7
RIL 990 3,200 BUY 65.0 68.0 78.8 85.6 15.2 14.6 12.6 11.6 1.8 1.6 1.5 1.3 12.1 11.7 12.3 12.0
GAIL 412 522 NEU 31.7 32.3 32.6 36.8 13.0 12.7 12.6 11.2 2.2 1.9 1.8 1.6 17.5 16.0 14.6 15.0
IGL 355 50 NEU 25.3 25.7 30.2 32.6 14.0 13.8 11.8 10.9 3.3 2.8 2.4 2.0 26.0 22.1 21.9 20.1
Petronet LNG 174 130 NEU 15.3 9.5 10.2 12.8 11.3 18.3 17.0 13.6 2.9 2.6 2.3 2.1 28.8 15.1 14.5 16.1
BPCL 603 436 BUY 36.6 56.2 46.5 49.2 16.5 10.7 13.0 12.3 2.6 2.2 2.0 1.8 16.8 22.5 16.4 15.7
Source : Company, HDFC sec Inst Research


No change in estimates







Page | 5

ONGC : RESULTS REVIEW 1QFY15



STANDALONE INCOME STATEMENT
(Rs bn) FY12 FY13 FY14E FY15E FY16E
Revenues 765.15 830.05 838.89 926.32 1,053.68
Growth % 16.2 8.5 1.1 10.4 13.7
Raw material (0.89) (0.20) 7.92 - -
Operating and other expenses 306.11 394.00 393.99 428.20 472.74
EBITDA 459.04 436.05 444.90 498.12 580.94
EBITDA Margin % 60.0 52.5 53.0 53.8 55.1
EBITDA growth % 21.8 (5.0) 2.0 12.0 16.6
Depreciation, Depletion, Impairment 168.29 184.17 187.71 191.46 195.29
Other income 44.53 54.37 67.13 53.01 54.89
EBIT 335.27 306.25 324.32 359.66 440.53
Finance charges 0.35 0.28 0.00 - -
PBT 334.92 305.97 324.32 359.66 440.53
Provision for taxes 115.20 96.19 103.37 115.09 140.97
PP/EO/Minority/Associate interest (31.50) 0.53 - - -
PAT 251.23 209.26 220.95 244.57 299.56
EPS 26.8 24.5 25.8 28.6 35.0
EPS Growth % 21.2 (8.7) 5.4 10.7 22.5
Source: Company, HDFC sec Inst Research

STANDALONE BALANCE SHEET
(Rs bn) FY12 FY13 FY14E FY15E FY16E
SOURCES OF FUNDS



Share Capital 42.78 42.78 42.78 42.78 42.78
Reserves and Surplus 1,086.79 1,201.75 1,324.47 1,470.69 1,647.31
Total Shareholders Funds 1,129.57 1,244.53 1,367.25 1,513.47 1,690.09
Total Debt 45.00 - - - -
Deferred Taxes 111.98 128.88 165.79 165.79 165.79
Other Long Term Liabilities 5.62 11.24 11.85 11.85 11.85
Long Term Provisions 213.13 221.87 257.20 257.20 257.20
Capital Employed 1,505.30 1,606.53 1,802.09 1,948.30 2,124.93
APPLICATION OF FUNDS



Net fixed assets and producing
assets
679.45 798.44 960.12 1,058.66 1,164.97
Capital WIP/Development well
in progress
268.79 248.91 255.58 315.58 363.97
Long term loans and advances 254.50 219.98 181.78 181.78 181.78
Other non-current assets 105.05 116.18 124.92 124.92 124.92
Investments 52.16 91.73 172.04 172.04 172.04
Inventory 51.65 57.04 58.83 65.98 75.06
Debtors 61.95 68.64 81.66 88.82 101.04
Cash and bank balance 201.25 132.19 107.99 88.61 98.95
Loans and advances 31.24 38.77 43.67 43.67 43.67
Other current assets 11.24 9.38 6.29 6.36 6.42
Total current assets 357.33 306.01 298.43 293.45 325.14
Trade creditors 47.60 53.41 63.72 71.06 80.83
Other current liabilities 141.95 112.23 119.26 119.26 119.26
Provisions 22.43 9.10 7.81 7.81 7.81
Total Current Liabilities 211.98 174.74 190.80 198.13 207.90
Net current assets 145.35 131.27 107.64 95.32 117.23
Capital Employed 1,505.30 1,606.53 1,802.09 1,948.30 2,124.93
Source: Company, HDFC sec Inst Research




Page | 6

ONGC : RESULTS REVIEW 1QFY15


STANDALONE CASH FLOW
(Rs bn) FY12 FY13 FY14E FY15E FY16E
PAT 251.23 209.26 220.95 244.57 299.56
Non Operating Income 31.17 38.06 46.99 37.10 38.42
PAT from Operations 220.06 171.20 173.96 207.46 261.14
Depreciation 168.29 184.17 187.71 191.46 195.29
Interest 0.35 0.28 0.00 - -
Working capital change 46.61 21.70 113.95 (7.06) (11.58)
OPERATING CASH FLOW 435.31 377.34 475.62 391.87 444.85
Capex (278.26) (282.96) (355.76) (350.00) (350.00)
Free Cash Flow 143.69 78.07 99.72 25.97 78.39
Investments (92.16) (49.07) (92.08) - -
Other Income (31.17) (38.06) (46.99) (37.10) (38.42)
INVESTING CASH FLOW (401.59) (370.09) (494.83) (387.10) (388.42)
Capital issuance (9.69) (0.86) (4.80) - -
Debt issuance 45.00 (45.00) - - -
Dividend (74.59) (106.29) (94.16) (98.35) (122.94)
Interest and Others (10.04) (1.13) (4.80) - -
Source: Company, HDFC sec Inst Research

STANDALONE KEY RATIOS
FY12 FY13 FY14E FY15E FY16E
PROFITABILITY %



EBITDA margin 60.0 52.5 53.0 53.8 55.1
EBIT margin 43.8 36.9 38.7 38.8 41.8
APAT margin 30.0 25.3 26.3 26.4 28.4
RoE 21.8 17.7 16.9 17.0 18.7
RoCE 16.5 13.5 13.0 13.0 14.7
RoIC 17.0 13.1 12.1 13.0 14.8
EFFICIENCY



Tax rate % 31.4 31.5 31.9 32.0 32.0
Total Asset turnover (x) 0.7 0.7 0.6 0.6 0.7
Inventory (days) 24.6 25.1 25.6 26.0 26.0
Debtor (days) 29.6 30.2 35.5 35.0 35.0
Payables (days) 22.7 23.5 27.7 28.0 28.0
Cash conversion cycle (days) 31.5 31.8 33.4 33.0 33.0
Net Debt/EBITDA (x) (0.4) (0.3) (0.2) (0.2) (0.2)
Net D/E (0.1) (0.1) (0.1) (0.1) (0.1)
Interest coverage 962.6 - - - -
PER SHARE DATA
EPS (Rs) 26.8 24.5 25.8 28.6 35.0
CEPS (Rs) 49.0 46.0 47.8 51.0 57.8
BV (Rs) 132.0 145.5 159.8 176.9 197.5
DPS (Rs) 8.8 9.5 9.5 10.0 12.5
VALUATION
P/E (x) 15.0 16.4 15.6 14.1 11.5
P/Cash EPS (x) 8.2 8.7 8.4 7.9 7.0
P/BV (x) 3.0 2.8 2.5 2.3 2.0
EV/EBITDA (x) 7.4 7.8 7.6 6.8 5.8
EV/Revenue (x) 4.3 4.0 4.0 3.6 3.2
OCF/EV (%) 12.9 10.9 13.7 11.2 12.8
FCF/EV (%) 4.4 2.4 3.0 0.8 2.3
FCFE/M Cap (%) 2.9 3.6 2.9 0.8 2.3
Dividend Yield 2.2 2.4 2.4 2.5 3.1
Source: Company, HDFC sec Inst Research

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ONGC : RESULTS REVIEW 1QFY15

















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Rating Definitions
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
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Date CMP Reco Target
13-Aug-13 275 BUY 360
10-Oct-13 274 BUY 360
14-Feb-14 277 BUY 351
31-May-14 378 BUY 435
6-Jun-14 464 BUY 435
11-Jul-14 404 BUY 471
14-Aug-14 402 BUY 470

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