Buy ONGC; target of Rs 90: Motilal Oswal

Motilal Oswal 's research report on ONGC

Oil and Gas sales and net realization (USD41.4/bbl; -31% YoY) stood in line with estimates. Net sales came in line with est. at INR169b (-31% YoY). We have built in oil/gas production at 23.3mmt/24.8bcm for FY21, as per the management’s earlier guidance. Currently, OPEC+ production cuts stand at 7.7mnbopd (pertaining to Aug’20) and the group is scheduled to meet on 30th Nov’20 and 1st Dec’20 to decide on easing cuts by an additional 2mnbopd from Jan’21. We forecast a crude oil price of ~USD45/bbl for 2HFY21 and expect prices to remain stable around current levels in the medium term. However, we highlight that a change of USD5/bbl in oil price realization would raise ONGC’s EBITDA (consolidated/SA) by 7%/12% for FY22. Despite the delay, ONGC is expected to grow its gas production in FY22, with efforts to arrest the decline in oil production from age-old fields (accounting for 60–70% of total oil production). Maintain Buy.

Outlook

ONGC is trading at 3.3x FY22 EV/EBITDA and 4x FY22 P/E. We value the company at 10x Sep’22E adj. EPS of INR6.4 and add value of investments to arrive at a target price of INR90/share. Reiterate Buy.

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