Nomura India has downgraded ONGC to ‘Reduce’ from ‘Neutral’, citing unfavourable government policies along with weak production and operational track record.
In a note, Nomura said the government’s policies have been unfavourable towards upstream companies as
any upside during a commodity upcycle is capped through subsidies (up to FY15)/ windfall taxes currently) on oil. It believes that a ceiling price on gas will do the same just when Indian exploration and production (E&P) companies were to benefit from the ongoing commodity upcycle.
“Indian domestic gas price formula has been a drag to earnings as realisations have remained below-cost-of-production for 12 out of the 17 revisions, which have taken place since November 2015; up stream’s requests for a floor for gas prices have been repeatedly denied, but a ceiling price is all but certain to be implemented now,” it said.
The brokerage has cut FY23 consolidated EPS estimate for ONGC to Rs 29.70, as higher oil realisations of $83 per barrel and higher volumes across oil and gas are offset by lower profitability for OVL, along with significant drag from downstream businesses of HPCL and MRPL.
“We thus downgrade ONGC to Reduce, with our SOTP-based TP cut to Rs 110, based on 4 times September 2024 EPS and value of investments. Our low P/E multiple reflects ONGC’s inefficient capital allocation, unfavourable policies which have impeded profitability and underwhelming production and operational track record despite rising levels of capex and operating costs over several years,” Nomura said.
The scrip closed at Rs 142.90 on BSE. Nomura’s target of Rs 110 suggests a potential 23 per cent downside for the stock.
ONGC has reported a 30 per cent drop in net profit at Rs 12,825.99 crore for September quarter compared with Rs 18,347.73 crore in the year-ago quarter.
Nomura has build in oil volume growth of 2 per cent over FY24-25F and gas volume growth of 5-7 per cent. Nomura said ONGC’s volume guidance are more aggressive at 4-8 per cent for oil and 7-16 per cent for gas, but its past record of a decline of 1-3 per cent in CAGR for oil volumes over the past 5-10-years and nil to minus 3 per cent decline in gas volumes over the past decade made it build in conservative estimates.
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