Stock Market Result Update on ONGC for 2QFY2012

Stock Market Result Update on ONGC for 2QFY2012 with a Buy recommendation and a Target Price of `324 (12 months).

For 2QFY2012, ONGC’s top line grew by 24.3% yoy on account of higher realization. PAT for the quarter grew by 60.4% yoy due to a decline in depreciation, depletion and amortization (DD&A) expenses. We maintain our Buy recommendation on the stock.

Higher realization lifts ONGC’s top line: ONGC’s top line for the quarter grew by 24.3% yoy to `22,616cr, in-line with our estimate of `22,991cr. ONGC’s top-line growth was driven by higher net realization, which grew by 33.4% yoy to US$83.7/bbl. Crude oil sales volume decreased by 1.6% yoy to 5.8mn tonnes. The company shared a subsidy burden of `5,713cr in 2QFY2012 vs. `3,019cr of subsidy shared in 2QFY2011 and `12,046cr in 1QFY2012.

Decline in DD&A expenses spurts PAT growth: Despite a 33.4% increase in crude oil realization, EBITDA margin expanded by only by 174bp yoy to 64.0% on account of a 36.0% yoy increase in royalty expenses to `2,880cr. EBITDA registered a 27.8% yoy increase to `14,469cr. DD&A expenses decreased by 25.5% yoy to `3,337cr due to lower dry well write-offs. Consequently, net profit increased by 60.4% yoy to `8,642cr, significantly above our estimate of `6,161cr.

Outlook and valuation: Going forward, we expect incremental production from marginal fields to more than offset any decline in production from the ageing fields. ONGC’s subsidiary, OVL is also expected to report a jump in volumes by FY2013 to ~12mn tonnes, with incremental productions. Although there is an FPO overhang on the stock in the near term, we believe increased volumes and net realization should offset these concerns. We maintain our Buy rating on the stock with a target price of `324.