ONGC stock: Maintain ‘buy’ with target price of Rs 190

Our domestic gas production estimates is at 25.9bcm/30.6bcm for FY20/FY21 coupled with production coming online from KG-DWN98/2.

2QFY20 net sales were down 12% Y-o-Y to Rs 245 bn (in-line), primarily due to lower crude oil realisation at $60.3/bbl (v/s $73.1/bbl in 2QFY19). EBIDTA was down 16% Y-o-Y to Rs 133 bn (in-line). During the quarter, other expenditure was at $6.4/boe (v/s $7.1/boe in 2QFY19).

DD&A was at $10/bbl in 2QFY20 v/s 7.6/bbl in 2QFY19. Dry well cost was 21% higher Y-o-Y due to write-backs, majorly from Mumbai and KG offshores. PBT was 2% higher than estimated at Rs 90.4b (-29% YoY), with higher other income offsetting higher depreciation and interest cost.

Total production stood at 12.1 mmtoe (-3% Y-o-Y). Total sales stood at 10.32 mmtoe (-1% YoY). We expect crude prices to remain stable ~$60-70/bbl, fading the fear of government subsidies. We estimate domestic crude oil production at 23.7mmt/24mmt for FY20/FY21, amid new addition of oil, which should majorly help offset depletion from old fields, and maintain stable oil production for ONGC. Our domestic gas production estimates is at 25.9bcm/30.6bcm for FY20/FY21 coupled with production coming online from KG-DWN98/2.

Our assumptions are conservative compared to the company’s guidance due to expected delays in execution amidst difficult topology for key projects (like KG-DWN-98/2). ONGC’s (standalone) capex guidance stands at Rs 320b/Rs 350b for FY20/FY21. The stock is currently trading at ~50% discount to its 10-year long-term P/E average at 4.9x, with attractive dividend yield of ~6.3-6.7% and PBV of 0.7x for both FY20/FY21. The stock is trading at 5.0x FY21E consolidated EPS of Rs 27.3. We value the company at 8x FY21 standalone EPS of Rs 19.9 (excluding other income) adding the value of investments; we reiterate ‘buy’ rating with TP of Rs 190.