Buy This Maharatna PSU Stock For Potential Gain of 29%, Dividend Yield is 6.73%

1. Stock outlook of ONGC

The current market price of ONGC is Rs 155.95 apiece. The stock has a potential to give a return of 29% if investors buy at current market price of Rs 155. The stock has touched its 52-week high of Rs 194.95 and 52-week low of Rs 108.50 apiece. Potential domestic gas pricing reforms could act as a key re-rating catalyst for ONGC.

2. High oil prices and likely further domestic gas price hike to drive an 18% PAT CAGR

ONGC is a direct beneficiary of recent sharp recovery in Brent crude oil price to >~$100/bbl (led by recovery in global oil demand and supply concern due to recent geopolitical tensions between Russia-Ukraine). Furthermore, domestic gas prices are expected to further increase to $8.5-9/mmbtu from October 2022 post sharp upward revision of 110% to $6.1/mmbtu for H1FY2023 and the same would turnaround upstream PSUs gas business, given gas cost of $3.5-3.7/mmbtu for ONGC.

Thus, we expect ONGC's standalone PAT to report a robust 18% CAGR over FY2022-FY2024E and reach Rs. 42,659 crore by FY2024E (approximately 1.6x of FY2019 PAT). Management has stated that there are no talks of windfall by the government; and ONGC gives almost 60% of its oil revenue to the government in the form of statutory levies, dividend, and income tax and has plan of Rs. 30,000 crore and, thus, does not see any kind of windfall tax for upstream PSUs.

3. Exploration campaign to augment oil and gas production

ONGC has announced short-term exploration capex plan of approximately Rs. 31,000 crore ($4 billion) to increase oil/gas production (excluding JVs) at an impressive CAGR of 4%/8% to 21.7mmt/26.1bcm over FY2022-FY2025. Major part of growth would be driven by KG-DWN-98/2, which is expected to start first oil production by December 2022 and ramp-up to peak oil/gas production level of 45kbpd/12mmscmd in CY2024E.

Gas production from KG 98/2 asset would fetch premium gas price of $9.9/mmbtu as the field is a deep-water block, which is eligible for higher gas price.

4. Key Risks

Sharp fall in international oil and gas price and unfavourable government policies with regards to oil subsidies are key risk to our earnings and valuation. Longer-than expected disruption in Sakhalin-1 (Russia) given logistics and insurance issues could impact OVL production/earnings.

5. Valuation

According to Sharekhan, "ONGC's stock price has corrected by 18% from its 52-week high of Rs. 195 on concerns of windfall tax on upstream PSUs and ignores earnings tailwinds from high oil and gas price, better RoE of ~16%, and turnaround of subsidiaries. The recent correction provides a good entry opportunity for investors, given attractive valuation of 4.7x/0.7x its FY2024E EPS/BV and the stock price factoring in oil realisation of only $60/bbl, which is significantly below the current oil price of $120/bbl. Moreover, high dividend yield of 10-11% provides comfort to investors. Hence, we re-initiate coverage on ONGC with a Buy rating and price target (PT) of Rs. 200."

6. About Oil and Natural Gas Corporation Ltd

Maharatna ONGC is the largest crude oil and natural gas Company in India, according to its official website. It is contributing around 71 per cent to Indian domestic production. Crude oil is the raw material used by downstream companies like IOC, BPCL, HPCL and MRPL (Last two are subsidiaries of ONGC) to produce petroleum products like Petrol, Diesel, Kerosene, Naphtha, and Cooking Gas LPG. The market captialisation of ONGC is Rs 196,189 crore at the time of writing the report.

Disclaimer

The above stock was picked from the brokerage report of Sharekhan. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.