Retain ‘sell’ on ONGC with unchanged FV of Rs 60

ONGC’s 2QFY21 results were well ahead of our expectations boosted by higher value-added-products sales volumes, higher realisations, reduction in other expenses and favourable movement in below-Ebitda items. We align FY2021E EPS for strong performance of ONGC and its subsidiaries, while broadly retaining FY2022-23 estimates. ‘Sell’ stays with unchanged FV of Rs 60. Potential recovery in global oil prices or deregulation of domestic gas prices are key risks to our negative stance.

ONGC’s revenues were 4% above our estimate at Rs 169.2 billion in 2QFY21 driven by 2% higher crude realisations and 10% higher VAP sales, which was partly offset by lower-than-expected oil sales volumes. Ebitda was 12% above our estimate at Rs 84.4 billion, aided by a healthy reduction in operating expenses. Adjusted standalone net income was sharply higher at Rs 37.7 billion (EPS of Rs 3) further boosted by higher other income and lower interest cost, DD&A expenses and tax rate.

Reported net income was lower at Rs 28.8 billion including an impairment loss of Rs 12.4 billion recognised on producing fields on factoring lower natural gas price. Consolidated reported net income was higher at Rs 58 billion (EPS of Rs 4.6), including net income of RS 24.8 billion from HPCL, Rs 6.73 billion from OVL and RS 0.36 billion from MRPL. In 1HFY21, adjusted standalone net income declined 66% y-o-y to Rs 42.3 billion (EPS of Rs 3.4), reflecting a sharp drop in oil and gas realisations and lower production volumes. Consolidated net income was higher at Rs 68.9 billion (EPS of Rs 5.5), including significant net profit of Rs 52.9 billion from HPCL, modest net income of Rs 3.4 billion from OVL and net loss of RS 4.6 billion from MRPL.