Standard Post with Image

Experts Positive on ONGC, Say Valuations Are Cheap

  • The Oil and Natural Gas Corporation (ONGC) auction, expected to have started at 9.15 am, will carry on till 3.30 pm. The floor price of the auction sale is at Rs 290 per share. The government is likely to raise Rs 12,405 crore at the floor price by offering 42.77 crore shares.Experts are positive on the stock and see big upside potential. They feel the valuations are cheap. Tirthankar Patnaik, EVP - institutional sales, Religare Capital Markets is positive on the stock. "We have a positive view on the stock, especially with its cheap valuations," he adds.Amit Rustagi, oil and gas analyst of Antique Stock Broking has the same view. He feels the valuations are cheap. He sees a lot of positive triggers for the stock going forward.

  • Patnaik has a target price of Rs 350. "We have quite a big upside on the stock," he asserts.Meanwhile, Rustagi has a one-year target price of Rs 335 on ONGC.Also read: ONGC auction would go through, says PN Vijay

  • Q: What you are hearing in terms of appetite ex of the insurance companies? What kind of prices people are talking about in terms of bids that they intent to put in?

  • Patnaik: The numbers that we have been hearing are anywhere between Rs 295 to Rs 300. That's the band that people are looking at. We have a positive view on the stock, especially with its cheap valuations and big upside that could be possible from gas increases. This sort of positive view is across the street. That's why the bid numbers that we are hearing are in Rs 290-300 band.

  • Q: Once the auction is done, do you expect Rs 290-300 to become a base for the stock price or do you see the stock coming off?

  • Patnaik: We don't see the stock coming off. We have a target price of roughly ten times December 12 earnings. That translates to about Rs 350. So, we have quite a big upside on the stock. I think even if the stock takes about a year to reach there, in the near-term, we don't see the number coming down anywhere below Rs 300.

  • Valuations at roughly 9.5 times FY13 and just about 8.5 times FY14 numbers are quite compelling. There is the obvious upside, given that some sort of rationalisation is definitely going to happen on diesel pricing. So, clearly there is an upside.

  • From a long-term perspective, if Cairn ramps up its current production from about 130 KBPD to about 160 KBPD, given ONGC's 30% stake in that, we might see upsides coming up for ONGC there as well.

  • Lastly, there is this field development plan (FDP) approval for ONGC. If that happens, they will add another 20 MMSCMD, roughly 30% of their overall production. So, clearly a lot of positives are being built in on the stock.

  • The only negative is if the Budget fails to live up to expectations then the stock might see an overhang. Otherwise, there are quite a lot of positives built in on the stock. So, Rs 300 plus is something that we see coming up very soon.

  • Q: Do you think some of these issues like oil pricing, subsidy issues might rein in optimism or the liquidity conditions are such that Rs 295-300 should be easy?

  • Rustagi: It is not only a matter of liquidity; it's a matter of valuations and triggers going forward. ONGC is trading at 9-9.5 times FY13 earnings. There are a lot of positive triggers in the stock going forward- any rationalisation of duties or any rationalisation of pricing on diesel, government taking steps on curtailing subsidised kerosene as well as LPG by using UID mechanism. There will be upside production coming from Cairn Rajasthan field, as well as any clarity on their KG basin development. So, there are many triggers in the stock. Valuations are cheap.

  • People have forgotten one thing about ONGC that it is also a partial play on oil prices. Roughly 40% of their consolidated revenues are coming from oil linked products where in there is direct upside to their earnings. So, if you see their nine months earnings for FY12, it is roughly 27% higher despite their net realisation in the domestic business remaining the same. Basically that is the key, which we are highlighting to the clients, you can play higher oil prices through ONGC. Domestic net realisation, which is controlled by the government, can provide stabilisation in this current scenario. So, Rs 31-32 EPS FY12-FY13, the stock is at 9-9.5 times, makes a lot of sense.

Source