Friday, February 11, 2011

Pick of the week: ONGC

Broking firm Edelweiss has picked up Oil &Natural Gas Corpn (ONGC) as Edelweiss Star. It has recommended `Buy` with the target price of Rs 1,360. Broking firm has given investment rationale and technical view for investing in the stock. The same are as below:

Investment rationale:
Global crude demand likely to increase on global recovery. Moreover energy consumption in India from natural gas(currently ~9% due to shortage of gas) is set to rise due to production increase from 132mmscmd in FY10 to around 230 mmscmd in FY12E. Based on the demand of gas for power and fertilizers, we believe that an increase in thegas supplies can be easily absorbed by the country. In fact, we believe that India may have an appetite for more gas supplies, as the country’s GDP grows above 8.0% CAGR in the next decade which offers serious opportunities in oil & gas sector.

ONGC`s (Q,N,C,F)* earnings will be positively correlated to the increase in crude prices, as an increasing proportion of its international revenues (through OVL in a deregulated environment) will lead to higher realisations on crude. Also, OVL will be the major driver for volumes in the future and is also currently scaling up its production assets aggressively.

Significant APM gas price hike at one go is definitely positive for ONGC. This is a significant positive for the company and will support the substantial capital investmentsby it. Further, ONGC`s current exploration acreage offers significant opportunities for increase in reserves. Further, we are enthused by ONGC`s asset, new projects, and potential exploration upsides. However, till clear subsidy sharing mechanism emerges, uncertainty may prevail.

Investment Risks

Lower-than-expected crude prices will impact the company`s crude realizations and earnings. Additionally, the company`s net realizations also depend on the upstream (ONGC) subsidy sharing.

Higher-than-expected decline rates in its existing matured assets could impact its production, going forward.

ONGC has assets in countries like Sudan and Syria, which face geo-political risks. Therefore, any unfavorable incident could impact production.

Outlook and Valuations
Our outlook on ONGC has improved due to increase in gross crude realisation and recent correction in stock price. On our FY11E and FY12E EPS estimate of Rs. 105 and 129, the stock is currently trading at a P/E of 11.3x and EV/EBITDA of 4.9x on FY11E basis and at a P/E of 9.2x, and EV/EBITDA of 4.3x on FY12E basis. Given these attractive valuations and its growth prospects, we believe the stock offers upside potential in the near term.

Source: Myiris news - Live News - Pick of the week: ONGC

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