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

Government approves PFC follow on public offer

The government on Wednesday approved follow-on public (FPO) offer of the state-run lending agency Power Finance Corporation worth about Rs 5,732 crore.

The exact amount to be raised through the offer can be ascertained only after the Empowered Group of Ministers (EGOM) decides the offer price.

The shares of the company were trading at Rs 249.7 a price, down 2.44 per cent from previous close in the afternoon trade on Bombay Stock Exchange (BSE).

"The Cabinet Committee on Economic Affairs (CCEA) today approved the follow on public offer of the PFC," an official statement said here.

The company will also infuse 15 per cent fresh equity by issuing 17,21,65,005 shares of Rs 10, the statement added.

"The fresh equity would be 15 per cent of pre-issue existing paid up capital," it said.

Meanwhile, sources said the FPO is likely to hit the markets in the first quarter of next financial year.

The offer would comprise 5 per cent disinvestment of the government's share in PFC through putting 5,73,88,335 crore shares of Rs 10 on sale.

The government currently holds 89.78 per cent stake in the public sector company. The market capitalisation of PFC currently stands at Rs 28,854 crore.

The company had earlier divested 10 per cent stake through an initial public offering (IPO) in 2007.

After the proposed FPO, government's stake may go down to about 85 per cent.

The statement said that the reservation of equity shares for PFC employees are subject to the limit prescribed for retail investors by SEBI, which will not exceed 0.12 per cent of the issue size.

A discount of 5 per cent of offer price will be given to retail individual investors and eligible employees.

The public offer would help PFC to meet the eligibility requirement of maintaining a CRAR (Capital To Risk Assets Ratio) of 15 per cent for industrial finance company status.

The FPO will also enhance equity base of the company to enable it to meet the growing future investment needs of the power sector.

PFC is a non-banking financial institution that provides loans for various power projects in generation, transmission and distribution sector as well as for renovation & modernisation (R&M) of existing power projects.

The government has set a target of raising Rs 40,000 crore from disinvestment the current financial year, against Rs 25,000 crore in the previous close.

Source: Government approves PFC follow on public offer - Business Today - Business News