CLSA maintains underperform on ONGC, follow up hikes may disappoint

NEW DELHI: Although ONGC declared results which were better than expectations and upstream names remain our preferred bet in a blue sky scenario on diesel price hikes, we expect near term newsflow on price hike and subsidy sharing to disappoint, CLSA said in a note.

CLSA expects that the gas price hike suggested by an expert committee could add 33 per cent to ONGC's EPS; but the implementation may remain uncertain in near term and maintains 'underperform' with a target price of Rs 300.

"With the budget session of the Parliament starting soon and continuing till end of March and state elections expected in May'13, promise of monthly diesel price hikes may remain unmet," said the CLSA note.

Concurrently, the recent uptick in crude price will add further pressure on under-recoveries. Building the recent policy measures CLSA has increased FY14-15 EPS by 2-3 per cent. However, lower FY13 crude production forecasts leads to 1% cut in FY13 EPS.

ONGC's 3QFY13 net profit came 7 per cent ahead of CLSA estimate at Rs 55.6bn as crude sales volume came higher than our expectation.

There are also rising risks of higher subsidy burden for upstream with first indications in the budget (end of Feb'13). ONGC net realisation for 3Q came in at US$48/bbl.

The finance ministry's recommended movement to export parity could reduce calculated losses by Rs180 billion or 11 per cent disallowance of under-recoveries.