Street turns bullish on ONGC as EPS improves

MUMBAI: The stock of Oil & Natural Gas Corp ( ONGC), India's largest oil exploration company, was out of investors' radar due to depressed crude oil price and ambiguous policy on subsidy sharing for the past two years. But the perception appears to have changed after the June quarter results, which were followed by earnings upgrade of 10-20% on account of the lower effective rate on oil cess and better cost management.

CLSA, in a recent report, said that higher earnings per share ( EPS) triggered an increase in its target price to Rs 270. It also upgraded the stock to `outperform' from `sell.' ONGC's operating profits in the June quarter was Rs 9,276 crore, nearly 18% higher than consensus estimates due to lower operating cost. The company's management stated in an earnings call that operating cost is expected to remain lower for rest of the fiscal. This may result in 10% year-on-year drop in operating cost for FY17.

The company has improved efficiency of crude handling. The crude oil production-to-sales ratio improved to 93% in the June quarter from the historical average of 87% between FY14 and FY16. If it maintains the ratio at the current level, this may boost projected earnings by around 9%. In addition, upstream companies are paying cess on crude oil at an effective rate of 16.67%, which is lower than the street expectation of 20%.

A recovery in the crude oil prices may help ONGC to fetch better realisation. At Monday's closing price of Rs 254, ONGC's stock was traded at 11 times FY18 expected earnings. This is at 25-30% discount to its international peers.Given the upbeat prospects in the coming quarters, the valuation discount may offer comfort to investors.