ONGC’s earnings beat is offset by subsidy sharing concerns
While ONGC did not share any of the government’s subsidy burden during the quarter, investors are a worried lot as far as subsidy goes
State-run Oil and Natural Gas Corp. Ltd’s (ONGC’s) net profit of ₹8,265 crore was nearly 15% ahead of consensus estimates of analysts polled by Bloomberg. But investors were unmoved. The ONGC stock declined by 1.6% on Monday, a day when the benchmark Sensex lost 0.2%.
What gives? For one, “other income” was higher than analysts’ expectations. Besides, domestic crude oil production declined by 6% year-on-year.
Sure, higher crude oil prices have helped and compensated the fall in the company’s output to some extent. Net crude oil price realizations rose as much as 48% over the same period last year to $73.07 a barrel. Overall, revenues increased by 48% to ₹27,990 crore.
ONGC did well to reduce its debt. Stand-alone borrowings declined to almost ₹14,000 crore at the end of the September quarter versus ₹25,592 crore at the end of March this year.
But investors are worried that the gains from higher realizations may not last too long. While the company did not share any of the government’s subsidy burden during the quarter, investors are a worried lot as far as subsidy goes.
“Owing to higher oil price during the election sensitive year, market is concerned on the expected subsidy burden on upstream companies,” pointed out IDBI Capital Markets and Securities Ltd analysts in a report on 5 November.
Small wonder, despite higher oil prices, shares of ONGC have lost almost 13% so far this fiscal year. Sure, current valuations are undemanding at 6.3 times estimated earnings for FY19, based on Bloomberg data.
ONGC will be one of the cheap upstream stocks globally, which is currently reflecting a valuation of net realization of $45-48 a barrel, added IDBI Capital.
The government’s subsidy provision of ₹21,000 crore for FY19 is expected to fall short.
According to Jefferies India Pvt. Ltd, even if a ₹21,000 crore burden falls on ONGC for the rest of FY19 (~50% upstream share), consolidated earnings per share would still rise 35% year-on-year.
However, how things exactly play out remains to be seen and that means uncertainty for investors. In this backdrop, there is little to suggest a reversal in ONGC’s stock performance, at least in the medium term.
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