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ONGC shares: 2 key triggers that could drive the stock in 2023, according to Motilal Oswal

1 min read . Updated: 02 Jan 2023, 01:58 PM IST Livemint

The year 2023 is likely to be a defining year for ONGC with two prominent triggers, as per Motilal Oswal

Oil and gas production to improve 10% and 20% from mid-CY23, respectively, as per domestic brokerage and research firm Motilal Oswal, which has shared Oil and Natural Gas Corporation Ltd (ONGC) as the top idea for new year 2023 in the sector.

“The year 2023 is likely to be a defining year for ONGC with two prominent triggers. These are: a) a rise in domestic oil & gas production, and b) possible floor on gas realization. Both are likely to play out in favor of the company, an outcome that makes us pitch ONGC as the top idea for 2023 in the sector," the note stated.

Over the past three years, the dividend payout of ONGC has stood at around 33% of its consolidated PAT. In addition to the great conjunction of production growth and better gas segment profitability, this implies a strong dividend yield of 13.6% for FY23, as per Motilal Oswal.

For 10 quarters, domestic APM gas price was below $3/mmBtu (NCV), roughly the cost of gas production for ONGC. For another eight quarters, ONGC barely made any money on its gas production with domestic gas prices being below $3.5/mmBtu (NCV), it highlighted.

The floor of USD4.0/mmBtu recommended by Kirit Parikh, thus, provides a fillip to its profitability from the nominated fields as well as incentivizes ONGC to raise production that would garner a 20% premium over the prevailing APM gas price, the brokerage said.

“ONGC trades at 3.3x FY24E consolidated EPS of ₹44.2 and 2.2x consolidated EV/EBITDA. Considering the great conjunction in addition to the cushion provided by the high dividend yield of 13.6% in FY23, we retain our BUY rating on ONGC shares with a target price of ₹198, making it the top idea for 2023 in the sector," it suggested.

Though, key risks, as per the brokerage, could be capital misallocation, increase in windfall taxes or sharp decline in oil prices, and non-implementation of a floor for APM gas. ONGC is the largest crude oil and natural gas company in India, contributing over 70% to the domestic production.