ONGC gains 2%, hits over 6-month high on hopes of strong earnings growth

According to Motilal Oswal, 2023 is likely to be a defining year for ONGC with two prominent triggers-- a rise in domestic oil & gas production, and a possible floor on gas realization

Shares of Oil and Natural Gas Corporation (ONGC) rose 2 per cent to hit an over six-month high of Rs 151.80 on the BSE in Thursday’s subdued intra-day trade on hopes of strong earnings growth ahead.

The stock of the state-owned oil exploration & production company was trading at its highest level since June 30, 2022. In comparison, the S&P BSE Sensex was down 0.36 per cent at 60,824 at 02:26 PM.

In the past three months, ONGC has rallied nearly 20 per cent as compared to a 3 per cent rise in the benchmark index.

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

According to Motilal Oswal Financial Services (MOFSL), 2023 is likely to be a defining year for ONGC with two prominent triggers--rise in domestic oil & gas production and possible floor on gas realization. 

“With increased visibility of positive outcome based on these two triggers, we reiterate our BUY rating on the stock. We recommend ONGC as the top idea for 2023 in the sector. Valuing the standalone business at 6x Dec’24E EPS of Rs 28.2 and adding the value of investments of Rs 27, we arrive at our target price of Rs 198,” the brokerage said in a report.

Capital misallocation, increase in windfall taxes or sharp decline in oil prices, and non-implementation of a floor for APM gas are key downside risks, it added.

Brent crude prices have moderated to $81/bbl levels (last 1-month average) driven by continued global economic concerns and the resurgence of covid in China as they have loosened lockdown restrictions.

However, despite the windfall tax impact, net realisation for ONGC may stay at $75/bbl levels, which is $18/bbl higher than the average realisation over FY15-22, said analysts at ICICI Securities in a report dated December 27.

The brokerage estimates an EPS CAGR of 19 per cent over FY22-24E driven by assumptions of $75/bbl crude realisation, $7.8/mmbtu gas realisation and a CAGR of 3.9 per cent in overall group production (including OVL).

Valuations of just 2.7x FY24E EPS, 2.2x EV/EBITDA and 0.5x P/BV remain attractive, it said, while maintaining its ‘buy’ rating on ONGC with a target price of Rs 195 per share.