ONGC's 4Q profit was hit by an ad hoc increase in the subsidy share of upstream companies. Though the subsidy overhang continues, we prefer upstream PSUs over OMCs on a risk-adjusted basis, and view them as safe de-regulation plays.
n Subsidy spoils results. ONGC's 4QFY11 net profit at `27.9bn (down ~26% yoy) was significantly hit by an ad hoc increase in the subsidy share of upstream companies. Though crude production volumes were slightly below expectations, sales volumes were as expected. ONGC shared `121.4bn in 4Q as subsidy (3QFY11: `42.2bn; 4QFY10: `50bn), resulting in 4Q net realization at US$38.7/bbl, after a subsidy discount of US$70.1/bbl. The realization was the lowest in the past nine quarters. The share of upstream burden in 4QFY11 was higher, at 82.9%, and averaged 82.2% for FY11.
n Subsidy overhang continues. Upstream companies' FY11 subsidy share was increased to 38.8% from 33.3% originally, underlining the ad hoc nature of the subsidy-sharing mechanism, and continues to be a key overhang on the stock. Our FY12-13 earnings estimates are based on upstream companies sharing 33.3% subsidy; we may reduce our estimates 8-10% if the subsidy share is raised to 38.8%.
n Valuation. We continue to prefer upstream PSUs over OMCs on a risk-adjusted basis, and view them as safe de-regulation plays. At current market price, the stock trades at 8.8x FY12e EPS.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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