ONGC - Buy

OIL & NATURAL GAS CORPORATION LIMITED (BUY)

31 / 12 / 07
CMP :
INDUSTRY :
FACE VALUE :
MARKET CAP :
COMMENT :

Rs. 1236.50
OIL & GAS
RS. 10
RS. 2,63,723 (Cr)
BUY

TARGET :
RS..
SENSEX :
20,286
52 Week High: RS. 1387
52 Week Low : RS. 750

Company Overview
Oil and Natural Gas Corporation Limited (ONGC) was incorporated in 1956 by the
Government of India as a Public Limited Company and awarded Navratna status in
1988. The company has emerged as the most valuable company in India. The company
has seven exploration fields and of the ten production assets, seven are onshore field and
the balance three are offshore assets (including Mumbai High, Neelam Heera and
Bassein & Satellites ).
Shareholding pattern

Sharehodling pattern
2.08

Foreign holding

8.62
4.53
10.64

Govt / financial
institiution
Coporte bodies
Director and their
relatives

74.14

Other including
indian public

( Source www.geojit.com)

i Metanova

ONGC - Buy

Macro economic factors

The economy has been growing at around 9 per cent in the past two years recording a
growth rate of 9 per cent and 9.4 per cent in 2005-06 and 2006-07 respectively.
Significantly, the industrial and service sectors have been contributing a major part of this
growth, suggesting the structural transformation underway in the Indian economy.
Indias GDP has recorded strong growth over the last three years, and this rapid growth is
likely to continue for the next years. Strong economic growth is accompanied by robust
growth in demand for energy. India derives almost 30% of its primary energy
requirement in demand for crude oil. However, the maximum available crude oil reserves
in India are estimated to be around 5.7bn barrels, comprising 0.5% of the global reserves.
This is extremely low considering India shelters around 16% of the world population.
At current rate of production, the countrys crude oil reserves will last for only 20 years
as against 40 years of global reserves. As at end of FY07, indias per capita
consumption
Per capita consumption petroleum products stood at 18kg, which is far less than the
world average of 550kg.
Currently, India imports more than 75% of its annual crude oil demand. The countyrs
growing energy needs demand aggressive investment in search for new oil reserves. To
this end, the government intitited NELP have resulted in investment commitments of
US$ 12bn and the seventh round is due in December 2007. These investment will
increase demand for oil-allied services.
Just have a look at production and consumption oil in India. (See below chart)
Trend in production and imports of crude oil in
India
80
70

100000

60
80000

50

60000

40
30

40000

20
20000

10

0
2001200220032004200520062007

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Production
(%)

('000 tons)

120000

Imports
Imports as % of
throughput

ONGC - Buy

If we look at exploration status of Indian sedimentary basin. It shows that still there a lot
of scope to be tapped in this industry.
Exploration status of the indian sedimentary
basin
Well Explored,
20%
Initiated, 44%
Unexplored,
15%
Poorly
expolred, 21%
Well Explored

Unexplored

Poorly expolred

Initiated

( Source www.google.com)

Sharing under- recoveries by upstream companies

Rs. Bn
ONGC
OIL
GAIl
TOTAL

2006-07
101.52
11.77
6.71
120

%
85
10
5
100

2005-06
119.56
9.77
10.64
139.98

%
85
7
8
100

ONGC have the highest share in under recoveries. It shows ONGC is market leader and
when company will finish this projects then companys revenue will boost.
Peer group comparison ONGC enjoying leadership
Company
Oil & Natural
Gas Corporation
Ltd.
Cairn India Ltd.
Aban
Offshore
Ltd.
Shiv-Vani Oil &
Gas Exploration
Services Ltd.
Hindustan
Oil
Exploration
Company Ltd.

Sales (rs cr.)

PAT (rs cr.)

Market Cap (rs

cr.)

56,913.43
5.91

15,642.92
-29.22

266,802.96
41,383.35

495.77

99.6

17,267.74

205.15

25.66

2,238.31

114.51

2.47

2,169.91

i Metanova

ONGC - Buy

Stock market trends :- The Sensex topped 20,000 for the first time last month, the third
best performing stock market in Asia after China and Bangladesh. The large amount of
overseas capital inflow has pushed up the value of rupee by 12.7% this year, the second
best performing currency in Asia after the Philippine peso.
Overseas investors have bought a record $18.7 billion of Indian stocks this year. The
economy has become more broad based and has moved beyond the software sector.

Industry Overview
The oil and gas industry is witnessing a sustained rise in demand both at consumer and
commercial segments. The industry has estimated to be Rs. US $ 110 bn (about 15% of
India GDP ). The country's crude oil output for the financial year ended March 2007 was
up 5.6 per cent to 33.98 million tonne (mt) compared with 32.19 mt in the previous fiscal.
India ranks sixth in the world in terms of petroleum demand and by 2010, India is
projected to replace South Korea and emerge as the fourth-largest consumer of energy,
after the United States, China and Japan.
The outlook on upstream oil and gas sector continue to be favorable with any possible
downside from a decline in crude prices expected to be largely offset by a decline in a
subsidy sharing as well.
Investment rational
National exploration licensing policy
Huge order inflow for ONGC on the back of a surge in E&P (Exploration and
production) capex
According to BP statistical review at the end of 2006, indias crude oil reserve stood at
5.7bn barrels . That amount is 0.5% of global reserves. At the current rate of production,
the countrys crude oil reserves will be last for 20 years more as against 40 years of
global reserve. With more than 80% of indias sedimentary basin still under explored so
there is huge potential is untapped. Over the last seven years, thorugh six round of
National exploration licensing policy (NELP), the government of India has attracted
investment of US $12bn for exploration activities in the country. So the increase in E&P
capital expenditure will benefit to ONGC in meeting huge order flow. ONGC has forayed
into a memorandum of understanding (MoU) with global oil major, BP, to collaborate in
exploration and production (E&P) business in India and abroad.

i Metanova

ONGC - Buy
Recently ministry of petroleum and natural gas has passed 57 new block bidding which
will take place in April 2008 and ONGC will also bid at competitive price with other
companies. This will benefit ONGC in getting new projects and revenue.
Implementing in January kalol project A new source of revenue
Kalol project is the highest producing field of ONGCs in western onshore.
ONGC has sighned MoU with Shell for techonology cooperation application on Kalol
and other oil field of Gujarat. Commercial term will be finalized soon. ONGC is
considering floating special purpose vehicle for implementing this project. In mid of
January the project will be implemented and will help benefit ONGC in increasing their
oil reserve as well as revenue.
ONGC discover Indias biggest huge gas reserve off at Andhra Coast
The potential of discover is estimated at 600bn cubic meters of the hydrocarbon. It will
yield 600-700 BCM of gas that is twice the size of KG Bassein field. This will benefit in
future as company will start the production in Andhra coast.
Near monopoly and high entry barriers
ONGC currently accounts for 84% of the domestic natural gas and crude supply, which
can be largely attributed to its vast geographical presence across the country. To put
things into perspective, ONGC's domestic exploration licenses cover a total area of
approximately 6,80,800 sq. kms and has been awarded almost 50% of the total blocks
that have been granted under NELP. Further, the segment requires a large capital
commitment and also a long gestation period. For instance, ONGC spends almost Rs 40
m per day on its three exploration ships in the Porbandar coast and two ships in the
Krishna Godavari delta.
Recent news

ONGC plans to invest more than US$16.5 bn in the refining business over the
next four to five years to scale its refining capacity up to 45.5 mn tons by 200910.
ONGC has signed agreement with ENI to take a 20-25% stake in a Congo oil
block and in retrun give the Italian firm a 30-35% stake in Mahanadi basin block.
ONGC foreign arm is all set to acquire a 33% stake in the Egyptian deep water
block from operator Royal Dutch Shell for an investment of US$380mn.

Concerns

Availability of skilled labor has been a hindrance to sectors growth. If the

situation continue then ONGC expansion could suffer
i Metanova

ONGC - Buy

If we look at the price trend of last one year then it will help us to know how a stock has
performed. Look for a positive trend in 12-month,6-month and 3-month periods.
Period
3 months
6 months
12 months

BSE
Closing price

change
930.55
921.25
865.25

34.05
35.4
44.17

( Source yahoo finance blog)

Attractive valuation : Recommend a BUY

At CMP of Rs1236, the stock trades at P/E multiple of 14. And Given the robust
perforamcne in last three year and being a market leader, I suggest investor to must have
this stock in their portfolio. I recommend a BUY with target price of Rs 2000 in long
term.
Valuation summary
Financial snapshot
The financial health of a company is dependent on a combination of profitability, shortterm liquidity and long term liquidity. Companies, which are profitable, but have poor
short term or long term liquidity measures, do not survive the troughs of the trade cycle.
Also firms, which are not profitable but are cash rich, do not survive in the long term
either. Such companies are taken over for their cash flow or by others who believe that
they can improve the profitability of the business. Thus, those companies that do succeed
and survive over the long term have a well-rounded financial profile, and perform well in
all aspects of financial analysis. Profitability ratios reflects the business environment of
the time.

i Metanova

ONGC - Buy

Key ratios
Ratios

Mar-07

Mar-06

Per share ratio (Rs)

EPS
Dividend
Book value per share

71.66
310
287

98.22
450
375

Valuation ratios (x)

P/E
P/BV
Market cap. / sales
EV/PBIDT

12.84
3.03
3.3
7.25

13.8
3.46
3.87
7.86

Profitability ratios (%)

OPM
NPM
ROCE
ROE

44.51
26.5
56.7
27

50.28
29.2
57.5
28.63

Liquidity ratios
Current ratio

2.77:1

Debtors turnover
Leverage ratios (x)
Debt / eaquity
Du pont model
PBIST/Sales (%)
Sales/Net Assets
PBDIT/Net Assets (%)
PAT/PBIDT(%)
Net Assets / Net worth
ROE (%)

3.06:1
17

.001:1

27

.002:1

44.51
0.74
0.33
61.75
1.24
27

50.28
0.73
0.37
59.49
1.23
28.63

i Metanova

ONGC - Buy

Key financial
(Rs. In Crores)
Year

Mar-07

Mar-06

Net Sales

56,912.31

48,244.39

Operating profit

25,332.60

24,256.90

Net Profit

15,642.92

14,430.78

Cash flow analysis

(Rs. In Crore)
Year

Mar-07

Mar-06

NOPAT

15,669.01

14,461.82

Operating cash flow

22,910.02

20,367.09

Free flow cash flow

35,992.25
31,413.97
( Source www.ongcindia.com &
- www.geojit.com )

Valuation
The company has registered a CAGR of 45 % in OP margin. I believe that ONGC will
grow at 20 30 % in topline for the next few years.
ONGC has earned a net profit of RS 1,56,429 mn (Up 8.4% from Rs 1,44,308 mn in
2005-06). It has been highest profit making of all oil marketing companies in India.
During the year company has registered a gross revenue of Rs.590,575 million (up 19.5%
from Rs.494,397 million in 2005-06), despite sharing under-recoveries of Rs.170,239
million (Rs. 119,565 million in 2005-06), of the Public Sector Oil Marketing Companies
by way of discounts in the price of Crude Oil, Domestic LPG and PDS Kerosene (SKO),
on administrative instructions of the Ministry of Petroleum & Natural Gas (MoP&NG),
Government of India.

i Metanova

ONGC - Buy
It is excellent. For an investor ONGC is a must have. Every time you find a dip, go and
buy it, and while I am sticking my neck out I think at some point we will see it cross Rs
2000. So, there is money to be made I hope in this stock.
If we look at advance tax collection in India then ONGC has paid highest tax payer in
this year. It shows sound profitability of business. Apart from this we look at IOC, BP HP
and Essar oil all have jumped up on expectation of pet price rationalization. This
indirectly benefits ONGC as their subsidy burden comes down.

Prepared by :Vikas D. Chhajed

MBA (Finance) Batch of 2008
ICFAI Business School, Bangalore

Source
Books that would be preferred
a) ICMR Security Analysis
Website
1.www.infraline.com
2. http://petroleum.nic.in/
3.www.geojit.com
4. www.ongcindia.com
5.www.valuenotes.com
6.www.moneycontrol.com
7.www.google.com
Other source
1. News paper
2. Magazine The Analyst

i Metanova