ONGC - CAN RULE IN 4-DIGITs?
A question swept across our mind - Can ONGC share price rule in 4 digits i.e. over 140% return?! Some out-of-the-box thinking actually gave us a very calculated and precise answer to this question. Read on to get an all encompassing analysis to this eye-popping question.
By Geetanjali Kedia
Oil and Natural Gas Corporation (ONGC), India’s most valued public sector enterprise, can become even more valuable, if it is not subject to the under-recoveries on crude oil, kerosene and LPG. Now well, this fact is not hidden even from the aam aadmi, what is interesting to note, is that it can actually be a win-win for all (Government of India (GoI), tax-payers, consumers, equity shareholders), if this measure is actually undertaken. Infact, GoI should relax ONGC and other upstream companies viz. OIL India and GAIL, from subsidy sharing of oil marketing companies (OMCs), to derive larger and sustainable valuations and gains.
Let’s elaborate the point, amidst some data crunching -
Below is an extract of ONGC’s standalone financials:
| Rs. crore | Q1FY15 | Q4FY14 | FY14 |
| Net Sales | 21,747 | 20,881 | 83,156 |
| PAT | 4,782 | 4,889 | 22,095 |
| Equity (FV Rs 5 each) | 4,278 | 4,278 | 4,278 |
| Reported EPS (Rs.) | 5.59 | 5.71 | 25.83 |
At current market price of Rs. 428 per share, ONGC share is ruling at a PE multiple of about 16.50 times, based on FY14 EPS of Rs. 25.83 (historic earnings). Current market cap stands at around Rs. 3.66 lakh crore, as at 25th August 2014.
If we add back the burden of under-recoveries shared by ONGC, we get revised FY14 EPS of Rs. 62.67, as under:
| In Rs. crore | Q1FY15 | Q4FY14 | FY14 |
| Net Sales | 21,747 | 20,881 | 83,156 |
| PAT | 4,782 | 4,889 | 22,095 |
| Add: PAT component of under-recoveries | 7,396 | 9,122 | 31,524 |
| Revised PAT | 12,178 | 14,011 | 53,619 |
| Equity (FV Rs 5 each) | 4,278 | 4,278 | 4,278 |
| Reported EPS (Rs.) | 5.59 | 5.71 | 25.83 |
| Revised EPS (based on Revised PAT) (Rs.) | 14.23 | 16.38 | 62.67 |
ONGC shared subsidy of Rs.54,600 crore in FY14, on which PBT was Rs. 47,756 crore and PAT Rs. 31,524 crore.
Even if we assume no change in the PE multiple*, based on revised EPS of Rs. 62.67, share price and market cap would come to around Rs. 1,030 per share and about Rs. 8.85 lakh crore, respectively. This will be a whopping 142% rise from the current levels!
*PE multiple for ONGC can actually move higher beyond 20x, due to:
Better financials - No subsidy overhang, robust EPS, better pay-out
Competitive strengths -
- All crudes are sweet and ~76% are light, with sulphur percentage ranging from 0.02-0.10, hence attracting premium in the market.
- It owns and operates over 26,600 kilometers of pipelines in India, including sub-sea pipelines. No other company in India operates even 50% of this length.
Coming back, Rs. 8.85 lakh crore market cap means valuation of US $ 150 billion, which is same as the value of some of the largest oil and gas companies in the world such as BP (British Petroleum) of UK and Total of France. ONGC will stand uno supremo in the race to highest market cap, hitherto shared by TCS and RIL alternately.
With rise in market cap by about Rs. 5.20 lakh crore, GoI will stand to gain about Rs. 3.60 lakh crore, due to rise in market cap, as 68.94% equity is held by GoI. Holdings of IOC, LIC and GAIL in ONGC, to the extent of 17.88%, are not considered, which can give a gain of close to Rs. 93,000 crore.
By not asking ONGC to share the subsidy, the cost- benefit to GoI will work out to as under:
Cost to GoI for under recovery Rs. 54,600 crore
Benefit to GoI:-
| S. No. | Potential for gain, in the event subsidy is not shared by ONGC | Rs. Crore |
| 1 | Extra tax on PBT of Rs. 47,756 crore | 16,232 |
| 2 | GoI can ask ONGC to pass on incremental PAT as additional dividend. If we presume it to be Rs. 30 per share, dividend works out Rs.25,668 crore. On this, GoI can earn Dividend Distribution tax @17% | 4,364 |
| 3 | 68.94% of the additional dividend of Rs. 25,568 will accrue to GoI | 17,700 |
| 4 | 17.88% of the additional dividend of Rs. 25,568 will accrue to 3 PSUs | 4,590 |
|
| Total | 42,886 |
Thus, based on cost of Rs. 54,600 crore and benefit of Rs. 42,886 crore, net loss to GoI will be Rs. 11,714 crore. But this can get recouped much more, due to much higher valuations to be given to ONGC.
So GoI will be able to mobilise much higher amount on part stake sale in ONGC, which was on the agenda of UPA and now of the NDA Govt. Apart from this, transparent process being followed for upstream companies will also improve the perception of PSUs amongst FIIs, DIIs as well as HNIs.
Similar calculations can be applied to OIL India and GAIL, which will reveal in-line benefits.
So, it seems that by asking upstream companies to meet under recoveries of OMCs, it is a ‘penny wise pound foolish’ view being adopted. Or can be said that we are ourselves exposing our true Navratnas to vulnerability leading to poor valuations.
Hope, GoI removes this anomaly, to fetch better valuations for ONGC, OIL India and GAIL on the bourses, which will be in the larger interest of GoI, LIC, retail shareholders and for our economy at large.
Also hope that GoI will set a bold precedent, by deviating from age old junky formula of burdening upstream companies with under recoveries of OMCs.
This can also make GoI mobilize over Rs. 1 lakh crore, annually over next 4-5 years, by divesting part stake in PSUs, largely to control the burgeoning fiscal deficit.