The Hindu Business Line : ONGC is value buy, feel analysts

SHARES of Oil and Natural Gas Corporation (ONGC) may be currently ruling weak on the bourses, but the counter is steadily garnering investor interest on good valuations play.

So much so that analysts across various broking houses are maintaining a `buy' call on ONGC.

The general perception is that the company's stock performance is likely to be driven by higher global crude prices, higher gas prices, overseas acquisitions and upside from domestic discoveries.The company has reported a 68 per cent jump in net profits for FY03 at Rs 10,400 crore . This mainly came from increasing production that crossed the 26-m.t. mark of crude oil and 24.3 bcm of natural gas coupled with higher price realisations for crude and value-added products (because of de-regulation of crude and product prices).

"The company has aggressively invested towards enhancing its oil recovery capabilities and exploitation of new oil reserves. It is targeting to double its oil reserves in the next 20 years," an analyst from a leading broking house said.

According to analysts, the acquisition of MRPL is a distinct plus for the company. "With the acquisition of MRPL, ONGC will now have better bargaining power to dispose off the crude it produces. Currently, ONGC's crude is being sold to BPC, IOC and HPC. After the acquisition of MPRL, this crude can be easily diverted to the MRPL refinery at Mangalore if required," Mr Amit Mahajan, senior analyst at Paresh Khandwala Securities said.

The MRPL acquisition also enables ONGC to fulfil its plans to enter marketing of transportation fuels. Following this, ONGC has now its own refinery, its own production source of petroleum products. Hence the whole supply chain for ONGC is complete — from production of crude to marketing of petroleum products.

"We expect that eventually ONGC will take over HPCL's stake in MRPL as well. After this ONGC and MRPL will be merged and the accumulated losses of MRPL will be adjusted in the accounts of ONGC, thereby helping ONGC pay less tax," he added.

Sources said that in the short-term, the 13 oil and natural gas blocks acquired by ONGC (9 on its own and 4 in consortium with either Oil India Ltd or IOC) via the Government's new exploration and licensing policy - NELP-III, is being viewed as a future trigger for the stock. "If ONGC were to strike natural gas reserves, the impacts of these finds will continue to be felt over the next few years," an analyst said.

Domestic broking houses apart, a Merrill Lynch report has also put out a `buy' recommendation on the stock. "There is upside from higher gas prices as well as volume growth from overseas acquisitions," it said.However, there are those who believe that the good times are over for ONGC, with FY03 probably being a peak year in terms of profitability for the company. "Crude price is the only driver of profitability in the company. And given that crude prices may average between $24-$25, profit growth is unlikely. In the domestic business, we see no meaningful increase in production, no volume growth," an analyst said.

As regards the MRPL acquisition, the reasoning is that it will be a challenge for ONGC to show a profit in MRPL. On the overseas acquisitions, there is a perception that it would add about 10 m.t. to crude and gas production by 2008. "This would mean an net profit of Rs 2,000 crore or so. It is again a long term story," he added.

The stock ended the day at Rs 353 on the BSE with around 25,845 shares traded. On the NSE the stock ended at Rs 353.10 with around 39,643 shares traded.

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