ONGC’s Valuations Fail To Soar Despite Record Profit Expectations

India's largest oil explorer is expected to report a record profit, but that doesn't seem to be inspiring investor confidence.

Oil and Natural Gas Corporation Ltd.'s 12-month forward valuation for FY19 based on price-to-earnings, price-to-book and enterprise value-to-Ebitda are at a 14-year low even as it's expected to report a net profit of more than Rs 27,000 crore, the highest since its listing.

Investors fear that populist measures ahead of the general election may force ONGC to bear a portion of the subsidy burden. That's because the government had maintained petroleum subsidy at Rs 24,833 crore for the ongoing fiscal—largely unchanged from the previous fiscal—despite crude oil prices surging over last year.

Nitin Tiwari, oil and gas analyst with Antique Stock Broking, attributed the headwinds to a politically charged landscape and frequent dilution of promoter's stake.

Dilution of the promoter's stake by sales through exchange traded funds have weighed on share prices. Shares of the state-run company underperformed the Nifty 50 Index in the last one year by more than 20 percent.

The government has so far garnered around Rs 32,400 crore in four tranches—two each through CPSE ETF and Bharat 22 ETF. The sale was at a discount and with ONGC having one of the highest weightages in the funds, share price returns over the past year have been limited.

Yet, there are reasons for investors of the oil explorer to cheer. Here's a look at them:

Subsidy Burden

ONGC has repeatedly said that it doesn't believe that the government will ask them to share subsidy burden—a sentiment that analysts agree. Prices of liquified petroleum gas and kerosene have been raised by the government since the start of financial year 2019, negating the possibility.

The government might rollover the subsidy burden to the next financial year to meet its fiscal deficit target in FY19. The budgeted petroleum subsidy for FY20 is Rs 37,478 crore though crude prices are expected to remain stable.

Production Growth

ONGC's gas production has risen at least in the last three fiscals and the company expects a growth of four percent for FY20 over the last year. Crude oil production, which has declined in the last few years, is expected to grow in the next financial year, according to management estimates.

Stable Product Prices

While prices of Brent crude are expected to range between $66-67 per barrel, according to Bloomberg estimates, gas prices are expected to be rise 11 percent to $3.74 per million British thermal units, according to BloombergQuint poll.

Strong Dividend Yield

ONGC has maintained a high dividend payout in the last nine years by distributing on average 40 percent of its earnings as dividend. It has announced an interim dividend of Rs 5.25 per share and a buyback worth Rs 4,022 crore so far in FY19.