Nomura cuts ONGC to reduce from Neutral to reduce

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Nomura cuts ONGC to reduce from Neutral to reduce

Nomura India downgraded ONGC to Reduce'' from Neutral', citing unfavourable government policies along with weak production and operational track record.

In a note, Nomura said that the policies of the government have been unfavourable towards upstream companies.

Any upside is limited by subsidies up to 15 windfall taxes on oil during a commodity upcycle. It believes that a ceiling price on gas will do the same when Indian exploration and production E&P companies were to benefit from the ongoing commodity upcycle.

Upstream s requests for a floor for gas prices have been denied, but a ceiling price is all but certain to be implemented now, it said, as realisations have remained below-cost of-production for 12 out of the 17 revisions that took place since November 2015; the Indian domestic gas price formula has been a drag on earnings.

The brokerage has cut FY 23 consolidated earnings estimate for ONGC to Rs 29.70, as higher oil realisations of $83 per barrel and higher volumes across oil and gas are offset by lower profitability for OVL, along with significant drag from downstream businesses of HPCL and MRPL.

We downgrade ONGC to Reduce, with our SOTP-based TP cut to Rs 110, based on 4 times September 2024 EPS and value of investments. Our low P E multiple reflects ONGC's inefficient capital allocation, unfavourable policies that have impeded profitability and underwhelming production and operational track record despite rising levels of capex and operating costs over several years, Nomura said.

The scrip closed at Rs 142.90 on the BSE. Nomura's target of Rs 110 suggests a potential 23 per cent downside for the stock.

ONGC reported a 30 per cent drop in net profit at Rs 12,825. The September quarter saw 99 crore compared to 18,347. In the year-ago quarter, there were 73 crore.

Nomura has grown in oil volume growth by 2 per cent over FY 24 -- 25 F and gas volume growth of 5 -- 7 per cent. Nomura said ONGC's volume guidance is more aggressive at 4 -- 8 per cent for oil and 7 -- 16 per cent for gas, but its previous record of a decline of 1 -- 3 per cent in CAGR for oil volumes over the past 5 -- 10 years and nil to minus 3 per cent decline in gas volumes over the past decade made it build conservative estimates.