Motilal Oswal Picks Maharatna Large Cap Stock To Buy For 36% Return, Target Price Rs 198

Leading brokerage firm Motilal Oswal is bullish on leading large cap maharatna stock, Oil and Natural Gas Corporation Ltd (ONGC) with a target price of Rs 198 apiece and a potential return of 36%. Oil and gas production to improve 10% and 20% from mid-CY23, respectively, according to the report. Check key details below:

1. ONGC Stock Performance & Return

The last trading price of the stock is Rs 146 apiece with an intraday gain of over 1%. The stock's 52-week high is Rs 194 apiece and 52-week low is Rs 119 apiece, respectively. The company has a market capitalisation of Rs 1,84,678.50 crore.

The shares of the large cap Petroleum & Gas sector stock have rallied 15% in last 3-years and 16% in last 3-months. The shares have fallen 25% in last 5-years.

2. Long Awaited Production Growth In Sight

For the past 10 years, the company has spent INR2,874b in its exploration projects. Hence, ONGC's RRR (2P) - an indicator of sustainable production - has remained above 1x continuously.

However, its oil/condensate production from domestic fields (ex-JVs) declined to 19.5mmt in FY22 from a peak of 26.5mmt in FY05. Similarly, gas production from domestic fields (ex-JVs) reached a peak of 24.7bcm in FY19, but that too decreased steadily to 20.6bcm in FY22.

3. Much Needed Relief On Gas Pricing From The Nominated Fields

Since the implementation of the existing gas price mechanism from Nov'14, domestic APM gas prices have remained below USD3/mmBtu (NCV) for 10 quarters due to the high weightage of Henry Hub in the pricing formula.

For another eight quarters, domestic gas prices have remained below USD3.5/mmBtu. Comparing these with ONGC's gas production cost of ~USD3/ mmBtu leads us to infer that it has been severely impacted by low gas prices.  In light of the above, the recent recommendations of Kirit Parikh, valuing domestic APM gas prices to 10% of Brent could be a boon, if implemented.

4. Valuation

According to Motilal Oswal, "ONGC trades at 3.3x FY24E consolidated EPS of INR44.2 and 2.2x consolidated EV/EBITDA. Considering the great conjunction in addition to the cushion provided by the high dividend yield of 13.6% in FY23, we retain our BUY rating on ONGC with a TP of INR198, making it the top idea for 2023 in the sector."

Key risks: Capital misallocation, increase in windfall taxes or sharp decline in oil prices, and non-implementation of a floor for APM gas.

About ONGC

Maharatna ONGC is the largest crude oil and natural gas Company in India, contributing around 75 per cent to Indian domestic production. ONGC's quest for energy goes deeper than setting new benchmarks in deep-water drilling in the Krishna Godavari Basin or finding new frontiers of energy.

 

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.