This Bluechip Stock Hit A Decade Low; Should You Buy?

Shares of oil exploration major, Oil and Natural Gas Corporation (ONGC) hit a new decade low in trade earlier this week. There has been an immediate knee-jerk reaction thanks to falling crude prices.

At these levels the stock of ONGC remains extremely attractive.

Extremely attractive on valuations

Consensus estimates, place the EPS of ONGC closer to levels of 24 for 2020-21. At Rs 106, the stock is quoting slightly above p/e levels of 4 times. We barely see any stock quoting at these p/e levels. In fact, most of the global state owned oil and gas firms are trading anywhere between 10 and 15 times p/e. The stock is also available at a price to book value of just 0.61 times.

The stock should actually be trading at least at twice these levels. The reason for such poor valuations is not something that is easy to understand. In fact, the stock also gives you a dividend yield of near 6 per cent. It is highly possible that ONGC declares a dividend sometime in the month of Feb-March and remember dividends are still tax free upto Rs 10 lakhs until March 31, 2020.

The quarterly numbers for the period ending Dec 31, 2019, will also be declared sometime later next month.

Linked to crude prices

The company has always been a very profitable entity, with negligible debt and solid cash flows. Recently, on account of acquiring the government's stake in HPCL, the company may have added on debt.

The company's profitability is linked to crude prices and as long as crude prices remain elevated, the company tends to benefit. However, sometimes it tends to share the government's subsidy burden, if crude prices are too high.

Stable set of performance likely

ONGC is likely to show a stable performance in the next few quarters, even if there is a slight fluctuation in oil and gas prices. In fact, several analysts believe that gas volumes of the company are likely to go up in the coming years.

This should augur very well for a company like ONGC. Another important reason for picking the stock of ONGC is the performance of ONGC Videsh, a subsidiary of the company.

This subsidiary owns interests in 39 oil and gas assets in 19 countries. ONGC Videsh is the second largest petroleum company of India, next only to its parent ONGC. This company also is performing very well, which should boost revenues at net profits of the parent company. It's also important to remember that ONGC hold majority stake in both HPCL and MRPL, both of which are very good oil refining companies.

Those looking to hold for the long-term, the stock could be an excellent pick.