ET Intelligence Group: ONGC and Oil India might move beyond their sluggish trading ranges after a year because of the significant increase in oil subsidy provisions in the FY20 interim budget.
State-owned upstream companies are trading at less than seven times their one-year forward earnings and figure among the cheapest exploration and production companies globally due to uncertainties over subsidies.
New Delhi has increased the oil subsidy provision by 62 per cent to Rs 33,700 crore for FY20, in line with Street estimates. The budget provisions indicate that the government could manage the burden if crude oil remained in the range of $60-65 per barrel and it need not pass the incremental costs on to state-owned oil explorers.
The disbursement of oil subsidy is computed based on a cash basis. This means subsidy for the fourth-quarter of any fiscal year is rolled over for the next fiscal year. For instance, in order to compute the actual payment of oil subsidy, under-recoveries of the fourth-quarter of FY18 and nine-months of FY19 are considered. The under-recoveries on LPG and Kerosene for the current fiscal are likely to be Rs 40,500 crore, while the budget provision was only Rs 20,700 crore. So, for this year rolled over subsidy burden will be Rs 19,700 crore.
The higher provision of oil subsidy for FY20 would translate into a smaller shortfall for the Centre. Hence, there is a low probability of passing the subsidy burden on to the upstream companies. The government raised the budget provision for LPG subsidy under Direct Benefit Transfer to Rs 29,500 crore from Rs 16,500 crore. This too indicated that it was intended to manage DBT on LPG directly without putting the incremental burden on PSU oil companies.
The stock prices of ONGC and Oil India mean that the Street is pricing net realization of less than $45 per barrel, while international crude prices are hovering around $62. CLSA in a note said that fears of a large subsidy burden pulled down ONGC and OIL’s stock to levels that they are pricing in post-subsidy realisation of $44/47 per barrel.
“A $55/bbl post-subsidy realisation scenario will imply bearcase fair values of Rs 201 and Rs 255 per share for ONGC and Oil India, an upside of 41 per cent and 49 per cent from the current levels, respectively,” the CLSA note further added. Similarly, Kotak Institutional Equities raised the EPS estimate of ONGC and Oil India by 15-28 per cent and reiterated ‘buy’ rating with fair values of Rs 210 and Rs 235 for ONGC and Oil India, respectively.