ONGC hits 6-month high on hopes of strong March quarter earnings

Shares of Oil and Natural Gas Corporation (ONGC) hit a 6-month high of Rs 170, up 4 per cent, in intra-day trade on Wednesday, extending its previous day’s 4 per cent gain on the BSE on the expectations of strong earnings in the January-March quarter (Q4FY19).

The stock was trading at its highest level since October 4, 2018. The trading volumes on the counter more than doubled with a combined 11.7 million equity shares changing hands on the NSE and BSE till 10:54 am.

For the first nine months (April-December) of FY19, the company had posted 62 per cent year-on-year (YoY) jump in net profit at Rs 22,671 crore. The stock had underperformed the market in FY19, sliding 10 per cent, as compared to a 17 per cent rally in the benchmark S&P BSE Sensex.

ONGC has been faltering on its oil production growth. But, analysts at Motilal Oswal Securities believe that once KG-DWN-98/2 comes into production, it would result in a significant gas production growth for the company.

The brokerage firm prefers ONGC over Oil India, as gas production is likely to grow around 5-6 per cent annually for the next 3-4 years, oil production is set to increase marginally, ONGC has no subsidy burden so far, it has strong dividend yield, and its valuations are attractive.

“Even as ONGC is poised to end the year with perhaps a 'never-seen-before' profitability, its valuations continue to be in doldrums. Headwinds stemming from politically charged landscape and frequent dilution of Government of India’s stake have kept the stock returns capped,” Nitin Tiwari, analyst at Antique Stock Broking said in a company update.

With crude clocking in an average of around $62/bbl YTD-CY19, we expect Q4FY19 to be a quarter with robust earnings as well, leading to highest-ever standalone profitability for ONGC. In light of such strong profitability, healthy dividends payouts are also anticipated, thereby ensuring strong dividend yield, the brokerage firm said in report dated March 15, 2019.

Despite strong profitability and robust dividend yield stock continues to languish at a P/E of just 5xFY21e and P/BV of 0.7x FY21. We therefore reiterate our BUY rating with a target price of Rs 205 per share (at a P/BV of 1x FY21e), the brokerage firm said.