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									                                                                                                            Event Update | Oil & Gas
                                                                                                                         June 27, 2011



 ONGC                                                                                    ACCUMULATE
                                                                                         CMP                                     `284
 Fuel price hike, duty cuts – Impact analysis                                            Target Price                            `325
 Government hikes fuel prices, cuts duties: On June 24, 2011, the Empowered              Investment Period                12 Months
 Group of Ministers (EGoM) announced to raise retail fuel prices. As expected,
 the government not only took price hikes but also surprisingly re-jigged the duty      Stock Info
 structure. The government hiked diesel price by `3/litre. Prices of cooking fuels,     Sector                                  Oil & Gas
 LPG and Kerosene, were also hiked by `50/cylinder and `2/litre, respectively.
                                                                                        Market Cap (` cr)                        243,104
 The resultant price hikes will help reduce under recoveries of OMCs by around
                                                                                        Beta                                         0.8
 `21,000cr. The duty cuts will cost the exchequer a whopping `49,000cr.
                                                                                        52 Week High / Low                      368/248
 Under recoveries to fall, but still remain high: With these measures, we now           Avg. Daily Volume                        119443
 estimate under recoveries to remain at `97,551cr in FY2012 and `102,484cr in
                                                                                        Face Value (`)                                 5
 FY2013. We estimate the Indian crude oil basket to remain at around
                                                                                        BSE Sensex                                18,412
 US$95–105 in FY2012 and FY2013.
                                                                                        Nifty                                      5,527
 No clarity on subsidy-sharing mechanism yet: Although the government has               Reuters Code                           ONGC.BO
 pegged subsidy-sharing burden of 33.0% of under recoveries for 1QFY2012,
                                                                                        Bloomberg Code                         ONGC@IN
 there is still no clarity on the policy of the subsidy-sharing mechanism. Given that
 crude price is at around US$100/bbl, we continue to peg FY2012 and FY2013
 subsidy sharing for downstream companies at 38.7% of under recoveries.                 Shareholding Pattern (%)
 Outlook and valuation: We anticipate ONGC’s incremental production from                Promoters                                   74.1
 marginal fields to more than offset any decline in production from the ageing          MF / Banks / Indian Fls                     19.4
 fields. OVL is also expected to report increased volumes by 2013 at ~12mn              FII / NRIs / OCBs                            4.5
 tonnes on account of incremental productions from Myanmar, Sakhalin-1 and              Indian Public / Others                       2.0
 Venezuela coming on stream. Deregulation of diesel and resolution of the royalty
 issue with Cairn could be significantly earnings accretive for ONGC. Higher gas
 price from extant fields and mark-to-market prices from incremental production         Abs. (%)               3m        1yr          3yr
 could accrete earnings further. Significant discoveries in the high-potential
                                                                                        Sensex                (2.8)      3.6        36.8
 Cambay, KG basin and Mahanadi fields (still under appraisal) could further boost
                                                                                        ONGC                  1.8     (12.9)        39.5
 valuations. Although there is an FPO overhang on the stock in the near term,
 we believe increased volumes and net realisation should offset these concerns.
 We recommend an Accumulate view on the stock with an SOTP-based target
 price of `325.

 Key financials (Consolidated)
  Y/E March (` cr)                       FY2010       FY2011      FY2012E    FY2013E
  Net sales                             101,755       126,416     123,716    137,949
  % chg                                     (2.7)         24.2       (2.1)      11.5
  Net profit                              19,404       23,711      23,960     25,180
  % chg                                      -2.0         22.2        1.1        5.1
  OPM (%)                                   44.2          41.8       42.6       40.6
  EPS (`)                                   22.7          27.7       28.0       29.4
  P/E (x)                                   12.5          10.3       10.1        9.7
  P/BV (x)                                    2.4          2.1        1.8        1.6    Bhavesh Chauhan
  RoE (%)                                   20.0          21.6       19.1       17.8    Tel: 022 - 3935 7800 Ext: 6821
                                                                                        Bhaveshu.chauhan@angelbroking.com
  RoCE (%)                                  19.9          22.0       19.2       18.3
  EV/Sales (x)                                2.2          1.7        1.7        1.5
                                                                                        Amit Vora
  EV/EBITDA (x)                               5.1          4.3        4.1        3.8    Tel: 022 - 3935 7800 Ext: 6827
 Source: Company, Angel Research                                                        amit.vora@angelbroking.com




Please refer to important disclosures at the end of this report                                                                        1
                                                                            ONGC | Event Update




                Government hikes fuel prices, cuts duties to tame mounting
                under recoveries

                In a meeting held on June 24, 2011, the EGoM took bold steps on the country's
                retail fuel pricing after a long wait of one year. As expected, the government not
                only took price hikes but also surprisingly re-jigged the duty structure. On the price
                hike front, on an immediate basis, the government increased diesel price by
                `3/litre; whereas the price of cooking fuels, LPG and Kerosene, were increased by
                `50/cylinder and `2/litre, respectively. The resultant price hikes will help reduce
                under recoveries of OMCs by around `21,000cr.

                Further, to reduce the burden of under recoveries on OMCs, the government
                lowered the customs duty and excise duty on crude oil and petroleum products.
                Customs duty on crude oil has been reduced to nil from 5%; whereas on the petrol
                and diesel front, the revised customs duty will stand at 2.5% from 7.5% earlier.
                This will result in a loss of `26,000cr to the exchequer. Excise duty on diesel has
                also been reduced by `2.6/litre to `2/litre, resulting into a loss of `23,000cr to the
                exchequer. Thus, the duty cuts will cost the exchequer a whopping `49,000cr.




June 27, 2011                                                                                       2
                                                                                  ONGC | Event Update




                Under recoveries to fall, but still remain high

                With these measures, we now estimate under recoveries to remain at `97,551cr in
                FY2012 and `102,484cr in FY2013. We estimate the Indian crude oil basket to
                remain at around US$95–105 in FY2012 and FY2013.


                Exhibit 1: Product-wise break-up of under recoveries

                           120,000

                           100,000
                                                                                     24,999
                           80,000                   24,508

                           60,000                   23,346                           23,813
                  (` cr)




                           40,000

                           20,000
                                                    49,697                           53,672
                                -
                                                   FY2012E                          FY2013E

                              Diesel under recoveries   LPG under recoveries   Kerosene under recoveries


                Source: Company, Angel Research




                No clarity on subsidy-sharing mechanism yet

                Although the government has pegged subsidy-sharing burden of 33.0% of under
                recoveries for 1QFY2012, there is still no clarity on the policy of the
                subsidy-sharing mechanism. Given that crude price is at around US$100/bbl,
                we continue to peg FY2012 and FY2013 subsidy sharing for upstream companies
                at 38.7% of under recoveries.

                Exhibit 2: ONGC’s share of subsidy to remain high
                                                                                       FY2012E      FY2013E
                Under recoveries (before price hike and duty cuts)                     167,551      172,484
                Dec. in under recoveries due to price hikes                              21,000       21,000
                Dec. in under recoveries due to duty cuts                                49,000       49,000
                Under recoveries (after price hike and duty cuts)                        97,551     102,484
                Upstream companies share @81.0%                                          79,016       83,012
                ONGC's share of subsidy @38.7% of upstream share                         30,579       32,126
                Source: Company, Angel Research




June 27, 2011                                                                                              3
                                                                         ONGC | Event Update




                Outlook and valuation

                We anticipate ONGC’s incremental production from marginal fields to more than
                offset any decline in production from the ageing fields. OVL is also expected to
                report increased volumes by 2013 at ~12mn tonnes on account of incremental
                productions from Myanmar, Sakhalin-1 and Venezuela coming on stream.

                Deregulation of diesel and resolution of the royalty issue with Cairn could be
                significantly earnings accretive for ONGC. Higher gas price from extant fields and
                mark-to-market prices from incremental production could accrete earnings further.

                Significant discoveries in the high-potential Cambay, KG basin and Mahanadi
                fields (still under appraisal) could further boost valuations.

                Although there is an FPO overhang on the stock in the near term, we believe
                the increase in volumes and net realisation should offset these concerns.
                We recommend Accumulate on the stock with an SOTP target price of `325.




June 27, 2011                                                                                   4
                                                                                  ONGC | Event Update



                Profit & loss statement (Consolidated)
                Y/E March (` cr)                      FY08     FY09      FY10      FY11    FY12E     FY13E
                Total operating income               96,782 104,588 101,755 126,416 123,716 137,949
                % chg                                  17.7      8.1      (2.7)     24.2     (2.1)     11.5
                Total Expenditure                    55,527   61,364    56,805    73,558   71,040    81,994
                Net Raw Materials                    25,070   28,975    25,339    32,812   30,104    34,746
                Other Mfg costs                      18,419   17,678    16,321    21,134   19,390    22,380
                Personnel                             1,328    1,162     1,407     1,822    1,936     2,234
                Other                                10,710   13,549    13,738    17,790   17,181    19,830
                EBITDA                               41,255   43,225    44,949    52,858   52,676    55,956
                % chg                                  14.0      4.8       4.0      17.6     (0.3)      6.2
                (% of Net Sales)                       42.6     41.3      44.2      41.8     42.6      40.6
                Depreciation& Amortisation           13,888   15,430    18,719    20,691   21,185    22,671
                EBIT                                 27,367   27,794    26,230    32,167   31,491    33,285
                % chg                                  13.0      1.6      (5.6)     22.6     (2.1)      5.7
                (% of Net Sales)                       28.3     26.6      25.8      25.4     25.5      24.1
                Interest & other Charges               894     1,774     1,102      590      600       680
                Other Income                          4,541    5,072     5,273     5,624    6,700     6,900
                (% of PBT)                             14.6     16.3      17.3      15.1     17.8      17.5
                Recurring PBT                        31,014   31,093    30,401    37,201   37,591    39,505
                % chg                                   8.6      0.3      (2.2)     22.4      1.0       5.1
                Adj. related to prior period (Net)      93      (11)      (40)         -         -          -
                Extraordinary Expense/(Inc.)              -     (66)          -        -         -          -
                PBT (reported)                       30,921   31,169    30,441    37,201   37,591    39,505
                Tax                                  10,700   11,009    10,714    13,093   13,230    13,904
                (% of PBT)                             34.6     35.3      35.2      35.2     35.2      35.2
                PAT (reported)                       20,221   20,160    19,728    24,108   24,361    25,601
                Add: Share of earnings of asso.         2.1      9.9       7.8       8.2      9.5       9.8
                Less: Minority interest (MI)           351      375       332       406      410       431
                PAT after MI (reported)              19,872   19,795    19,404    23,711   23,960    25,180
                ADJ. PAT                             19,872   19,861    19,404    23,711   23,960    25,180
                % chg                                   8.9     (0.1)     (2.3)     22.2      1.1       5.1
                (% of Net Sales)                       20.5     19.0      19.1      18.8     19.4      18.3
                Basic EPS (`)                          23.2     23.1      22.7      27.7     28.0      29.4
                Fully Diluted EPS (`)                  23.2     23.1      22.7      27.7     28.0      29.4
                % chg                                  11.8     (0.4)     (2.0)     22.2      1.1       5.1




June 27, 2011                                                                                           5
                                                                             ONGC | Event Update



                Balance sheet (Consolidated)
                Y/E March (` cr)                   FY08     FY09     FY10     FY11    FY12E    FY13E
                SOURCES OF FUNDS
                Equity Share Capital               2,139    2,139    2,139    4,278    4,278    4,278
                Preference Capital                     -        -        -        -        -        -
                Reserves& Surplus                 75,948   90,085   99,268 113,568 128,972 144,741
                Shareholders’ Funds               78,087   92,224 101,407 117,845 133,250 149,019
                Minority Interest                  1,145    1,411    1,643    2,041    2,441    2,862
                Total Loans                         944     6,559    6,267    8,371    9,427   10,862
                Deferred Tax Liability             8,738    9,223   10,291   10,291   10,291   10,291
                Liability for abandonment cost    12,932   17,145   17,459   17,459   17,459   17,459
                Total Liabilities                101,846 126,562 137,067 156,007 172,868 190,493
                APPLICATION OF FUNDS
                Gross Block                      149,493 169,748 193,300 221,403 253,403 284,341
                Less: Acc. Depreciation           93,825 105,955 117,757 138,449 159,634 182,305
                Net Block                         55,668   63,794   75,543   82,954   93,769 102,036
                Capital Work-in-Progress          14,423   24,758   25,616   27,241   28,194   29,283
                Goodwill                           2,578   11,404    9,539    9,539    9,539    9,539
                Investments                        4,482    3,480    5,159    5,159    5,159    5,159
                Current Assets                    47,534   50,715   50,566   62,886   69,610   78,906
                Cash                              25,056   22,596   22,384   34,059   40,280   49,231
                Loans & Advances                   7,068   13,264   12,057   12,057   12,057   12,057
                Other                             15,411   14,855   16,125   16,770   17,274   17,619
                Current liabilities               23,513   28,239   30,198   32,613   34,244   35,271
                Net Current Assets                24,022   22,476   20,369   30,273   35,366   43,635
                Mis. Exp. not written off           674      651      841      841      841      841
                Total Assets                     101,846 126,562 137,067 156,007 172,868 190,493




June 27, 2011                                                                                      6
                                                                                ONGC | Event Update



                Cash flow statement (Consolidated)
                Y/E March (` cr)                    FY08      FY09      FY10      FY11    FY12E     FY13E
                Profit before tax                 31,014    31,093    30,441    37,201    37,591    39,505
                Depreciation                       9,078     8,779     8,863    20,691    21,185    22,671
                (Incr)/ Decr in Misc Exp            (180)        1     (264)          -         -         -
                Change in Working Capital          2,415     2,355     (719)     1,771     1,128       682
                Less: Other income                (2,903)   (3,238)   (2,300)   (5,624)   (6,700)   (6,900)
                Direct taxes paid                (10,508) (10,244)    (7,748) (13,093) (13,230) (13,904)
                Cash Flow from Operations         28,915    28,746    28,272    40,946    39,974    42,054
                (Inc.)/ Dec. in Fixed Assets     (16,814) (21,639) (21,253) (29,728) (32,953) (32,027)
                (Inc.)/ Dec. in Investments       (1,260)      902    (2,249)         -         -         -
                (Inc.)/ Dec. in loans and adv.        (1)   (1,951)      532          -         -         -
                Other income                       2,078     3,365     2,673     5,624     6,700     6,900
                Cash Flow from Investing         (15,996) (19,323) (20,297) (24,104) (26,253) (25,127)
                Issue of Equity                      166          -      287          -         -         -
                Inc./(Dec.) in loans                (598)    4,968     (304)     2,104     1,056     1,435
                Dividend Paid (Incl. Tax)         (7,822)   (8,103)   (8,078)   (7,272)   (8,556)   (9,411)
                Others                              (285)   (8,748)      (92)         -         -         -
                Cash Flow from Financing          (8,538) (11,883)    (8,187)   (5,168)   (7,500)   (7,976)
                Inc./(Dec.) in Cash                4,380    (2,460)    (211)    11,675     6,221     8,951
                Opening Cash balances             20,676    25,056    22,596    22,384    34,059    40,280
                Closing Cash balances             25,056    22,596    22,384    34,059    40,280    49,231




June 27, 2011                                                                                            7
                                                                                 ONGC | Event Update



                Key ratios
                Y/E March                                FY08    FY09    FY10     FY11     FY12E    FY13E
                Valuation Ratio (x)
                P/E (on FDEPS)                           12.2    12.3    12.5      10.3     10.1      9.7
                P/CEPS                                    7.2     6.9     6.4       5.5      5.4      5.1
                P/BV                                      3.1     2.6     2.4       2.1      1.8      1.6
                Dividend yield (%)                        2.8     2.8     2.9       3.0      3.2      3.5
                EV/Sales                                  2.3     2.2     2.2       1.7      1.7      1.5
                EV/EBITDA                                 5.4     5.1     5.1       4.3      4.1      3.8
                EV/Total Assets                           2.2     1.7     1.7       1.5      1.3      1.1
                Per Share Data (`)
                EPS (Basic)                              23.2    23.1    22.7      27.7     28.0     29.4
                EPS (fully diluted)                      23.2    23.1    22.7      27.7     28.0     29.4
                Cash EPS                                 39.5    41.2    44.6      51.9     52.8     55.9
                DPS                                       8.0     8.0     8.3       8.5      9.0     10.0
                Book Value                                 91    108     119       138      156      174
                Dupont Analysis (%)
                EBIT margin                              28.3    26.6    25.8      25.4     25.5     24.1
                Tax retention ratio                      65.4    64.7    64.8      64.8     64.8     64.8
                Asset turnover (x)                        1.3     1.2     0.9       1.1      1.0      1.0
                ROIC (Post-tax)                          24.1    19.9    15.5      17.6     16.0     15.8
                Cost of Debt (Post Tax)                      -       -       -         -        -        -
                Leverage (x)                                 -       -       -         -        -        -
                Operating ROE                            24.1    19.9    15.5      17.6     16.0     15.8
                Returns (%)
                ROCE (Pre-tax)                           28.2    24.3    19.9      22.0     19.2     18.3
                Angel ROIC (Pre-tax)                     44.5    39.3    31.2      35.0     31.6     30.8
                ROE                                      27.4    23.3    20.0      21.6     19.1     17.8
                Turnover ratios (x)
                Asset Turnover (Gross Block)              0.7     0.7     0.6       0.6      0.5      0.5
                Inventory / Sales (days)                   25      24      27        28       29       29
                Receivables (days)                         22      25      26        27       27       28
                Payables (days)                            99    109     137       134      131      132
                Working capital cycle (ex-cash) (days)     (2)     (2)     (4)       (8)    (13)     (14)
                Solvency ratios (x)
                Net debt to equity                       (0.3)   (0.2)   (0.2)     (0.2)    (0.2)    (0.3)
                Net debt to EBITDA                       (0.6)   (0.4)   (0.4)     (0.5)    (0.6)    (0.7)
                Interest Coverage (EBIT/Interest)        30.6    15.7    23.8      54.5     52.5     48.9




June 27, 2011                                                                                            8
                                                                                                                  ONGC | Event Update




 Research Team Tel: 022 – 3935 7800                  E-mail: research@angelbroking.com                    Website: www.angelbroking.com

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 Disclosure of Interest Statement                                                  ONGC
 1. Analyst ownership of the stock                                                  No
 2. Angel and its Group companies ownership of the stock                            No
 3. Angel and its Group companies' Directors ownership of the stock                 No
 4. Broking relationship with company covered                                       No

 Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors.



 Ratings (Returns) :             Buy (> 15%)                      Accumulate (5% to 15%)                 Neutral (-5 to 5%)
                                 Reduce (-5% to 15%)              Sell (< -15%)


June 27, 2011                                                                                                                               9

								
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