Idr Ongc 040212 51849

Initiating Coverage
March 30, 2012

Rating Matrix
Rating Target Target Period Potential Upside : : : : Hold | 287 12-15 months 7%
Oil and Natural Gas Corporation (ONGC)

| 268
YoY Growth (%)

YoY Growth (%) Net Sales EBITDA Net Profit FY11 15.6 5.5 15.7 FY12E 18.8 8.9 22.6 FY13E 4.7 -3.9 -14.7 FY14E 8.5 6.2 -4.0
Oil giant pushing through obstacles

Oil & Natural Gas Corporation (ONGC), Indias largest national oil & gas company, is primarily engaged in exploration, development and production of crude oil and natural gas in both India and abroad. ONGCs core strength lies in its strong resource base and increasing production resulting from aggressive capex. We expect ONGC to grow at a CAGR of 10.2% in revenues over FY11-14E on the back of steady growth in revenues from oil & gas sales and growth in MRPLs revenues. ONGC is expected to report net profit of | 22,903.3 crore in FY14E. The government reforms in pricing of petroleum products/price hikes would add significantly to the earnings and valuation of the company. We are initiating coverage on ONGC with a HOLD rating and target price of | 287.
Current & target multiple

FY11 PE (x) Target PE (x) EV/EBITDA (x) P/BV (x) EV/Sales (x) RoNW (%) RoCE (%) 10.2 10.9 4.4 2.0 1.8 19.8 26.6 FY12E 8.2 8.8 4.0 1.7 1.5 21.0 25.8 FY13E 9.7 10.4 4.4 1.6 1.5 16.3 21.3 FY14E 10.2 10.9 4.2 1.4 1.4 14.4 19.3
Large resource base; JVs + marginal fields to spearhead volume growth

The ONGC group has large 1P, 2P and 3P crude oil and natural gas reserves base of 961 mmtoe, 1,426 mmtoe and 1,688 mmtoe, respectively. The company has managed to maintain a diversified portfolio of yielding assets through its wholly owned subsidiary ONGC Videsh Ltd (OVL). We expect ONGC groups oil & gas production at 63.5 mmtoe and 67.7 mmtoe in FY13E and FY14E, respectively, implying growth at a CAGR of 2.9% over FY11-14E. The production growth would mainly be attributable to the JVs and new and marginal fields.
Stock Data
Bloomberg Code/Reuters Code Sensex Average volumes Market Cap (| crore) 52 week H/L Equity Capital (| crore) Promoters Stake (%) FII Holding (%) DII Holding (%) ONGC IN/ ONGC.NS 17404 374256 229289.0 325/241 4277.8 69.2 5.3 6.8
Government reforms in pricing of petroleum product inevitable

We believe price hikes and government reforms have become inevitable in the backdrop of high crude oil prices and gross under-recoveries. ONGC would be a major beneficiary of government reforms in the pricing of petroleum products. Any reforms and price hikes in petroleum products like diesel, LPG and kerosene would add significantly to its earnings. ONGCs EPS would increase by ~| 2.3 for | 10,000 crore reduction in under-recoveries (38.7% upstream sharing).
Comparative return matrix (%)

Company ONGC Oil India Cairn India Reliance Industries 1M (8.0) (1.7) (8.6) (11.0) 3M (0.2) 7.5 8.0 (4.1) 6M 2.7 (3.5) 29.4 (3.9) 12M (5.1) (3.7) (0.8) (28.9)
Valuations
We believe ONGCs large reserves base, increasing production due to aggressive capital expenditure and price hikes/reforms on part of the Indian government would create value for investors, going forward. ONGC is trading at 9.7x FY13E and 10.2x FY14E EPS of | 27.5 and | 26.4, respectively. We are initiating coverage on the stock with a HOLD rating and a price target of | 287 (valuation based on average of P/BV multiple: | 301 per share and P/E multiple: | 272 per share).
Exhibit 1: Key Financials (Consolidated)
(Year-end March) Revenues (| bn) EBITDA (| bn) Net Profit (| bn) EPS (|) P/E (x) Price/Book Value (x) EV/EBITDA (x) RONW (%) ROCE (%)
Source: Company, ICICIdirect.com Research
Price movement
6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 Apr-11 Jul-11 Sep-11 Dec-11 Nifty (L.H.S) Price (R.H.S) 350 300 250 200 150 100 50 Mar-12
FY10 1034.4 461.2 197.3 22.7 11.8 2.3 4.8 19.5 25.6
FY11 1219.3 486.5 228.2 26.2 10.2 2.0 4.4 19.8 26.6
FY12E 1434.6 529.6 279.8 32.5 8.2 1.7 4.0 21.0 25.8
FY13E 1509.6 508.9 238.6 27.5 9.7 1.6 4.4 16.3 21.3
FY14E 1635.0 540.2 229.0 26.4 10.2 1.4 4.2 14.4 19.3
Analysts name
Mayur Matani mayur.matani@icicisecurities.com Nishit Zota nishit.zota@icicisecurities.com
ICICI Securities Ltd | Retail Equity Research
Shareholding pattern (March 2012)

Shareholder Promoters Institutional investors Non promoter corporate holding General public Holding (%) 69.2 17.1 11.8 1.9
Company Background
Oil & Natural Gas Corporation (ONGC) is Indias largest national oil & gas company. Set up in 1956, ONGC is primarily engaged in the exploration, development and production of crude oil and natural gas in both India and abroad. ONGC, through its wholly owned subsidiary ONGC Videsh Ltd (OVL), has a presence across 14 countries with participating interests in 33 projects comprising ten producing projects, 18 exploration blocks and four development blocks for its E&P activities. The company is also present in downstream refining and marketing operations in India through its subsidiary MRPL, which operates a refinery with an installed capacity of 11.8 MMTPA. ONGC is also involved in production of LPG and other value added products, alternative energy projects and exploring the feasibility of setting up a nuclear power project. The ONGC group has large 1P, 2P and 3P crude oil and natural gas reserves base of 961 mmtoe, 1,426 mmtoe and 1,688 mmtoe, respectively, covering a total exploratory area of 4,79,210 sq km in India and 150,323 sq km overseas. ONGC, PSC JV and OVL have 2P crude oil and natural gas reserves base of 986 mmtoe, 39 mmtoe and 402 mmtoe, respectively. In FY11, ONGC produced 27.3 million metric tonne (mmt) of crude oil and 25.3 billion cubic meters (bcm) of natural gas, representing 72.4% and 48.5% of Indias total production of crude oil and natural gas, respectively. Offshore production forms majority of ONGCs total oil & natural gas production in FY11, with Mumbai High producing 10.6 mmt of crude oil and 4.6 bcm of natural gas. OVL produced 6.8 mmt and 2.7 bcm of crude oil and natural gas, respectively, in FY11. The ONGC groups production of crude oil and natural gas stood at 34 mmt and 28 bcm, respectively, in FY11.
FII & DII holding trend (%)

10 8 6 4 2 0 Q4FY11 Q1FY12 FII Q2FY12 DII Q3FY12 4.5 7.6 4.9 7.4 5.2
7.0 5.3
6.8
Exhibit 2: ONGC Group Structure
Page 2
Investment Rationale
Large resource base; JVs, marginal fields to spearhead volume growth
ONGC is Indias largest E&P player with strong exploration and production capabilities and a total acreage of 4,79,210 sq km in India and 150,323 sq. km overseas. ONGC has working interests in 36 nomination blocks (24 onshore and 12 offshore) and 79 NELP blocks (33 onshore and 46 offshore). ONGC has an aggressive exploration programme of | 44661.8 crore in the next five years. The companys 1P, 2P and 3P crude oil & natural gas reserves base stands at 961 mmtoe, 1,426 mmtoe and 1,688 mmtoe, respectively. These reserves include 758 mmtoe, 1,025 mmtoe and 1,253 mmtoe of 1P, 2P and 3P reserves, respectively, from the domestic fields & 203 mmtoe, 402 mmtoe and 435 mmtoe of 1P, 2P and 3P reserves, respectively, from international fields.
Exhibit 3: ONGC Group oil & natural gas reserves
1P 1800
ONGC groups large resource and reserve base will drive production growth and valuations
2P
3P 1688 1426
1350 986 mtoe 900 450 724
1212 961
402 435 35 39 JV 41 203
0 ONGC
OVL
Total
Exhibit 4: Break-up of ONGC reserves

1P Oil Domestic (inc.JV) OVL Total Oil (mmt) Gas Domestic (inc.JV) OVL Total Gas (bcm) Total (mmtoe)
2P 476 256 733 548 145 693 1426
3P 573 270 843 680 165 845 1688
Crude oil and natural gas constitutes 51.4% and 48.6% of ONGC Groups 2P reserves
401 105 505 358 98 456 961
Page 3
ONGC has a reserve life of 19.5 and 42.4 years for its domestic and international operations (based on 2P reserves), respectively.
Exhibit 5: Reserve life (FY11)
50 45 40 35 30 25 20 15 10 5 0 45.9
42.4
ONGC has a reserve life of 19.5 and 42.4 years for its domestic and international operations (based on 2P reserves), respectively
reserve life (years)
21.4 14.4
19.5
23.8
1P
2P ONGC OVL
3P
A higher oil price (resulting in improved commercial viability) has led to a stable reserve replacement ratio (RRR) in the second half of the last decade. ONGC reported a strong RRR of 1.8 in FY11 (five year average of 1.5). Over FY08-11, ONGCs cumulative reserve accretion in FY08-11 has been 299 mmtoe. ONGCs strong RRR indicates a potential for sustainable reserve accretion in future. Sustainable reserve accretion will drive production growth, which would eventually lead to higher earnings and valuations.
Exhibit 6: ONGCs reserve replacement ratio over past few years
100 80
ONGC has a healthy reserve replacement ratio of over 1.5 over the last five years, which indicates sustainable production in future
83.0 65.6 63.8 68.9
83.6
mtoe
60 40 20 0 FY07 FY08 Reserve Accretion FY09 FY10 Production RRR FY11
2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
Page 4
Aggressive capex plans to sustain production levels

ONGC has incurred a capex of | 91,306 crore in the past four years towards exploration, development, production & redevelopment projects. ONGCs exploratory expense of | 22,609.6 crore has resulted in 106 discoveries. Steady cash generation and low leverage would enable the company to undertake a similar heavy capex programme, going ahead. ONGC is expected to undertake an aggressive exploration programme in the next five years, where the company is expected to spend | 44,661.8 crore to drill 611 wells in FY13-17E.
Exhibit 7: Aggressive capex plans
40000 32000 ( | crore) 24000 16000 8000 0 FY10 FY11 FY12E FY13E FY14E
Capital projects 46%
Exhibit 8: Break-up of capital expenditure (FY12E)

36163
Exploratory drilling 27% Development drilling 18% Survey 6%
28276 23559
31316
33065
R&D Integration 1% 2%
On the development side, ONGC has drilled 947 development wells in FY08-11. The company has spent | 16,513.6 crore towards development drilling for FY08-11 and is expected to spend | 5830.6 crore and | 8,058.4 crore in FY13E and FY14E, respectively. The company is planning to drill 1120 development wells during the next five years with a capex of | 26,505 crore.
Exhibit 9: No. of wells drilled for exploration and development activities
350 300 224 178 87 98 106 128 125
294 256 218
no. of wells
ONGC plans to drill 611 exploration wells and 1120 development wells during the next five years incurring a capex of | 44,661.8 crore and | 26,505 crore, respectively
250 200 150 100 50 0 FY07
FY08 Exploratory
FY09 Development
FY10
FY11
Page 5
Since 2000, ONGC has been implementing incremental/enhanced oil recovery projects and redevelopment of existing fields to combat the natural decline in these fields. This has increased the recovery factor from 28% in 2000 to 33.5% in 2011. The cumulative gain through these IOR/EOR projects has been ~ 64 MMT, with an incremental gain of 8.48 MMT in FY11. ONGC has 21 IOR/EOR and redevelopment schemes in 15 major fields of which 15 have been completed and six are currently under implementation. The total investment in these projects has been | 25,797 crore (up to March, 2011) against a total planned investment of | 34,055 crore. These projects have tried to keep overall production constant by substituting production from mature fields (decline rate of 7% a year).
Exhibit 10: IOR/EOR/redevelopment projects to arrest production declines
ONGCs
implementation
of
IOR/EOR/redevelopment
projects has increased the recovery factor from 28% in 2000 to 33.5% in 2011
Exhibit 11: Investment in IOR/EOR redevelopment projects

Project IOR/ Redevelopment Projects Heera & South Heera Redevelopment MHS Redevelopment Phase-II MHN Redevelopment Phase-II IOR Lakwa-Lakhmani IOR Geleki IOR Rudrasagar E&P Infrastructure development Construction of new MHN Complex Pipeline Replacement-2 Source: Company, ICICIdirect.com Research Project Cost (| crore) 2305 8813 7133 664 1674 439 6326 3796
ONGC has 21 IOR/EOR and redevelopment schemes in 15 major fields of which 15 schemes have been completed and six are currently under implementation
Exhibit 12: Investment in new field development projects

Project Development of C series Fields Phase 1 Development of B-22 cluster Fields Development of B-46 cluster Fields Development of B-193 cluster Fields Additional Development od D-1 Field North Tapti Gas Field Development G-1 & GS-15 Development Development of Cluster-7 Fields Development of WO-16 Cluster Development of BHE & BH-35 Area
ONGCs aggressive investment in new field development projects (marginal fields) is expected to provide production growth
Project Cost (| crore) 3195 2921 1457 5633 2164 755 2218 3241 2523 372
Page 6
JVs+ marginal fields to spearhead crude oil and gas volumes

ONGC remains the largest producer of crude oil & natural gas, producing 27.28 MMT of crude oil and 25.33 BCM of natural gas from domestic fields in FY11. The company contributes 72.4% of crude oil and 48.5% of natural gas production in India.
Exhibit 13: Area of domestic operations
ONGC is the largest producer of crude oil & natural gas, producing 27.28 MMT of crude oil and 25.33 BCM of natural gas from domestic fields in FY11
We expect crude oil production from domestic fields to reach 28.2 mmt and 30.3 mmt in FY13E and FY14E, implying a CAGR of 3.5% in FY11-14E. The production growth can mainly be attributed to JVs and new and marginal fields, which would be coming on stream in the next few years. Some of these marginal fields are Cluster 7, B-22 & B-193 on the western offshore & G-1/GS-15 & Padmavati on the eastern offshore. A ramp-up in JV blocks would also add significantly to crude oil volumes. The Rajasthan block (Cairn-70%, ONGC-30%) would play a critical role in volume addition. Production at most of the old nomination blocks is exhibiting a declining trend. We believe the production in old nomination blocks would continue to decline.
Exhibit 14: ONGCs domestic oil & gas production
75 60 2.5 23.1 30 15 0 FY10 FY11 ONGC (oil)
2.2 23.1 2.9 24.4
2.2 23.2 3.2 23.9 FY12E JV (oil) ONGC (gas)
2.1 24.6 3.9 24.3 FY13E JV (gas)
2.0 26.4 4.2 26.1
30.3 mmt in FY13E and FY14E, respectively, implying a CAGR of 3.5% in FY11-14E
mmtoe
Oil production from domestic fields to reach 28.2 mmt and
45 1.8 24.7
FY14E
Page 7
Gas production from domestic fields to reach 28.42 bcm by FY14E, implying a CAGR of 3.9% in FY11-14E
We expect gas production from domestic fields to reach 28.42 bcm by FY14E, implying a CAGR of 3.9% in FY11-14E. Most recent discoveries of ONGC happen to be gas discoveries, which could result in gas production growing at a faster rate than crude oil. Most recent discoveries in the Eastern coast- G-1 & GS-15, G-4 & GS-29, Vashishtha, S-1 & KG-DWN98/2, are related to gas reserves. Production at GS-15 has already started in August 2011 while that from GS-1 is expected in 2012-13. Daman Offshore, one of the largest discoveries in nomination blocks in recent times, is expected to come on stream in FY16 and contribute around 5 BCM. The new and marginal fields on the western Coast-B-22, B-193, Cseries, Cluster 7, North Tapti, etc. are together likely to contribute substantially in the next five years. In contrast to the nomination blocks, the JV blocks would exhibit a decline in gas production.
Exhibit 16: Areas of new field development projects
Exhibit 15: Areas of new field development projects
OVL: the growth driver

ONGC has a global presence via its wholly owned subsidiary OVL (created in 1996), as well as through projects undertaken in consortia with other oil & gas companies. The primary business of OVL is acquisition of oil & gas fields in foreign countries, exploring, producing, transporting, exporting & carrying out other related functions. Currently, OVL has a presence in 14 countries, namely, Russia, Venezuela, Sudan, Myanmar, Vietnam, Syria, Brazil, Colombia, Cuba, Libya, Nigeria, Kazakhstan, Iran and Iraq. Out of 33 projects, OVL is the operator in 11 and joint operator in six. OVL has 2P oil reserves of 256.5 million metric tones and 2P gas reserves of 145 billion cubic metres. It contributes ~ 28% to ONGCs consolidated 2P reserves. OVLs primary assets are GNOP (Sudan), Carabobo (Venezuela) and Imperial & Sakhalin (Russia), which together account for 78% of OVLs 2P reserves and 47% of its production. For FY11, the production for OVL amounted to 6.8 mmt of crude oil and 2.7 bcm of natural gas. ONGC Nile Ganga BV (ONGBV) is a wholly owned subsidiary of OVL, engaged in E&P activities in Sudan, Syria, Venezuela, Brazil and Myanmar.
OVL has 2P oil reserves of 256.5 mmt and 2P gas reserves of 145 bcm, which contribute ~ 28% to ONGCs consolidated 2P reserves
Page 8
Exhibit 17: ONGC Videsh area of international operations
Exhibit 18: OVL participating interests in different producing areas

Country Vietnam Sudan Sudan Russia Colombia Syria Venezuela Russia Brazil Project Block 06.1 (offshore) GNOP Block 5A Sakhalin-I MECL Himalaya (4 PSCs) Sancristobal, PIVSA Imperial Energy BC-10 (offshore) Participating Companies OVL 45%, BP 35% (Operator); PetroVietnam 20% OVL 25%; CNPC 40%, Petronas 30%, Sudapet 5% (GNPOC- Operator) OVL 24.125%;Petronas 67.875%;Sudapet 8%. (WNPOC-Operator) OVL 20%; ENL 30% (Operator) Sodeco 30%;SMNG-S 11.5% RN Astra 8.5% OVL 25-50%;SIPC 25-50%; Ecopetrol (50-100%) (MECL-Operator) SSPD (Operator) 62.5-66.67%,HES BV 33.33 to 37.5% OVL 40%, PDVSA 60% (PIVSA - Operator) OVL 100% OVL 15%; Shell 50% (Operator) & Petrobas 35% Current Status Producing Gas & Condensate Producing Oil Producing Oil Producing Oil & Gas Producing Oil Producing Oil & Gas Producing Oil Producing Oil Producing Oil
Exhibit 19: Region-wise OVL production in FY11

Block 6.1,Vietnam Sakhalin-1,Russia GNOP, Sudan 1.5 1.8 0.8 0.8 0.6 0.6 0.5 0.2 0.0 0.5 Oil (MMT) 1.0 Gas (BCM) 1.5 2.0 2.5 0.2 2.2 0.4
OVLs primary assets are GNOP (Sudan), Carabobo (Venezuela) and Imperial & Sakhalin (Russia), which together account for 78% of OVLs 2P reserves and 47% of its production
Imperial Russia Sancristobal, Venezuela AFPC,Syria BC10,Brazil MECL, Colombia Block 5A, Sudan
Page 9
OVLs production has grown at a CAGR of 2.4% in FY08-11 against ONGCs standalone production, which remained flat for the same period. We expect OVLs production to be 8.6 mtoe and 9 mtoe in FY13E and FY14E, respectively.
Exhibit 20: OVLs oil & natural gas production
10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0
2.4
2.7
OVLs production is expected to reach 8.6 mtoe and 9 mtoe
2.5
2.5
2.6
mmtoe
in FY13E and FY14E, respectively
6.5
6.8
6.2
6.1
6.4
FY10
FY11
FY12E Oil (MMT) Gas (BCM)
FY13E
FY14E
The Sakhalin Block accounts for a large share (~34%) of OVLs 2P reserve. The block is operated by Exxon (30%) and other partners Rosneft (20%), SODECO (30%) and OVL (20%). The Chavyo field has already attained peak production earlier in the decade and is expected to exhibit a declining trend, going ahead. The decline in the Chavyo field will be offset by production from the Odoptu field, which commenced production in September 2010. We expect production to rise, once production commences in Arkutun-Dagi. The production from Arkutun-Dagi is expected to start in FY15. OVL holds a 100% stake in UK-listed Imperial, which mainly operates in the Tomsk region of Western Siberia. There have been ramp-up issues and production has declined post acquisition by OVL in January 2009. Imperials production in 2008 was 10000 bopd and it is currently producing ~15000 bopd. We expect the operational issue to continue in the near future. Carabobo (Venezuela) is located in the heavy oil belt of Venezuela. OVL holds an 11% stake in the block. Marginal production of 20000 bopd is expected to start in December 2012. By FY14, production is expected to touch 50000 bopd. The license term is for 25 years and can be further extended by 15 years. OVL holds an 11% stake in the block. OVL holds a 17% stake in the A1 A3 block of Myanmar, which is expected to produce 200 mmscmd of gas from May 2013 onwards. Production is expected to peak one year after the commencement of production. As far as Syria is concerned, the European Union and the US have imposed sanctions that have impacted exports. Volumes have started dropping since Q3FY11. The ongoing dispute between North Sudan and South Sudan has resulted in a shutdown of operations in South Sudan, This has brought down volumes from 1,20,000 bopd to 57,000 bopd.
Page 10
Overall, ONGCs group production is expected to increase at a CAGR of 2.9% from 62.1 mmtoe in FY11 to 67.7 mmtoe in FY14E. The total oil production is expected to increase at a CAGR of 2.5% from 34.0 mmt in FY11 to 36.6 mmt in FY14E. Total gas production is expected to increase at a CAGR of 3.4% from 28.0 bcm in FY11 to 31.0 bcm in FY14E.
Exhibit 21: ONGC Group oil & natural gas production
75 60 45 30 15 0 FY08 ONGC (oil) FY09 JV (oil) FY10 OVL (oil) FY11 ONGC (gas) FY12E JV (gas) FY13E OVL (gas) FY14E 2.0 2.8 22.3 6.8 2.0 26.0 2.2 3.0 22.5 6.6 1.8 25.4 2.4 2.5 23.1 6.5 1.8 24.7 2.7 2.2 23.1 6.8 2.9 24.4 2.5 2.2 23.2 6.2 3.2 23.9 2.5 2.1 24.6 6.1 3.9 24.3 2.6 2.0 26.4
at a CAGR of 2.9% from 62.1 mmtoe in FY11 to 67.7 mmtoe in FY14E
mmtoe
Overall, ONGCs group production is expected to increase
6.4 4.2 26.1
Government reforms in pricing of petroleum product is inevitable

Gross under-recoveries on regulated petroleum products have increased over the past few years due to the increase in crude oil prices. This has led to an increase in the subsidy burden for ONGC from | 2,690 crore in FY04 to | 24,892 crore in FY11.
Exhibit 22: Impact of gross under-recoveries on ONGC
200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 178,469 150 120 90 78,193 46,051 60 30 0 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E US$ per barrel
167,973 139,824 103,292 77,123 40,000 9,274 20,146 49,387
| Crore
Gross under-recoveries (LHS)

ONGC Subsidy Burden (LHS)
Crude oil prices (RHS)
Net Realisations (RHS)
Page 11
In the prevailing scenario of high crude oil prices, we expect gross underrecoveries to remain high at | 1,67,973 crore and | 1,78,469 crore in FY13E and FY14E, respectively (we assume Brent crude oil prices at US$115/barrel and exchange rate of | 50 per US$). Also, given the limited capacity of downstream companies to share subsidy burden, we assume the subsidy burden share for upstream companies to remain high at 38.7% in FY13E and FY14E. This would lead to higher subsidy burden of | 53,972.3 crore (US$73.7 per barrel) and | 57,344.9 crore (US$73 per barrel) in FY13E and FY14E, respectively. Net realisations are expected to be lower at US$44.3/barrel and US$45/barrel in FY13E and FY14E, respectively.
Exhibit 23: ONGCs subsidy sharing burden
60000 48000 53972.3 | Crore 36000 24000 15.7 12000 11555.0 0 FY10 FY11 FY12E FY13E FY14E 24892.0 15 0 35.6 44588.4 30 64.9 73.7 73.0 75 60 45 USD per barrel
High crude oil prices would lead to higher subsidy burden for ONGC of | 53,972.3 crore (US$73.7/barrel) and | 57,344.9 crore (US$73/barrel) in FY13E and FY14E, respectively
57344.9
Exhibit 24: ONGCs oil gross and net realisations

125 100 USD per barrel
Net realisations are expected to be lower at US$44.3/barrel and US$45/barrel in FY13E and FY14E, respectively
119.5
118.0
118.0
75 60
75 50 25 0
71.7 55.9 53.8 54.6 44.3 45.0 45 30 15 FY10 FY11 Gross Realised Price Subsidy / Discount (RHS) FY12E FY13E FY14E Realised Price after Subsidy / Discount
However, given the current situation of high gross under-recoveries, price hikes and government reforms have become inevitable. We believe ONGC would be a major beneficiary of government reforms in the pricing of petroleum products. Any reforms and price hikes in petroleum products like diesel, LPG and kerosene would add significantly to its earnings. ONGCs EPS would increase by ~| 2.3 for | 10,000 crore reduction in under-recoveries (38.7% upstream sharing).
Page 12
USD per barrel
89.4
Exhibit 25: Sensitivity of EPS to change in gross under-recoveries

Gross under-recoveries (| Crore) Base Case less | 10,000 crore Base Case Base Case plus | 10,000 crore
Source: ICICIdirect.com Research
Subsidy Burden (| Crore) FY13E FY14E 50759.2 54131.7 53792.3 57344.9 57185.5 60558.0
Net Realisations (US$) FY13E FY14E 48.7 49.1 44.3 45.0 39.9 41.0
EPS (|) FY13E 29.8 27.5 25.3
FY14E 28.7 26.3 24.0
The EPS would increase by ~| 2.3 for | 10,000 crore reduction in under-recoveries. The EPS would increase by ~| 1.8 for | 1 per litre increase in diesel prices
The Indian governments aim of lowering fiscal deficit to 5.1% in FY13BE and lower oil subsidy estimates of | 43,580 crore for FY13BE makes a diesel price hike imperative. This would offset the negative impact caused by increased under-recoveries.
Exhibit 26: Sensitivity of EPS to change in diesel prices

Diesel Prices Base Case less | 1 per litre Base Case Base Case plus | 1 per litre
Gross under-recoveries (| Crore) FY13E FY14E 175370.6 186517.5 167973.4 178469.4 160576.1 170421.2
Subsidy Burden (| Crore) FY13E FY14E 56349.2 59930.9 53792.3 57344.9 51959.5 54758.9
Net Realisations (US$) FY13E FY14E 41.0 41.8 44.3 45.0 47.5 48.3
EPS (|) FY13E 25.8 27.5 29.2
FY14E 24.4 26.3 28.3
Page 13
Financials
Stable growth in consolidated revenues
We expect revenues to increase from | 1,21,929.3 crore in FY11 to | 1,63,499.1 crore in FY14E at 10.2% CAGR over FY11-14E mainly on account of higher contribution from MRPL. MRPLs revenues in the same period of FY11-14E would increase at a CAGR of 17.4% from | 39,169.2 crore in FY11 to | 63,616.1 crore in FY14E on account of higher throughput and crude oil prices. Consolidated oil revenues would increase from | 63,512 crore in FY11 to | 75,028.6 crore in FY14E at a CAGR of 5.7% mainly on account of an increase in oil sales from 34 mmt in FY11 to 36.6 mmt in FY14E (CAGR-2.5% over FY11-14E). Gas revenues would increase at 8.7% CAGR over FY11-14E from | 13,878 crore in FY11 to | 17,879.2 crore in FY14E. This would be on account of an increase in gas sales volume from 28 bcm in FY11 to 31 bcm in FY14E and increased realisations from domestic fields.
Exhibit 27: Projected consolidated revenue growth
200000 160000
ONGCs revenues are expected to increase from at 10.2% CAGR over FY11-14E mainly on account of higher contribution from MRPL
143460.1 121929.3 103438.9
150958.8
163499.1
| Crore
| 1,21,929.3 crore in FY11 to | 1,63,499.1 crore in FY14E
120000 80000 40000 0
FY10
FY11
FY12E
FY13E
FY14E
On a standalone basis, revenues would increase at slower growth rate of 5.6% CAGR over FY11-14E from | 69,165.4 crore in FY11 to | 81,692.6 crore in FY14E on account of muted growth in oil and gas production.
Exhibit 28: Trend in standalone revenues
100000 80000 61645.5 60000 40000 20000 0 FY10
69165.4
75414.4
76585.4
81692.6
| Crore
FY11
FY12E
FY13E
FY14E
Page 14
Exhibit 29: Standalone revenues

100000 80000 | Crore 60000 40000 20000 0 FY10 Crude Oil FY11 FY12E Others FY13E FY14E
Exhibit 30: Standalone revenue break-up

100% 80% 60% 40% 20% 0% FY10 Crude Oil FY11 Natural Gas FY12E Others FY13E FY14E 73.8 66.7 68.1 63.3 64.1
10.6 12.9
9.7 18.9
11.0 19.2
13.6 21.0
12.8 20.8
Natural Gas
Other Operating Income
Other Operating Income
Source: Company, ICICIdirect.com Research *Others include LPG, Naphtha, C2-C3,SKO, Profit Petroleum and others
Consolidated EBITDA to increase at 3.5% CAGR over FY11-14E

ONGCs consolidated EBITDA is expected to increase from | 48,649.1 crore in FY11 to | 54,024.7 crore in FY14E at 3.5% CAGR over FY11-14E. However, the EBITDA margin is expected to decline from 39.9% in FY11 to 33% in FY14E mainly on account of higher crude oil prices.
Exhibit 31: Trend in consolidated EBITDA and EBITDA margin
60000 48000 | Crore 36000 24000 12000 0 FY10 FY11 EBITDA
Exhibit 32: Raw material costs as a percentage of revenues

36 EBITDA margin (%) 32 30.5 (%) 28 24 20 FY10 FY11 FY12E FY13E FY14E 24.5 25.6 32.5 33.7
46117.7
48649.1
52960.1 50886.8 54024.7
50 40
44.6
39.9
36.9
33.7
33.0 30 20 10 0
FY12E
FY13E
FY14E
EBITDA margin
On a standalone basis, ONGCs EBITDA is expected to be flat at | 41,018.9 crore in FY11. The EBITDA margin is expected to decline from 59.3% in FY11 to 50.1% in FY14E mainly on account of an increase in statutory levies as a percentage of revenues from 19.4% in FY11 to 29% in FY14E due to an increase in cess from | 2,500 per tonne to | 4,500 per tonne.
Page 15
Exhibit 33: Trend in standalone EBITDA and EBITDA margin

60000 45000 | Crore 30000 15000 0 FY10 FY11 EBITDA
65 EBITDA margin (%) 41018.9 59.3 43959.8 38406.7 58.3 50.1 50.1 50 45 FY12E FY13E EBITDA margin FY14E 40937.1 60 55
37154.3 60.3
Exhibit 34: Standalone costs as a percentage of revenues

18.0 17.9
Exhibit 35: Standalone cost variables impacting EBITDA margins

65 60 (%) 55 50 45 EBITDA Dec in RM Inc in EMP Inc in Inc in margin costs costs statutory other EXP (FY11) levies
17.7
17.8
17.7
0.0
0.2
8.9
19.4
20.1
21.4
28.9
29.0
59.3
0.1 50.1
FY10 Raw Material Costs
FY11
FY12E
FY13E Statutory Levies
FY14E Other Expenditure
Employees Cost
EBITDA margin (FY14E)
Consolidated profits to increase marginally

We expect ONGCs consolidated net profit to increase marginally from | 22,825 crore in FY11 to | 22,903.3 crore in FY14E while ONGCs standalone net profit will decline from | 18,924 crore in FY11 to | 16,510 crore in FY14E. This is mainly on account of an increased subsidy burden on ONGC from | 24,892 crore in FY11 to | 57,344.9 crore in FY14E.
Exhibit 36: Consolidated net profit trend
30000 25000 20000 | Crore 15000 10000 5000 0 FY10 FY11 FY12E FY13E FY14E | Crore 19727.6 22825.0 27981.2 23863.2 22903.3
Exhibit 37: Standalone net profit trend

30000 24000 18000 12000 6000 0 FY10 FY11 FY12E FY13E FY14E 16767.6 18924.0 22898.4 17358.0 16510.0
Page 16
OVLs contribution towards the groups profitability is expected to increase from 12% in FY11 to 22.2% in FY14E, mainly due to higher realisations.
Exhibit 38: Contribution of subsidiaries to consolidated PAT
Percentage contribution to consolidated PAT
OVLs contribution towards the groups profitability is expected to increase from 12% in FY11 to 22.2% in FY14E, mainly due to higher realisations
100 90 80 70 60 50 40 30 20 10 0
5.6 10.6
5.2 12.0
2.3 16.2
4.6 23.0
5.7 22.2
83.9
82.9
81.6
72.4
72.1
FY10
FY11
FY12E Standalone OVL MRPL
FY13E
FY14E
Return ratios to contract due to aggressive capital expenditure

ONGCs consolidated return on capital employed (RoCE) is expected to decline from 26.6% in FY11 to 19.3% in FY14E on account of high capital expenditure on exploration activities and capital projects (to sustain production from ageing fields). The return on invested capital (RoIC) is expected to decline from 32.0% in FY11 to 20.3% in FY12. The return on net worth (RoE) is expected to decrease from 19.8% in FY11 to 14.4% in FY14E.
Exhibit 39: Consolidated return ratios
35 28 (%) 21 14 7 0 FY10 FY11 ROCE
Exhibit 40: Standalone return ratios

35 33.0 26.0 33.8 25.9 32.2 24.8 18.4 19.2 19.4 20.6 14.6
29.8 25.6 19.5
32.0 26.6 19.8
31.0 25.8 21.0 23.5 21.3 16.3 20.3 19.3 14.4
28 21 (%) 14 7
22.1 19.1 16.8 13.2
FY12E ROE
FY13E ROIC
FY14E
0 FY10 FY11 ROCE

FY12E ROE
FY13E ROIC
FY14E
Page 17
Risk & concerns

Volatility in crude oil prices has material adverse effect on business
Increase in crude prices would have an adverse impact on ONGCs revenues and profitability on account of higher subsidy burden. Any increase in oil prices would result in lower realisations and earnings for the company. Lower net realisations may reduce the economic viability of projects planned or in development. Lower net realisations may result in the impairment of higher cost reserves and other assets. This may result in decreased earnings or losses. The refining business is also susceptible to volatility in crude oil prices. Crude oil is the largest cost component for the refining business, which makes refining margins susceptible to volatile crude oil prices.
Exhibit 41: Sensitivity of realisation and EPS to change in crude oil prices
Brent Crude Oil Prices (US$) 90.0 95.0 100.0 105.0 110.0 115.0 120.0 125.0 130.0 135.0
The EPS would change by ~| 0.5 per share on a US$5 per barrel change in Brent crude oil prices
Sensitivity to Realisation (US$) FY13E FY14E 60.0 60.8 56.9 57.6 53.7 54.5 50.6 51.3 47.4 48.9 44.3 45.0 41.1 41.9 38.0 38.7 34.8 35.6 31.7 32.4
Sensitivity to EPS (|) FY13E FY14E 30.1 29.6 29.6 28.9 29.1 28.3 28.6 27.6 28.1 27.0 27.5 26.3 27.0 25.7 26.5 25.1 26.0 24.4 25.5 23.8
Adverse subsidy sharing mechanism

The Indian government operates a mechanism, whereby the underrecoveries are shared among the GoI, public sector oil marketing companies (OMCs) and public sector upstream companies. There is no clarity from the government on the subsidy sharing mechanism, which is currently implemented in an ad-hoc manner. Due to the increase in crude oil under-recoveries in FY11, the share of upstream companies in subsidy sharing was increased from 31.3% in FY10 to 38.8% FY11. This resulted in a discount of US$35.6 per barrel in FY11, an increase of 126.8% over US$15.7 per barrel in FY10.
Exhibit 42: Sensitivity of realisation and EPS to change in subsidy sharing mechanism
Upstream Share (%) 30.0 33.3 38.7 40.0 45.0 50.0
The EPS would decrease by ~| 6.5 per share on an increase in upstream companies subsidy share from 38.7% to 45%
Sensitivity to Realisation (US$) FY13E FY14E 60.9 61.4 54.5 55.2 44.3 45.0 41.8 42.6 32.3 33.2 22.7 23.7
Sensitivity to EPS (|) FY13E FY14E 36.1 35.9 32.8 32.2 27.5 26.3 26.3 24.9 21.3 19.4 16.4 13.9
Page 18
Asset concentration
The Mumbai High field in the Western Offshore basin, which accounts for ~32% of the total domestic crude oil & natural gas production, has been experiencing declining production since levels since 1990. Any catastrophic events in ONGCs area of operations will have a material adverse effect on the business and profitability of the company.
Sensitivity to volatile exchange rates

The earnings of ONGC are sensitive to volatility in exchange rates. An appreciation of the Indian rupee against the US dollar would have a positive impact on ONGCs profitability and valuation as the decline in rate of gross under-recoveries will be more than that of net realisations.
Exhibit 43: Sensitivity of EPS to change in exchange rate
Exhange Rate (USD / INR)
The EPS would change by ~| 0.2 per share on a | 2 change in the exchange rate
46.0 48.0 50.0 52.0 54.0

Sensitivity to EPS (|) FY13E 27.8 27.6 27.5 27.4 27.2
FY14E 26.9 26.6 26.3 26.1 25.8
Dry wells
ONGCs future growth in oil and gas production is dependent on finding, acquiring and developing further reserves. The companys failure to find successful wells in new exploratory blocks may lead to a decline in reserves and would also impact the profitability on account of write-offs of exploration costs.
Geopolitical risks
ONGC conducts its business in countries that are subject to sanctions administered or enforced by the US Department of Treasurys Office of Foreign Assets Control, the United Nations Security Council, the European Union and/or Her Majestys Treasury. Existing sanctions against Iran, Sudan, Cuba, Myanmar, Syria, and Libya present challenges in conducting normal business operations. Sanctions against Iran will have an adverse impact on MRPL that historically sources half of its crude requirement from Iran. The US and EUs existing sanctions against Syria and the Syrian petroleum industry as a result of the continuing unrest in that country have already started impacting the production levels from the blocks in Syria owned by OVL. The company also faces security risk in some of its assets in Assam, Nagaland and Tripura, which are located in the North East region of India. The company has experienced interruptions in production and exploration activities due to insurgencies.
Page 19
Valuation
We believe ONGCs large reserves base, increasing production due to aggressive capital expenditure and price hikes/reforms from the Indian government would create value for investors, going forward. ONGC is trading at 9.7x FY13E and 10.2x FY14E EPS of | 27.5 and | 26.4, respectively. We are initiating coverage on the stock with a HOLD rating and a price target of | 287 (valuation based on average of P/BV multiple: | 301 per share and P/E multiple: | 272 per share).
Exhibit 44: Valuation Table
Valuation based on P / BV multiple Adjusted Book Value for FY14E (|Crore) Adjusted number of shares (Crore) Adjusted Book Value per share (|) Multiple Value of core business (| per share) Add: Listed investments (25% discount to CMP) (| per share) Fair Value per share (|) Valuation based on P / E multiple Profit after tax for FY14E (| Crore) Less: Other Income adjusted for tax (| Crore) Adjusted profit after tax for FY14E (| Crore) Number of shares (Crore) Adjusted EPS for FY14E (|) Multiple Fair value per share without investments (|) Add: Value of Investments (| per share) Listed investments (25% discount to CMP) Other Investments Fair value per share (|) Weighted Target Price (| per share)
156806.9 855.6 183.3 1.6 293.3 8.2 301
22903.3 498.3 22405.0 855.6 26.2 10.0 261.9 8.2 1.8 272 287
ONGCS EPS would decrease from | 26.4 (Brent oil prices: US$115/barrel to | 25.1 in FY14E if Brent crude oil prices sustain at US$125/barrel. However, its EPS would increase to | 29.6/share in FY14E if Brent crude oil prices decline to US$90/barrel.
Exhibit 45: P/E chart
500 400
ONGC is trading at 9.9x FY14E EPS of | 26.4 against the five-year historical average of 10.2x
Share Price (|)
300 200 100 0 Mar-07 Mar-08 Price 6x Mar-09 8x Mar-10 10x 12x Mar-11 14x Mar-12
Page 20
Exhibit 46: P/BV chart

500 400
Share Price (|)
300 200 100 0 Mar-07 Mar-08 Price 1x Mar-09 1.4x Mar-10 1.8x 2.2x Mar-11 2.6x Mar-12
ONGC is trading at 1.4x FY14E P/BV of | 185.3 against the five-year historical average of 2.1x
ONGC is currently trading at EV of US$ 4.4 per boe against the global average of US$ 15 per boe for pure upstream companies and US$ 16 per barrel for integrated oil & gas companies.
Exhibit 47: Global upstream players
Company Canadian Natural Resources Encana Corp Cnooc ltd. Talisman Energy inc Anadarko Petroleum corp Apache Corp Chesapeake Energy Corp Devon Energy Corporation Eog Resources inc Average
Source: Bloomberg, ICICIdirect.com Research
Market Cap (US$ mn) 35860 12967 91775 12827 38543 37975 15377 28534 29365
EV / 2P Reserves (US$/boe) 9 14 27 14 20 15 10 10 16 15
Exhibit 48: Global integrated players

Company Cenovus Energy inc Continental Resources inc/ok Imperial Oil Ltd Petrochina Co. Ltd Royal Dutch Shell PLC-a shs Woodside Petroleum Ltd BP PLC Chevron Corp Conocophilips Exxon Mobil Corp Hess Corp Husky Energy inc Lukoil oao Occidental Petroleum Corp Suncor Energy inc TNK-BP Holding-cls Average
Source: Bloomberg, ICICIdirect.com Research
Market Cap (US$ mn) 27112 15254 38319 278977 222945 29192 139668 211239 96502 405714 19958 24440 52017 76588 50781 47690
EV / 2P Reserves (US$/boe) 13 32 12 14 18 27 10 18 14 17 16 23 3 25 14 6 16
Page 21
Financial summary
Profit & Loss Statement (Standalone)
(| Crore) FY14E 81,692.6 6.7 0.0 700.0 1723.5 23729.9 14602.1 40,755.6 40,937.1 6.6 20,053.8 20,883.3 20.0 3,064.3 23,927.6 -4.4 7,417.5 16,510.0 -4.9
(Year-end March) Revenue Growth (%) (Inc.)/Dec. in stock trade Raw material Costs Employee Costs Statutory Levies Other Expenditure Op. Expenditure EBITDA Growth (%) Depreciation EBIT Interest Other Income PBT Growth (%) Tax Reported PAT Growth (%)
FY10 61,645.5 -4.4 -118.0 579.5 1106.7 11987.3 10935.7 24,491.2 37,154.3 16.7 14,658.8 22,495.5 68.7 2,557.0 24,983.8 4.3 8,216.3 16,767.6 4.0
FY11 69,165.4 12.2 -12.9 635.3 1303.2 13925.3 12295.7 28,146.5 41,018.9 10.4 15,943.0 25,075.9 25.1 2,568.2 27,619.0 10.5 8,695.0 18,924.0 12.9
FY12E 75,414.4 9.0 -125.7 630.6 1424.4 16146.5 13378.8 31,454.6 43,959.8 7.2 16,584.4 27,375.4 17.4 6,713.1 34,071.1 23.4 11,172.7 22,898.4 21.0
FY13E 76,585.4 1.6 0.0 676.0 1566.9 22143.8 13792.1 38,178.7 38,406.7 -12.6 16,663.2 21,743.5 20.0 3,298.3 25,021.8 -26.6 7,663.8 17,358.0 -24.2
Balance Sheet (Standalone)

(Year-end March) Source of Funds Equity Capital Preference Capital Reserves & Surplus Shareholder's Fund Loan Funds Deferred Tax Liability Well Abandonment Sinking Fund Source of Funds Application of Funds Net Block Capital WIP Producing Properties Pre-Producing Properties Total Fixed Assets Investments Inventories Debtor Cash Loan & Advance, Other CA Total Current assets Current Liabilities Provisions Total CL and Provisions Net Working Capital Miscellaneous expense Application of Funds FY10 2,138.9 0.0 85,143.7 87,282.6 5.0 8,918.2 16,400.7 112606.5 FY11 4,277.8 0.0 93,226.7 97,504.4 0.0 9,950.4 17,564.3 125019.1 FY12E 4,277.8 0.0 106,865.8 111,143.5 0.0 10,950.4 18,564.3 140658.2 FY13E 4,277.8 0.0 114,414.3 118,692.1 0.0 11,950.4 19,564.3 150206.7 (| Crore) FY14E 4,277.8 0.0 121,164.6 125,442.4 0.0 12,950.4 20,564.3 158957.0
15,648.5 10,241.4 40,282.2 5,549.7 71,721.7 5,772.0 4,678.6 3,058.6 18,231.0 27,803.1 53,771.3 12,087.6 7,412.4 19,500.0 34,271.4 841.3 112606.4
18,639.5 14,031.6 43,575.7 7,747.2 83,994.0 5,332.8 4,119.0 3,845.9 22,446.6 28,232.2 58,643.6 18,814.9 4,932.5 23,747.4 34,896.2 796.0 125019.1
27,470.0 13,243.6 47,577.9 9,270.7 97,562.2 5,332.8 4,958.8 4,235.6 25,417.6 27,057.2 61,669.1 16,529.2 8,172.8 24,702.0 36,967.2 796.0 140658.2
36,440.7 12,663.6 52,613.9 11,106.1 112,824.2 5,332.8 5,035.8 4,301.4 19,689.5 25,882.2 54,908.8 16,785.9 6,869.3 23,655.2 31,253.6 796.0 150206.7
42,551.8 10,846.6 60,063.3 14,164.4 127,626.1 5,332.8 5,371.6 4,588.2 15,311.2 24,707.2 49,978.2 17,905.2 6,870.9 24,776.2 25,202.0 796.0 158957.0
Page 22
Cash Flow Statement (Standalone)

(| Crore) FY14E 16,510.0 9,759.8 20,053.8 1,000.0 27,804.0 1,121.0 552.3 29477.4 34,855.7 0.0 1.0 -34855.7 1,000.0 0.0 1.0 1000.0 -4,378.3 19,689.5 15311.2
(Year-end March) Profit after Tax Less: Dividend Paid Add: Depreciation Add: Others Cash Profit Increase/(Decrease) in CL (Increase)/Decrease in CA CF from Operating Activities Purchase of Fixed Assets (Inc)/Dec in Investments Others CF from Investing Activities Inc/(Dec) in Loan Funds Inc/(Dec) in Sh. Cap. & Res. Others CF from financing activities Change in cash Eq. Op. Cash and cash Eq. Cl. Cash and cash Eq.
FY10 16,767.6 8,219.8 14,658.8 1,116.0 24,131.8 -1,605.2 -36.5 22490.1 23,042.9 -681.7 0.0 -23724.7 369.9 -0.5 0.0 369.4 -865.2 19,096.2 18231.0
FY11 18,924.0 8,701.7 15,943.0 1,032.2 27,242.8 4,247.4 -656.7 30833.4 28,215.2 439.2 0.0 -27776.0 1,158.6 -0.5 0.0 1158.1 4,215.6 18,231.0 22446.6
FY12E 22,898.4 9,259.3 16,584.4 1,000.0 31,223.5 954.6 -54.5 32123.7 30,152.6 0.0 0.0 -30152.6 1,000.0 0.0 0.0 1000.0 2,971.0 22,446.6 25417.6
FY13E 17,358.0 9,509.5 16,663.2 1,000.0 25,511.7 -1,046.8 1,032.2 25497.1 31,925.3 0.0 0.0 -31925.3 1,000.0 -299.9 0.0 700.1 -5,728.1 25,417.6 19689.5
Key Ratios (Standalone)
(Year-end March) Per share data (|) Book Value Cash per share EPS Cash EPS DPS Profitability & Operating Ratios EBITDA Margin (%) PAT Margin (%) Fixed Asset Turnover (x) Inventory Turnover (Days) Debtor (Days) Current Liabilities (Days) Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) PE Price to Book Value EV/EBITDA EV/Sales Leverage & Solvency Ratios Debt to equity (x) Interest Coverage (x) Debt to EBITDA (x) Current Ratio Quick ratio
FY10 102.0 21.3 19.6 36.7 8.2 60.3 27.2 0.9 27.7 18.1 71.6 19.2 26.0 33.0 13.7 2.6 5.7 3.4 0.0 327.7 0.0 2.8 2.5
FY11 114.0 26.2 22.1 40.8 8.7 59.3 27.4 0.8 21.7 20.3 99.3 19.4 25.9 33.8 12.1 2.4 5.0 3.0 0.0 998.6 0.0 2.5 2.3
FY12E 129.9 29.7 26.8 46.1 9.3 58.3 30.4 0.8 24.0 20.5 80.0 20.6 24.8 32.2 10.0 2.1 4.6 2.7 0.0 1,573.3 0.0 2.5 2.3
FY13E 138.7 23.0 19.9 39.4 9.5 50.1 22.7 0.7 24.0 20.5 80.0 14.6 18.4 22.1 13.4 1.9 5.5 2.7 0.0 1,087.2 0.0 2.3 2.1
FY14E 146.6 17.9 19.3 42.7 9.8 50.1 20.2 0.6 24.0 20.5 80.0 13.2 16.8 19.1 13.9 1.8 5.2 2.6 0.0 1,044.2 0.0 2.0 1.8
Page 23
Profit & Loss Statement (Consolidated)

(| Crore) FY14E 163,499.1 8.5 0.0 55130.8 2423.5 28717.9 23202.1 109,474.3 54,024.7 6.2 21,989.8 32,035.0 495.6 3,424.3 34,963.6 -3.7 12,060.3 22,903.3 -4.0
(Year-end March) Revenue Growth (%) (Inc.)/Dec. in stock trade Raw material Costs Employee Costs Statutory Levies Other Expenditure Op. Expenditure EBITDA Growth (%) Depreciation EBIT Interest Other Income PBT Growth (%) Tax Reported PAT Growth (%)
FY10 103,438.9 -2.9 -372.9 25711.9 1407.1 17015.4 13559.6 57,321.1 46,117.7 8.4 18,739.1 27,378.6 556.4 3,619.2 30,441.4 -2.3 10,713.8 19,727.6 -2.1
FY11 121,929.3 15.6 -891.7 32143.2 1715.6 19684.7 20628.4 73,280.2 48,649.1 5.5 16,522.5 32,126.6 437.4 2,627.1 34,316.3 12.7 11,491.3 22,825.0 15.7
FY12E 143,460.1 18.8 -658.6 44445.6 2022.0 22301.2 22389.9 90,500.1 52,960.1 8.9 17,107.1 35,852.9 461.0 4,155.2 42,707.2 24.5 14,725.9 27,981.2 22.6
FY13E 150,958.8 4.7 0.0 49116.3 2126.9 26496.8 22332.1 100,072.1 50,886.8 -3.9 17,733.2 33,153.5 410.6 3,578.3 36,321.2 -15.0 12,458.0 23,863.2 -14.7
Balance Sheet (Consolidated)

(| Crore) FY14E 4,277.8 154,245.0 158,522.8 8,061.8 23450.4 14,588.8 1,965.9 206589.6
(Year-end March) Source of Funds Equity Capital Reserves & Surplus Shareholder's Fund Loan Funds Abandon cost liability Deferred Tax Liability Minority Interest Source of Funds Application of Funds Net Block Capital WIP Producing Properties Pre-Producing Properties Total Fixed Assets Investments Inventories Debtor Cash Loan & Advance, Other CA Total Current assets Current Liabilities Provisions Total CL and Provisions Net Working Capital Miscellaneous expense Application of Funds
FY10 2,138.9 99,267.8 101,406.6 6,266.9 17459.0 10,291.2 1,643.2 137067.0
FY11 4,277.8 111,049.5 115,327.2 6,291.2 19850.4 11,152.6 2,001.9 154623.4
FY12E 4,277.8 128,939.6 133,217.4 6,594.8 21050.4 12,284.8 1,965.9 175113.2
FY13E 4,277.8 142,203.2 146,481.0 10,208.8 22250.4 13,436.8 1,965.9 194342.8
33,914.7 17,601.3 51,166.5 8,012.5 110,695.1 5,159.3 8,240.1 7,142.4 14,970.2 20,216.2 50,568.9 22,681.9 7,515.8 30,197.7 20,371.3 841.3 137067.0
35,857.9 27,378.6 57,189.6 10,237.9 130,664.1 3,356.1 8,567.6 9,772.4 20,562.0 20,029.8 58,931.8 34,036.6 5,088.0 39,124.6 19,807.1 796.1 154623.4
42,620.5 27,095.4 64,187.0 12,259.5 146,162.4 3,387.1 11,339.0 11,071.7 23,252.0 21,578.8 67,241.5 34,029.5 8,444.3 42,473.7 24,767.7 796.0 175113.2
64,261.3 21,595.4 72,876.9 14,692.7 173,426.2 3,387.1 12,061.5 11,563.0 14,924.1 21,163.6 59,712.2 35,710.7 7,267.9 42,978.6 16,733.5 796.0 194342.8
72,404.4 18,953.4 84,784.2 18,468.3 194,610.3 3,387.1 13,128.6 12,393.9 8,243.6 19,891.0 53,657.1 38,524.7 7,336.2 45,860.9 7,796.3 796.0 206589.6
Page 24
Cash Flow Statement (Consolidated)

(| Crore) FY14E 22,903.3 9,738.9 21,989.8 0.0 36,306.3 2,882.3 -625.4 38563.1 43,173.9 0.0 1.0 -43173.9 -947.0 -1,122.7 1.0 -2069.7 -6,680.5 14,924.1 8243.6
(Year-end March) Profit after Tax Less: Dividend Paid Add: Depreciation Add: Others Cash Profit Increase/(Decrease) in CL (Increase)/Decrease in CA CF from Operating Activities Purchase of Fixed Assets (Inc)/Dec in Investments Others CF from Investing Activities Inc/(Dec) in Loan Funds Inc/(Dec) in Sh. Cap. & Res. Others CF from financing activities Change in cash Eq. Op. Cash and cash Eq. Cl. Cash and cash Eq.
FY10 19,727.6 8,257.5 18,739.1 1,109.3 31,318.5 1,958.7 -517.2 32760.0 29,478.7 -1,679.0 0.0 -31157.6 21.7 -2,286.9 0.0 -2265.2 -662.9 15,633.1 14970.3
FY11 22,825.0 8,738.9 16,522.5 128.2 31,874.0 8,927.0 -2,771.1 38029.9 36,491.5 1,803.2 0.0 -34688.3 2,415.6 -165.5 0.0 2250.1 5,591.8 14,970.2 20562.0
FY12E 27,981.2 9,239.4 17,107.1 0.0 36,945.1 3,349.1 -5,619.8 34674.5 32,605.4 -31.0 0.0 -32636.4 1,503.6 -851.7 0.0 651.9 2,689.9 20,562.0 23252.0
FY13E 23,863.2 9,489.1 17,733.2 0.0 33,259.3 504.9 -798.6 32965.6 44,997.1 0.0 0.0 -44997.1 4,814.0 -1,110.5 0.0 3703.5 -8,327.9 23,252.0 14924.1
Key Ratios (Consolidated)

(Year-end March) Per share data (|) Book Value Cash per share EPS Cash EPS DPS Profitability & Operating Ratios EBITDA Margin (%) PAT Margin (%) Fixed Asset Turnover (x) Inventory Turnover (Days) Debtor (Days) Current Liabilities (Days) Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) PE Price to Book Value EV/EBITDA EV/Sales Leverage & Solvency Ratios Debt to equity (x) Interest Coverage (x) Debt to EBITDA (x) Current Ratio Quick ratio FY10 118.5 17.5 22.7 44.6 8.2 44.6 19.1 0.9 48.8 42.3 134.3 19.5 25.6 29.8 11.8 2.3 4.8 2.1 0.1 49.2 0.1 1.7 1.4 FY11 134.8 24.0 26.2 45.6 8.7 39.9 18.7 0.9 45.2 51.6 179.6 19.8 26.6 32.0 10.2 2.0 4.4 1.8 0.1 73.4 0.1 1.5 1.3 FY12E 155.7 27.2 32.5 52.5 9.3 36.9 19.5 1.0 54.9 53.6 164.7 21.0 25.8 31.0 8.2 1.7 4.0 1.5 0.0 77.8 0.1 1.6 1.3 FY13E 171.2 17.4 27.5 48.3 9.5 33.7 15.8 0.9 57.5 55.1 170.2 16.3 21.3 23.5 9.7 1.6 4.4 1.5 0.1 80.7 0.2 1.4 1.1 FY14E 185.3 9.6 26.4 52.1 9.8 33.0 14.0 0.8 58.7 55.4 172.1 14.4 19.3 20.3 10.2 1.4 4.2 1.4 0.1 64.6 0.1 1.2 0.9
Page 25
Annexure
MRPL refinery, a subsidiary of ONGC
Mangalore Refinery and Petrochemicals (MRPL) was incorporated in 1987 by Hindustan Petroleum Corporation Limited (HPCL), a public sector company and Indian Rayon & Industries Ltd and its associate companies (AV Birla Group). In March 2003, ONGC acquired the 37.4% stake of equity held by Indian Rayon & Industries and, subsequently, increased its holding to the present level of 71.62%. In 2011, MRPL revised its nameplate capacity from 9.69 MMTPA to 11.82 MMTPA and has a Nelson index of 6.0. The refinery, located on the west coast of India, is designed to produce a whole range of products (~ 55% of middle distillates), supplying to both the domestic and export market. MRPL has been operating at an average capacity utilisation of 120% for the last five years. During FY11, the company achieved a refinery crude throughput of 12.64 MMT. MRPL reported revenues and PAT of | 39,169.2 crore and | 1,176.2 crore, respectively in FY11. MRPL is implementing various plans to improve GRM, manufacture VAP & get better distillate yield. The company is expanding its throughput capacity from 11.8 MMTPA to 15.4 MMTPA through its refinery upgradation and expansion project (Phase III refinery project) costing | 13,964 crore. This project would add 3 MMTPA and the remaining 0.6 MMTPA would come through CDU/VDU revamp in phase I refinery. After the expansion, the nelson complexity is expected to increase from 6.0 to 9.0. The Phase III refinery project is scheduled to be commissioned by March 2012.
Exhibit 49: Blocks awarded to ONGC under NELP rounds
NELP rounds Blocks awarded Awarded to ONGC+ ONGC consortia Surrendered blocks (ONGC operated) With ONGC (Operator) With ONGC (Non-Operator)
I 24 9 7 2 0
II 23 16 14 1 0
III 23 13 6 6 0
IV 20 14 1 11 2
V 20 8 1 3 3
VI 52 25 0 24 1
VII 41 19 0 18 1
VIII 32 17 0 14 3
Total 235 121 29 79 10
Exhibit 50: ONGC domestic reserves break-up

Fields Oil plus condensate 62 fields Mumbai High Total Oil plus condensate for 63 fields Gas 63 fields Mumbai High Total Gas for 63 fields Total Oil plus oil equivalent gas for 63 fields Uncertified reserves (owned & operated) Domestic JV (ONGC's share) Grand Total
1P 217.6 119.9 337.5 241.3 46.5 287.8 625.3 98.3 34.8 758.4
2P 255.2 131.7 386.9 366.8 58.3 425.0 811.9 173.7 39.2 1024.7
3P 282.6 186.0 468.5 435.9 72.6 508.6 977.1 234.9 41.3 1253.3
Page 26
Exhibit 51: ONGC overseas reserves details

Blocks, Country Imperial, Russia Sakhalin-1, Russia GNOP, Sudan/South Sudan Block 5A, South Sudan AFPC, Syria Block 24, Syria Block BC-10, Brazil MECL, Colombia PIVSA, Venezuela Block 06.1,Vietnam Blocks A1, A3, Myanmar Carabobo-1,Blocks,Venezuela Grand Total (A+B)
1P 22.5 107.0 17.4 6.6 3.2 1.8 6.0 4.1 12.7 11.2 10.3 0.0 202.9
2P 111.3 139.6 21.9 7.5 3.2 3.5 6.7 5.1 12.7 15.3 21.8 53.0 401.5
3P 111.3 139.6 33.1 8.5 4.0 3.7 6.7 5.9 12.7 19.5 37.3 53.0 435.0
Page 27
Glossary & conservation factors

1P 2P 3P bbls bcm boepd bopd EOR IOR mmbbls mmboe mmbtu mmscf mmscfd mmscmd mmt NELP PSC 1 barrel 1 bcm 1 kl 1 metric tonne 1 mmt Proven Proven plus probable Proven plus probable and possible barrels billion cubic meter barrels of oil equivalent per day barrels of oil per day Enchanced oil recovery Improved oil recovery million barrels million barrels of oil equivalent million british thermal unit million standard cubic feet of gas million standard cubic feet of gas per day million standard cubic meter per day million metric tonne New Exploartion and Licensing Policy Production sharing contract = 5.8 mmbtu = 6.29 mmboe = 6.293 barrels = 7.205 bbls = 1.145 bcm
Page 28
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No. 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com ANALYST CERTIFICATION
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Initiating Coverage

March 30, 2012

Oil and Natural Gas Corporation (ONGC)

YoY Growth (%)

Oil giant pushing through obstacles

Current & target multiple

Large resource base; JVs + marginal fields to spearhead volume growth

Government reforms in pricing of petroleum product inevitable

Comparative return matrix (%)

ICICI Securities Ltd | Retail Equity Research

Shareholding pattern (March 2012)

FII & DII holding trend (%)

Exhibit 2: ONGC Group Structure

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

1350 986 mtoe 900 450 724

402 435 35 39 JV 41 203

Exhibit 4: Break-up of ONGC reserves

2P 476 256 733 548 145 693 1426

3P 573 270 843 680 165 845 1688

401 105 505 358 98 456 961

ICICI Securities Ltd | Retail Equity Research

reserve life (years)

Source: Company, ICICIdirect.com Research

83.0 65.6 63.8 68.9

60 40 20 0 FY07 FY08 Reserve Accretion FY09 FY10 Production RRR FY11

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Aggressive capex plans to sustain production levels

Exhibit 8: Break-up of capital expenditure (FY12E)

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

294 256 218

250 200 150 100 50 0 FY07

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Source: Company, ICICIdirect.com Research

Exhibit 11: Investment in IOR/EOR redevelopment projects

Exhibit 12: Investment in new field development projects

ICICI Securities Ltd | Retail Equity Research

JVs+ marginal fields to spearhead crude oil and gas volumes

Source: Company, ICICIdirect.com Research

2.2 23.1 2.9 24.4

2.2 23.2 3.2 23.9 FY12E JV (oil) ONGC (gas)

2.1 24.6 3.9 24.3 FY13E JV (gas)

2.0 26.4 4.2 26.1

Oil production from domestic fields to reach 28.2 mmt and

ICICI Securities Ltd | Retail Equity Research

Exhibit 15: Areas of new field development projects

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

OVL: the growth driver

ICICI Securities Ltd | Retail Equity Research

Exhibit 17: ONGC Videsh area of international operations

Source: Company, ICICIdirect.com Research

Exhibit 18: OVL participating interests in different producing areas

Source: Company, ICICIdirect.com Research

Exhibit 19: Region-wise OVL production in FY11

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

OVLs production is expected to reach 8.6 mtoe and 9 mtoe

in FY13E and FY14E, respectively