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Oil & Natural Gas Corp LtdJuly 29, 2008

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ultU

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Khandwala Securities Limited For private circulation onlyVikas Building, Green Street, Fort, Mumbai 400 023. Please read the Important Disclosure at the end of this report.

Tel No. +91 22 4076 7373 Fax No. +91 22 4076 7377

Our Research Reports can be accessed on: www.bloomberg.net (KHDS), www.capitaliq.com, www.thomsonreuters.com,www1.firstcall.com,

www.kslindia.com, www.moneycontrol.com, www.securities.com

This report is a part of intellectual property of Khandwala Securities Limited; any query on this report may be directed to Head of Research [email protected]

1QFY09 Result Update

CMP: INR 982 Target: INR 1,280 BUY

BSE Sensex 13,792

S&P Nifty 4,190

BSE Oil & Gas 9,304

Bloomberg Consensus

(BUY/SELL/HOLD) 20/3/3

BSE Code 500312

NSE Code ONGC

Bloomberg Code ONGC IN

Reuters ONGC.BO

52 Wk High/Low (INR) 1,387/770

Equity (INR Mn) 21,389

Market Cap. (INR Mn) 2,100,159

Shareholding Pattern (%):Foreign 6.97

Institutions 5.67

Corporate 11.27

Government 74.14

Public & Others 1.96

Total: 100.00

Returns Abs Relative to

(%) Perf Sensex BSE O&G

1 Month 20.52 18.07 17.25

3 Months -4.98 15.24 14.16

1 Year 7.43 18.74 -7.00

Relative Price Performance

75

100

125

150

175

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

ONGC BSE O&G Sensex

Source: Comline Products

Analyst: Vinay Nair

Email: [email protected]

Result Highlights Q1FY09 (Standalone)

Record oil prices led net sales grow 46.5% to Rs 200.5 bn asagainst Rs 136.8 bn during the corresponding quarter last year.

EBITDA rose 49.7% to Rs 117.55 bn as against Rs 78.5 bn samequarter last year.

Net profit grew 43% to Rs 65.92 bn as against Rs 46.10 bn for thesame quarter last year.

High performance could continue if government keeps wordRestructuring of the subsidy sharing allocation mechanism was apositive move assuring reasonable cash earnings for thecompany. The subsidy burden amounted to Rs 98.11 bn duringQ1FY09 resulting in the net realization of $69.14 as compared to$50.34/barrel in the corresponding quarter last year. Thegovernment has capped amount of subsidy burden at Rs 450 bnfor the upstream PSUs (ONGC Rs 383 bn) at crude price of $123/barrel. We believe crude prices will average in the range of $110-$115/ barrel.

Description (INR Bn) FY05 FY06 FY07 FY08 Q109

Discount on Sales 41.04 119.56 170.24 220.01 98.11

Impact on Profit 25.53 72.10 103.33 132.41 54.97

Net Realisation/barrel($) 37.83 42.33 44.22 53.69 69.1

Supported by depreciating rupeeThe net realization per barrel grew 37.34% from $50.34/barrel to$69.14/barrel YoY. In rupee terms, the reported realization wasRs 2,876/barrel during the latest quarter compared to Rs2,129.75/barrel in previous full year.

Pay revision and Depreciation pressurize marginsThe company has provided for a sum of Rs 2.2bn during thequarter on account of pay revision w.e.f. January 1, 2007.Depreciation elevated by 59.4% on account of provisioning of Rs5.5 bn for dry wells against Rs 1.7 bn in the correspondingquarter previous year. The depletion increased by 14% to Rs 9.76bn.

ValuationThe restructuring of the subsidy sharing allocation mechanism was apositive move assuring reasonable cash earnings for the companyONGC is expected to report sustainable earnings in the comingquarters due to high crude price, depreciation of rupee, and relativelylower proportion of subsidy burden.We maintain our BUY rating onthe stock with a price target of 1,280, offering a 30% upside.

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Khandwala Securities Limited

Khandwala Research Oil & Natural Gas Corporation LimitedJuly 29, 2008

2

Vulnerable Net Realization

The gap between gross and net realization per barrel will widen as the crude pricerises, and vice-versa when crude falls, assuring sustainable revenues for thecompany. The policy driven earnings of the company increase its downside risks,

however historically even a six-fold rise in the crude price have not disturbed theearnings of the company

In rupee terms the realizationwas reported at Rs 2,129.75 perbarrel in previous whole yearwhich increased to Rs 2,876/perbarrel this quarter.

20

40

60

80

100

120

2004-05 2005-06 2006-07 2007-08 2008-09E 2009-10E

($ Per Barrel) Pre Subsidy Crude Oil Price Post Subsidy Crude Oil Price

Oil Production to remain flat

Any depletion in production ofleague fields will be offset bymarginal fields. Mgmt hastargeted production of 140 MMTof Oil in Xl plan against 129

MMT in X plan.

0

6

12

18

24

30

2007-08 2008-09E 2009-10E 2010-11E 2011-12E 2012-13E

(MTPA) Mumbai offshore Others Marginal fields

Depleting Gas production

Production of natural gas hasbeen targeted relatively lower

for Xl plan by mgmt at 112 BCMas against 116 BCM in X plan

0

5

10

15

20

25

2007-08 2008-09E 2009-10E 2010-11E 2011-12E 2012-13E

(BCM) Mumbai offshore Others Marginal fields

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3

Valuation

ONGC is one of the most undervalued companies and yet to receive its dueattention. Lack of clarity in policy regarding under recoveries, decliningproduction from its league fields have continuously resulted in negative

sentiments hovering around the stock. However, we believe higher crude pricesand production from marginal fields and KG basin would offset for the concernsabove. The restructuring of the subsidy sharing allocation mechanism was apositive move assuring reasonable cash earnings for the company. The resourcesin OVL, KG basin and other prospective blocks have huge potential upside. Wemaintain our BUY rating on the stock with a price target of 1,280, offering a 30%upside.

ONGC Standalone 860

OVL (EV/BOE-2P Reserves) 13x 242

MRPL (15% discount to CMP) 33

Other Investment 32

Total 1,167Cash 113

Value per share 1,280

Upsides

Crude price rise further. Potential resources in OVL Increase in volumes from marginal fields Increase in natural gas prices Rupee depreciating further Policy revamp leading to lower subsidy sharing

burden

Downsides

Crude price slides Delay in production from marginal fields Appreciation of rupee Unfavorable policy leading higher subsidy burden

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1QFY09 Financial Results

Descriptions Q1FY09 Q1FY08 Y-o-Y 4QFY08 Q-o-Q

(INR Mn) Jun-08 Jun-07 Gwth (%) Mar-08 Gwth (%)

Net Sales 200,522 136,877 46.5 156,261 28.3

Other Income 10,500 8,388 25.2 20,337 (48.4)

Total Income 211,022 145,265 45.3 176,598 19.5

Expenditure

(Increase)/Decrease in Stock in Trade (61) (359) (83.1) (382) (84.2)

Consumption of Raw Materials (2,468) (971) 154.2 (2,468) 0.0

Other Expenditure (21,013) (12,566) 67.2 (38,342) (45.2)Depreciation, Depletion and Amortization (27,970) (17,546) 59.4 (38,445) (27.2)

Statutory Levies (31,353) (28,991) 8.1 (33,802) (7.2)

Purchase of Trade Goods (25,177) (12,942) 94.5 (21,870) 15.1

Employees Cost (2,897) (2,543) 13.9 (1,630) 77.7

Interest (38) (48) (19.8) (123) (69.1)

Profit (+)/ Loss (-) from Ordinary Activities before Tax 100,046 69,301 44.4 39,536 153.1

Tax (34,117) (23,913) 42.7 (13,265) 157.2

Net Profit (+)/ Loss (-) from Ordinary Activities after Tax 65,929 46,105 43.0 26,271 151.0

Extraordinary Items 434 - - - -

Net Profit 66,363 46,105 43.9 26,271 152.6

EPS 31.04 21.56 43.9 12.29 152.6

High crude pricesand capped subsidyburden improvesrealistionRise in Depreciation

on account of

provisioning for drywells at Rs 9.7 bn.

Provision for sixthpay commission ofRs 2.2 bn increasesstaff cost.

Increase in work overexpense and arrears dueto pay revision

Survey Expenditure onDry wells written off

INR 770 Cr (one timeprovision)

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Financial Statement

Profit & Loss Statement

Descriptions 2005-06 2006-07 2007-08 2008-09E 2009-10E

(INR Mn) Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Gross Sales 482,444 569,123 601,493 611,575 636,505

Less: Excise 2,780 2,709 3,007 3,058 3,183

Net Sales 479,664 566,414 598,485 608,517 633,323

Other Income 23,485 42,292 50,107 50,107 50,107

Inc/Dec In Stock 2,116 (197) 1,141 263 1,221

Total Income 505,265 608,508 649,733 658,887 684,651

Expenditure

Purchases 34,338 59,401 65,115 64,957 68,277

Prod Sell Tran. Dist Expenses 170,246 210,901 233,703 200,289 216,515

EBIDTA 300,681 338,206 350,915 393,640 399,860

Depr, Depl, Amort 86,459 101,109 97,979 112,008 130,591

EBIT 214,222 237,097 252,936 281,632 269,268Interest 298 395 590 - -

EBT 213,924 236,702 252,346 281,632 269,268

Tax 74,063 80,273 85,329 95,755 91,551

PAT 144,308 156,429 167,018 185,877 177,717

EPS (INR) 67.5 73.2 78.1 86.9 83.1

Balance Sheet

Descriptions 2005-06 2006-07 2007-08 2008-09E 2009-10E


Share Capital 14,259 21,389 21,389 21,389 21,389Reserves and Surplus 525,337 597,850 696,424 806,128 911,016

Total 539,597 619,239 717,812 827,517 932,405

Loan Fund 1,070 3,737 - - -

Deferred Tax (Net) 63,551 65,227 73,707 84,973 95,743

Liability Aban Cost 126,156 147,353 147,353 147,353 147,353

Total 730,374 835,557 938,873 1,059,842 1,175,501

Application Of Funds

Fixed Assets 1,039,720 1,135,324 1,280,432 1,425,606 1,651,144

Less: Depr And Depl 685,465 751,248 849,227 958,315 1,084,662

Net Fixed Assets 354,255 384,076 431,204 467,291 566,482

Work-in-Progress 57,906 82,257 86,172 110,312 110,014

Investments 48,886 57,021 57,021 57,021 57,021

Current Assets 371,615 443,954 487,716 539,663 564,331

Current Liabilities 105,951 136,891 123,241 114,444 122,347

265,664 307,063 364,475 425,218 441,984

Miscellaneous 5,141 - - - -

Total 730,374 835,557 938,873 1,059,842 1,175,501

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Key Financial Ratios

Descriptions 2005-06 2006-07 2007-08 2008-09E 2009-10E


Gross Profit (%) 62.32 59.71 58.63 64.69 63.14

Net Profit (%) 30.09 27.62 27.91 30.55 28.06

Return on Cap Employed (%) 34.56 28.38 26.94 26.57 22.91

Return on Equity (%) 26.74 25.26 23.27 22.46 19.06

EPS (INR) 67.47 73.14 78.09 86.90 83.09

CEPS (INR) 107.90 120.41 123.90 139.28 144.15

Turnover Ratios

Stock Turnover 15.79 18.67 15.97 16.13 16.26

Debtor Turnover 12.95 20.52 13.51 13.70 13.99

Asset Turnover 0.66 0.68 0.64 0.57 0.54

Current Ratio 3.51 3.24 3.96 4.72 4.61

CMP (INR) 982 982 982 982 982

P/E Ratio 14.55 13.43 12.58 11.30 11.82

P/BV 3.89 3.39 2.93 2.54 2.25

EV/EBITDA 6.99 6.22 5.99 5.34 5.25

Revenue Growth (%) 3.46 18.09 5.66 1.68 4.08

EBITDA Growth (%) 14.88 12.48 3.76 12.18 1.58

Net Profit Growth (%) 11.15 8.40 6.77 11.29 (4.39)

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