INDIA DAILY September 3, 2020 India 2-Sep 1-day 1-mo 3-mo Sensex 39,086 0.5 3.9 15.6 Nifty 11,535 0.6 4.2 15.6 Contents Global/Regional indices Dow Jones 28,646 0.8 8.4 11.3 Daily Alerts Nasdaq Composite 11,940 1.4 11.1 24.3 FTSE 5,965 1.8 1.1 (4.1) Results Nikkei 23,247 0.5 7.1 4.1 ONGC: Lower costs save the day Hang Seng 25,120 (0.3) 2.1 4.7 KOSPI 2,364 0.6 5.1 13.3 Jubilant Foodworks: Emergence of 'trust economy' lends more power to the story Value traded – India Cash (NSE+BSE) 654 652 643 J K Cement: New plants cushion market weakness 11,03 Derivatives (NSE) 20,100 11,456 9 Company alerts Deri. open interest 3,673 3,036 2,476 Bajaj Auto: Annual report analysis Sector alerts Forex/money market Change, basis points Banks: Negligible activity with suspension of the act 2-Sep 1-day 1-mo 3-mo Rs/US$ 73.1 9 (207) (194) 10yr govt bond, % 6.3 (15) 22 4 Net investment (US$ mn) 31-Aug MTD CYTD FIIs (320) - 4,807 MFs (16) - 3,077 Top movers Change, % Best performers 2-Sep 1-day 1-mo 3-mo EDEL IN Equity 77 (0.3) 1.8 65.8 IHFL IN Equity 204 (0.7) 7.6 61.2 BAF IN Equity 3,669 0.7 12.8 56.4 TTMT IN Equity 150 4.5 43.6 55.8 RBK IN Equity 197 2.7 16.2 55.0 Worst performers YES IN Equity 14 (1.7) 20.5 (47.0) BHIN IN Equity 196 3.8 2.1 (12.2) DMART IN Equity 2,218 (1.0) 7.5 (6.9) MRF IN Equity 58,741 0.7 (3.8) (6.3) NEST IN Equity 15,993 (1.3) (3.2) (6.0) [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. SELL ONGC (ONGC) Oil, Gas & Consumable Fuels SEPTEMBER 02, 2020 RESULT Sector view: Attractive Lower costs save the day. ONGC managed to report modest profits in 1QFY21 amid a CMP (`): 80 sharply lower crude price environment contrary to our expectation of a modest loss Fair Value (`): 60 reflecting a meaningful decline in operating costs and exploratory write-offs, both well BSE-30: 39,086 below the usual run-rate. We broadly retain our EPS estimates and reiterate SELL on the stock with an unchanged Fair Value of Rs60. Potential recovery in global crude prices or deregulation of domestic gas prices are key risks to our negative stance. ONGC Stock data Forecasts/valuations 2020 2021E 2022E 52-week range (Rs) (high,low) 150-50 EPS (Rs) 13.5 3.5 7.1 Mcap (bn) (Rs/US$) 1,011/13.9 EPS growth (%) (42.9) (73.9) 101.4 ADTV-3M (mn) (Rs/US$) 1,777/24 P/E (X) 6.0 22.9 11.4 Shareholding pattern (%) P/B (X) 0.4 0.4 0.4 Promoters 60.4 EV/EBITDA (X) 2.8 5.0 3.8 FIIs 8.1 RoE (%) 7.3 1.9 3.8 MFs/BFIs 6.1/11.4 Div. yield (%) 6.2 2.4 3.6 Price performance (%) 1M 3M 12M Sales (Rs bn) 1,782 1,342 1,679 Absolute 3 (5) (34) EBITDA (Rs bn) 630 345 449 Rel. to BSE-30 (1) (18) (37) Net profits (Rs bn) 169 44 89 Sharp decline in operating expenses and exploratory write-offs result in modest profits ONGC’s revenues were in line with our estimate at Rs130.1 bn, declining 51% yoy in 1QFY21 led by—(1) 2.6% yoy reduction in oil sales volumes and 15.2% reduction in gas sales volumes and (2) sharp 57% decline in oil realizations and 35% decline in domestic gas price. EBITDA declined 61% yoy to Rs59.1 bn, albeit 11% above our estimate reflecting lower-than-expected employee cost and other expenses. The management indicated that some of the cost savings related to operating expenses are sustainable contrary to its historical trends and has guided for a yoy lower run-rate in FY2021, even as variable costs and certain provisions may increase from 1QFY21 levels. ONGC reported standalone net income of Rs4.96 bn (EPS of Rs0.4) versus our estimate of modest loss, further boosted by lower-than-assumed exploratory write-offs, which was partly offset by lower other income and higher tax rate at 45%. Consolidated net income was higher at Rs10.9 bn (EPS of Rs0.9), including—(1) Rs22.5 bn of net income from HPCL, (2) Rs3.3 bn of loss from OVL and (3) Rs5.2 bn of net loss from MRPL. Oil and gas volumes continue to decline, although production guidance remains optimistic Overall crude oil sales volumes declined 2.6% yoy to 5.15 mn tons reflecting 1.3% decline in production from own fields and 18.6% decline in production from JVs. Overall natural gas sales volumes declined sharply by 15.2% yoy to 4.2 bcm, reflecting 12.7% decline in production from own fields and 32.6% decline in production from JVs partly attributed to lower off-take amid lockdowns. Value-added-products (VAP) sales volumes reduced 28.6% yoy to 0.68 mn tons amid lower demand. OVL reported 10% decline in crude oil as well as gas production volumes to 2.23 mn tons and 1.2 bcm, respectively. The management has maintained rather optimistic production guidance for FY2021—(1) oil volumes to decline modestly by 3% yoy to 22.69 mn tons and (2) gas production volumes to remain steady yoy at 24.9 bcm. Tarun Lakhotia Retain FY2021-23 EPS estimates and FV of Rs60; SELL stays Hemang Khanna We broadly retain our FY2021-23 EPS estimates as lower oil and gas volumes in FY2021 have been largely offset by reduction in operating expenses and exploratory write-offs. We retain SELL rating on the stock with an unchanged Fair Value of Rs60; our reverse valuation suggests the stock is pricing in Dated Brent crude recovering to over US$48/bbl. Lower operating costs and write-offs for a quarter aside, we see limited upside to earnings and cash flows without any sharp recovery in global crude prices and/or change in domestic gas pricing formula, both of which are key risks to our negative stance on the stock. [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. ONGC Oil, Gas & Consumable Fuels Exhibit 1: ONGC’s interim results, March fiscal year-ends (Rs mn) (% chg.) yoy 1QFY21 1QFY21E 1QFY20 4QFY20 1QFY21E 1QFY20 4QFY20 FY2021E FY2020 (% chg.) Net sales 130,113 129,553 265,547 214,562 0.4 (51.0) (39.4) 629,148 962,136 (34.6) Total expenditure (71,036) (76,254) (114,427) (128,683) (6.8) (37.9) (44.8) (356,563) (469,267) (24.0) Increase/(decrease) in stock in trade 1,115 — 141 (4,678) — (2,470) Raw materials (a) (3,967) (4,061) (6,392) (5,882) (2.3) (37.9) (32.6) (19,095) (25,881) (26.2) Staff expenditure (4,985) (6,273) (6,082) (6,115) (20.5) (18.0) (18.5) (23,313) (25,203) (7.5) Statutory levies (29,809) (29,053) (62,361) (48,070) 2.6 (52.2) (38.0) (145,562) (225,708) (35.5) Other expenditure (33,391) (36,866) (39,733) (63,938) (9.4) (16.0) (47.8) (168,592) (190,004) (11.3) EBITDA 59,077 53,299 151,120 85,879 10.8 (60.9) (31.2) 272,585 492,869 (44.7) Other income 4,368 6,331 7,475 13,256 (31.0) (41.6) (67.0) 58,132 61,050 (4.8) Interest (4,918) (7,065) (6,461) (8,695) (30.4) (23.9) (43.4) (24,928) (28,237) (11.7) DD&A (49,492) (54,189) (61,563) (80,370) (8.7) (19.6) (38.4) (228,028) (273,005) (16.5) Depletion (28,963) (28,974) (33,215) (25,396) (0.0) (12.8) 14.0 (132,450) (134,159) (1.3) Depreciation (9,310) (8,652) (8,570) (8,920) 7.6 8.6 4.4 (40,378) (35,150) 14.9 Dry wells written off (5,679) (11,875) (14,519) (26,434) (52.2) (60.9) (78.5) (42,500) (69,958) (39.2) Survey expenses (5,590) (4,688) (8,778) (3,950) 19.3 (36.3) 41.5 (12,750) (16,879) (24.5) Impairment loss and others 50 — 3,520 (15,670) 50— (16,860) Pretax profits 9,035 (1,624) 90,572 10,070 (656.3) (90.0) (10.3) 77,762 252,677 (69.2) Extraordinary/prior-period adjustment — — — (48,991) — (48,991) Current tax (3,360) 275 (23,370) (8,478) (13,709) (70,487) Deferred tax (715) 131 (8,159) 16,415 (3,888) 1,246 Net income 4,960 (1,218) 59,043 (30,983) (507.2) (91.6) (116.0) 60,165 134,445 (55.2) Adjusted net income 4,960 (1,218) 59,043 8,017 (507.2) (91.6) (38.1) 60,165 166,782 (63.9) Adjusted EPS (Rs) 0.4 (0.1) 4.7 0.6 (507.2) (91.6) (38.1) 4.8 13.3 (63.9) Tax rate (%) 45.1 25.0 34.8 20.4 22.6 34.0 Volume data Subsidy loss — — — — — — Crude production ex JVs ('000 tons) 5,068 5,137 5,240 (1.3) (3.3) 20,628 Crude production - JVs ('000 tons) 597 733 579 (18.6) 3.1 2,725 Gas production ex JVs (mcm) 5,351 6,128 5,828 (12.7) (8.2) 23,748 Gas production - JVs (mcm) 194 288 211 (32.6) (8.1) 1,149 Crude production ('000 tons) 5,665 5,870 5,819 (3.5) (2.6) 23,353 Gas production (mcm) 5,545 6,416 6,039 (13.6) (8.2) 24,897 Crude sales ex JVs ('000 tons) 4,443 4,574 4,388 4,693 (2.9) 1.3 (5.3) 17,750 17,977 (1.3) Crude sales - JVs ('000 tons) 707 715 898 741 (1.1) (21.3) (4.6) 3,452 3,360 2.7 Gas sales ex JVs (mcm) 4,124 4,132 4,772 4,517 (0.2) (13.6) (8.7) 18,164 18,528 (2.0) Gas sales - JVs (mcm) 112 177 224 146 (36.6) (50.0) (23.3) 842 874 (3.7) Crude sales ('000 tons) 5,150 5,289 5,286 5,434 (2.6) (2.6) (5.2) 21,203 21,337 (0.6) Gas sales (mcm) 4,236 4,309 4,996 4,663 (1.7) (15.2) (9.2) 19,006 19,402 (2.0) LPG (000 tons) 277 237 249 260 1,100 1,011 Naphtha/NGL (000 tons) 218 249 331 274 1,062 1,176 C2/C3/C4 (000 tons) 161 277 326 304 975 1,224 SKO (000 tons) 7 14 22 5 30 55 Others (000 tons) 17 21 24 23 87 92 Total VAP sales ('000 tons) 680 797 952 866 (14.7) (28.6) (21.5) 3,255 3,558 (8.5) Pricing data Gross crude price realization (US$/bbl) 28.7 29.4 66.3 49.0 (2.2) (56.7) (41.4) 37.8 58.6 (35.6) Domestic gas price (US$/mn BTU) 2.7 2.7 4.1 3.6 0.0 (35.1) (25.9) 2.3 3.8 (39.4) Notes: (a) Represents consumption of stores & spares.