INDIA DAILY October 28, 2016 India 27-Oct 1-day 1-mo 3-mo Sensex 27,916 0.3 (1.3) (1.0) Nifty 8,615 - (1.5) (0.6) Contents Global/Regional indices Dow Jones 18,170 (0.2) (0.9) (1.6) Daily Alerts Nasdaq Composite 5,216 (0.7) (1.9) 1.2 Results FTSE 6,987 0.4 2.0 4.0 ONGC: Lower costs yet again Nikkei 17,411 0.4 5.7 5.7 Hang Seng 23,064 (0.3) (2.4) 4.0 Maruti Suzuki: Delivers again KOSPI 2,017 (0.3) (1.7) (0.2) Value traded – India Bajaj Finserv: Strong on all counts Cash (NSE+BSE) 300 259 256 Dabur India: Revenue weakness persists; recovery prognosis remains hope- Derivatives (NSE) 9,613 5,257 6,862 based Deri. open interest 3,382 3,392 3,146 Tech Mahindra: Impressive show Forex/money market JSW Steel: In line - strong volumes, weak margins Change, basis points 27-Oct 1-day 1-mo 3-mo United Spirits: Usual concoction - poor headline #s, encouraging mix change Rs/US$ 66.9 4 38 (28) & a few one-offs 10yr govt bond, % 7.1 1 (1) (36) Cummins India: All well but for the margin miss Net investment (US$ mn) 26-Oct MTD CYTD ABB: Cost provisions mar results FIIs (227) (450) 7,060 MFs 109 902 3,018 TVS Motor: Decent quarter; EBITDA margin remains flat yoy Top movers Change, % Dalmia Bharat: Ahead of peers Best performers 27-Oct 1-day 1-mo 3-mo Cholamandalam: Vehicle finance stable, home equity weak ADSEZ IN Equity 305.0 (0.0) 12.5 35.4 ONGC IN Equity 290.8 0.2 15.6 31.4 PI Industries: Strong show, but moderation ahead RECL IN Equity 135.2 0.8 10.7 27.5 IDFC IN Equity 68.2 (1.9) 0.7 27.4 Info Edge: Lower ad-spends drive operational beat FB IN Equity 81.6 (0.5) 7.9 25.8 IIFL Holdings: NBFC is the sole earnings driver Worst performers IDEA IN Equity 77.5 (1.5) (6.1) (26.2) SKF: Strong quarter HDIL IN Equity 80.1 0.4 (5.2) (21.5) JPA IN Equity 11.0 (3.1) (1.8) (17.7) Karur Vysya Bank: Weak performance WPRO IN Equity 461.7 (2.1) (4.5) (16.6) UT IN Equity 6.0 (0.8) (1.6) (16.1) Just Dial: Challenging quarter Results, Change in Reco PVR: Solid execution Kotak Institutional Equities Research [email protected] . Mumbai: +91-22-4336-0000 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) Energy OCTOBER 28, 2016 RESULT Coverage view: Attractive Lower costs yet again. ONGC’s 2QFY17 results were ahead of our estimates driven by Price (`): 291 (1) higher revenues due to better realizations and higher VAP volumes, (2) low Target price (`): 260 operating costs and (3) less write-offs, benefiting from exploration successes and BSE-30: 27,916 change in accounting policy. Lower operating costs and write-offs, drive 9-14% upgrade in our FY2017-18E EPS. We retain SELL with a revised TP of ₹260 (₹230 previously), as the recent outperformance leaves no headroom for disappointment. Company data and valuation summary Oil & Natural Gas Corporation Stock data Forecasts/Valuations 2016 2017E 2018E 52-week range (Rs) (high,low) 297-188 EPS (Rs) 20.3 22.6 24.6 Market Cap. (Rs bn) 2,487.9 EPS growth (%) (8.5) 11.4 9.1 Shareholding pattern (%) P/E (X) 14.4 12.9 11.8 Promoters 68.9 Sales (Rs bn) 1,304.0 1,331.1 1,486.8 FIIs 5.5 Net profits (Rs bn) 173.3 193.1 210.7 MFs 1.2 EBITDA (Rs bn) 470.4 503.2 549.0 Price performance (%) 1M 3M 12M EV/EBITDA (X) 5.2 5.3 4.9 Absolute 17.5 30.3 17.3 ROE (%) 9.4 10.1 10.4 Rel. to BSE-30 18.8 30.8 14.5 Div. Yield (%) 2.9 2.9 3.1 Strong performance driven by higher revenues, lower operating costs and exploration write-offs ONGC’s 2QFY17 revenues at `184 bn (-10% yoy and +3% qoq) was 1% above our estimate, led by higher crude realizations at US$47.9/bbl (+4% qoq) and increase in VAP volumes. EBITDA at `96.5 bn was 6% ahead of our estimate, led by lower other expenses to `36.2 bn (-8% yoy and +2% qoq) primarily due to lesser work-over operations. The management indicated that the work-over activities reduced in this year, as the rigs have been deployed to drill development wells and the situation may possibly reverse next year. Net income at `49.7 bn was further boosted by lower DD&A expenses, partially offset by lower other income. We highlight that the write-offs pertaining to exploration and survey expenses, are particularly lower in 1HFY17 at `15.1 bn versus `56.7 bn in FY2016 and `108.7 bn in FY2015. The company attributed lower write-offs to (1) an increase in success rate with higher number of discoveries, (2) reduction in drilling of deep-water wells and (3) change in accounting policy, which allows carrying hydrocarbon-bearing wells in balance sheet for 3-7 years instead of two years until FY2014—the last one is particularly worrying as exploratory wells-in-progress has increased to `192 bn as of September 30, 2016 versus `109 bn as of March 31, 2014. Decline in crude sales volumes; increase in natural gas and VAP volumes ONGC’s total crude oil sales volume declined 5.2% yoy and 0.2% qoq to 5.86 mn tons in 2QFY17, led by lower sales volumes from own fields. Crude oil sales volume from own-fields declined 4.4% yoy and 1.2% qoq to 4.82 mn tons. Crude oil sales volume from JV fields declined 9% yoy and increased 5% qoq to 1.04 mn ton. ONGC’s total natural gas sales volume increased 3.5% yoy and 7.6% qoq to 4.46 bcm in 2QFY17. Natural gas sales volume from own-fields increased 4.6% yoy and 8.6% qoq to 4.24 bcm. Natural gas sales volume from JV fields declined 15% yoy and 8% qoq to 223 mcm. VAP volumes increased 14.2% yoy and 7% qoq to 0.81 mn tons. The company maintained its production target of 26.2 mn tons of oil and 23.8 bcm of gas, despite lower run-rate of 12.7 mn tons of oil and 11.3 bcm of gas in 1HFY17. Upgrade estimates to factor in lower operating costs and DD&A expenses Tarun Lakhotia [email protected] We revise our estimates to `22.6 in FY2017 and `24.6 in FY2018 from `19.8 and `22.6 Mumbai: +91-22-4336-0875 previously to reflect (1) reduction in operating expenses, (2) modestly lower volumes, (3) lower DD&A costs and (4) other minor changes. Our target price increases to `260 from `230 earlier, based on 11X March 2018E EPS plus value of investments. A sharp rebound in crude price is a key risk to our negative view on upstream PSUs. Kotak Institutional Equities Research [email protected] Mumbai: +91-22-4336-0000 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. ONGC Energy Exhibit 1: ONGC standalone interim results, March fiscal year-ends (` mn) (% chg.) yoy 2QFY17 2QFY17E 2QFY16 1QFY17 2QFY17E 2QFY16 1QFY17 1HFY17 1HFY16 (% chg.) FY2017E Net sales 183,950 181,373 205,121 177,848 1 (10) 3 361,798 431,403 (16) 754,846 Total expenditure (87,476) (90,262) (99,161) (83,942) (3) (12) 4 (171,418) (203,609) (16) (363,040) Increase/(decrease) in stock in trade 1,101 — (1,006) 43 1,143 99 — Raw materials (a) (3,103) (3,135) (3,266) (2,815) (1) (5) 10 (5,918) (4,729) 25 (12,642) Trading purchase (2) (21) (16) (24) (26) (34) (57) Staff expenditure (5,067) (5,049) (4,530) (4,677) 0 12 8 (9,744) (9,286) 5 (19,763) Statutory levies (44,239) (43,879) (51,099) (41,066) 1 (13) 8 (85,304) (105,756) (19) (181,445) Other expenditure (36,165) (38,178) (39,245) (35,404) (5) (8) 2 (71,569) (83,903) (15) (149,134) EBITDA 96,475 91,110 105,960 93,905 6 (9) 3 190,380 227,794 (16) 391,806 Other income 11,836 12,934 11,864 9,524 (8) (0) 24 21,361 20,493 4 42,786 Interest (3,034) (2,947) (3,280) (2,920) (5,954) (6,445) (12,689) DD&A (34,529) (40,391) (46,617) (36,997) (15) (26) (7) (71,527) (91,809) (22) (160,022) Depletion (26,175) (26,553) (27,565) (25,343) (1) (5) 3 (51,518) (53,078) (3) (105,266) Depreciation (2,870) (3,313) (1,790) (3,234) (13) 60 (11) (6,104) (5,780) 6 (12,309) Dry wells written off (3,334) (8,470) (15,102) (6,251) (61) (78) (47) (9,585) (25,151) (62) (30,952) Survey expenses (2,140) (2,280) (2,180) (3,350) (5,490) (7,620) (28) (12,620) Impairment loss and other adjustments (10) 225 20 1,180 1,170 (180) 1,125 Pretax profits 70,748 60,706 67,927 63,512 17 4 11 134,260 150,034 (11) 261,881 Extraordinary/Prior-period adjustment — — — — — — — Tax (15,100) (14,084) (18,600) (17,100) 7 (19) (12) (32,200) (45,600) (29) (62,002) Deferred tax (5,899) (6,556) (2,513) (4,086) (9,985) (3,936) (26,012) Net income 49,749 40,066 46,814 42,325 24 6 18 92,075 100,498 (8) 173,867 Adjusted net income 49,749 40,066 46,814 42,325 24 6 18 92,075 100,498 (8) 173,867 Adjusted EPS (Rs) 5.8 4.7 5.5 4.9 10.8 11.7 20.3 Other comprehensive income 46,264 109 17,242 63,505 5,978 Total comprehensive income 96,013 46,923 59,567 155,580 106,476 Tax rate (%) 29.7 34.0 31.1 33.4 31.4 33.0 33.6 Volume data Subsidy loss — — 5,955 — — 17,285 16,452 Crude production ex JVs ('000 tons) 5,537 5,666 5,493 (2.3) 0.8 11,030 11,238 Crude production - JVs ('000 tons) 855 909 850 (5.9) 0.6 1,705 1,818 Gas production ex JVs (mcm) 5,511 5,356 5,172 2.9 6.6 10,683 10,838 Gas production - JVs (mcm) 296 346 322 (14.5) (8.1) 618 682 Crude sales ex JVs ('000 tons) 4,817 4,932 5,039 4,876 (2.3) (4.4) (1.2) 9,693 9,901 (2.1) 19,549 Crude sales - JVs ('000 tons) 1,039 1,030 1,137 994 0.8 (8.6) 4.5 2,033 2,243 (9.4) 4,081 Gas sales ex JVs (mcm) 4,238 4,183 4,051 3,904 1.3 4.6 8.6 8,142 8,243 (1.2) 16,440 Gas sales - JVs (mcm) 223 236 261 243 (5.4) (14.6) (8.2) 466 518 (10.0) 920 Crude sales ('000 tons) 5,856 5,962 6,176 5,870 (1.8) (5.2) (0.2) 11,726 12,144 (3.4) 23,631 Gas sales (mcm) 4,461 4,419 4,312 4,147 1.0 3.5 7.6 8,608 8,761 (1.7) 17,360 LPG (000 tons) 359 342 289 342 701 534 1,366 Naphtha/NGL (000 tons) 290 277 285 280 570 565 1,115 C2/C3 (000 tons) 124 113 109 115 239 182 451 SKO (000 tons) 18 9 19 7 25 38 51 Total VAP sales ('000 tons) 810 754 709 757 7.4 14.2 7.0 1,567 1,331 17.7 3,044 Pricing data Gross crude price realization (US$/bbl) 47.9 46.2 51.2 46.1 3.8 (6.5) 3.9 47.0 57.4 (18.1) 50.5 Subsidy discount (US$/bbl) — — 2.4 — — 2.3 1.7 Net crude price realization (US$/bbl) 47.9 46.2 48.8 46.1 3.8 (1.9) 3.9 47.0 55.1 (14.7) 48.8 Domestic gas price (US$/mn BTU) 3.4 3.4 5.2 3.4 0.0 (34.2) 0.0 3.4 4.2 (18.8) 3.1 Notes: (a) Represents consumption of stores & spares.