Soon after oil company Oil and Natural Gas Corporation (ONGC) posted a 30 percent decline in its net profit for the September quarter (Q2FY23), global brokerage house Nomura downgraded the stock to 'reduce' from 'neutral'.
The decline in the company's net profit comes on the back of the windfall tax levied by the government on the sector benefitting from the sharp and sudden rise in crude oil prices. Net profit in Q2FY23 came in at ₹12,825.99 crore versus ₹18,347.73 crore in the year-ago period. However, the company's revenue rose 57.4 percent YoY to ₹38,321 crore.
Nomura has also cited “unfavourable government policies” along with weak production and operational track record as key reasons for its downgrade. The brokerage house has a target price of ₹110 on the stock, indicating a potential downside of 23 percent.
In the report, Nomura stated that the government’s policies have been unfavourable towards upstream companies as any upside during a commodity upcycle is capped through subsidies or windfall taxes, as currently on oil. It believes that a ceiling price on gas will do the same just when Indian exploration and production (E&P) companies were to benefit from the ongoing commodity upcycle.
"Indian domestic gas price formula has been a drag to earnings as realisations have remained below-cost-of-production for 12 out of the 17 revisions, which have taken place since November 2015; upstream’s requests for a floor for gas prices have been repeatedly denied, but a ceiling price is all but certain to be implemented now," noted the brokerage.
It also cut the FY23 consolidated EPS estimate for ONGC to ₹29.70, as higher oil realisations of $83 per barrel and higher volumes across oil and gas are offset by lower profitability for ONGC Videsh, along with significant drag from downstream businesses of HPCL and MRPL.
It further estimates an oil volume growth of 2 percent over FY24-25F and gas volume growth of 5-7 percent.
Overall in 2022, the stock has fallen 17 percent. In the 11 months of the year (including November so far), it gave positive returns in six and negative in five. The stock jumped the highest in January, up 21 percent, followed by November (so far), up 7 percent. Meanwhile, it lost the most in July, down 11.5 percent followed by September, down 8.5 percent.
In the last 1 year, the stock has fallen 9 percent.
According to a MintGenie poll, 24 analysts on average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.