Oil & Natural Gas Corp Ltd

July 29, 2008

1QFY09 Result Update

CMP: INR 982

BSE Sensex S&P Nifty BSE Oil & Gas Bloomberg Consensus (BUY/SELL/HOLD) BSE Code NSE Code Bloomberg Code Reuters 52 Wk High/Low (INR) Equity (INR Mn) Market Cap. (INR Mn) 20/3/3 500312 ONGC ONGC IN ONGC.BO 1,387/770 21,389 2,100,159 13,792 4,190 9,304

Target: INR 1,280

BUY

Result Highlights Q1FY09 (Standalone)

Record oil prices led net sales grow 46.5% to Rs 200.5 bn as against 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 same quarter last year. Net profit grew 43% to Rs 65.92 bn as against Rs 46.10 bn for the same quarter last year. High performance could continue if government keeps word Restructuring of the subsidy sharing allocation mechanism was a positive move assuring reasonable cash earnings for the company. The subsidy burden amounted to Rs 98.11 bn during Q1FY09 resulting in the net realization of $69.14 as compared to $50.34/barrel in the corresponding quarter last year. The government has capped amount of subsidy burden at Rs 450 bn for the upstream PSUs (ONGC Rs 383 bn) at crude price of $123/ barrel. We believe crude prices will average in the range of $110$115/ barrel.
Description (INR Bn) Discount on Sales Impact on Profit Net Realisation/barrel($) FY05 41.04 25.53 37.83 FY06 119.56 72.10 42.33 FY07 170.24 103.33 44.22 FY08 220.01 132.41 53.69 Q109 98.11 54.97 69.1

Result Update

Shareholding Pattern (%): Foreign Institutions Corporate Government Public & Others Total: Returns (%) 1 Month 3 Months 1 Year Abs Perf 20.52 -4.98 7.43 6.97 5.67 11.27 74.14 1.96 100.00 Relative to Sensex 18.07 15.24 18.74 BSE O&G 17.25 14.16 -7.00

Supported by depreciating rupee The net realization per barrel grew 37.34% from $50.34/barrel to $69.14/barrel YoY. In rupee terms, the reported realization was Rs 2,876/barrel during the latest quarter compared to Rs 2,129.75/barrel in previous full year. Pay revision and Depreciation pressurize margins The company has provided for a sum of Rs 2.2bn during the quarter on account of pay revision w.e.f. January 1, 2007. Depreciation elevated by 59.4% on account of provisioning of Rs 5.5 bn for dry wells against Rs 1.7 bn in the corresponding quarter previous year. The depletion increased by 14% to Rs 9.76 bn.

Relative Price Performance

ONGC 175 BSE O&G Sensex

150

125

100

Valuation
75 Aug-07 Sep-07 Apr-08 Dec-07 Oct-07 Feb-08 Jun-08 Jan-08 Jul-07 May-08 Nov-07 Mar-08 Jul-08

Source: Comline Products

Analyst: Vinay Nair Email: [email protected] Khandwala Securities Limited

The restructuring of the subsidy sharing allocation mechanism was a positive move assuring reasonable cash earnings for the company ONGC is expected to report sustainable earnings in the coming quarters due to high crude price, depreciation of rupee, and relatively lower proportion of subsidy burden. We maintain our BUY rating on the stock with a price target of 1,280, offering a 30% upside.

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Vulnerable Net Realization

The gap between gross and net realization per barrel will widen as the crude price rises, and vice-versa when crude falls, assuring sustainable revenues for the company. 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 the earnings of the company In rupee terms the realization was reported at Rs 2,129.75 per barrel in previous whole year which increased to Rs 2,876/per barrel this quarter.
120 ($ Per Barrel) Pre Subsidy Crude Oil Price Post Subsidy Crude Oil Price

100

80

60

40

20 2004-05 2005-06 2006-07 2007-08 2008-09E 2009-10E

Oil Production to remain flat

Any depletion in production of league fields will be offset by marginal fields. Mgmt has targeted production of 140 MMT of Oil in Xl plan against 129 MMT in X plan.
30 (MTPA) Mumbai offshore Others Marginal fields

24

18

12

0 2007-08 2008-09E 2009-10E 2010-11E 2011-12E 2012-13E

Depleting Gas production

Production of natural gas has been targeted relatively lower for Xl plan by mgmt at 112 BCM as against 116 BCM in X plan
25 (BCM) Mumbai offshore Others Marginal fields

20

15

10

0 2007-08 2008-09E 2009-10E 2010-11E 2011-12E 2012-13E

Khandwala Research

Oil & Natural Gas Corporation Limited July 29, 2008

Khandwala Securities Limited

Valuation
ONGC is one of the most undervalued companies and yet to receive its due attention. Lack of clarity in policy regarding under recoveries, declining production from its league fields have continuously resulted in negative sentiments hovering around the stock. However, we believe higher crude prices and production from marginal fields and KG basin would offset for the concerns above. The restructuring of the subsidy sharing allocation mechanism was a positive move assuring reasonable cash earnings for the company. The resources in OVL, KG basin and other prospective blocks have huge potential upside. We maintain our BUY rating on the stock with a price target of 1,280, offering a 30% upside.
ONGC Standalone OVL (EV/BOE-2P Reserves) 13x MRPL (15% discount to CMP) Other Investment Total Cash Value per share 860 242 33 32 1,167 113 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

Khandwala Research

Oil & Natural Gas Corporation Limited July 29, 2008

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1QFY09 Financial Results

High crude prices and capped subsidy burden improves realistion Provision for sixth pay commission of Rs 2.2 bn increases staff cost.

Rise in Depreciation on account of provisioning for dry wells at Rs 9.7 bn.

Descriptions (INR Mn) Net Sales Other Income Total Income Expenditure (Increase)/Decrease in Stock in Trade Consumption of Raw Materials Other Expenditure Depreciation, Depletion and Amortization Statutory Levies Purchase of Trade Goods Employees Cost Interest Profit (+)/ Loss (-) from Ordinary Activities before Tax Tax Net Profit (+)/ Loss (-) from Ordinary Activities after Tax Extraordinary Items Net Profit EPS

Q1FY09 Jun-08 200,522 10,500 211,022 (61) (2,468) (21,013) (27,970) (31,353) (25,177) (2,897) (38) 100,046 (34,117) 65,929 434 66,363 31.04

Q1FY08 Jun-07 136,877 8,388 145,265 (359) (971) (12,566) (17,546) (28,991) (12,942) (2,543) (48) 69,301 (23,913) 46,105 46,105 21.56

Y-o-Y Gwth (%) 46.5 25.2 45.3 (83.1) 154.2 67.2 59.4 8.1 94.5 13.9 (19.8) 44.4 42.7 43.0 43.9 43.9

4QFY08 Mar-08 156,261 20,337 176,598 (382) (2,468) (38,342) (38,445) (33,802) (21,870) (1,630) (123) 39,536 (13,265) 26,271 26,271 12.29

Q-o-Q Gwth (%) 28.3 (48.4) 19.5 (84.2) 0.0 (45.2) (27.2) (7.2) 15.1 77.7 (69.1) 153.1 157.2 151.0 152.6 152.6

Increase in work over expense and arrears due to pay revision

Survey Expenditure on Dry wells written off INR 770 Cr (one time provision)

Khandwala Research

Oil & Natural Gas Corporation Limited July 29, 2008

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Financial Statement
Profit & Loss Statement
Descriptions (INR Mn) Gross Sales Less: Excise Net Sales Other Income Inc/Dec In Stock Total Income Expenditure Purchases Prod Sell Tran. Dist Expenses EBIDTA Depr, Depl, Amort EBIT Interest EBT Tax PAT EPS (INR) 34,338 170,246 300,681 86,459 214,222 298 213,924 74,063 144,308 67.5 59,401 210,901 338,206 101,109 237,097 395 236,702 80,273 156,429 73.2 65,115 233,703 350,915 97,979 252,936 590 252,346 85,329 167,018 78.1 64,957 200,289 393,640 112,008 281,632 281,632 95,755 185,877 86.9 68,277 216,515 399,860 130,591 269,268 269,268 91,551 177,717 83.1 2005-06 Mar-06 482,444 2,780 479,664 23,485 2,116 505,265 2006-07 Mar-07 569,123 2,709 566,414 42,292 (197) 608,508 2007-08 Mar-08 601,493 3,007 598,485 50,107 1,141 649,733 2008-09E Mar-09 611,575 3,058 608,517 50,107 263 658,887 2009-10E Mar-10 636,505 3,183 633,323 50,107 1,221 684,651

Balance Sheet
Descriptions (INR Mn) Share Capital Reserves and Surplus Total Loan Fund Deferred Tax (Net) Liability Aban Cost Total Application Of Funds Fixed Assets Less: Depr And Depl Net Fixed Assets Work-in-Progress Investments Current Assets Current Liabilities Miscellaneous Total 1,039,720 685,465 354,255 57,906 48,886 371,615 105,951 265,664 5,141 730,374 1,135,324 751,248 384,076 82,257 57,021 443,954 136,891 307,063 835,557 1,280,432 849,227 431,204 86,172 57,021 487,716 123,241 364,475 938,873 1,425,606 958,315 467,291 110,312 57,021 539,663 114,444 425,218 1,059,842 1,651,144 1,084,662 566,482 110,014 57,021 564,331 122,347 441,984 1,175,501 2005-06 Mar-06 14,259 525,337 539,597 1,070 63,551 126,156 730,374 2006-07 Mar-07 21,389 597,850 619,239 3,737 65,227 147,353 835,557 2007-08 Mar-08 21,389 696,424 717,812 73,707 147,353 938,873 2008-09E Mar-09 21,389 806,128 827,517 84,973 147,353 1,059,842 2009-10E Mar-10 21,389 911,016 932,405 95,743 147,353 1,175,501

Khandwala Research

Oil & Natural Gas Corporation Limited July 29, 2008

Khandwala Securities Limited

Key Financial Ratios

Descriptions (INR Mn) Gross Profit (%) Net Profit (%) Return on Cap Employed (%) Return on Equity (%) EPS (INR) CEPS (INR) Turnover Ratios Stock Turnover Debtor Turnover Asset Turnover Current Ratio CMP (INR) P/E Ratio P/BV EV/EBITDA Revenue Growth (%) EBITDA Growth (%) Net Profit Growth (%)
15.79 12.95 0.66 3.51 18.67 20.52 0.68 3.24 15.97 13.51 0.64 3.96 16.13 13.70 0.57 4.72 16.26 13.99 0.54 4.61

2005-06 Mar-06
62.32 30.09 34.56 26.74

2006-07 Mar-07
59.71 27.62 28.38 25.26

2007-08 Mar-08
58.63 27.91 26.94 23.27

2008-09E Mar-09
64.69 30.55 26.57 22.46

2009-10E Mar-10
63.14 28.06 22.91 19.06

67.47 107.90

73.14 120.41

78.09 123.90

86.90 139.28

83.09 144.15

982 14.55 3.89 6.99

982 13.43 3.39 6.22

982 12.58 2.93 5.99

982 11.30 2.54 5.34

982 11.82 2.25 5.25

3.46 14.88 11.15

18.09 12.48 8.40

5.66 3.76 6.77

1.68 12.18 11.29

4.08 1.58 (4.39)

Khandwala Research

Oil & Natural Gas Corporation Limited July 29, 2008

Khandwala Securities Limited

INDIA
EQUITY RESEARCH Name Ashok Jainani Dipesh Mehta Hatim K Broachwala Vinay Nair Giriraj Daga Vivek Patil Harshul Verma Sandeep Bhatkhande Lydia Rodrigues Designation VP, Head Research Research Analyst Research Analyst Research Analyst Research Analyst Research Analyst Research Associate Research Associate Research Executive TEL. NO. +91 22 4076 7373 Sectors Market Strategy IT , Telecom BFSI Energy Metals, Cement FMCG, Retail Automobiles, Capital Goods Publishing Data Mining E-mail [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] [email protected] FAX +91 22 4076 7378

INSTITUTIONAL DEALING Biranchi Sahu Gopi Doshi Sweedel A Colaco Mayank Patwardhan Head Senior Dealer Dealer Dealer

TEL NO. +91 22 4076 7342-47/56 Institutional Equity Institutional Equity Institutional Equity Institutional Equity

FAX NO. +91 22 4076 73 77-78 [email protected] [email protected] [email protected] [email protected]

PRIVATE CLIENT GROUP Sanjay K Thakur Subroto Duttaroy Jagdish R Modi President General Manager Manager

TEL No. +91 22 4076 7317-21 Sales & Marketing Equity & Portfolio Mgmt. Service Equity & Portfolio Mgmt. Service

FAX NO. +91 22 4076 73 77 [email protected] [email protected] [email protected]

BRANCH OFFICE (PUNE) Ajay G Laddha Vice President

TEL NO. +91 20 2567 1404/06

FAX NO. +91 20 2567 1405 [email protected]

Corporate Office:
Vikas Building, Ground Floor, Green Street, Fort, MUMBAI 400 023. Tel. No. (91) (22) 4076 7373 Fax No. (91) (22) 4076 7377/78 E-mail: [email protected]

Branch Office:
C8/9, Dr. Herekar Park, Off. Bhandarkar Road, PUNE 411 004 Tel. No. (91) (20) 2567 1404/06 Fax. No. (91) (20) 2567 1405 Email: [email protected]

Web site: www.kslindia.com

Important Disclosure:
The Research team of Khandwala Securities Limited on behalf of itself has prepared the information given and opinions expressed in this report. The information contained has been obtained from sources believed to be reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, KSL or its group companies make no guarantee, representation or warranty, whether express or implied and accepts no responsibility or liability as to its accuracy or completeness of the data being provided. All investment information and opinion are subject to change without notice. Also, not all customers may receive the material at the same time. This document is for private circulation and information purposes only. It does not and should not be construed as an offer to buy or sell securities mentioned herein. KSL shall not be liable for any direct or indirect losses arising from the use thereof and the investors are expected to use the information contained herein at their own risk. KSL and its affiliates and / or their officers, directors and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. KSL and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors, as they believe necessary. Income from investments may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. The value of or income from any investment may be adversely affected by changes in the rates of currency exchange. The recipient means this document strictly for use only. None of the material provided herein may be reproduced, published, resold or distributed in any manner whatsoever without the prior explicit written permission of KSL.

Khandwala Research

Oil & Natural Gas Corporation Limited July 29, 2008