Oil and Natural Gas Corporation Limited (ONGC) is one of India’s largest crude oil and natural gas exploration companies. Evaluating its financial health is crucial for an equity investor before investing. This article analyses key factors like revenue growth, profitability, debt level, and valuation ratios to determine whether ONGC presents a good investment opportunity.
Read on to learn about ONGC’s recent stock performance, financial ratios, growth drivers, and peer comparisons so that you can make an informed equity investment decision.
Contents
ONGC – An Overview
ONGC is India’s largest crude oil and natural gas company, contributing around 70% of the country’s domestic production. With a market capitalisation of over ₹4.18 lakh crore, it is one of India’s most valuable public sector enterprises.
ONGC’s upstream operations involve exploring and producing oil and gas from onshore and offshore fields across India. This includes assets in prolific basins like Mumbai High in the Arabian Sea and the Krishna Godavari basin in the Bay of Bengal. The company also owns downstream refining operations.
Assessing Revenue Growth Trends
Over the past five years, ONGC has seen its annual revenues rise steadily from ₹83,683 crore in FY17 to ₹1,09,655 crore in FY21. This indicates a healthy compound annual growth rate (CAGR) of 6.95% during this period.
Two key factors have driven the growth in revenues:
1. Increase in Crude Oil and Natural Gas Production: ONGC has incrementally ramped production from its domestic oil and gas fields. Natural gas output has grown by 10% CAGR over FY17-FY22 to reach 25 billion cubic meters.
2. Favourable Commodity Prices: Global crude oil prices increased from 2017 to 2019, supporting revenue growth as ONGC’s realisations are linked to international prices. Prices only declined sharply in 2020 once the pandemic hit demand globally.
Evaluating Profitability
Over the past five years, ONGC’s share price revenue has gradually increased. However, the company’s profitability needs to grow more. In the 2021 fiscal year, their net profits decreased to ₹18,347 crore from ₹21,346 crore in the 2017 fiscal year.
But things started looking up for the company in the 2022 fiscal year, when its net profits rose to ₹40,306 crore, thanks to the rising global oil and gas prices. The ongoing Russia-Ukraine conflict also contributed to keeping energy prices high in 2023.
Some key metrics showcase ONGC’s overall profitability trends:
- Net Profit Margin: Remained range bound between 15-25% over FY17-22, reflecting volatile commodity prices
- Return on Equity (ROE): Dropped from 15.5% in FY17 to 11.2% in FY21 but recovered to 25.5% in FY22 due to higher earnings
To boost profitability in the future, ONGC is targeting production from new projects and improved oil & gas recovery from existing matured fields through cutting-edge techniques.
Assessing Capital Structure and Debt Levels
Maintaining a beneficial balance between debt and equity is imperative for the financial health of highly capital-intensive oil and gas companies.
Over FY17-22, ONGC has kept its debt levels mainly under control. Total debt did spike temporarily from ₿66,500 crore in FY17 to ₿86,800 crore in FY21 due to new acquisitions and capex needs. However, the debt/equity ratio remained at a reasonable 0.28 in FY22, while interest coverage stood at over 10x.
The company is now focused on becoming debt-free over the medium term to ensure capital discipline. Rather than higher debt, significant future funding needs could be met through internal accruals, equity raising, and asset monetisation.
Evaluating Valuations
After the 85% returns delivered over the past year, ONGC currently trades at a trailing price-to-earnings (P/E) ratio of 10.75x and a price-to-book value (P/B) of 1.37x based on FY22 financials. Among industry peers, it is valued in line with the levels of other domestic upstream companies like Oil India (P/E of 9.6x, P/B of 1.0x)
ONGC has traded in the 10-12x P/E band over the past five years, reflecting its stability as a government-owned oil and gas behemoth. The below-market P/E also offers a reasonable valuation buffer.
With profits expected to remain healthy, backed by supportive crude prices, there is scope for further valuation re-rating. According to analysts, ONGC’s earnings per share (EPS) could grow by 40-50% in FY23, which presents significant upside potential.
Key Positives for ONGC
- Market leader in India’s oil & gas production – Controls three-fourths of local crude and gas output
- Revenue and profit growth aided by rising energy commodity prices and steady gas output ramp-up
- Prudent capital structure and interest coverage ratios
- Potential value unlocking through stake sale in subsidiaries like Mangalore Refinery
Key Risk Factors
- Volatility in global crude oil prices affecting earnings
- Execution delays in key upcoming projects like KG 98/2
- High capex intensity in the oil exploration business
- Regulatory burden from oil and gas pricing policies
Peer Comparison
ONGC is the top oil and gas company in market capitalisation, revenue size, and reserve strength compared to peers like Selan Exploration and Asian Energy Services. The favourable industry scenario and dominant market position set ONGC in a sweet spot. Selan and Asian Energy trade at richer valuations, while ONGC offers better growth prospects at reasonable valuations.
Aban Offshore has delivered high returns owing to industry tailwinds. However, ONGC’s more significant scale, healthy balance sheet, and diversified operations make it a relatively safer bet in the long term. Among listed peers, Deep Industries comes closest to ONGC regarding operational metrics. However, Deep Industries’ financial risk profile seems weaker.
In summary, ONGC remains a proxy play on India’s increasing energy demand story. Considering its reasonable valuations, robust financial position, high capital discipline and industry leadership, ONGC seems an attractive equity investment from a long-term perspective.
Conclusion
ONGC, one of India’s leading public sector companies, has good long-term potential for investors due to its strong financial position and growth prospects. However, short-term volatility in the stock market may occur due to fluctuations in commodity prices. Investors should align their investment in ONGC with their long-term financial goals and risk tolerance.