ONGC stock upgrade
Last updated: 11 Dec, 2020 | 12:28 pm
Global investment banking giant Morgan Stanley has upgraded ONGC stock to ‘overweight’ from ‘equal-weight’. It has raised the price target to Rs 115 from Rs 84. It is the first time in four years that Morgan Stanley has turned ‘overweight’ on the company.
- Recovery in Average Selling Price: Morgan Stanley believes that Indian Gas ASP’s (Average Selling Prices) have bottomed out at $1.7/mmbtu and expect them to double by the end of FY23. Additionally, global demand recovery and balancing oil markets with a $50/bbl Brent oil price forecast for FY21 should also be beneficial for ONGC.
- Volume Growth: ONGC had seen a flattish trend in volumes in the last decade however the trend is expected to reverse with volumes estimated to grow at 4.3% CAGR from FY21-FY24.
- Earnings forecast: The brokerage house estimates 47% earnings CAGR over FY21-23 with ROCE expanding by 230 basis points on the back of efficient use of Free Cash Flows. It also expects ONGC to have a more diversified earnings profile, unlike the past where 90% of profits have come from oil and gas production.
- Valuation: According to Morgan Stanley ONGC is one of the cheapest players in the Energy and Petroleum space, trading at 2 years forward PE of 6.5, almost 25% discount to peers.
Our proprietary VGQM model continues to have a HOLD rating on the stock.