Thursday, September 26, 2013


The ONGC stock has been in focus all through this year. In fact this is the only PSU oil stock worth any significant weight on the index. It’s a pity that this stock has been suffering from whims and fancies of Government in an election year.

Let’s just take a look at what is going on. India’s FY13 oil subsidy burden was Rs 1.6 lakh crores. The Government paid Rs 1 lakh crores out of that and made upstream companies pay the balance Rs 60,000 cr. This roughly works out to 62% for Govt and 38% for upstream, which has been stable for 2-3 years. Out of this, of course ONGC paid the lion’s share of over 80%.

FY14 started on a great note. Global crude price started to soften and the government introduced a monthly price hike of 50 paise per litre on diesel. The combined effect was a projection of only Rs 80,000 crore as under-recovery for FY14 – a straight cut of 50%. However, just when things looked sanguine, came the unknown devil of sharp Rupee depreciation.

A sharp depreciation from Rs 55/$ to around Rs 65/$, along with 10-15% surge in crude prices from lows meant that the under-recovery projection is now back to Rs 1.6 lakh crores. If the Govt bites the bullet and hikes diesel prices by Rs 5/l in one go, this can come down to Rs 1.25 lakh croes, however that diesel price hike is now looking a distant reality.

So where does ONGC stand amidst all this drama? As I wrote, when the year started with an under-recovery projection of Rs 80,000 crores, the street applied the formula of 38% and assumed that the upstream contribution will be down to Rs 30,000 crores. However, it missed the risk that the Government will want to take the benefit of its move on diesel and fall in crude prices. Slowly but surely, street began to realize that there is a risk of upstream still ending up paying Rs 60,000 cr as the ‘worst case scenario’.

However, now even this Rs 60,000 cr burden actually looks ‘best case scenario’ for upstream instead of being ‘worst case scenario’. There is a good chance that the Government makes upstream pay more than they did last year citing the fact that upstream gains significantly due to Rupee depreciation and at some stage needs to pass on some benefit to the Government.

The ONGC stock was comfortable above 300 when FY14 started, even hitting a high of 355 – but since then it’s been a downward journey and we have seen a correction of 22% from the highs. To be fair the stock is still YTD positive and that’s because the street believes that while there may be near-term concerns, the sheer value in stock may start to reflect once elections are out of way.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options given to him by his employers as part of his compensation. All views expressed in this blog are my personal views and my channel does not subscribe to the same