ONGC Rating: Sell; Kotak Institutional Equities says lacklustre output trajectory a dampener

We retain our negative stance on ONGC noting (i) lacklustre volume trajectory despite sustained large capex; (ii) generally rising cost structure with the current year being an exception; and (iii) deteriorating return ratios given inefficient capital allocation. We believe valuation multiple for the stock needs to be lower as dividend is the only takeaway for shareholders with retained earnings failing to generate incremental growth or value. Sell stays with a revised FV of Rs 90, now based on $55/bbl crude price. Near-term elevated crude price is the only risk to our stance.

Volume trajectory has remained lacklustre despite sustained increase in capex and reserves: ONGC’s domestic production has remained lacklustre with volumes generally declining over the whole of past decade despite (i) sustained increase in capex and (ii) even a rising reserves base.