SSKI - ONGC

ONGC reported Q4FY07 numbers that were marginally below our expectation. Net profits at Rs22.1bn were down 9.7% yoy, led by higher under recovery contribution (up 37% yoy to Rs 46.7bn). For FY07, consolidated profits were up 15.4% yoy to Rs 177.7bn, driven by higher crude / gas realization as well as higher production. The stock trades at a steep discount to global / domestic earnings as well as reserve valuations, which reflects highly pessimistic estimates on loss sharing, APM deregulation and growth. However, with a 21-32% increase expected in ultimate (recoverable) reserves over the next 18-24 months, low earnings sensitivity to international crude prices and falling proportion of APM gas, we see the valuation gap narrowing significantly. Reiterate Outperformer, with a revised target price of Rs1337, upside of 43% from current levels.