Fundamental Analysis And Intrinsic Value of ONGC Ltd.
Dated: 06 Apr 23
Company: ONGC Ltd.
CMP: Rs. 150.60
Introduction
In this article we will try to analyze ONGC Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.
Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.
Leverage Ratios
Observations:
- Company is maintaining a healthy interest coverage ratio.
- It has been able to bring the debt to pre COVID levels.
Operating Ratios
Observations:
- The company has been operating with negative working capital during the period of operation. The difference between current assets and liabilities has been coming down and has become almost half during this period, however, current liabilities still outweigh current assets. After acquisition of HPCL, deposits from customers and dealers were transferred to current liabilities as per the direction of C&AG, this also adds to the negative working capital.
- The total assets turnover ratio shows that the company has lot of assets that are either unutilised or underutilised.
Profitability Ratios
Observations:
- Company has not been able to significantly improve its PAT and EBITDA margins during the period.
Intrinsic Value
Assumptions:
- The increase in cash flow is assumed to be Rs. 5904.02 million for the first five years and then Rs 2952.01 million from sixth to tenth year. The growth rate is projected based on the past Free Cash Flows (refer to figure below). In the past free cash flow has increased at the rate of Rs. 11808.04 million per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
- Terminal growth rate is assumed to be 0%.
- Discount rate is assumed to be 12%.
- Free Cash Flow is extrapolated with the base value as Rs 200000 million which is between 2017 and 2021 levels. The average of free cash flows for the previous years is Rs. 300099.09 million.
- Increase in Revenue is assumed to be Rs.118624.84 million per year for the first five years and then Rs 59312.42 million per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has increased at the rate of Rs. 237249.68 million per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.
- Free cash flow will be 7% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.07. Here we assume that the same average will hold good for future.
Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free cash flows and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.
Free Cash Flow Growth Model
Intrinsic Value: Rs. 152.75
Stock Entry price with 25% margin of safety: Rs.114.56
Revenue Growth Model
Intrinsic Value: Rs.259.70
Stock Entry price with 25% margin of safety: Rs.194.78
The average of the above two stock entry prices works out to be Rs.154.67. When the stock starts trading below this price it becomes attractive for long term investment.
Author
Jibu Dharmapalan
Fundamental Analyst
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Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.
References:
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