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Stock pick of the week: ONGC

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On February 14 2020, ONGC (Oil and Natural Gas Corporation) reported a 47.07 per cent decline in December quarter profit on account of on lower oil production and prices as well as higher depreciation. The stock will probably dip further later today, even though it is already trading at a 10 year low. If you have high risk appetite and agree with my investing thesis below, you might want to buy ONGC when the markets open later today.

ONGC Logo

Personally, I had been buying ONGC since January 2020, starting at ~Rs.119 and buying for as low as ~Rs.103, with thousands of units in my portfolio as of today.

You might say: Hey Amber, are you mad? Why would you recommend a stock that doesn’t seems to be doing well?

Well, because the company’s fundamentals are strong. ONGC, a Public Sector Undertaking (PSU), is the largest producer of crude oil and natural gas in India, contributing around 70 per cent of Indian domestic production. It’s current market cap is 129954 crores, making it the market leader by market cap as well.

Moreover, ONGC was the most profitable PSU in FY19. In layman terms, in FY19 it was the most profitable company run by government (i.e. in which central government owns more than 51% share).

As in: ONGC is to government, what Jio is to Reliance… Bad analogy, eh?

Most importantly, this is what HDFC Securities (broker firm) had to say after the report came out on Friday that reported a ~47% decline in PAT in December quarter:

“Despite production cut from OPEC and non-OPEC countries, we expect the oil prices to remain muted owing to the robust supply from US Shale and weakening global macros. Thus, we do not foresee subsidy sharing in FY21/22E as well. Besides, ONGC will generate OCF yield of 32.1/35.1% and dividend yield of 9.7% over FY21/22E. Though the stock has remained out of flavor given GoI’s stake sale to achieve its disinvestment target, it still remains a key overhang on the stock (in the last 2 years, GoI’s shareholding shrank from 67.7% to 62.8%). We value ONGC at Rs 173/sh (8x Dec-21E standalone core EPS (adj. for dividend income) + OVL EPS and Rs 31 from other investments) vs the consensus TP of Rs 184. We maintain BUY on ONGC following an inline performance with our PAT estimate in 3QFY20. The current valuations after adjusting for investments (OVL and others) for FY21/22 are 1.5/1.3x EV/EBITDA, 3.6/3.1x PER. Such pessimism is unwarranted in our opinion.”

To understand how big and well established ONGC is, here are some sample stories:

Still don’t trust me? Well, I usually don’t like stock tips from popular media and news sources; I would rather research a company’s fundamentals (and take a dive into company’s annual reports), but if you want some ‘trustworthy‘ source to reciprocate this:

Threat of sustainable energy alternatives?

Worried that sustainable alternatives will take over oil and gas?

In my humble opinion, that’s at least 3-5 years away, if not more. Forget mainstream adoption, next time you are out on Indian roads, just notice what’s the percentage of electric two- and four-wheelers you see around yourself.

What about risks associated with investing in PSU stocks?

Well, first things first, PSU stocks aren’t usually the right choice for “buy-and-hold” strategy. These aren’t high growth stocks (the likes of Bajaj Finance or Dmart).

So, when I am recommending to buy ONGC today, that’s for selling it once it hits the target price of rs. 125 (with a stop loss ~Rs. 95).

For instance, what if this turns out to be next GAIL? For those who don’t now, another PSU GAIL was trading around Rs. 180 in Jun 2019, and fell down to ~Rs. 150 in a single day. It dipped further and is now trading at ~Rs. 123 (with support at ~117).

If this happens with ONGC as well, I wouldn’t mind holding the stock for a few years if it comes down to that. I am willing to take my chances given the risk-reward ratio.

Unless you are a full-time trader, I would personally recommend you to only trade stocks with the money that you don’t mind losing completely (i.e. usually not more than 10% of your total portfolio). For your investments, linked to different goals (wedding, child education, travel, retirement etc.), go with mutual funds instead. Quoting Patrick Mckenzie on “Efficient Market Hypothesis”:

“You are astoundingly unlikely to know more about any stock from reading the newspaper, seeing their chart on Google Finance, or consuming their quarterly reports than a team of PhDs who did nothing but study that stock for the last year, and accordingly are vanishingly unlikely to trade stocks in such a fashion that you do better than the market once you account for fees and tax impact.”

So as a investor (i.e. not a trader), use Mutual funds for equity exposure to get inflation beating post-tax returns. And if you have risk appetite, maybe invest 10-15% of your total portfolio into a handful of stocks targeting 25% CAGR over long term (10 years or more).

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.”

— Warren Buffet

 

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