ONGC shares tank 3%; Axis Capital says 'Sell' oil PSU stock, sees 11% further downside

Shares of Oil & Natural Gas Corporation Limited (ONGC) fell over 3 per cent in Monday’s trade, extending losses to a fourth consecutive session, after Axis Capital initiated coverage on the stock with a 'Sell' rating and a target price of Rs 205 apiece. On Monday, the stock fell 3.40 per cent to hit a low of Rs 229.95 on BSE. Axis's target suggests 11 per cent potential upside over this price.  

The domestic brokerage said ONGC’s earnings were likely to moderate amid a weak crude oil price outlook and added that production could continue to decline even with support from BP. Axis Capital also flagged ONGC’s subsidiaries ONGC Videsh Ltd (OVL) and ONGC Petro Additions Ltd (OPaL) as value-destructive, citing unsustainable leverage levels.

"Our SELL rating is premised on: (1) production decline continuing despite BP intervention, (2) muted oil price outlook driving a 20% decline in standalone PAT over FY25-27, and (3) high debt in key subsidiaries OVL and OPaL likely requiring parental support. The stock trades at 10.5 times FY27 EPS (standalone), 30 per cent premium to its ten-year average. We are 25-30 per cent below Bloomberg consensus on FY26-28 PAT," it said.

Axis Capital said ONGC’s earnings are expected to moderate amid a weak crude oil price outlook. It said crude prices were likely to remain under pressure due to rising supply and muted demand. Citing the International Energy Agency, the brokerage said global oil supply was expected to rise by 3.1 million barrels per day in CY25 and 2.5 million barrels per day in 2026, driven by higher non-OPEC and OPEC+ output, while demand growth was projected to remain modest at about 0.8 million barrels per day in both years.

Axis Capital assumed a Brent crude price of $66 per barrel in FY26 and $65 per barrel in FY27, and estimated ONGC’s standalone profit after tax to decline 20 per cent over FY25–FY27.

The brokerage also flagged concerns around ONGC’s subsidiaries, calling ONGC Videsh Ltd (OVL) and ONGC Petro Additions Ltd (OPaL) value-destructive due to unsustainable leverage. It estimated FY26E net debt of about Rs 31,100 crore for OVL, equivalent to around 10 times Ebitda, and Rs 25,200 crore for OPaL, or about 53 times Ebitda.

Axis Capital said OPaL’s cash flows are insufficient to meet even interest obligations. Due to high leverage, it estimated negative equity value of about Rs 16,200 crore (around Rs 13 per share) for OVL, including the Mozambique asset, and Rs 18,900 crore (around Rs 15 per share) for OPaL, adding that ONGC may need to infuse equity into these subsidiaries in the coming years to meet debt obligations.

On valuation, Axis Capital said it valued ONGC on a sum-of-the-parts basis, using a discounted cash flow approach for the core upstream business in India and overseas operations, a 6x EV/Ebitda multiple for the petrochemicals business, and a 20 per cent discount to market prices for listed investments such as HPCL and Indian Oil Corporation. It said higher crude oil prices remained the key upside risk to its thesis.