ONGC dividend yield, firmer crude outlook and OVL turnaround support value thesis

Investment View and Valuation

Motilal Oswal Financial Services Limited reiterates a Buy rating on ONGC, describing the stock as a value play with growth optionality. The broker had recently upgraded ONGC on the basis of inexpensive valuations, modest expected production growth and greater operational freedom amid the Government's multi-year focus on energy security.

At a current market price of Rs 240, the broker's sum-of-the-parts target price is Rs 290. The stock trades at 5.7 times FY28E consolidated P/E, below its long-term one-year-forward average of 6.5 times.

The Rs 290 target values standalone ONGC at 6.5 times December 2027E adjusted EPS, listed investments at a 25 per cent discount to market price and OVL at 0.5 times FY25 book value per share. Motilal Oswal believes the market's implied valuation of ONGC's core business discounts Brent at only about US dollar 65 per barrel from 2QFY27 to FY28E, which it considers overly conservative.

Dividend Yield and Crude-Price Outlook

A key attraction is ONGC's one-year-forward dividend yield of 6.9 per cent, a three-year high according to Bloomberg consensus estimates. This yield assumes around a 40 per cent payout ratio, broadly consistent with the four-year average.

A yield above 7 per cent was previously seen only during Covid-19 and the windfall-tax period. Those periods were associated with stock de-rating rather than a lasting shift in payout policy. Motilal Oswal models a 38 per cent dividend payout for FY27E, implying a dividend yield of around 6.5 per cent at the prevailing market price. Sustained higher crude prices would create upside to dividend estimates.

The broker uses crude assumptions of US dollar 80 per barrel for the remaining three quarters of FY27E and US dollar 75 per barrel in FY28E. Its upstream view has strengthened after the US Energy Information Administration raised its Brent forecast by 6 per cent to US dollar 87 per barrel for CY26 and US dollar 69 per barrel for CY27.

The International Energy Agency estimated a 1.8 million-barrel-per-day deficit in 3QCY26, as the Strait of Hormuz closure kept 8.3 million barrels per day of Gulf output offline. However, the International Energy Agency expects the market to return to surplus by year-end as disruptions ease, making the crude-price outlook an important variable for ONGC.

Production and Operating Outlook

Motilal Oswal models only around 1 per cent overall production CAGR for FY26 to FY28E, comprising oil production CAGR of negative 0.3 per cent and gas production CAGR of 2.1 per cent. The production outlook is supported by the start of DUDP, KG-98/2 and Samudra Manthan.

The broker also cites the new ONGC and BP contract for fields in the Western Offshore Basin, following the Mumbai High technical services provider contract. ONGC's gas realisation is expected to rise as around 7-8 per cent of volumes annually qualify for higher new-well gas prices.

Motilal Oswal sees limited investor concern around HPCL because its capex cycle is nearly complete and gross marketing margins are normalising higher.

OVL as a Potential Catalyst

OVL is a further potential catalyst for ONGC. OVL reported cumulative EBITDA of Rs 47.2 billion and PAT of Rs 29.5 billion over the past six months.

If this run-rate is annualised into FY27E and valued at 8 times P/E, Motilal Oswal estimates OVL's fair value at Rs 38 per ONGC share, which is Rs 15 per share above the Rs 23 per share currently included in its sum-of-the-parts valuation. This potential uplift depends on the improved OVL run-rate being sustained and on multiple assets moving into development.

Financial Estimates and Valuation Metrics

For FY26, ONGC reported consolidated sales of Rs 6,622 billion, EBITDA of Rs 1,133 billion and adjusted PAT of Rs 501 billion. Motilal Oswal estimates FY27E sales of Rs 6,933 billion, EBITDA of Rs 1,122 billion and adjusted PAT of Rs 523 billion, followed by FY28E sales of Rs 6,619 billion, EBITDA of Rs 1,201 billion and adjusted PAT of Rs 530 billion.

The broker's thesis is supported by ONGC's high dividend yield, a firmer near-term crude outlook, modest production growth, operational catalysts and potential improvement in OVL's valuation contribution. The crude-price outlook, the timing of a return to market surplus and the sustainability of OVL's improved run-rate remain important variables for the valuation.