On Wednesday, HSBC analyst issued a new rating for Oil & Natural Gas Corp Ltd (ONGC:IN) shares, downgrading the stock from Hold to Reduce, despite increasing the price target to INR230.00, up from the previous INR175.00. The adjustment in the rating and price target is a reflection of revised earnings estimates and the company's shift towards green energy.
The downgrade comes with a revised outlook on the company's future performance, where HSBC now anticipates a 4-5% cut to ONGC's FY25-26 earnings estimates, primarily due to lower production volumes. The analyst cited that government actions have a significant impact on ONGC's cash flows, and therefore, dividends are considered a more accurate measure of the company's value.
HSBC's analysis incorporates a dividend discount model to value ONGC, highlighting the importance of dividends in the context of government influence on the company. The firm's recent commitment to a green energy transition has been noted positively, warranting a higher terminal growth assumption compared to ONGC's previous status as solely an oil explorer.
Despite the positive view on ONGC's transition to green energy, HSBC pointed out several factors that could potentially lead to a reduction in estimates, including disappointment in production, fluctuating oil prices, and increased capital expenditures.
Nevertheless, HSBC acknowledged that there is an upside risk to their assessment, which could come from a significant increase in new oil or gas discoveries that would drive production growth for ONGC.
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