ONGC's Rs 2 Trillion Investment to Reduce Carbon Emissions. 5 Things to Know...

India ranks third on the list of largest greenhouse gas emitters in the world.

India pledged to become a Net-Zero country by 2070. However, it requires around US$ 10.1 trillion of investments to achieve this target and it seems there's a lack of funding in this space.

Nevertheless, there are some companies that are putting in huge amounts in India's green energy space so that the country is able to achieve those targets. One big player making strides is ONGC.

ONGC's announcement of investing Rs 2 trillion over the next few years to become a Net Zero by 2038 has come as a silver lining.

Last week, Oil and Natural Gas Corporation (ONGC) announced its comprehensive strategy for using energy efficiently.

As per its announcements, phase 1 will focus on investing Rs 1 trillion (tn) out of the entire investment amount into renewable energy projects, offshore wind energy projects, and the production of green ammonia.

This is not the first investment for sustainable development by ONGC. There are a lot of projects in this space that are already running successfully and a lot more are in the pipeline.

Recent CSR activities and projects

Let's take a look at the top CSR activities and projects that ONGC is currently pursuing.

• ONGC has made significant efforts in reducing its carbon footprint. Being one of the largest companies in the oils & gas space across the globe, it has restricted its CO2 emission to around 10 MMT for the previous few years, which is way lower than the initial years of the company.
• Another major initiative of the company is the Clean Development Mechanism (CDM), which is again for reducing CO2 emissions. It has around 15 CDM projects already running which makes them one of the leading companies in adopting CDM. Recently, the company registered one of the biggest CDM projects in Tripura which can bring down CO2 production by 16 lakh tons in a year.
• Currently, ONGC has a capacity of 189 MW for generating electricity from renewable resources. It has a 51 MW wind power plant in Kutch, Gujrat and a 102 MW plant in Jaisalmer, Rajasthan.
• The leading Maharatna company optimally used its 100% CSR budget which is close to Rs 5 billion (bn) every year. It has also followed the government’s guidelines for CSR activities and invested 33% of the CSR budget in Swachh Bharat projects.
• Talking about Swachh Bharat Projects, ONGC has taken up a project to clean and revive the ancient river - Saraswati. Not only this, but they are also cleaning up the Sabarmati River in Ahmedabad.
• The remaining CSR budget of ONGC has been utilised for the priority focus area of Education and Health Care for the past three years. From developing multi-speciality hospitals in the north-eastern states of the country to building a fully functional cancer speciality hospital in Nagpur, to setting up special medical treatment facilities for the elderly people, the company is doing every bit possible.
• ONGC is carrying on projects in Ladakh to explore geothermal energy as well.

How ONGC fares on the financials?

ONGC is undoubtedly leading the way for sustainable development in the country. However, as a business, is it performing well?

Revenue

ONGC contributes to around 70% of the crude oil production in India. In financial year 2023, the company's net sales stood at Rs 6,848.3 bn , an increase of 28.8% on a YoY basis.

Revenue (Rs billion)						CAGR (%)		Change (%)
Particulars	23-Mar	22-Mar	21-Mar	20-Mar	19-Mar	5 yr	3 yr	1 yr
Net Sales	6,848.30	5,317.70	3,605.70	4,250.00	4,534.60	8.6	23.8	28.8
Total Income	6,929.00	5,392.00	3,699.00	4,335.30	4,616.10	8.5	23.3	28.5

Data Source: BSE

During FY20 and FY21, the net sales dropped from Rs 4,534.6 bn in FY19 to Rs 3,605.7 bn in FY21, which again picked up since last year.

Similarly, the total income that ONGC generated in FY23 increased at a 3-year CAGR of 23.3% as the income increased from Rs 3,699 bn in FY21 to Rs 6,929 bn in the previous financial year. In FY23, ONGC drilled 461 new wells and completed five major projects worth Rs 86 bn.

Another breakthrough for ONGC in FY23 was the discovery of the Vindhyan Basin, which is their eighth discovery of basins in the country. There are a total of nine such basins though.

Profits

ONGC's profits tanked by 33.5% in FY23 on a YoY basis.

However, the state-owned oil & gas company has been profitable throughout the last five years. The profits even increased at a 3-year CAGR of 15.4%.

Profitability (Rs billion)						CAGR (%)		Change (%)
Particulars	23-Mar	22-Mar	21-Mar	20-Mar	19-Mar	5 yr	3 yr	1 yr
Net Profit	327.8	492.9	213.4	115.6	338.9	-0.7	15.4	-33.5
EPS (Rs)	28.2	36.2	12.9	8.7	23.8	3.4	29.7	-22.2

Data Source: BSE

Rising expenses in the previous financial year led to the drop in the profits. Even the taxes went up the ladder drastically, which again negatively affected the profits of the firm.

As the net profits tanked, the earnings-per-share also dipped by 22.2% in FY23 on a YoY basis. However, when compared to FY21, the EPS has increased by 29.7% in the past three years.

Valuations

ONGC has been fairly valued over the past three years. In FY20, the company had a price-to-earnings ratio (P/E ratio) of 13.8, which has come down to 5.7 in the previous financial year. However, it has increased from FY22 when the ratio stood at 3.7.

The average P/E of the peer companies is around 10, which makes ONGC fairly valued as well.

Valuations
Valuation Ratios	23-Mar	22-Mar	21-Mar	20-Mar	19-Mar
P/E	5.7	3.7	5.7	13.8	6.6
P/B	0.7	0.7	0.5	0.7	0.9

Data Source: Equitymaster

The price-to-book value ratio (P/B ratio) entails the same story. It is lower than the sectoral P/B ratio as well. Moreover, the company has steadily maintained a fair P/B ratio over the past five years.

Dividends

Dividends (%)
Particulars	23-Mar	22-Mar	21-Mar
Dividends per share (Adj.) (Rs.)	11.3	10.5	3.6
Dividends payout ratio	43.2	26.8	22.3
Dividend Yield	7.5	6.4	3.5

Data Source: Equitymaster

ONGC being a Maharatna Company has always offered great dividends to its shareholders.

In FY23, the company paid a 225% dividend to its shareholders, which is one of the highest in the industry and even in the history of the company itself. The dividend per share that was paid for the year was Rs 11.3 up from Rs 10.5 of FY22.

The company's dividend payout ratio has almost doubled in the previous financial year. In FY22, the ratio stood at 26.8%, from which it went up to 43.2% in FY23.

Compared with its peer companies, ONGC has one of the highest dividend payout ratios in the oil exploration and production sector.

Similarly, its dividend yield has increased as well. From 3.5% in FY21, it has risen to 7.5% in FY23. The major peers of the company are offering almost half of the dividend yield.

Return ratios

The returns offered by ONGC have significantly dropped in FY23 due to the drop in their profits. It has tanked by 38.4% in the previous financial year compared to FY22.

Return				CAGR
Particulars	23-Mar	22-Mar	21-Mar	3- Year (%)
ROE	11.7	19	9.2	8.3
RoCE	13.9	17.6	11.8	5.6

Data Source: Equitymaster

However, the ROE has grown at a CAGR of 8.3% over the past three years while its RoCE has increased at a CAGR of 5.6% over the same period.

How did the market react to this announcement?

The shareholders of ONGC seem to be happy about the decision to invest Rs 2 tn in the sustainable development of the company.

After the announcement on 31 August 2023, the share price jumped from Rs 174.3 on 31 August to Rs 181.7 on 1 September 2023.

That said, the company's stock price has been moving in a highly stable manner for the past year. It has gained around 31% during this period.

What's on hold for the future?

• The company has entered into a MoU for developing a five GW solar plant in Rajasthan and it is aiming for 10 GW within 2030.
• ONGC also planning to set up 25 CBG plants in the coming three years and they are actively looking for strategic partners for the project.
• They are also working on building a green ammonia facility, which will have a 1 MMTPA capacity.
• It is investing to achieve its onshore wind energy target of 2 GW by 2030. This is one of the highly advanced tech-led projects in the renewable energy space.
• The company is also aiming at multiplying its oil and gas production by 3x within 2040 including production from its overseas plants.

Conclusion

The demand for sustainable investment is rising globally and there is a huge scope in India for the same as it is one of the largest emitters of CO2 and other greenhouse gases.

ONGC's move towards becoming a Net Zero by 2038 can be a win-win scenario for the organisation as well as its investors and the economy as a whole.

The company has already been a leader in sustainable development, and now with this new investment and the number of projects they have in their pipeline, their target of becoming Net Zero by 2038 doesn't seem impossible.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...