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ONGC: Up on higher oil price & lower subsidy - Views on News from Equitymaster

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ONGC: Up on higher oil price & lower subsidy
Jan 22, 2010

Performance summary
  • Standalone topline grows by 23% YoY during 3QFY10 on account of higher gross realisations and lower subsidy burden per barrel of crude oil.
  • EBITDA margin increases to 60% during the quarter from 41% in 3QFY09 as trading of MRPL products have been discontinued.
  • Other income turns negative during the quarter.
  • Standalone bottomline registers a growth of 23% YoY during 3QFY10 on account of higher operating margins, despite higher depreciation and tax outgo.


Standalone financial snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales * 126,201 155,061 22.9% 504,144 459,802 -8.8%
Expenditure * 74,354 61,715 -17.0% 247,264 179,069 -27.6%
Operating profit (EBDITA) 51,848 93,347 80.0% 256,880 280,733 9.3%
EBDITA margin (%) 41.1% 60.2%   51.0% 61.1%  
Other income 10,372     32,418 17,508 -46.0%
Interest 41 29 -28.7% 1,054 126 -88.1%
Depreciation 28,603 46,758 63.5% 78,405 102,108 30.2%
Profit before tax 33,576 46,258 37.8% 209,839 196,008 -6.6%
Tax 8,828 15,723 78.1% 71,078 66,097 -7.0%
Extraordinary item - -   434 -  
Profit after tax/(loss) 24,748 30,536 23.4% 139,196 129,911 -6.7%
Net profit margin (%) 19.6% 19.7%   27.6% 28.3%  
No. of shares (m)         2,139  
Diluted earnings per share (Rs)**         71  
Price to earnings ratio (x)**         15.5  
* 3QFY09 sales and expenditure include trading of MRPL products, now discontinued.
** On trailing twelve months basis

What has driven performance in 3QFY10?
  • ONGC’s topline grew by 23% YoY during 3QFY10. The company produced 6.7 m tonnes of crude oil during the quarter (lower by 3.1% YoY) and 6.46 b cubic meters of gas (higher by 0.05% YoY).

  • ONGC’s subsidy burden during 3QFY10 declined 29% YoY to Rs 35 bn from Rs 49 bn in 3QFY09. The gross realisation from crude oil was US$ 77 per barrel during the quarter, 30% higher than the US$ 59 per barrel during 3QFY09. However, subsidy per barrel fell by 24% during the quarter to US$ 19 per barrel from US$ 25 per barrel during the same period last year.

  • The company made 7 discoveries during 3QFY10 and 2 more in January, which have been notified to Directorate General of Hydrocarbons.

  • ONGC’s raw material costs declined by 12.3% YoY (as a percentage of sales) during 3QFY10 primarily on the back of discontinuation of MRPL products.

    Cost break-up
    (Rs m) 3QFY09 3QFY10 Change
    Raw materials 16,580 1,304 -92.1%
    % sales 13.1% 0.8%  
    Staff cost 3,910 3,047 -22.1%
    % sales 3.1% 2.0%  
    Statutory levies 24,585 31,033 26.2%
    % sales 19.5% 20.0%  
    Other expenditure 29,279 26,330 -10.1%
    % sales 23.2% 17.0%  
    Total cost 74,354 61,715 -17.0%
    % sales 58.9% 39.8%  

  • ONGC plans to invest Rs 21.6 bn for development of D1 marginal field in Mumbai offshore leading to an incremental oil production of 8.3 m tonnes. It also plans to invest Rs 7 bn for acquisition of a new multi support vessel (MSV). It will be commissioned by September, 2012. ONGC presently has a fleet of 4 MSVs. Out of these 2 MSVs are owned by ONGC and 2 are hired.

  • The company has extended the interest free loan to its overseas arm, ONGC Videsh for two more years. Hence, interest on the loan for 1HFY10 amounting to Rs 4.6 bn has been reversed during the quarter.

What to expect?
On the volumes front, ONGC faces difficulties in maintaining the levels of production from its ageing fields. On the margins front, the company continues to be subject to the ad hoc subsidy sharing mechanism. The manner in which discounts are notified does not provide topline visibility for the company even in extremely favourable global conditions. However, the company presents the best opportunity in India to participate in the movement of crude prices, provided sufficient margin of safety is sought in the buy price.

At the current market price of Rs 1,103, the stock is trading at a multiple of 16.5 times its trailing 12 months standalone earnings and 10 times our estimated FY12 earnings. At present valuations, the stock does not offer the margin of safety we look for. As such we would advice against adding fresh positions at this juncture.

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