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ONGC: Hit by low prices & subsidies - Views on News from Equitymaster
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ONGC: Hit by low prices & subsidies
Jan 29, 2009

Performance summary
  • Standalone topline declines by 18% YoY during 3QFY09 due to lower realisations.
  • EBITDA margin declines to 41% during the quarter.
  • Other income grows by 47% YoY in 3QFY09.
  • Standalone bottomline registers a decline of 43% YoY during the quarter.
  • For 9mFY09, topline clocks a growth of 13%, while the bottomline declines by 1%.


Standalone financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 152,205 125,387 -17.6% 445,723 501,843 12.6%
Expenditure 70,891 74,354 4.9% 198,531 247,264 24.5%
Operating profit (EBDITA) 81,314 51,033 -37.2% 247,192 254,578 3.0%
EBDITA margin (%) 53.4% 40.7%   55.5% 50.7%  
Other income 7,633 11,187 46.6% 25,619 34,719 35.5%
Interest 114 41 -63.9% 466 1,054 125.9%
Depreciation 22,118 28,603 29.3% 59,534 78,405 31.7%
Profit before tax 66,716 33,576 -49.7% 212,810 209,839 -1.4%
Extraordinary item - -   - 434  
Tax 23,051 8,828 -61.7% 72,065 71,078 -1.4%
Profit after tax/(loss) 43,665 24,748 -43.3% 140,746 139,196 -1.1%
Net profit margin (%) 28.7% 19.7%   31.6% 27.7%  
No. of shares (m)         2,139  
Diluted earnings per share (Rs)*         77  
Price to earnings ratio (x)*         8.5  
* On trailing twelve months basis

What has driven performance in 3QFY09?
  • ONGC’s gross realisation in respect of crude oil during 3QFY09 was US$ 59 per barrel (US$ 119 in 2QFY09), down from US$ 91 per barrel in 3QFY08. The net realisation (after discounts) was US$ 34 per barrel in 3QFY09 (US$ 46 in 2QFY09), down from US$ 55 per barrel in 3QFY08.

  • ONGC shared the under-recoveries of the oil marketing companies for 3QFY09 by allowing discount in the prices of crude oil, PDS kerosene and domestic LPG. As a result, its topline for 3QFY09 was lower to the tune of Rs 49 bn (Rs 127 bn in 2QFY09), while the bottomline was lower by Rs 28 bn (Rs 71 bn in 2QFY09).

  • The company produced 6.49 m tonnes (MMT) of crude oil during 3QFY09, lower than 6.6 MMT produced during 3QFY08. Natural gas production during 3QFY09 stood at 5.7 bn cubic meters (BCM) as against 5.8 BCM in 3QFY08.

  • Extraordinary items represent Rs 430 m (net of tax expense) on account of final settlement of the insurance claim in respect of flood (during August 2006) damage compensation for Hazira gas complex, after adjustment of net book value of the damaged assets.

  • ONGC carries a contingent liability to the tune of Rs 5.5 bn plus interest pertaining to a case with the Government of India regarding profit petroleum from a joint venture.

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, we believe the company offers an opportunity to participate in the inevitable long term rise of crude oil provided sufficient margin of safety is sought in the buy price.

At the current market price of Rs 654 the stock is trading at a multiple of 7.7 times our FY11E estimated earnings. We believe the stock is attractive at current levels.

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