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ONGC: Higher crude prices fuel profit growth - Views on News from Equitymaster
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ONGC: Higher crude prices fuel profit growth
Jan 29, 2011

ONGC has announced its 3QFY11 results. The group reported a 34.2% YoY and a whopping 132.0% YoY increase in top line and bottomline respectively. Here is our analysis of the results.

Performance summary
  • Standalone top line increased by 34.2% YoY for the quarter. For the 9 months period, sales were up 15.4% YoY.
  • EBITDA margins came at 65.0% for the quarter, up 4.8% YoY. For the 9 months period, the margins came at 62.3%, registering a modest gain of 1.2% YoY.
  • Standalone bottomline soared 132.0% YoY for the quarter leading to net margins of 34.0% versus 19.7% in 3QFY10. For the 9 months period, net profits were up 24.2% YoY leading to net margins of 30.4% versus 28.3% during 9mFY10.


Financial performance snapshot
(Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Sales 155,061 208,042 34.2% 459,802 530,574 15.4%
Expenditure 61,715 72,726 17.8% 179,069 200,109 11.7%
Operating profit (EBDITA) 93,347 135,316 45.0% 280,733 330,466 17.7%
Operating profit margin (%) 60.2% 65.0%   61.1% 62.3%  
Other income (301) 6,693   17,508 19,827 13.2%
Interest 29 54 85.7% 126 91 -27.5%
Depreciation 46,758 36,410 -22.1% 102,108 111,553 9.3%
Profit before tax 46,258 105,544 128.2% 196,008 238,648 21.8%
Profit before tax margins (%) 29.8% 50.7%   42.6% 45.0%  
Tax 15,723 34,712 120.8% 66,097 77,317 17.0%
Profit after tax/(loss) 30,536 70,832 132.0% 129,911 161,331 24.2%
Net profit margin (%) 19.7% 34.0%   28.3% 30.4%  
No. of shares         2,139  
Diluted earnings per share (Rs)*         93.1  
P/E ratio (x)*         12.2  
* On a trailing 12 months basis

What has driven performance in 3QFY11?
  • ONGC’s standalone top line increased by 34.2% YoY on account of higher crude output (7.03 MT versus 6.6 MT in 3QFY10). Gross realizations during the quarter stood at US$ 89.13 per barrel, up 16.3% YoY.

  • Operating margins were up by 4.8% YoY as net realization per barrel of crude improved by 12.3%, from US$ 57.69 in 3QFY10 to US$64.79 this quarter (US$ 62.75 per barrel in 2QFY11).Despite a 20.7% YoY rise in the subsidies, the realizations improved as crude prices strengthened during the quarter. However, the net realizations for the 9 months period were up just by 2.3% YoY on account of higher subsidies (up 95% YoY for the 9 months period) on final petroleum products. The operating margins also strengthened due to better expense management as the overall operating costs were reduced to 35% of sales versus 40% of sales in 3QFY10.

  • Net profit margins were up by 14.4% YoY as net profits jumped 132% YoY, boosted by recovery of Rs 19 bn dues from natural gas customers as well as by lower depreciation costs which declined by 22% YoY during the quarter. Other income was positive this year versus a loss in 3QFY10. The under recoveries led to an adverse impact of Rs 24 bn on the bottomline.

    Cost break-up
    (Rs m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
    Raw materials 1,304 1,872 43.6% 2,124 3,786 78.2%
    % sales 0.8% 0.9%   0.5% 0.7%  
    Staff cost 3,047 2,913 -4.4% 8,406 8,762 4.2%
    % sales 2.0% 1.4%   1.8% 1.7%  
    Statutory levies 31,033 38,865 25.2% 91,245 106,232 16.4%
    % sales 20.0% 18.7%   19.8% 20.0%  
    Other expenditure 26,330 29,075 10.4% 77,293 81,329 5.2%
    % sales 17.0% 14.0%   16.8% 15.3%  
    Total cost 61,715 72,726 17.8% 179,069 200,109 11.7%
    % sales 39.8% 35.0%   38.9% 37.7%  

What to expect?
ONGC has made five discoveries during the quarter which we believe will be the key to volume growth in the future as it will get difficult to maintain the levels of production from existing ageing fields. While increase in crude prices is positive for ONGC, it will also increase overall under recoveries and it is difficult to estimate how much ONGC benefit from it as there is no clear subsidy sharing mechanism in place yet. At the current share price of Rs 1,136, the stock is trading at 7.5 times our estimated FY13 earnings (Research pro subscribers please click here).While the prospects look good for ONGC on account of increasing crude prices and discovery of new fields, we would advise against adding fresh positions till we have a clear picture regarding sharing of subsidies.

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