Energy stocks have announced mixed results for 9mFY05. High crude oil prices had different impacts on different businesses depending on the straddle of the energy sector. In other words, while oil marketing companies witnessed a sharp dip in bottomline on account of higher costs and lower realization factors, upstream majors, such as ONGC, had a very good outing during the period, with its product (read crude oil) touching prices never witnessed before by the oil major (ONGC was selling crude at regulated rates until FY02). In the following analysis, we have included ONGC and GAIL as the upstream companies while HPCL and BPCL represent the downstream segment of the energy straddle.
Operating profit (EBDITA)
EBDITA margin (%)
Profit before tax
Profit after tax/(loss)
Net profit margin (%)
Price to earnings ratio (x)
Volumes lead to higher topline: During 9mFY05, the topline witnessed a strong growth of over 21% YoY. This comes on the back of higher volumes growth for the downstream majors in terms of retail products such as petrol, diesel and LPG, which grew by 4%, 6.5% and 11.4% YoY. At the same time, crude oil prices have averaged close to US$ 40 per barrel, up by nearly 43% as compared to the average prices in FY04. To add to this is the fact that GAIL, the gas major, witnessed a sharp volume growth thanks to the commencement of Petronet LNG's gas supply. All in all, the four companies included in the analysis have had a decent topline growth in the period under consideration.
Policies eat into margins: During the first nine months until December 2004, operating margins witnessed a dip of 80 basis points. Although higher crude oil prices helped ONGC, the same proved to be a bane for the oil marketing companies as raw material costs zoomed. To make matters worse, oil-marketing companies witnessed a freeze on retail product prices due to political considerations, which resulted in lower realizations, thereby pushing operations in certain states into losses.
Bottomline grows but...: The bottomline growth of 17% is a result of the above factors. Although product prices at the refinery gate increased, the same was not allowed to be passed on by the government. But for the high refining margins witnessed by the downstream majors, the bottomline could have witnessed a single-digit growth. On the other hand, ONGC witnessed a 103% jump in its bottomline, while GAIL's PAT growth was over 63% on the back of strong volumes growth.
What to expect?
The energy sector witnessed the worst period post-dismantling during 1HFY05 on the back of rising input costs and freeze on prices. However, recent decisions to reduce duties on products have helped marketing margins to improve. Also, the effect of high crude oil prices (nearly US$ 40 per barrel) is now being factored into the prices. Having said that, we believe that crude oil prices are likely to remain in the current range over the medium term. Upstream companies such as ONGC are likely to ride this high trend. Further, the government is also indicating a gas price hike, which would help ONGC reduce subsidies thereby adding the latter's bottomline. But investors need to remember that this sector is highly dependant on government policies. Though we are encouraged by the signals emanating on the policy level, in coalition politics, good economics is not exactly 'good politics'.
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