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ONGC: Higher subsidy burden drags performance

Feb 10, 2012

ONGC has announced results for the third quarter of financial year 2011-12 (3QFY12). The company registered 11% year on year (YoY) decline in the topline and the bottomline was down 4.8% YoY. Here is our analysis of the results.

Performance summary
  • Topline declined by 11% YoY during the quarter (3QFY12) versus. For the first nine months( 9MFY12), the topline registered a growth of 9.0% YoY.
  • The operating profits were down 18.3% during the quarter, with margins at 59.7% versus 65.1% last year. For the first nine months, the margins came at 60.5% versus 62.3% last year (EBITDA for 9 months up 5.9% YoY).
  • Net profits were down 4.8% YoY with margins at 36.4% versus margins at 34.1% in 3QFY11.The net profit margins for the first nine months came at 33.7%, versus 30.4% for 9MFY11.
  • The Board of Directors had declared an interim dividend of Rs 6.25 per share in January 2012 that has since been paid.

Rs m 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Sales 208,042 185,171 -11.0% 530,574 578,444 9.0%
Expenditure 72,726 74,663 2.7% 200,099 228,550 14.2%
Operating profit (EBDITA) 135,316 110,509 -18.3% 330,476 349,895 5.9%
Operating profit margin (%) 65.0% 59.7%   62.3% 60.5%  
Other income 6,693 9,582 43.2% 19,827 28,181 42.1%
Interest 54.4 18.6 -65.8% 91.1 124 36.1%
Depreciation 36,410 45,320 24.5% 111,563 119,326 7.0%
Profit before tax 105,544 74,752 -29.2% 238,648 258,626 8.4%
Profit before tax margins (%) 50.7% 40.4%   45.0% 44.7%  
Exceptional items   31,421     31,421  
Tax 34,712 38,759 11.7% 77,317 95,261 23.2%
Profit after tax/(loss) before exceptional items 70,832 67,414 -4.8% 161,332 194,785 20.7%
Net profit margin (%) 34.0% 36.4%   30.4% 33.7%  
No. of shares         8555  
Diluted earnings per share (Rs)*         22.8  
P/E ratio (x)*         12.4  
*On the basis of trailing 12 months

What has driven performance in 3QFY12?
  • The net sales declined both on account of decline in sales volume (6.74 million tonnes of crude oil drilled versus 7.04 MT last year) and lower net realizations. The crude oil production fell by 4.1% to 6.74 million tone (MT), slightly offset by marginal increase in gas production. The net realizations fell to US$ 44.96 per barrel (versus US$ 64.79 per barrel last year). For the first nine months, net realizations stood at US$ 58.61 per barrel. The net realizations were down despite an increase in gross realizations.

  • The operating profits were down 18.3% during the quarter, with margins at 59.7% versus 65.1% last year. For the first nine months, the margins came at 60.5% versus 62.3% last year (EBITDA for 9 months up 5.9% YoY). The decline in margins was mainly on account of increase in 'Statutory levies' that increased to 21% from 19% last year (as a % of sales) and a 3% YoY increase in other expenditure (as a % of sales).

  • The decline in bottomline was relatively less (down 5% YoY) on account of Rs 31.4 bn royalty payment from Cairn India during the quarter. The subsidy formula was changed during the quarter, resulting in an increase in the burden (up 197% during the quarter) from one third to 37.9% of the total under recoveries for the first nine months. ONGC paid Rs 125.4 bn as oil subsidy bill in the third quarter this year against Rs 42.2 bn in the same period a year ago. The depreciation costs were also higher during the quarter (up 7% YoY as a % of sales). The depletion rate was higher on account of capitalization of some marginal fields.

What to expect?
Rising subsidy burden and lack of any clarity regarding subsidy sharing mechanism remains a major concern for ONGC. ONGC is facing stagnation in the production of oil. Its subsidiary ONGC Videsh Ltd (OVL) has encountered some production issues from fields in Sudan and Syria. OVL's production at its Imperial Energy assets in Russia continues to stagnate at around 16,000 barrels per day. The company has not given any clear guidance regarding the disinvestment program. The interim results are certainly a dampener for any such move. The company aims to raise crude production by 15% to 28 MT by the end of FY2014.

The stock is currently trading at a PE (trailing 12 months) of 12.4. On account of an unclear subsidy sharing mechanism, the future of the stock remains uncertain. Regarding final valuations, we will incorporate the results in our forecasts and update our subscribers soon.

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