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ONGC: Subsidy, DDA expenses drag profits - Views on News from Equitymaster
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ONGC: Subsidy, DDA expenses drag profits
Feb 23, 2015

Oil and Natural Gas Corporation Ltd (ONGC) has announced results for the quarter ending December 2014. The topline declined by 9.8% year on year (YoY) during the quarter while bottomline was down by 49.9% YoY. Here is our analysis of the results.

Performance summary
  • Topline for the quarter declined by 9.8% year on year (YoY).
  • The operating profits for the quarter were down 32.1 % YoY with margins at 37.7% (versus 50.4% in 3QFY14).
  • The firm registered a decline of 49.9% YoY in the bottomline during the quarter with net profit margins at 18.9% versus 34.2% in 3QFY14.
  • The subsidy burden for the quarter stood at Rs 94.6 bn, down 31.3% YoY.
  • Because of the subsidies, the company's bottomline was impacted and came in lower by around Rs 54 bn (lower by Rs 76.5 bn in 3QFY14). Net sales also came in lower by Rs 92 bn during the quarter (lower by Rs 133 bn in 3QFY14) because of the fuel subsidies.
  • Crude oil realizations before and post discount stood at US$ 76 per barrel and US$ 35.6 per barrel respectively during the quarter. The company has notified two more hydrocarbon discoveries during the quarter.
  • The Government of India has decided to reimburse Rs 4.2 bn as compensation of past costs incurred by the company in the discovered fields of Panna, Mukti, Tapti and Ravva awarded to private companies/JVs. As such, the company has accounted for Rs 3.9 bn as other income. Also , an amount of Rs 260 m has been adjusted against the carrying amount of assets.
  • The company has considered a contingent liability worth Rs 134 bn towards the differential in royalties between post discount and pre discount oil prices to state of Gujarat. It has also shown as deposit an amount of Rs 19.7 bn towards differential royalty with effect from February 2014 .

Financial snapshot
Rs m 3QFY14 3QFY15 Change (%) 9MFY14 9M'FY15 Change (%)
Sales 207,447 187,147 -9.8% 622,750 608,228 -2.3%
Other operating income 1,076 2,098 95.0% 3,009 4,006 33.1%
Total income 208,522 189,245 -9.2% 625,758 612,235 -2.2%
Expenditure 103,444 117,948 14.0% 351,149 362,009 3.1%
Operating profit (EBDITA) excl OI 105,078 71,297 -32.1% 274,609 250,226 -8.9%
Operating profit margin (%) 50.4% 37.7%   43.9% 40.9%  
Other income 26,623 13,776 -48.3% 53,414 36,336 -32.0%
Interest 0 13 6150.0% 3.2 15.2 375.0%
Depreciation 25,884 33,395 29.0% 73,474 83,556 13.7%
Profit before tax 105,818 51,664 -51.2% 254,546 202,991 -20.3%
Profit before tax margins (%) 50.7% 27.3%   40.7% 33.2%  
Tax 34,558 15,952 -53.8% 82,488 65,012 -21.2%
Profit after tax 71,260 35,712 -49.9% 172,058 137,979 -19.8%
Net profit margin (%) 34.2% 18.9%   27.5% 22.5%  
No. of shares         8,555  
Diluted earnings per share (Rs)*         21.8  
P/E ratio (x)*         15.3  
*On trailing 12 months basis

What has driven performance in 3QFY15?
  • The standalone crude production from ONGC fields for the quarter grew 3.35% YoY (1.9% YoY growth in 9MFY15). However, crude oil production from JV fields was down 2.7% YoY. Gas production from ONGC fields declined by 5.5% YoY while that from JV fields declined by 2.2%. Overall, oil production for the quarter grew by 0.98%YoY while gas production declined by 4.3% YoY.

  • The operating profits for the quarter were impacted by high subsidy burden as the government seems to have kept most of the benefits of falling crude prices to itself. The net realizations declined both sequentially and on an annual basis. Higher exploration costs write off also dragged profits. This was compensated to some extent by higher other income, mainly with Government compensating for the past costs incurred by the company in the discovered PMT fields.

    Cost breakup
    Rs m 3QFY14 3QFY15 Change (%) 9MFY14 9M'FY15 Change (%)
    Cost of materials consumed 1,348 2,548 89.1% 3,327 5,441 63.5%
    as a % of sales 0.6% 1.4%   0.5% 0.9%  
    Employee benefit expenses 4,489 4,001 -10.9% 14,812 12,627 -14.8%
    as a % of sales 2.2% 2.1%   2.4% 2.1%  
    Statutory levies 57,402 53,126 -7.4% 171,364 165,894 -3.2%
    as a % of sales 27.7% 28.4%   27.5% 27.3%  
    Other costs 22,101 33,519 51.7% 107,151 95,893 -10.5%
    as a % of sales 10.7% 17.9%   17.2% 15.8%  
    Exploration costs w/off 18,106 24,754 36.7% 54,495 82,154 50.8%
    as a % of sales 8.7% 13.2%   8.8% 13.5%  
    Total costs 103,444 117,948 14.0% 351,149 362,009 3.1%
    as a % of sales 49.9% 63.0%   56.4% 59.5%  

  • The bottomline for the quarter declined by 50% on the back of lower crude realizations and subsidy burden.
What to expect?

During the quarter, the crude production improved which is a positive. However, ONGC could not benefit much from the relief on the under recovery front with net realizations coming in lower both sequentially and annually. The management expects fourth quarter to be better as dry well write offs were significantly higher in the third quarter which are not likely to be there in the fourth quarter. Ageing domestic fields is another concern for the company. But management is optimistic on production from onshore fields. Clarity in subsidy sharing is likely to be a significant catalyst for the company.

The company has notified two more discoveries during the quarter (total 18 discoveries in 2014-15, versus 14 discoveries in 2013-14. At current prices, the stock of ONGC is trading at a price to earnings multiple of around 15 times. We maintain a Buy view on the stock and target price of Rs 441 from a perspective of three years.

Also, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation. We suggest that no single large cap stock should comprise more than 5-6% of your total stock portfolio.

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