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ONGC: Overtakes HLL

Apr 9, 2002

The sale of Videsh Sanchar Nigam Ltd. (VSNL) and Indo-Burmah Petroleum (IBP) sparked off a dramatic rally in the once untouchable public sector (PSU) stocks. Oil & Natural Gas Corporation (ONGC), the largest oil exploration & production (E&P) company in the country, has considerably outperformed the BSE Sensex year-to-date (YTD). The scrip is trading higher by 159% over the concerned period compared to 7.2% rise in the Sensex. The rise in ONGC though is not due to expectations of privatisation. The Government, earlier, has classified ONGC as a strategic asset. With dismantling of the administered pricing mechanism (APM) the Government also linked indegeniously produced crude oil to international parity prices. This has sparked the buying frenzy in the stock. Prior to the phased deregulation in the sector, ONGC was being compensated on cost plus basis. From FY99, the terms of payment were converted to a step-up linkage mechanism with FOB import prices. However, as oil prices strengthened over FY00 and FY01, the Government put a ceiling on indegeniously produced oil by PSUs at $16 / barrel.

ONGC: Taxing windfall gains
  Case 1 Case 2 % change
Oil price ($/barrel) 20.0 25.0 25.0%
Oil price ($/tonne) 147.4 184.3 25.0%
Oil price (Rs/tonne) 7,148.9 8,936.1 25.0%
Cess (Rs/tonne) 900.0 1,800.0 100.0%
Net realisations 6,248.9 7,136.1 14.2%
* numbers are estimates

Consequently, decontrol in prices is likely to lead to a spurt in turnover for ONGC. Eating into the windfall gains, which could have been registered by ONGC, the Finance Minister in the recent budget increased the cess on crude produced by PSUs to 1,800/ metric tonne (MT) from Rs 900/ MT. This move, it seems, is largely to fund the subsidies on LPG and kerosene.

At Rs 357 the ONGC stock trades on a multiple of 8.4x 9mFY02 annualised earnings. E&P business offers value in the form of strong cash flows and high profitability. The operating cost of drilling crude is estimated at $8-$10/ barrel. E&P business tends to be the cash cow for integrated energy players. Valuations of ONGC have reached levels commanded by international peers. In terms of market capitalisation, ONGC is the highest valued company. As per reports, global oil demand is growing at 2% annually while reserves are depleting at 6%. This could keep upward pressure on oil prices.

Value realised
(Rs m) ONGC Petrobras
CMP 357 1,265
Sales* 223,582 1,208,677
EBITDA* 118,936 486,856
PAT* 60,702 200,414
EPS 42.6 184.5
OPM 53.2% 40.3%
NPM 27.1% 16.6%
Book value 212.6 455.1
No. of shares 1,426 1,086
M.Cap 508,401 1,373,959
EV 532,653 1,574,708
P/E 8.4 6.9
CMP/Book value 1.7 2.8
EV/EBITDA 4.5 3.2
* 9 month annualised

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