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ONGC: Lower subsidy aids bottomline

Jun 1, 2010

ONGC has announced its FY10 results. The company has reported a 4% YoY decline and 4% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone topline declines by 4% YoY during FY10 on account of lower volumes, despite higher net realisations per barrel of crude oil.
  • EBITDA margin increases to 61% during the year from 49% in FY09 as trading of MRPL products have been discontinued.
  • Other income declines by 47% during the year.
  • Standalone bottomline registers a growth of 4% YoY during FY10 on account of higher operating margins, despite higher depreciation and tax outgo.
  • Board declares final dividend of Rs 15 per share, in addition to interim dividend of Rs 18.

Standalone financial snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 141,334 160,023 13.2% 645,478 619,825 -4.0%
Expenditure 79,240 65,843 -16.9% 326,505 244,912 -25.0%
Operating profit (EBDITA) 62,094 94,180 51.7% 318,974 374,914 17.5%
EBDITA margin (%) 43.9% 58.9%   49.4% 60.5%  
Other income        9,797        4,691 -52.1% 42,215 22,199 -47.4%
Interest           136           561 312.4%        1,190           687 -42.3%
Depreciation 42,444 44,480 4.8% 120,849 146,588 21.3%
Profit before tax 29,311 53,831 83.7% 239,150 249,838 4.5%
Tax        7,243 16,066 121.8% 78,321 82,163 4.9%
Profit after tax/(loss) 22,068 37,764 71.1% 160,829 167,676 4.3%
Net profit margin (%) 15.6% 23.6%   24.9% 27.1%  
No. of shares (m)       2,139    
Diluted earnings per share (Rs)                 78      
Price to earnings ratio (x)       14.8    

What has driven performance in FY10?
  • ONGC's topline declined by 4% YoY during FY10. The company produced 26.5 m tonnes of crude oil during the year (lower by 2% YoY) and 25.6 bn cubic meters of gas (higher by 1% YoY). The company achieved a reserve replacement ratio (addition to reserves vs. production from the reserves) of 1.73 during FY10.

  • ONGC's subsidy burden during FY10 was Rs 116 bn as compared to Rs 282 bn in FY09. The gross realisation from crude oil was US$ 72 per barrel during the year, as compared to US$ 86 per barrel during FY09. However, subsidy per barrel fell during FY10 to US$ 16 per barrel from US$ 38 per barrel during last year.

  • The company made 21 discoveries during FY10 which include 11 new prospects and 10 new pools.

  • ONGC's raw material costs declined by 11.3% YoY (as a percentage of sales) during FY10 primarily on the back of discontinuation of MRPL products.
    Cost break-up
    (Rs m) 4QFY09 4QFY10 Change
    Raw materials 18,214 2,538 -86.1%
    % sales 12.9% 1.6%  
    Staff cost (699) 2,661 -480.6%
    % sales -0.5% 1.7%  
    Statutory levies 27,534 28,628 4.0%
    % sales 19.5% 17.9%  
    Other expenditure     34,192     32,017 -6.4%
    % sales 24.2% 20.0%  
    Total cost     79,241     65,843 -16.9%
    % sales 56.1% 41.1%  

  • ONGC has recognized an amount of Rs 4.4 bn during 4QFY10. This is because the petroleum ministry has directed GAIL that difference between consumer price and producer price revised by the ministry for APM gas being supplied to city gas distribution projects and small consumers should be transferred from the surplus in gas pool account to the producers like ONGC.

  • The company has changed its accounting policy of amortising intangible assets from the written down value method to the straight line method. As a result, depreciation declined by Rs 420 m.

  • ONGC plans to invest Rs 21.6 bn for development of D1 marginal field in Mumbai offshore leading to an incremental oil production of 8.3 m tonnes. It also plans to invest Rs 7 bn for acquisition of a new multi support vessel (MSV). It will be commissioned by September, 2012. ONGC presently has a fleet of 4 MSVs. Out of these 2 MSVs are owned by ONGC and 2 are hired.

What to expect?
On the volumes front, ONGC faces difficulties in maintaining the levels of production from its ageing fields. On the margins front, the company continues to be subject to the ad hoc subsidy sharing mechanism. The manner in which discounts are notified does not provide topline visibility for the company even in extremely favourable global conditions. However, the recent increase in APM gas prices, the likelihood of a fuel price deregulation and the consistently good performance of ONGC are positives.

In our view, the company presents the best opportunity in India to participate in the movement of crude prices, provided sufficient margin of safety is sought in the buy price.

At the current market price of Rs 1,160, the stock is trading at a multiple of 14.8 times its trailing 12 months standalone earnings and 11 times our estimated FY12 earnings. At present valuations, the stock does not offer the margin of safety we look for. As such we would advice against adding fresh positions at this juncture.

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