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ONGC: Higher subsidies dent margins - Views on News from Equitymaster
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ONGC: Higher subsidies dent margins
Jun 1, 2011

ONGC has announced the fourth quarter results for financial year 2010-2011 (4QFY11).The company has reported a flattish growth of 0.7% YoY and a 26% YoY decrease in bottom line. Here is our analysis of the results.

Performance summary
  • Standalone top line remained almost at the same level as last year for the quarter, registering a marginal growth of 0.7% YoY. For full year, the topline registered an increase of 12% YoY. On a consolidated basis, full year topline was up 16% YoY.
  • The operating profit for the quarter declined by 15% YoY, with margins down 9% (YoY). For the full year, the operating profit registered an increase of 9% YoY while margins declined by 1% (YoY).On a consolidated basis, the operating profit for full year was up 14% YoY and margins were down 1.3% (YoY).
  • The discount to oil marketing companies was reported at Rs 121 bn for the quarter (up 143% YoY). For full year, the subsidy burden came at Rs 249 bn (up 115% YoY).
  • Standalone bottomline plunged 26% YoY for the quarter leading to net margins of 6% (YoY). For the full year, net profits were up 13% YoY while margins witnessed a flattish recovery of 0.3% (YoY).On a consolidated basis, net profits (including minority share and associate’ s share) for the full year were up 16% YoY, with margins at 18.7% versus 19.1% last year.
  • The company reported a reserve replacement ratio (RRR) of 1.76 (versus 1.74 in FY10)
  • The board has recommended a final dividend of Rs 0.75 per share. Along with interim , this translates into a dividend of Rs 8.75 per share, implying a dividend yield of 3.1%

    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Sales 160,023 161,079 0.7% 619,825 691,654 11.6%
    Expenditure 65,843 81,357 23.6% 244,912 281,584 15.0%
    Operating profit (EBDITA) 94,180 79,723 -15.4% 374,914 410,069 9.4%
    Operating profit margin (%) 58.9% 49.5%   60.5% 59.3%  
    Other income 4,691 5,856 24.8% 22,199 25,682 15.7%
    Interest 560.8 160 -71.5% 686.5 251.1 -63.4%
    Depreciation 44,480 47,877 7.6% 146,588 159,430 8.8%
    Profit before tax 53,831 37,542 -30.3% 249,838 276,190 10.5%
    Profit before tax margins (%) 33.6% 23.3%   40.3% 39.9%  
    Tax 16,066 9,633 -40.0% 82,163 86,950 5.8%
    Profit after tax/(loss) 37,764 27,909 -26.1% 167,676 189,240 12.8%
    Net profit margin (%) 23.6% 17.3%   27.1% 27.4%  
    No. of shares         8,555  
    Diluted earnings per share (Rs)*         22.1  
    P/E ratio (x)*         12.7  
    * On a trailing 12 months basis

    What has driven performance in 4QFY11?
    • ONGC's standalone top line registered a flattish growth of 0.7% YoY for the quarter. The crude oil production was marginally down at 24.42 million tonnes in FY11 versus 24.6 million tonnes last year. The gas output was almost flat at 23.09 billion cubic metres (bcm) in FY11 (versus 23.11 bcm in FY10). For the quarter, the gross realizations rose to US$108.9 per barrel from US$ 79.15, while net proceeds after subsidies fell to US $38.75 a barrel from US$51.42. For full year, the net realisation came at US$53.77 per barrel versus US$ 55.94 last year.

      Cost break up
      (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
      Raw materials 2,538 2,438 -3.9% 4,662 6,224 33.5%
      % sales 1.6% 1.5%   0.8% 0.9%  
      Staff cost 2,661 4,270 60.5% 11,067 13,032 17.8%
      % sales 1.7% 2.7%   1.8% 1.9%  
      Statutory levies 28,628 33,021 15.3% 119,873 139,253 16.2%
      % sales 17.9% 20.5%   19.3% 20.1%  
      Other expenditure 32,017 41,628 30.0% 109,310 123,076 12.6%
      % sales 20.0% 25.8%   17.6% 17.8%  
      Total cost 65,843 81,357 23.6% 244,912 281,584  
      % sales 41.1% 50.5%   39.5% 40.7%  

    • The operating profit for the quarter declined by 15% YoY, with margins down 9% (YoY).This was mainly on account of increase in other expenditure and statutory levies by 5.8% (YoY) and 2.6% (YoY) respectively. The employee costs also rose during the quarter by 1% (YoY).

    • Net profit margins were down 26% YoY for the quarter as a result of higher under recovery burden. ONGC's share in subsidy at Rs 121 bn in the fourth quarter was almost equal to the total of past three quarters. The net profits have been adversely impacted by Rs 20.6 bn on account of the additional subsidy burden ( from one third to 38.5%).This took the total subsidy toll to Rs 249 bn for fiscal 2010-11, more than double the previous year.

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