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ONGC: High opex , royalty expense hit profits - Views on News from Equitymaster
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ONGC: High opex , royalty expense hit profits
Jun 5, 2015

Oil and Natural Gas Corporation Ltd (ONGC) has announced results for the quarter ending March 2015. The topline for the quarter grew by 2.0% year on year (YoY) while bottomline was down by 19.5% YoY, on a standalone basis. For FY15, the consolidated topline and bottomline registered decline of 8.2% YoY and 30.8% YoY respectively. Here is our analysis of the results.

Performance summary
  • Total income for the quarter grew by 2.0% year on year (YoY).
  • The operating profits for the quarter were down 17.1% YoY with margins at 35.8% (versus 44.0% in 4QFY14).
  • The firm registered a decline of 19.5% YoY in the bottomline during the quarter with net profit margins at 18.5% versus 23.4% in 4QFY14.
  • On a standalone basis, ONGC gross sales and bottomline declined by 1.3% YoY and 19.7% YoY respectively in FY15.
  • On a consolidated basis, the net sales for FY15 declined by 8.2% YoY while net profit was down by 30.8% YoY. The net profit margins for the group in FY15 stood at 11.5%, down from 15.3% in FY14.
  • No discount was extended by ONGC to oil marketing companies for the quarter. For FY15, the bottomline was impacted to the extent of Rs 204 bn (versus an adverse impact of Rs 315 bn in FY14). Total under recovery in FY15 stood at Rs 363 bn.
  • Domestic crude oil production for ONGC (including JV) stood at 6.45 MMT, versus 6.47 MMT in 4QFY14. However, overall gas production declined to 5.18 BCM from 6.17 BCM in 4QFY14.
  • The post discount realizations for ONGC stood at US$ 44.87 per barrel (up 9.9% YoY). The average crude price (pre discount) for the year stood at US$85.28 per barrel.
  • OVL's overall oil and gas production in FY15 stood at 8.87 MMTOE, up 6.1% YoY. The revenue for OVL declined by 14.6% YoY while bottomline declined by 57.2% YoY. The poor performance was mainly on account of low crude prices, higher impairment and depletion costs and high financing and exchange loss.
  • The reserve replacement ratio at the end of the year stood at 1.38.
  • Company's subsidiary MRPL registered a decline of 17% YoY and a net loss of Rs 17 bn in FY15 on account of exchange and inventory loss.
  • The Board of Directors has recommended a final dividend of Rs 0.5 per share. This is over and above the interim dividend of Rs 9 per share

Financial snapshot
Rs m 4QFY14 4QFY15 Change (%) FY14 FY15 Change (%)
Net sales 208,809 213,034 2.0% 1,732,020 1,590,748 -8.2%
Other operating income 4,322 3,441 -20.4% 12,645 18,201 43.9%
Total income 213,131 216,475 1.6% 1,744,666 1,608,949 -7.8%
Expenditure 121,272 140,281 15.7% 1,247,192 1,185,624 -4.9%
Operating profit (EBDITA) excl OI 91,859 76,194 -17.1% 497,474 423,325 -14.9%
Operating profit margin (%) 44.0% 35.8%   28.7% 26.6%  
Other income 13,719 17,336 26.4% 69,384 59,888 -13.7%
Interest 0.4 12.7 3075.0% 6,587 29,232 343.8%
Depreciation 35,804 30,955 -13.5% 166,136 180,277 8.5%
Profit before tax 69,773 62,562 -10.3% 394,134 273,704 -30.6%
Profit before tax margins (%) 33.4% 29.4%   22.8% 17.2%  
Tax 20,883 23,211 11.1% 127,604 96,974 -24.0%
Profit after tax 48,890 39,351 -19.5% 266,530 176,730 -33.7%
Net profit margin (%) 23.4% 18.5%   15.4% 11.1%  
Share of profit/ (loss) in associates       118 303 156.6%
Minority interest       -1,583 6,303  
Net profit for the group       265,065 183,335 -30.8%
Group Net profit margin (%)       15.3% 11.5%  
No. of shares                8,555  
Diluted earnings per share (Rs)*                    21.4  
P/E ratio (x)*                    14.9  
*On trailing 12 months basis

What has driven performance in 4QFY15?
  • The operating profits for the quarter declined mainly on account of higher statutory levies and 'other expenses' (both as a % of sales) during the quarter.

  • The operating profits for the quarter declined mainly on account of higher statutory levies and 'other expenses' (both as a % of sales) during the quarter.

    Cost breakup
    Rs m 4QFY14 4QFY15 Change (%) FY14 FY15 Change (%)
    Cost of materials consumed 4,388 -288 nm 675,570 593,606 -12.1%
    as a % of sales 2.1% -0.1%   39.0% 37.3%  
    Employee benefit expenses 4,545 4,327 -4.8% 25,309 24,043 -5.0%
    as a % of sales 2.2% 2.0%   1.5% 1.5%  
    Statutory levies 55,164 62,851 13.9% 261,893 255,024 -2.6%
    as a % of sales 26.4% 29.5%   15.1% 16.0%  
    Other costs 33,237 46,874 41.0% 199,462 201,193 0.9%
    as a % of sales 15.9% 22.0%   11.5% 12.6%  
    Exploration costs w/off 23,938 26,517 10.8% 84,958 111,758 31.5%
    as a % of sales 11.5% 12.4%   4.9% 7.0%  
    Total costs 121,272 140,281 15.7% 1,247,192 1,185,624 -4.9%
    as a % of sales 58.1% 65.8%   72.0% 74.5%  

  • The bottomline declined by 19.5% YoY for the quarter on account of higher effective tax rate and poor operating performance. While other income was up 26.4% YoY, depreciation expense declined 13.5% YoY. PAT was impacted adversely due to retrospective royalty payments

  • For full year, despite higher net realizations in domestic business, the consolidated profit declined due to higher effective tax rate and increase in the 'exploration costs w/off' and higher finance costs.
What to expect?
The performance may remain muted in the short term on account of a weak crude price scenario. The company had to face higher statutory levy burden due to increase in royalty due to change in calculation - from net of discount value to gross value for certain fields.

Going forward, the new subsidy sharing formula for 1QFY16 (nil subsidy for oil price below US$ 60 per barrel, 85% subsidy for incremental price upto US$ 100 per barrel and 90% sharing for incremental price above US$ 100 per barrel), if it gets implemented will be a positive for ONGC. As far as long term prospects are concerned, a clear subsidy sharing formula and fuel reforms are likely to unlock the potential in the stock leading to the re rating of the stock.

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.

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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