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ONGC: Forex gains, lower write offs boost profits for the quarter - Views on News from Equitymaster

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  • Jun 6, 2014 - ONGC: Forex gains, lower write offs boost profits for the quarter

ONGC: Forex gains, lower write offs boost profits for the quarter

Jun 6, 2014

Oil and Natural Gas Corporation Ltd (ONGC) has announced results for the quarter ending March 2014. The topline registered 2.4% year on year (YoY) decline during the quarter while bottomline was up by 44.3% YoY. Here is our analysis of the results.

Performance summary
  • Topline for the quarter declined by 2.4% year on year (YoY). For FY14, revenues registered a flattish growth of 1.1% YoY.
  • The operating profits for the quarter were up 53.2% YoY with margins at 43.1% (versus 27.5% in 4QFY13). The increase in margins was mainly due to decline in exploration costs written off and decline in other expenses. For FY14, the operating profits grew by 9.5% YoY with margins at 43.7%, up from 40.3% in FY13.
  • The firm registered a growth of 44.3% YoY in the bottomline during the quarter with net profit margins at 22.9% versus 15.5% in 4QFY13. For FY14, the net profits grew by 5.6 % YoY, with net profit margins at 26.3%, versus 25.2% in FY13.
  • The gross realisations for the quarter stood at US$ 106.65 per barrel versus US$ 113.97 per barrel in 4QFY13. However, on account of subsidies, the net realisations declined to US$ 32.78 per barrel, down from US$ 50.85 per barrel in 4QFY13 (US$ 45.98 per barrel in 3QFY14).
  • In FY14, the net realisations came in at US$ 40.97 per barrel, down from US$ 47.85 per barrel in FY13. The gross realisations in FY14 were US$ 106.72 per dollar, down from US$ 110.74 per dollar in FY13.
  • The exchange rate for the quarter stood at Rs 61.79 per dollar, versus Rs 54.17 per dollar in 4QFY13. For FY14, the exchange rate stood at Rs 60.5 per dollar as compared to Rs 54.45 per dollar in FY13.
  • In rupees terms, the net realisations for the quarter stood at Rs 2,026 per barrel, down from Rs 2,755 per barrel in 4QFY13. For FY14, the net realisations stood at Rs 2,478 per barrel, down from Rs 2,606 per barrel in FY13.
  • The subsidy burden for the quarter stood at Rs 162 bn, up 31.6% YoY. For FY14, the subsidy burden for ONGC stood at Rs 564 bn, up 14% YoY. ONGC shares about 84% of the total under recoveries in the upstream segment.
  • The pretax profits were dragged down by Rs 91 bn and Rs 315 bn for the quarter and year ending March 2014 respectively, on account of subsidies.
  • On a consolidated basis, the revenues and net profits registered a growth of 7.4% YoY and 9.4% YoY respectively in FY14.
  • The oil and gas production from OVL stood at 5.486 MMT (up 26.3% YoY) and 2.871 BCM (down 1.6% YoY) in FY14.
  • The crude thruput for MRPL stood at 14.55 MMT in FY14, up from 14.4 MT in FY13. For MRPL, the net profits for the year stood at Rs 6 bn, as compared to losses of Rs 7.6 bn in FY13.
  • The Board of Directors has recommended final dividend of Rs 0.25 per share . The total dividend for the year comes at around Rs 9.5 per share, implying a dividend yield of 2.1%.

Standalone financial performance summary
Rs m 4QFY13 4QFY14 Change FY13 FY14 Change
Sales 218,299 213,131 -2.4% 829,859 838,889 1.1%
Expenditure 158,352 121,272 -23.4% 495,045 472,422 -4.6%
Operating profit (EBDITA) 59,946 91,859 53.2% 334,815 366,468 9.5%
Operating profit margin (%) 27.5% 43.1%   40.3% 43.7%  
Other income 12,455 13,718 10.1% 54,662 67,132 22.8%
Interest 1 0 -20.0% 288.8 3.6 -98.8%
Depreciation 23,872 35,804 50.0% 83,745 109,277 30.5%
Profit before tax 48,529 69,773 43.8% 305,443 324,319 6.2%
Profit before tax margins (%) 22.2% 32.7%   36.8% 38.7%  
Tax 14,642 20,883 42.6% 96,186 103,371 7.5%
Profit after tax 33,887 48,890 44.3% 209,257 220,948 5.6%
Net profit margin (%) 15.5% 22.9%   25.2% 26.3%  
No. of shares         8,555  
Diluted earnings per share (Rs)*         25.8  
P/E ratio (x)*         17.3  
(* on trailing twelve months earnings)

What has driven performance in FY14?
  • The net sales for the year grew marginally by 1.1% YoY. High under recovery burden constrained the growth, though weakness in domestic currency led to better realizations in rupee terms. In terms of sales volumes, the crude oil (standalone), value added products and gas, all declined on an annual basis.

  • The operating profits margins stood at 43.7% during the quarter, up 3.4% (YoY). The expansion in margins was mainly on account of decline in exploration costs written off and decline in other expenses.

  • ONGC's net profits grew by 5.6% YoY. The depreciation costs for the year grew by 31% YoY. Further, higher subsidies impacted the bottomline.

    Cost break-up...
    Rs m 4QFY13 4QFY14 Change FY13 FY14 Change
    Cost of materials consumed 1,367 4,388 220.9% 5,899 7,715 30.8%
    as a % of sales 0.6% 2.1%   0.7% 0.9%  
    Employee benefit expenses 7,360 4,545 -38.2% 19,574 19,357 -1.1%
    as a % of sales 3.4% 2.1%   2.4% 2.3%  
    Statutory levies 54,874 55,164 0.5% 220,514 226,528 2.7%
    as a % of sales 25.1% 25.9%   26.6% 27.0%  
    Other costs 47,359 33,237 -29.8% 148,171 140,389 -5.3%
    as a % of sales 21.7% 15.6%   17.9% 16.7%  
    Exploration costs w/off 47,392 23,938 -49.5% 100,887 78,433 -22.3%
    as a % of sales 21.7% 11.2%   12.2% 9.3%  
    Total costs 158,352 121,272 -23.4% 495,045 472,422 -4.6%
    as a % of sales 72.5% 56.9%   59.7% 56.3%  
What to expect?
Ageing fields remain a major concern for ONGC. However, the production from OVL has increased during the year. The management has given guidance for a growth in production, on the back of contribution from marginal fields. Going forward, a pick up in the production is likely to be the growth catalyst. Also, as subsidies decline because of phased deregulation in diesel, the net realizations may go up, and the development of several fields may become viable. A gas price hike will also be positive for ONGC.

ONGC may have to pay royalty to Gujarat Government at market prices, instead of net realizations that company has been considering since April 2008. The matter is sub judice and an unfavourable verdict could impact bottomline.

At current price of Rs 448, the stock of ONGC is trading at a PE (price to earnings ratio) of 17 x. While long term prospects of ONGC are bright, the decline in production rate from mature fields remains a concern. We are in the process of revising our estimates for the company and will soon update subscribers with the target price. Until then, we recommend not to buy the stock at the current price levels.

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