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ONGC: Post APM windfall

Jun 24, 2003

India's major oil and gas explorer, ONGC, announced its FY03 results yesterday. While the company's topline increased by about 48% YoY, the bottomline has shown a significant growth of about 70%. The company has become active in the past year, as far as crude oil exploration is considered. It was one of the favorites on the bourses and has gained about 53% in the last one year. Let's take a detailed look at the financial performance of the company.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Sales 64,692 124,195 92.0% 232,378 342,773 47.5%
Other Income 6,749 3,680 -45.5% 16,335 19,593 19.9%
Expenditure 31,055 58,289 87.7% 109,540 158,718 44.9%
Operating Profit (EBDIT) 33,637 65,906 95.9% 122,838 184,055 49.8%
Operating Profit Margin (%) 52.0% 53.1%   52.9% 53.7%  
Interest 686 155 -77.5% 2,469 1,132 -54.2%
Depreciation 12,274 12,860 4.8% 38,152 41,277 8.2%
Profit before Tax 27,426 56,572 106.3% 98,552 161,238 63.6%
Tax 10,974 19,787 80.3% 36,574 55,945 53.0%
Profit after Tax/(Loss) 16,452 36,785 123.6% 61,979 105,293 69.9%
Net profit margin (%) 25.4% 29.6%   26.7% 30.7%  
No. of Shares 1,426 1,426   1,426 1,426  
Diluted Earnings per share* 46.2 103.2   43.5 73.8  
P/E Ratio         6.6  

ONGC's topline growth mainly came about due to strengthening crude oil prices. Till last year, the company was allowed to sell crude oil at a fixed US$ 16 per barrel, irrespective of the prevailing international crude oil prices. However, with the dismantling of APM, ONGC sold the crude in line with the international prices. Crude prices increased significantly during FY03 owing to prevailing tension in Iraq during the same period. This helped the company see a spurt in its topline. This apart, the crude oil and natural gas production was at its highest levels in FY03, which further added to the topline.

However, ONGC's expenses too increased in tandem with revenues, by about 45%. There was a significant increase in government levies YoY. The case in point, the statutory levies increased by about 40% from Rs 2,419 pet tonne (FY02) to Rs 3,374 per tonne (FY03). Despite this, topline growth outstripped expense growth. Consequently, operating profit was up by about 50% for FY03. Led by strong topline growth, ONGC's bottomline too, spurted by about 70% YoY. The company has reduced its interest outgo by about 54%. However, this added to the bottomline only marginally.

If one were to look at the fourth quarter, the company has performed even better. While the bottomline of the company increased by about 36% in the first half of FY03, the impact of dismantling was seen clearly in the second half were the bottomline spurted by over 105%. The company sells the crude oil to refineries on contract basis. Hence in the second half, it got the benefits of selling crude oil at prevailing higher international prices. To put things into perspective, while the topline increased by over 31% in 1HFY03, in the second half this growth stood at nearly 63% YoY.

(Rs m) 1HFY02 1HFY03 Change 2HFY02 2HFY03 Change
Sales 111,281 146,043 31.2% 121,098 196,730 62.5%
Net Profit 31,430 42,574 35.5% 30,549 62,719 105.3%

ONGC plans to become a fully integrated global oil and gas player. Last year, it acquired MRPL marking its entry into refining segment in a small measure. The company also plans to set up its retail outlets thereby entering into the marketing front. The company has acquired stake in Sudan oil field and 2 blocks in Libya oil fields through its subsidiary ONGC Videsh. It has plans to acquire oil fields in other global fields like Myanmar, Iran, Iraq, South Korea, US and Kazakhstan. It has competed with global players and has garnered 37 out of the 70 blocks offered so far in NELP.

At Rs 490, the company is trading at a P/E multiple of 6.6x FY03 earnings. We believe that the company will see strong growth even in the first half of FY04, post which growth will stabilise. The company plans to double its reserves, from 5.8 bn tonnes of oil and oil-equivalent gas, to 12 bn tonnes in a period of 20 years. It has aggressive plans to source 20 m tonnes per year of oil and gas from equity assets abroad in future, which has already seen some progress till date. The only concern for the company is that the government has about 96% stake in the company and its focus may change from time to time putting pressure on its resources.

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