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ONGC: Crude price helps, subsidy hurts - Views on News from Equitymaster

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ONGC: Crude price helps, subsidy hurts
Jun 25, 2008

Performance summary
  • Standalone topline grows by 6% YoY during FY08. Consolidated topline grows by 18% YoY, lower than our expected growth of 30% for FY08.
  • Standalone EBITDA margin remain stable at 50.3% during the fiscal.
  • Other income grows by 18% YoY in FY08 due to higher interest charged from ONGC Videsh (OVL).
  • Excluding extraordinary item, standalone bottomline registers a growth of 10% YoY during FY08 on the back of steady margins and higher other income. Consolidated bottomline grows by 12% YoY, lower than our expected growth of 26% for FY08.
  • Board recommends a final dividend of Rs 14 per share. Total dividend during the year amounts to Rs 32 per share (dividend yield 4%).

Standalone financial snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 123,970 156,261 26.0% 566,328 598,485 5.7%
Expenditure 79,825 98,494 23.4% 281,598 297,677 5.7%
Operating profit (EBDITA) 44,145 57,767 30.9% 284,730 300,808 5.6%
EBDITA margin (%) 35.6% 37.0%   50.3% 50.3%  
Other income 21,790 20,337 -6.7% 42,431 50,107 18.1%
Interest 65 123 91.3% 215 590 174.3%
Depreciation 28,637 38,445 34.2% 94,994 97,979 3.1%
Profit before tax 37,232 39,536 6.2% 231,952 252,346 8.8%
Extraordinary item 4,751 -   4,751 -  
Tax 15,167 13,265 -12.5% 80,273 85,329 6.3%
Profit after tax/(loss) 26,816 26,271 -2.0% 156,429 167,017 6.8%
Net profit margin (%) 21.6% 16.8%   27.6% 27.9%  
No. of shares (m)         2,138.9  
Diluted earnings per share (Rs)         78.1  
Price to earnings ratio (x)         11.1  

What has driven performance in FY08?
  • Sales for FY08 were affected to the tune of Rs 220 bn due to the under recoveries of oil marketing companies (OMCs) shared by ONGC. The company allows discounts in the prices of crude oil, kerosene and domestic LPG that it supplies to the OMCs. The impact was Rs 201 bn at the PBT level and Rs 132 bn at the PAT level.

    Cost break-up
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Raw materials 13,646 24,720 81.2% 63,526 70,791 11.4%
    % sales 11.0% 15.8%   11.2% 11.8%  
    Staff cost 15,549 1,630 -89.5% 29,818 11,454 -61.6%
    % sales 12.5% 1.0%   5.3% 1.9%  
    Statutory levies 28,392 33,802 19.1% 119,931 127,080  
    % sales 22.9% 21.6%   21.2% 21.2%  
    Other expenditure 22,239 38,342 72.4% 68,324 88,352 29.3%
    % sales 17.9% 24.5%   12.1% 14.8%  
    Total cost 79,825 98,494 23.4% 281,598 297,677 5.7%
    % sales 64.4% 63.0%   49.7% 49.7%  

  • Staff cost is substantially lower for FY08 as the company now allocates certain employee benefits to exploration, development and production assets instead of treating them as expenses. The impact of this change in FY08 is to the tune of Rs. 6.3 bn.

  • ONGC has revised the rate of interest on loan to OVL during the 4QFY08 from 0.1% to 6% p.a. with effect from April 01, 2007. As a result, standalone other income is higher by Rs 7.3 bn for FY08.

What to expect?
At the current market price of Rs 864, the stock is trading at a multiple of 5.8 times our FY10 estimated earnings. We shall update this analysis on receipt of further details from the company.

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