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ONGC: Subsidy plays spoilsport - Views on News from Equitymaster

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ONGC: Subsidy plays spoilsport
Jun 25, 2009

Performance summary
  • Standalone topline increase by 7% YoY during FY09.
  • EBITDA margin declines to 49% during the fiscal from 50% in FY08.
  • Other income declines by 5% YoY in FY09.
  • Standalone bottomline registers a decline of 3% YoY during FY09 due to higher subsidy.
  • For 4QFY09, topline clocks a decline of 12%, while the bottomline declines by 16%.


Standalone financial snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 156,261 138,336 -11.5% 598,485 640,178 7.0%
Expenditure 98,494 79,240 -19.5% 297,677 326,505 9.7%
Operating profit (EBDITA) 57,767 59,095 2.3% 300,808 313,674 4.3%
EBDITA margin (%) 37.0% 42.7%   50.3% 49.0%  
Other income 20,337 12,796 -37.1% 50,107 47,515 -5.2%
Interest 123 136 10.2% 590 1,190 101.7%
Depreciation 38,445 42,444 10.4% 97,979 120,849 23.3%
Profit before tax 39,536 29,311 -25.9% 252,346 239,150 -5.2%
Extraordinary item - -   - 434  
Tax 13,265 7,243 -45.4% 85,329 78,321 -8.2%
Profit after tax/(loss) 26,271 22,068 -16.0% 167,017 161,263 -3.4%
Net profit margin (%) 16.8% 16.0%   27.9% 25.2%  
No. of shares (m)         2,139  
Diluted earnings per share (Rs)         75  
Price to earnings ratio (x)         13.7  

What has driven performance in FY09?
  • During FY09, ONGC produced crude oil to the tune of 27.13 m tonnes (MT), down from 27.93 MTs last fiscal. It also produced 25.43 bn cubic meters (BCM) of natural gas during the year, up from 25.12 BCM last year.

  • ONGC reported 28 new discoveries during FY09. The company has clarified that news reports of a 10 trillion cubic feet (TCF) discovery in the Krishna Godavari basin are not factual, as the reserves estimates are yet to be made for the asset. In fact, the company says that the initial flow rates do not indicate reserves anywhere near 10 TCF.

  • The company has accreted ultimate reserves from domestic acreages to the tune of 69 m tonnes of oil equivalent in FY09, the highest in 18 years.

  • ONGC continues to share the under recoveries of the public sector oil marketing companies on the sale of crude oil, kerosene and domestic LPG. As a result ONGC’s topline for FY09 was impacted to the tune of Rs 282 bn, while its bottomline for the year was impacted to the tune of Rs 158 bn.

  • ONGC’s standalone bottomline declined by 3% during FY09 due to a temporary production setback, a higher subsidy payout, higher exploration expenses and higher rig rates.

  • Extraordinary items of Rs 434 m is due to the full and final settlement of insurance claim in respect of damage to Hazira gas complex by flood during August 2006.

  • Including an interim dividend Rs18 per share, the company recommended a payout of Rs 32 per share – a dividend yield of 3% at the current stock price.

What to expect?
On the volumes front, ONGC faces difficulties in maintaining the levels of production from its ageing fields. On the margins front, the company continues to be subject to the ad hoc subsidy sharing mechanism. The manner in which discounts are notified does not provide topline visibility for the company even in extremely favourable global conditions. However, the company presents the best opportunity in India to participate in the movement of crude prices, provided sufficient margin of safety is sought in the buy price.

At the current market price of Rs 1,030, the stock is trading at a multiple of 13.7 times its FY09 standalone earnings. We shall update our view on the company after attending its analyst meet this evening.

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