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ONGC: The ‘extraordinary’ effect - Views on News from Equitymaster
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ONGC: The ‘extraordinary’ effect
Jun 27, 2006

Performance summary
Exploration and production giant, ONGC, declared its 4QFY06 and FY06 results. For FY06, topline registered a growth of 3.4% (as against 45% growth in FY05), while the net profits registered an 11.2% growth (as against 50% in FY05) backed by extraordinary income (receipts of insurance claims from BHN platform’s fire accident occurred during July 2005). The company has provided discounts to OMC’s, which has arrested the growth at the topline level. Also, volumes were lower during the year on account of fire at Bombay High.

Financial snapshot…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 121,489 118,984 -2.1% 463,629 479,229 3.4%
Expenditure 57,717 51,730 -10.4% 221,879 205,770 -7.3%
Operating profit (EBDITA) 63,773 67,254 5.5% 241,751 273,459 13.1%
EBDITA margin (%) 52.5% 56.5%   52.1% 57.1%  
Other income 4,931 6,299 27.7% 17,298 21,791 26.0%
Interest 102 323 217.1% 377 470 24.6%
Depreciation 17,584 31,574 79.6% 62,016 84,573 36.4%
Profit before tax 51,017 41,656 -18.3% 196,656 210,207 6.9%
Tax (13,040) (17,202) 31.9% (66,825) (74,064) 10.8%
Profit after tax/(loss) 37,977 24,454 -35.6% 129,831 136,143 4.9%
Extraordinary Items - 6,405   - 8,165  
Net profit 37,977 30,859 -18.7% 129,831 144,308 11.2%
Net profit margin (%) 31.3% 25.9%   28.0% 30.1%  
No. of shares (m) 1,425.9 1,425.9   1,425.9 1,425.9  
Diluted Annualised earnings per share (Rs) 106.53 86.56   91.0 101.20  
Price to earnings ratio (x)         10.50  

What is company’s Business?
ONGC is the country’s largest oil exploration and production (E&P) company accounting for nearly 90% of India’s proven oil and gas reserves. At the current rate of production, the company accounts for over 80% of oil and gas production. Apart from E&P, the company also produces value-added petroleum products such as LPG, kerosene, naphtha and diesel. While LPG is sold to the PSU marketing companies, a major chunk of naphtha is exported and diesel is used for captive consumption. ONGC also has a 72% stake in MRPL, a stand-alone refinery with a capacity of nearly 9.7 MMT (million metric tonnes). Together with MRPL, ONGC has planned its downstream fuel-retailing venture and has a license to set up nearly 1,600 retail outlets.

What has driven the performance?
Flat topline Growth: ONGC registered a growth of 4% YoY in topline for the fiscal. Volumes during the fiscal were lower by 5% for oil and oil equivalent (O+OEG) at 46.9 MMT for the fiscal, explained by the lower production of crude oil (down 8%), mainly due to disruption at Bombay High. For FY06, ONGC realized 62% of its revenues from the sale of crude oil, 13% from the sale of natural gas, 13% from the sales of value-added products and12% from others operations.

Subsidies pare growth: ONGC had to share in subsidy in the form of discounts with OMC’s, which was to the extent of Rs 119, 564 m (24.9% of the net sales registered during FY06). ONGC fetches 63% lower realisation on sales of gas due to sale at APM prices of US$ 1.75 per MMBTU (million metric british thermal units) as against US$ 4.74 per MMBTU by PMT (Panna-Mukta-Tapti JV consortium). This reduction on the expenditure side has resulted in margin expansion to the tune of 500 basis points for the fiscal.

Cost break up…
(%) of sales 4QFY05 4QFY06 FY05 FY06
Consumption of raw materials 0.6% 0.2% 0.3% 0.3%
Purchases(trading) 9.7% 6.4% 11.0% 7.2%
Staff cost 1.6% 4.2% 2.2% 2.7%
Other expenditure 35.7% 32.7% 34.4% 32.8%
Total expenditure as % of sales 47.5% 43.5% 47.9% 42.9%
Note: Other income includes statutory levies.

Extraordinary income boosts profits: Excluding extraordinary income, net profit margins for ONGC are 29%, which is in line with the previous fiscal (28% during FY05). Net profit grew by 5% as against the reported growth of 11%. ONGC lost around Rs 72,100 m on the subsidy front during the fiscal and if we exclude the subsidy and extraordinary income, net profit margins would have risen by 44%, in line with firm crude oil prices. Other income during the year increased by 26% after excluding the effect of one-time receipts on account of reimbursement from the oil pool account worth (Rs 1.8 bn). Higher depreciation during the fiscal was on account of the change in the depreciation policy of the firm, which reduced the net profits to the tune of Rs 11.6 bn. Excluding this, net profit margins before extraordinary income stands at 31%.

Performance over the recent past…
Particulars 4QFY06 3QFY06 2QFY06 1QFY06
Net Sales growth (YoY) -2.1% 3.1% 7.3% 5.6%
Operating profits growth (YoY) 5.5% 17.1% 12.5% 18.5%
Net profits growth (YoY) -35.6% 11.3% 22.3% 43.8%
Operating profit margins 56.5% 59.0% 56.4% 56.2%
Net profit margins 20.6% 31.2% 32.6% 30.5%
Note: Net profit margins and net profit growth is based on net profit before extraordinary items.

What to expect?
At the current market price of Rs 1,063, ONGC’s stock is trading at a price to earnings multiple of 10.5 times FY06 earnings. The management has declared a dividend of 200% (Rs 20 per share) in addition to the interim dividend of 250% (Rs 25 per share) declared during the year, adding up to Rs 45 per share for the fiscal. On the final dividend basis, the dividend yield is 1.9%.

ONGC has not benefited from the rise in the crude oil prices due to the subsidy burden. Given the reluctance on the part of the government to move towards market driven pricing mechanism, the fate of oil marketing companies as well as ONGC is not going change a great deal in the medium term.

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