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ONGC: Lower crude, lower subsidy - Views on News from Equitymaster

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ONGC: Lower crude, lower subsidy

Jul 23, 2009

Performance summary
  • Standalone topline declines by 26% YoY during 1QFY10.
  • EBITDA margin increases to 64% during the quarter from 59% in 1QFY09 as trading of MRPL products were stopped this quarter.
  • Other income declines by 7% YoY in 1QFY10.
  • Standalone bottomline registers a decline of 27% YoY during the quarter despite lower subsidy.

Standalone financial snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales * 200,522 149,454 -25.5%
Expenditure * 82,968 53,783 -35.2%
Operating profit (EBDITA) 117,554 95,671 -18.6%
EBDITA margin (%) 58.6% 64.0%  
Other income 10,500 9,786 -6.8%
Interest 38 61 60.1%
Depreciation 27,970 31,789 13.7%
Profit before tax 100,046 73,608 -26.4%
Tax 34,117 25,129 -26.3%
Extraordinary item 434 -  
Profit after tax/(loss) 66,363 48,479 -26.9%
Net profit margin (%) 33.1% 32.4%  
No. of shares (m)   2,139  
Diluted earnings per share (Rs)**   67  
Price to earnings ratio (x)**   16.3  
* 1QFY09 sales and expenditure include trading of MRPL products, now discontinued.
** On trailing twelve months basis

What has driven performance in 1QFY10?
  • ONGC’s topline declined by 26% YoY in 1QFY10. The company's 1QFY09 sales and expenditure included Rs 25 bn due to the trading of MRPL products, now discontinued. Excluding this amount, the company has witnessed a 15% YoY decline at the topline level during 1QFY10. Excluding the trading of MRPL products, i.e. on a like to like basis, the company’s EBITDA margin stood at 67% in 1QFY09, which has declined to 64% this quarter.

  • ONGC's registered oil production of 6.12 m tonnes in 1QFY10, as opposed to 6.41 in 1QFY09. It also produced 5.75 bn cubic meters (bcm) of gas during the quarter as opposed to 5.63 (bcm) in the corresponding quarter last year.

  • ONGC's gross realizations for 1QFY10 was US$ 61 per barrel (bbl), as compared to US$ 126/bbl in 1QFY09. As for net realisations, i.e. post discounts, the company clocked in at US$ 58/bbl this quarter as opposed to US$ 69/bbl in the corresponding quarter last year.

  • The company has shared under recoveries of the oil marketing companies for 1QFY10 by allowing discount in the prices of crude oil, kerosene and domestic LPG. As a result, the impact on the topline for 1QFY10 was Rs 4 bn (Rs 98 bn in 1QFY09), while the impact on the bottomline was Rs 2 bn (Rs 55 bn in 1QFY09).

  • 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.

  • ONGC reported 9 discoveries during 1QFY10. Out of these, 5 are new prospects while 4 are new pools. MRPL, ONGC’s subsidiary, will set up a polypropylene unit at a total project cost of Rs 18 bn to be executed in 39 months. The capacity of the plant will be 440,000 tonnes per annum

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 1,093, the stock is trading at a multiple of 16.3 times its trailing 12 months standalone earnings. We would not read too much into the YoY decline in ONGC’s bottomline for 1QFY10, due to the high base effect of the company’s 1QFY09 results, which was the company’s best ever quarterly performance. At the current price however, the stock does not offer the margin of safety we look for. As such we would advice against adding fresh positions at this juncture.

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