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ONGC: A good bounce back

Jul 28, 2004

Introduction to results
Upstream major, ONGC, has announced its 1QFY05 results, reporting an impressive 31% YoY growth in the topline while the bottomline has improved by 33% YoY (before allocation of subsidies to 1QFY04). This performance is backed by high crude oil prices. However, bottomline could have been boosted further but for the subsidies sharing agreement, under which ONGC had to take a hit of nearly Rs 4.8 bn.

(Rs m) 1QFY04 1QFY05 Change
Net sales 78,669 102,943 30.9%
Other income 2,679 3,020 12.8%
Expenditure 33,790 51,416 52.2%
Operating profit (EBDITA) 44,880 51,527 14.8%
Operating profit margin (%) 57.0% 50.1%  
Interest 41 82 99.8%
Depreciation 11,204 16,234 44.9%
Profit before tax 36,313 38,232 5.3%
Tax 14,968 15,150 1.2%
Profit after tax/(loss) 21,345 23,082 8.1%
Net profit margin (%) 27.1% 22.4%  
No. of shares (m) 1,425.9 1,425.9  
Diluted earnings per share (Rs)* 59.9 64.7  
P/E ratio (x)   10.5  
(* annualised)      

Company background
ONGC is India's flagship upstream company involved in exploration and production of oil and gas not only confined to the domestic boundaries but also spread globally with the help of its subsidiary ONGC Videsh (OVL). Since FY02, the company has been able to sell crude at import parity levels as against the earlier US$ 16 per barrel, as fixed by the government. It has four refineries, of which MRPL has substantial capacity. MRPL is likely to be the retail face given the fact that ONGC now plans to enter the downstream business of fuel retailing and marketing.

What has driven performance in 1QFY05?
Sales: Strong topline growth has been a result of robust international crude oil prices. To put things in perspective, the Indian crude oil basket touched nearly US$ 36 per barrel as compared to an average of nearly US$ 29 per barrel in FY04. The subsidy sharing agreement, as announced by the government, has created a dent of nearly Rs 8.2 bn by way of discounts on crude oil, kerosene and LPG (Liquefied petroleum gas).

Expenditure break-up
(%) of sales 1QFY04 1QFY05
Purchases 0.0% 12.9%
Raw materials consumed 0.7% 0.1%
Staff cost 2.8% 3.1%
Statutory Levies 26.3% 22.5%
Other expenditure 13.2% 11.4%

Operating margins: Although the margins have dipped significantly during 1QFY05 vis--vis the corresponding period last fiscal, this is largely due to the traded goods component, which were not present during 1QFY04. Higher staff costs can be attributed to a provision for VRS towards the employees accounting for nearly Rs 750 m. Margins could have been further depressed on account of subsidies but for the robust crude oil prices.

Net profit: ONGC witnessed a decent 8% YoY growth in bottomline on the back of high product prices. The bottomline growth could have been better but for the subsidies, which resulted in an after tax under-recovery of nearly Rs 4.8 bn. Also, the figures for 1QFY04 do not include the subsidy burden as the directive for subsidy sharing agreement was introduced in 3QFY04. However, the entire effect has been shown in FY04 results. In case, the amount is accounted for in the appropriate period, the bottomline shows an impressive growth of 33%.

Over the last four quarters: The last four quarters have witnessed a major dip in ONGC's performance and this is largely due to the fact that the company has had to account for subsidies on LPG and kerosene as per the subsidy sharing agreement. However, during 1QFY05, the company has witnessed change in fortunes on account of record high crude realization.

What to expect?
The stock is currently trading at Rs 683, implying a P/E multiple of 10.5x annualized 1QFY05 earnings. We believe, going forward, with its entry into the entire spectrum of the hydrocarbons value chain (petrochemicals, gas-based power plants, LNG terminals and retail marketing of fuels), ONGC is set to compete against the global majors. Although subsidies remain a major concern. Further, OVL's successful performance in acquiring oil equity abroad adheres well for the company in the long run. ONGC has planned huge capex for re-development of its ageing Mumbai High fields and has also planned to expand capacities of its refineries such as MRPL, so as to foray into the retail business. This is likely to benefit the company in the long-term.

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