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ONGC: Realisations outgrow subsidy - Views on News from Equitymaster
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ONGC: Realisations outgrow subsidy
Jul 29, 2008

Performance summary
  • Standalone topline grows by 47% YoY during 1QFY09 due to higher price realisation.

  • EBITDA margin increase to 58.6% during the quarter.

  • Other income grows by 25% YoY in 1QFY09.

  • Excluding extraordinary item, standalone bottomline registers a growth of 43% YoY during the quarter.



Standalone financial snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 136,877 200,522 46.5%
Expenditure 57,654 82,968 43.9%
Operating profit (EBDITA) 79,223 117,554 48.4%
EBDITA margin (%) 57.9% 58.6%  
Other income 8,388 10,500 25.2%
Interest 48 38 -19.8%
Depreciation 17,546 27,970 59.4%
Profit before tax 70,018 100,046 42.9%
Extraordinary item - (434)  
Tax 23,913 34,117 42.7%
Profit after tax/(loss) 46,105 65,495 42.1%
Net profit margin (%) 33.7% 32.7%  
No. of shares (m) 2,138.9 2,138.9  
Diluted earnings per share (Rs)*   87.1  
Price to earnings ratio (x)*   11.5  
* On trailing twelve months basis

What has driven performance in 1QFY09?
  • ONGC’s gross realisation in respect of crude oil during 1QFY09 was US$ 126 per barrel, up from US$ 72 per barrel in 1QFY08. The net realisation (after discounts) was US$ 69 per barrel as against US$ 50 in 1QFY08.

  • ONGC shared the under-recoveries of the oil marketing companies for 1QFY09 by allowing discount in the prices of crude oil, PDS kerosene and domestic LPG. As a result, its topline for 1QFY09 was lower to the tune of Rs 98 bn (Rs 36 bn in 1QFY08), while the bottomline was lower by Rs 55 bn.

  • The company produced 6.41 m tonnes (MMT) of crude oil during 1QFY09, marginally higher than 6.38 MMT produced during 1QFY08. Natural gas production during 1QFY09 stood at 5.63 bn cubic meters (BCM) as against 5.5 BCM in 1QFY08.

    Cost break-up

    (Rs m) 1QFY08 1QFY09 Change
    Raw materials 13,554 27,706 104.4%
    % sales 9.9% 13.8%  
    Staff cost 2,543 2,897 13.9%
    % sales 1.9% 1.4%  
    Statutory levies 28,991 31,353 8.1%
    % sales 21.2% 15.6%  
    Other expenditure 12,566 21,013 67.2%
    % sales 9.2% 10.5%  
    Total cost 57,654 82,968 43.9%
    % sales 42.1% 41.4%  

  • ONGC will produce & supply 6 million standard cubic meters per day of natural gas from Tripura gas field, at a total estimated capital cost of Rs 44 bn, in 3 phases. The production and revenue generation would commence during the current fiscal. The company will develop the North Tapti field at an estimated expenditure of Rs 6 bn. The project is expected to be completed by 2011. The four discoveries in the Barmer basin of Rajasthan – Mangala, Aishwariya, Raageshwari and Saraswati (MARS), where ONGC has a 30% participating interest (with Cairn India being the other party), will be developed simultaneously. The estimated capital expenditure for the development of these discoveries is Rs 60 bn. The company’s share amounts to Rs 18 bn. These fields are expected to produce 286 m barrels of oil till 2020. The company’s share will amount to 86 m barrels out of this.

  • Extraordinary items represent Rs 430 m (net of tax expense) on account of final settlement of the insurance claim in respect of flood (during August 2006) damage compensation for Hazira gas complex, after adjustment of net book value of the damaged assets.

  • The company will enter into a memorandum of understanding with the Uranium Corporation of India, for exploration and exploitation of Uranium.

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 has benefited from the surging crude prices as is evident from the increase in its net realisations by US$ 19 per barrel from US$ 50 in 1QFY08 to US$ 69 in 1QFY09. However, the discount per barrel during the same period has grown by US$ 35 per barrel from US$ 22 to US$ 57. The manner in which discounts are notified does not provide topline visibility for the company even in extremely favourable global conditions.

At the current market price of Rs 1,000, the stock is trading at a multiple of 6.7 times our FY10 estimated earnings. We shall soon update our view on the stock.

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