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ONGC: Subsidy hurts bottomline - Views on News from Equitymaster

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ONGC: Subsidy hurts bottomline

Jul 31, 2010

ONGC has announced its 1QFY11results. The company has reported a 9% YoY and 25% YoY decline in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone topline declines by 9% YoY during 1QFY11 on account of higher subsidy burden.
  • EBITDA margin contracts to 59% during the period from 65% in 1QFY10 primarily due to higher other expenditure.
  • Other income declines by 48% during 1QFY11.
  • Standalone bottomline registers a decline of 25% YoY during 1QFY11 on account of a fall in topline, lower operating margins and other income.

Standalone financial snapshot
(Rsm) 1QFY10 1QFY11 Change
Net sales 151,361 138,230 -8.7%
Expenditure 53,783 56,298 4.7%
Operating profit (EBDITA) 97,578 81,932 -16.0%
EBDITA margin (%) 64.5% 59.3%  
Other income 7,880 4,072 -48.3%
Interest 61 28 -54.8%
Depreciation 31,789 31,143 -2.0%
Profit before tax 73,608 54,834 -25.5%
Tax 25,129 18,223 -27.5%
Profit after tax/(loss) 48,479 36,611 -24.5%
Net profit margin (%) 32.0% 26.5%  
No. of shares (m) 2,139    
Diluted earnings per share (Rs)* 73    
Price to earnings ratio (x)*          17.1    
* On trailing twelve months basis

What has driven performance in 1QFY11?
  • ONGC's standalone topline declined by 9% YoY during 1QFY11 on account of a higher subsidy burden. The company shared the under-recoveries of oil marketing companies by allowing discount in the prices of crude oil, Kerosene and LPG. As a result, the company's sales revenue was lower by Rs 55 bn in 1QFY11 as compared to Rs 4 bn in 1QFY10.

  • ONGC's raw materials cost have become insignificant after the discontinuation of sale of MRPL products. ONGC's other expenditure increased by 4% YoY (as a percentage of sales) during 1QFY11.

    Cost break-up
    (Rs m) 1QFY10 1QFY11 Change
    Raw materials (52) 473  
    % sales 0.0% 0.3%
    Staff cost 2,512 2,789 11.0%
    % sales 1.7% 2.0%  
    Statutory levies 30,366 28,671 -5.6%
    % sales 20.1% 20.7%
    Other expenditure 20,957 24,365 16.3%
    % sales 13.8% 17.6%  
    Total cost 53,783 56,298 4.7%
    % sales 35.5% 40.7%

  • At the bottomline level, the higher subsidy burden affected ONGC by Rs 31 bn in 1QFY11 as compared to Rs 2 bn in 1QFY10. As a result, the company's net profit registered a decline of 25% YoY during 1QFY11.

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 recent increase in APM gas, auto and kitchen fuel prices and the consistently good performance of ONGC are positives.

In our view, 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 1,243, the stock is trading at a multiple of 8.2 times our estimated FY13 earnings. At present valuations, 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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