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ONGC : Bottomline drops 34% - Views on News from Equitymaster

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ONGC : Bottomline drops 34%
Aug 12, 2013

Oil and Natural Gas Corporation Ltd (ONGC) has announced results for the first quarter of financial year 2013-14. The topline registered 4.3% year on year (YoY) decline during the quarter while bottomline was down by 33.9% YoY. Here is our analysis of the results.

Performance summary
  • Topline for the quarter declined by 4.3% YoY.
  • The operating profits for the quarter were down by 30.3% YoY with margins at 35.8% (versus 49.2% in 1QFY13).
  • The firm registered 33.9% YoY decline in the bottomline during the quarter with net profit margins at 20.8% versus 30.1% in 1QFY13.

Financial snapshot
Rs m 1QFY13 1QFY14 Change
Sales 201,778 193,089 -4.3%
Expenditure 102,479 123,887 20.9%
Operating profit (EBDITA) 99,299 69,203 -30.3%
Operating profit margin (%) 49.2% 35.8%  
Other income 10,385 11,961 15.2%
Interest 293 2 -99.3%
Depreciation 19,976 23,325 16.8%
Profit before tax (before exceptional items) 89,415 57,836 -35.3%
Profit before tax margins (%) before exceptional items 44.3% 30.0%  
Exceptional items 0 0 nm
Profit before tax 89,415 57,836 -35.3%
Profit before tax margins (%) 44.3% 30.0%  
Tax 28,638 17,677 -38.3%
Profit after tax 60,777 40,160 -33.9%
Net profit margin (%) 30.1% 20.8%  
No. of shares   8,555  
Diluted earnings per share (Rs)*   25.2  
P/E ratio (x)**   11.0  

What happened during 1QFY14?
  • The net sales for the quarter declined by 4.3% YoY. The sales volumes for crude oil and value added products grew marginally on a year on year basis while gas sales volumes registered a decline. The net realizations on crude oil stood at US$ 40.17 per barrel for the quarter as compared to US$ 45.91 per barrel in 1QFY13 (down 12.5% YoY despite a 5.8% YoY decline in the gross crude oil prices). This was mainly on account of higher compensation to the state run oil marketing companies. In rupees terms, the net realizations on crude oil stood at Rs 2,247 per barrel (down 9.7% YoY). The crude oil sales volumes from joint ventures were marginally up by 1.6% YoY for the quarter. However, the gas sales volumes from JVs declined by 20.9% YoY.

  • The operating profits for the year declined by 30.3% with significant slip in the margins. Apart from lower net realisations, this was mainly on account of increase in the statutory levies (as a % of sales) from 26.1% in 1QFY13 to 28.9% this quarter and increase in other costs (as a % of sales) from 15.8% in 1QFY13 to 23.7% in 1QFY14. The exploration costs (written off) also increased from 5.9% in 1QFY13 to 8.1% this quarter (both as a % of sales).

  • ONGC's net profits declined by around 34% YoY for the quarter on account of high subsidy burden, higher operating expenses and increase in depreciation and amortization charges. The subsidy discount during the quarter stood at US$ 62.7 per barrel and dragged bottomline by around Rs 71 bn.

    Cost breakup
    Rs m 1QFY13 1QFY14 Change
    Raw materials 2,702 784 -71.0%
    as a % of sales 1.3% 0.4%  
    Staff expenses 3,304 5,897 78.5%
    as a % of sales 1.6% 3.1%  
    Statutory levies 52,679 55,720 5.8%
    as a % of sales 26.1% 28.9%  
    Other costs 31,787 45,803 44.1%
    as a % of sales 15.8% 23.7%  
    Exploration costs written off 12,006 15,682 30.6%
    as a % of sales 5.9% 8.1%  
    Total expenses 102,479 123,887 20.9%
    as a % of sales 50.8% 64.2%  
What to expect?
While the phased deregulation in diesel prices and announcement of gas price hike is a positive development, the rupee depreciation is likely to increase subsidy burden for ONGC. Also, ONGC's share to compensate downstream companies is not yet fixed. An increase in its share could impact profits even in case of overall decline in the under recoveries.

At the current price of Rs 289, the stock is trading at a price to earnings multiple of 6.9 times our estimated FY16 earnings. We maintain a 'Sell' recommendation on the stock

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