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ONGC: Higher net realizations support performance
Aug 26, 2015

Oil and Natural Gas Corporation Ltd (ONGC) has announced results for the quarter ending June 2015. The topline for the quarter grew by 4.4% year on year (YoY) while bottomline grew by 14.2% YoY, on a standalone basis.

Performance summary
  • Net sales for the quarter grew by 4.4% year on year (YoY).
  • The operating profits for the quarter were up 19.3% YoY with margins at 46.1% (versus 40.3% in 1QFY15).
  • The firm registered a growth of 14.2% YoY in the bottomline during the quarter with net profit margins at 24.1% versus 22.0% in 4QFY14.
  • Unlike in the preceding quarter when ONGC did not extend any discount to oil marketing companies, the company had to share subsidy worth Rs 11.3 bn, down 91% YoY. This lowered the bottomline by Rs 6.3 bn (versus around Rs 74 bn in 1QFY15).
  • Gross price for crude oil from nominated blocks during the quarter stood at US$ 63.8 per barrel, down from US$ 109.48 per barrel in 1QFY15. Net realization, however, improved from US$ 47.15 per barrel in last year to around US$ 58.2 per barrel, up 24% YoY. The subsidy share per barrel of crude oil declined from US$ 62 per barrel in the previous year to US$ 4.9 per barrel during the quarter.
  • The total crude oil production from ONGC and JVs stood at 6.136 MMT for the quarter, up 1.3% YoY. Of this, production from ONGC alone stood at 85%, and grew by 2.2% YoY while JV's production declined by 3.8% YoY. Overall natural gas production declined by 3.6% YoY. The production was down both from ONGC's and JV's fields, by 3% YoY and 12.3% YoY respectively.
  • Overall crude oil sales grew by 1.2% YoY. Of this, crude oil sales by ONGC alone (81% share) was up by 3.1% YoY while it declined by 6.1% YoY for JVs. Gas sales declined by 5.4% YoY - 4.4% decline from ONGC's fields and 23.4% YoY decline in sales from PSC JVs. The sales for value added products declined by 8.4% YoY.

Financial snapshot
Rs m 1QFY15 1QFY16 Change (%)
Net sales 217,470 226,958 4.4%
Other operating income 1,043 1,294 24.1%
Total income 218,513 228,253 4.5%
Expenditure 129,870 122,425 -5.7%
Operating profit (EBDITA) excl OI 87,600 104,534 19.3%
Operating profit margin (%) 40.3% 46.1%  
Other income 9,995 9,356 -6.4%
Interest 1 31 2269.2%
Depreciation 25,623 30,350 18.4%
Profit before tax 71,970 83,509 16.0%
Profit before tax margins (%) 33.1% 36.8%  
Tax 24,152 28,910 19.7%
Profit after tax 47,818 54,599 14.2%
Net profit margin (%) 22.0% 24.1%  
No. of shares   8,555  
Diluted earnings per share (Rs)*   21.5  
P/E ratio (x)*   10.7  
*On trailing 12 months basis

What has driven performance in 1QFY16?
  • Sales growth in the quarter was supported by lower subsidy burden (YoY) in a weak crude price scenario leading to higher realisations and higher oil output. However, some of the products and crude oil is sold at market price and to that extent weak price scenario had an adverse impact on financials. As per the management, the ratio is as high as 28%.

  • The operating profit margin improved to 46.1% from 40.3% in the corresponding quarter last year as decline in the exploration costs write off more than offset the increase in other expense (both as % of sales).

    Cost breakup
    Rs m 1QFY15 1QFY16 Change (%)
    Cost of materials consumed -720 196 nm
    as a % of sales -0.3% 0.1%  
    Employee benefit expenses 4,067 4,757 16.9%
    as a % of sales 1.9% 2.1%  
    Statutory levies 58,271 56,626 -2.8%
    as a % of sales 26.8% 25.0%  
    Other costs 29,977 45,389 51.4%
    as a % of sales 13.8% 20.0%  
    Exploration costs w/off 38,275 15,457 -59.6%
    as a % of sales 17.6% 6.8%  
    Total costs 129,870 122,425 -5.7%
    as a % of sales 59.7% 53.9%  

  • The bottomline grew by 14.2% YoY on the back of an improved operating performance. The growth was restricted to some extent due to higher effective tax rate and decline in other income. The depreciation expense also grew by 18.4% YoY.
What to expect?

For an oil exploration company, declining crude price is an unfavorable scenario. However, on account of subsidy sharing system on fuel under recoveries, ONGC is a company that has benefitted in a scenario of lower crude prices. As per the management, on a net basis, the company is likely to gain on a YoY basis in a low crude price (even sub US$50 per barrel) scenario.

A key issue that the company has been facing is decline /stagnation in crude oil production volumes. The company has managed a growth of 2.2% YoY in production from nominated blocks this quarter. The management expects new projects and development schemes to support volumes in the future - both in the oil and gas segments.

The stock price of ONGC has witnessed a significant correction since our recommendation due to the overhang of low crude price. While the negatives are already priced in, we believe that a clear subsidy sharing formula and fuel reforms could lead to the re rating of the stock. Currently, the stock offers a dividend yield of 4.1% (based on dividends in FY 15) and is available at a PE multiple of 10.7 times (on a trailing 12 months basis). We maintain a Buy view on the stock.

Also, we would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation. We suggest that no single large cap stock should comprise more than 5-6% of your total stock portfolio

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