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ONGC: A strong quarter
Aug 28, 2014 | Updated on Aug 30, 2014

Oil and Natural Gas Corporation Ltd (ONGC) has announced results for the quarter ending June 2014. The topline registered 13.2% year on year (YoY) decline during the quarter while bottomline was up by 19.1% YoY. Here is our analysis of the results.

Performance summary
  • Topline for the quarter grew by 13.2% year on year (YoY).
  • The operating profits for the quarter were up 28.1 % YoY with margins at 40.6% (versus 35.8% in 1QFY14.
  • The firm registered a growth of 19.1% YoY in the bottomline during the quarter with net profit margins at 21.9% versus 20.8% in 1QFY14.
  • The company has considered a contingent liability worth Rs 123 bn towards the differential in royalties between post discount and pre discount oil prices to state of Gujarat. It has also shown as deposit an amount of Rs 8.6 bn of differential royalty with effect from February 2014.

Consolidated financials
Rs m 1QFY14 1QFY15 Change (%)
Sales 193,089 218,513 13.2%
Expenditure 123,887 129,870 4.8%
Operating profit (EBDITA) 69,203 88,643 28.1%
Operating profit margin (%) 35.8% 40.6% 4.7%
Other income 11,961 8,952 -25.2%
Interest 2.1 1.3 -38.1%
Depreciation 23,325 25,623 9.9%
Profit before tax 57,836 71,970 24.4%
Profit before tax margins (%) 30.0% 32.9% 3.0%
Tax 17,677 24,152 36.6%
Profit after tax 40,160 47,818 19.1%
Net profit margin (%) 20.8% 21.9% 1.1%
No. of shares   8,555  
Diluted earnings per share (Rs)*   26.7  
P/E ratio (x)*   16.3  
*On trailing 12 months basis

What has driven performance in 1QFY15?
  • The sales growth of 13.2% YoY was mainly on account of higher net realizations (US$ 47.2 per barrel) on the sales of crude oil and natural gas. The depreciation in rupee also contributed to higher realizations. However, the oil and gas production for the quarter witnessed a decline. The subsidy contribution for the quarter pulled revenue lower by Rs 132 bn (4.5% YoY). ONGC had to share around 84% of the subsidy burden to be borne by the upstream augment (55%).

  • The operating margins for the quarter increased by 4.7% YoY. The gain in the margins was mainly on account of higher realizations and lower operating expenses. While ONGC witnessed around 144% YoY increase in the exploration write off costs, the same was offset by lower staff costs, statutory levies and other expenses (all as a % of sales).

  • The bottomline for the quarter grew by 19.1% on the back of better realizations and lower operating expenses. However, the growth was pulled down by subsidy expenses and higher dry well exploratory write offs.
What to expect?
Ageing fields remain a concern for the company. This quarter also, ONGC witnessed a decline in volumes. The management in its call has maintained the production guidance. ONGC may have to pay royalty to Gujarat Government at market prices, instead of net realizations that company has been considering since April 2008. The matter is sub judice and an unfavorable verdict will negatively impact the company.

A decline in the under recoveries on diesel is a positive for the company. Going forward, hike in gas prices and complete deregulation of diesel will be the key triggers for the stock. At current prices, the stock of ONGC is trading at a price to earnings multiple of 16 times. The stock price has risen by 47% in the year till date, mainly on the back of reform expectations and divestment plans. We are in the process of reviewing our estimates for ONGC and will update subscribers with the target price soon. Until then, we recommend not to buy the stock at the current price levels.

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