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ONGC: Exploring new avenues - Views on News from Equitymaster
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  • Oct 29, 2003

    ONGC: Exploring new avenues

    ONGC, the largest public sector company in the country, announced its 2QFY04 results yesterday and has reported topline and bottomline growth of 16% and 24% respectively. Also, improved operational efficiencies have helped the company to improve upon its operating margins for the quarter by 480 basis points. For the half-year ended September 2003, ONGCís sales and profit growth have been 15% and 17% respectively while the margins have improved by 470 basis points.

    Financial performance: A snapshot
    Rs m 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
    Net Sales 74,461 86,616 16.3% 143,790 165,285 14.9%
    Other Income 6,300 4,464 -29.2% 11,855 7,142 -39.8%
    Expenditure 36,063 37,765 4.7% 69,017 71,554 3.7%
    Operating Profit (EBDIT) 38,398 48,851 27.2% 74,773 93,731 25.4%
    Operating Profit Margin (%) 51.6% 56.4%   52.0% 56.7%  
    Interest 72 101 40.7% 920 142 -84.5%
    Depreciation 9,805 11,487 17.2% 19,319 22,691 17.5%
    Profit before Tax 34,821 41,727 19.8% 66,389 78,040 17.5%
    Tax 12,055 13,477 11.8% 23,815 28,445 19.4%
    Profit after Tax/(Loss) 22,766 28,250 24.1% 42,574 49,595 16.5%
    Net profit margin (%) 30.6% 32.6%   29.6% 30.0%  
    No. of Shares 1,426.0 1,426.0   1,426.0 1,426.0  
    Diluted Earnings per share* (Rs) 63.9 79.2   59.7 69.6  
    P/E Ratio (x)   7.3     8.3  
    (* annualised)            

    For the September quarter, the growth in ONGCís topline was contributed by growth in its offshore (75% of total revenues) and onshore (25%) revenues. While offshore revenues improved by 15%, the growth in onshore revenues was relatively higher at 16%. While PBIT margins have improved for both the segments, it was more prominent onshore (improvement of 800 basis points). The improvement in margins and, consequently, profitability was a result of decline (as percent of sales) in raw material and staff expenses, where the decline was to the tune of 22% and 44% respectively.

    Segment-wise performance
      2QFY03 2QFY04 Change
    Offshore revenues* 57,079 65,777 15.2%
    PBIT margins 49.9% 51.9%  
    Onshore revenues* 19,510 22,588 15.8%
    PBIT margins 16.6% 24.6%  
    Total revenues* 76,588 88,364 15.4%
    Overall PBIT margins 41.4% 44.9%  
    *Not adjusted for excise duty

    ONGC has benefited from the recent surge in global crude prices due to reduction in total production quota announced by the OPEC. It is to be noted that while ONGC accounts for around 80% of the crude oil and natural gas produced in the country, these products respectively form 71% and 15% of the companyís total revenues.

    Post the dismantling of the administered price mechanism, ONGC obtains full market price for selling crude oil to refineries. However, in recent times, there have been some concerns for the company regarding sharing the subsidy burden with public sector oil marketing companies (BPCL and HPCL) for domestic LPG and kerosene that they sell through the public distribution system (PDS). And if the latest directive (announced today) by the petroleum ministry is something to go by, ONGC would share the subsidy burden with these marketing companies, which would be to the tune of around Rs 21 bn, on account of such sales made by these oil-marketing companies in FY03.

    As a counter to this, and to grow the overall business, ONGC, in recent times, has been aggressively foraying into the international markets for investments in oilfields in several countries. In one such initiative, ONGC Videsh (the overseas investment arm of ONGC) entered into a couple of agreements in Sudan where, one, the company would lay a 714 km oil pipeline (for US$ 250 m) and, two, it would renovate Sudanís state refinery (for US$ 750 m).

    At the current price of Rs 578, the stock is trading at a P/E multiple of 8.3x its annualised 1HFY04 earnings. In FY04, ONGC is aggressively looking to increase its crude oil supplies through increased focus on both the domestic and foreign markets. The company, as a part of this initiative, is planning to incur a capital expenditure of around Rs 160 bn in FY04. Out of this amount, while around Rs 100 bn would be incurred in domestic exploration, the remaining Rs 60 bn would be incurred in acquiring equity investments abroad. The company has also won 15 of the 21 oil and gas exploration blocks in the fourth round of New Exploration Licensing Policy (NELP) and this would entail greater capex for ONGC going forward.

    Through all this and much more, despite the fact that the company is moving on its path towards higher growth, investors need to practice caution based on the high degree of risks that are involved in the exploration business. Also, the benefits of these investments would take time to accrue for the company. As such, investors need to take a long-term view.



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