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ONGC: The black gold rush…

Oct 29, 2004

Introduction to results
India’s largest oil exploration and production major, ONGC, has announced its 2QFY05 results. The company has recorded an impressive topline growth of 36% during the quarter while the bottomline has improved by 20% YoY. The growth numbers for the topline and bottomline are 34% and 15% respectively for 1HFY05.

What is the company’s business?
ONGC is the country’s largest oil exploration company accounting for over 80% of the oil production and 90% of gas production in the country. The company has been eyeing the global markets now for oil equity abroad through its subsidiary ONGC Videsh and is well on track to secure 20 MMTPA (million metric tonnes per annum) of oil and oil equivalent gas abroad by 2020. Having said that, it also has downstream refining interests through subsidiary MRPL, which has witnessed a major turnaround in fortunes since the takeover by ONGC.

(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Net sales 86,616 118,162 36.4% 165,285 221,105 33.8%
Expenditure 36,447 54,575 49.7% 68,870 105,990 53.9%
Operating profit (EBDITA) 50,169 63,587 26.7% 96,415 115,115 19.4%
EBDITA margin (%)57.9%53.8% 58.3%52.1% 
Other income 4,639 4,731 2.0% 7,400 7,751 4.7%
Interest 101 23 -77.4% 142 105 -26.4%
Depreciation 12,980 15,335 18.1% 25,633 31,569 23.2%
Profit before tax 41,727 52,961 26.9% 78,040 91,192 16.9%
Tax 13,477 19,122 41.9% 28,445 34,271 20.5%
Profit after tax/(loss) 28,250 33,839 19.8% 49,595 56,921 14.8%
Net profit margin (%)32.6%28.6% 30.0%25.7% 
No. of shares (m) 1,425.9 1,425.9   1,425.9 1,425.9  
Diluted earnings per share (Rs)* 79.2 94.9   69.6 79.8  
Price to earnings ratio (x)   8.4    10.0  
(* annualised)      

What has driven performance in 1QFY05?
Sales:  Post-dismantling of APM in FY02, ONGC has been able to sell its crude oil at import parity prices. Although the company was subject to subsidies on gas and crude oil, the realizations have improved dramatically. Given the current spike in crude oil prices, the topline growth of 36% is largely due to higher prices of crude. As per our estimates, the realizations are likely to be about US$ 40 per barrel (after accounting for the subsidies) in the current quarter as against US$ 29 in FY04. But for the subsidy burden of Rs 17.8 bn during the quarter, the topline could have been much better.

 2QFY042QFY051HFY04 1HFY05
Purchases0.0%9.9%0.0%11.3%
Consumption of Raw materials0.5%0.3%0.6%0.2%
Staff expenditure3.2%2.4%3.0%2.7%
Statutory levies24.6%21.6%25.4%22.0%
Other expenditure13.7%12.0%15.7%11.7%

Operating margins:  The operating margins have actually declined by over 400 basis points during 2QFY05 as compared to the corresponding period last fiscal. This could be attributed to the under-recoveries on LPG and kerosene, while at the same time, high drilling activity (encouraged by high crude oil prices) resulted in higher expenditure.

Net profit:  The bottomline growth of 20% during 2QFY05 is largely a trickle down impact of a strong topline on the back of high product prices. Also the company was able to reduce its interest obligations by a sharp 77%.

Quarterly trend3QFY044QFY041QFY052QFY04
Sales 72,277 83,077 102,943 118,162
(%) YoY growth 14.9%23.9%14.8%
Op. profits 37,739 42,474 51,527 63,587
(%) YoY growth 12.5%21.3%23.4%
Net profits 17,185 19,864 23,082 33,839
(%) YoY growth 15.6%16.2%46.6%

Over the last four quarters:  The last four quarters have seen a consistent rise in the topline, while the bottomline has also shown a similar trend. This can be attributed to the fact that crude prices have witnessed a rise during the same period in the international markets and ONGC has been a beneficiary of the same. But for the subsidy sharing arrangement, the numbers would have been more impressive.

What to expect?
At Rs 799, the stock is trading at a price to earnings multiple of 10x 1HFY05 annualized earnings. Given that the company is aggressively eyeing international oil fields and is also investing in redevelopment of its aging Bombay High and Cambay fields, the company is on the right track, given its limitations. Further, huge investments have been lined up for deep-water exploration. Although, the first well dug over 3,000 meters was a dry well, the company is optimistic about its success in the deep-water exploration. Also, investments have been lined up for MRPL, while the Sakhalin project is likely to commence production from next fiscal, which would boost the company’s share of energy in the country. However, given the huge capex plans, execution risks do exist.

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