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ONGC: Shines on high oil & gas prices - Views on News from Equitymaster
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ONGC: Shines on high oil & gas prices
Nov 1, 2010

ONGC has announced its 2QFY11 results. The company has reported a 20% YoY and 6% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Standalone topline increase by 20% YoY during 2QFY11 on account of higher oil and gas prices.
  • EBITDA margins expand to 61% during the period from 59% in 2QFY10.
  • Other income declines by 9% during 2QFY11.
  • Standalone bottomline registers a growth of 6% YoY during 2QFY11 on account of an increase in topline, higher operating margins and lower interest costs.

Financial performance snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales    153,379    184,303 20.2%    304,740       322,533 5.8%
Expenditure      63,571      71,085 11.8%     117,354       127,383 8.5%
Operating profit (EBDITA)      89,808     113,218 26.1%    187,387       195,150 4.1%
Operating profit margin (%) 58.6% 61.4%   61.5% 60.5%  
Other income         9,930         9,062 -8.7%       17,809          13,134 -26.3%
Interest                35                  9 -74.3%                 96 37 -61.9%
Depreciation       23,561      44,001 86.8%       55,350          75,143 35.8%
Profit before tax      76,142     78,270 2.8%    149,750       133,104 -11.1%
Tax      25,246      24,382 -3.4%       50,374         42,605 -15.4%
Profit after tax/(loss)      50,896      53,888 5.9%       99,376         90,499 -8.9%
Net profit margin (%) 33.2% 29.2%   32.6% 28.1%  
No. of shares            2,138.9         2,138.9  
Diluted earnings per share (Rs)*                       74.2  
P/E ratio (x)*         17.6  
* On a trailing 12 months basis

What has driven performance in 2QFY11?
  • ONGC's standalone topline increased by 20% YoY during 2QFY11 on account of higher oil and gas prices post the government deregulation. The government allowed the company to more than double gas prices to prevent the constant bleeding of state refiners. The company produced 6.85 m tonnes of crude oil during the quarter (higher by 3% YoY) and 6.46 bn cubic meters of gas (lower by 3% YoY).

  • ONGC’s subsidy burden during 2QFY11 increased 15% YoY to Rs 30.2 bn from Rs 26.3 bn in 2QFY10. The gross realisation from crude oil was US$ 79.21 per barrel during the quarter, 12% higher than the US$ 70.49 per barrel during 2QFY10. Subsidy per barrel increased by 17% during the quarter to US$ 16.5 per barrel from US$ 14.1 per barrel during the same period last year.

  • The company has had one more oil discovery in Cambay Basin, Western Onshore.

  • ONGC's raw materials cost have become insignificant after the discontinuation of sale of MRPL products. ONGC's other expenditure declined by 6% YoY during 2QFY11.

    Cost break-up
    (Rs m) 2QFY10 2QFY11 Change
    Raw materials 1297.6 1460.2 13%
    % sales 0.85% 0.79%  
    Staff cost 2,847 3,059 7%
    % sales 1.86% 1.66%  
    Statutory levies 29,846 38,696 30%
    % sales 19.46% 21.00%  
    Other expenditure 29,580 27,869 -6%
    % sales 19.29% 15.12%  
    Total cost 63,571 71,085 12%
    % sales 41.45% 38.57%  

  • At the bottomline level, the higher subsidy burden and royalty expense was offset by higher oil & gas prices. As a result, the company's net profit registered a growth of 6% YoY during 2QFY11.

What to expect?
On the volumes front, ONGC faces difficulties in maintaining the levels of production from its ageing fields. New, quality discoveries will be a key to volume growth. On the margins front, the company continues to be subject to the ad hoc subsidy sharing mechanism. The manner in which discounts are notified does not provide topline visibility for the company even in extremely favourable global conditions. However, the recent increase in APM gas, auto and kitchen fuel prices and the consistently good performance of ONGC are positives.

In our view, the company presents the best opportunity in India to participate in the movement of crude prices, provided sufficient margin of safety is sought in the buy price.

At the current market price of Rs 1,303.3, the stock is trading at a multiple of 8.7 times our estimated FY13 earnings. At present valuations, the stock does not offer the margin of safety we look for. As such we would advice against adding fresh positions at this juncture.

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