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ONGC: Lower subsidy aids bottomline - Views on News from Equitymaster
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ONGC: Lower subsidy aids bottomline
Nov 2, 2009

Performance summary
  • Standalone topline declines by 13% YoY during 2QFY10.
  • EBITDA margin increases to 58% during the quarter from 49% in 2QFY09 as trading of MRPL products, which typically have lower margins, have been discontinued.
  • Other income declines by 18% YoY in 2QFY10.
  • Standalone bottomline registers a growth of 6% YoY during the quarter on account of higher operating margins and lower interest costs.


Standalone financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales * 174,996 151,916 -13.2% 376,456 301,370 -19.9%
Expenditure * 89,942 63,571 -29.3% 172,911 117,354 -32.1%
Operating profit (EBDITA) 85,054 88,345 3.9% 203,546 184,016 -9.6%
EBDITA margin (%) 48.6% 58.2%   54.1% 61.1%  
Other income 13,970 11,393 -18.4% 23,532 21,180 -10.0%
Interest 974 35 -96.4% 1,013 96 -90.5%
Depreciation 21,832 23,561 7.9% 49,802 55,350 11.1%
Profit before tax 76,217 76,142 -0.1% 176,263 149,750 -15.0%
Tax 28,133 25,246 -10.3% 62,250 50,374 -19.1%
Extraordinary item   -   434 -  
Profit after tax/(loss 48,084 50,896 5.8% 114,447 99,376 -13.2%
Net profit margin (%) 27.5% 33.5%   30.4% 33.0%  
No. of shares (m)         2,139  
Diluted earnings per share (Rs)**         68  
Price to earnings ratio (x)**        16.6  
* 2QFY09 sales and expenditure include trading of MRPL products, now discontinued.
** On trailing twelve months basis

What has driven performance in 2QFY10?
  • ONGC’s topline declined by 13% YoY during 2QFY10. The company produced 6.63 m tonnes of crude oil during the quarter (lower by 3.4% YoY) and 6.45 bn cubic meters of gas (higher by 0.3% YoY).

  • ONGC’s subsidy burden during 2QFY10 declined 79% YoY to Rs 26.3 bn from Rs 126.6 bn in 2QFY09. The gross realisation from crude oil was US$ 70.5 per barrel during the quarter, 31% lower than the US$ 119.4 per barrel during 2QFY09. However, subsidy per barrel fell by 81% during the quarter to US$ 14 per barrel from US$ 73 per barrel during the same period last year.

  • The company made 5 discoveries during 2QFY10 and 4 more in October, which have been notified to Directorate General of Hydrocarbons.

  • ONGC’s raw material costs declined by 16% YoY (as a percentage of sales) during 2QFY10 primarily on the back of discontinuation of MRPL products.

    Cost break-up
    (Rs m) 2QFY09 2QFY10 Change
    Raw materials 29,537 864 -97.1%
    % sales 16.9% 0.6%  
    Staff cost 2,761 2,847 3.1%
    % sales 1.6% 1.9%  
    Statutory levies 31,304 29,846 -4.7%
    % sales 17.9% 19.6%  
    Other expenditure 26,341 30,014 13.9%
    % sales 15.1% 19.8%  
    Total cost 89,942 63,571 -29.3%
    % sales 51.4% 41.8%  

  • ONGC plans to invest Rs 247 bn and Rs 265 bn for FY10 and FY11 respectively. The company has lined up projects for enhancement of production of oil &gas from both Offshore and Onshore assets. Besides, the company plans to put its discoveries on the East Coast on production on a fast track basis through an integrated East Coast hub. It has bagged 17 blocks in NELP- VIII (14 blocks as operator and 3 as partner). The total number of NELP blocks with the company currently is 99 (86 as operator) besides 69 nomination blocks.

What to expect?
On the volumes front, ONGC faces difficulties in maintaining the levels of production from its ageing fields. 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 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 1,133, the stock is trading at a multiple of 16.6 times its trailing 12 months standalone earnings. We would not read too much into the YoY decline in ONGC’s topline for 2QFY10, due to the high base effect of the company’s 2QFY09 results. At the current price however, 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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