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ONGC: Unpredictable subsidy takes toll

Nov 11, 2008

Performance summary
  • Standalone topline grows by 13% YoY during 2QFY09 due to higher price realisation.
  • EBITDA margin declines to 49% during the quarter.
  • Other income grows by 22% YoY in 2QFY09.
  • Standalone bottomline registers a decline of 6% YoY during the quarter.
  • For 1HCY09, topline clocks a growth of 28% while the bottomline grows 18%.

Standalone financial snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 154,826 174,996 13.0% 293,518 376,456 28.3%
Expenditure 69,986 89,942 28.5% 127,640 172,911 35.5%
Operating profit (EBDITA) 84,840 85,054 0.3% 165,878 203,546 22.7%
EBDITA margin (%) 54.8% 48.6%   56.5% 54.1%  
Other income 11,413 13,970 22.4% 17,986 23,532 30.8%
Interest 305 974 219.6% 352 1,013 187.3%
Depreciation 19,871 21,832 9.9% 37,417 49,802 33.1%
Profit before tax 76,077 76,217 0.2% 146,094 176,263 20.7%
Extraordinary item - -   - 434  
Tax 25,102 28,133 12.1% 49,014 62,250 27.0%
Profit after tax/(loss) 50,975 48,084 -5.7% 97,080 114,447 17.9%
Net profit margin (%) 32.9% 27.5%   33.1% 30.4%  
No. of shares (m)         2,139  
Diluted earnings per share (Rs)*         86  
Price to earnings ratio (x)*         8.5  
* On trailing twelve months basis

What has driven performance in 2QFY09?
  • ONGC’s gross realisation in respect of crude oil during 2QFY09 was US$ 119 per barrel, up from US$ 78 per barrel in 2QFY08. The net realisation (after discounts) was US$ 47 per barrel as against US$ 56 in 2QFY08.

  • ONGC shared the under-recoveries of the oil marketing companies for 2QFY09 by allowing discount in the prices of crude oil, PDS kerosene and domestic LPG. As a result, its topline for 2QFY09 was lower to the tune of Rs 127 bn, while the bottomline was lower by Rs 71 bn.

  • The company produced 6.85 m tonnes (MMT) of crude oil during 2QFY09, lower than 7.0 MMT produced during 2QFY08. Natural gas production during 2QFY09 stood at 6.43 bn cubic meters (BCM) as against 6.35 BCM in 2QFY08.

  • Extraordinary items represent Rs 430 m (net of tax expense) on account of final settlement of the insurance claim in respect of flood (during August 2006) damage compensation for Hazira gas complex, after adjustment of net book value of the damaged assets.

  • ONGC has budgeted a capital outlay of Rs 196 bn for FY09 and Rs 209 bn for FY10.

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 adhoc subsidy sharing mechanism as is evident from the increase in subsidy from US$ 57 per barrel in Q1FY09 to US$ 73 per barrel in Q2FY09 even though its gross realisations declined from US$ 126 per barrel to US$ 119 during the same time. The manner in which discounts are notified does not provide topline visibility for the company even in extremely favourable global conditions.

    At the current market price of Rs 732 the stock is trading at a multiple of 8.57 times our FY11E estimated earnings. We believe the stock is fairly valued at current levels.

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