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ONGC: Bottomline remains flat
Nov 16, 2013

Oil and Natural Gas Corporation Ltd (ONGC) has announced results for the second quarter of financial year 2013-14. The topline registered 12.7% year on year (YoY) decline during the quarter while bottomline was up by 2.8% YoY. Here is our analysis of the results.

Performance summary
  • Topline for the quarter grew by 12.7% year on year (YoY). For the half year ending September 2013 (1HFY14), the revenues were up 4.1% YoY.
  • The operating profits for the quarter were up by 21.0% YoY with margins at 44.8% (versus 41.7% in 2QFY13). For the half year, the operating profits declined by 7.0% YoY with margins at 40.6%, down from 45.5% in 1HFY13.
  • The firm registered a growth of 2.8% YoY in the bottomline during the quarter with net profit margins at 27.1% versus 29.7% in 2QFY13. For the half year, the net profits declined by 15.8% YoY, with net profit margins at 24.2%, down from 29.9% in 1HFY13.

Financial snapshot
Rs m 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Sales 198,851 224,147 12.7% 400,629 417,236 4.1%
Expenditure 115,956 123,818 6.8% 218,435 247,705 13.4%
Operating profit (EBDITA) 82,895 100,329 21.0% 182,194 169,531 -7.0%
Operating profit margin (%) 41.7% 44.8%   45.5% 40.6%  
Other income 19,011 14,830 -22.0% 29,396 26,791 -8.9%
Interest 31 1 -97.1% 324 3 -99.1%
Depreciation 16,481 24,265 47.2% 36,457 47,590 30.5%
Profit before tax (before exceptional items) 85,394 90,892 6.4% 174,809 148,729 -14.9%
Profit before tax margins (%) before exceptional items 42.9% 40.6%   43.6% 35.6%  
Exceptional items 0 0   0 0  
Profit before tax 85,394 90,892 6.4% 174,809 148,729 -14.9%
Profit before tax margins (%) 42.9% 40.6%   43.6% 35.6%  
Tax 26,429 30,254 14.5% 55,067 47,930 -13.0%
Profit after tax 58,966 60,639 2.8% 119,743 100,798 -15.8%
Net profit margin (%) 29.7% 27.1%   29.9% 24.2%  
No. of shares         8,555  
Diluted earnings per share (Rs)*         22.2  
P/E ratio (x)** 8.3% 10.8%     12.1  
(* on trailing twelve months earnings)

What happened during 2QFY14?
  • The net sales for the quarter grew by 12.7% YoY on the back of better realizations. The net realizations on the sale of crude oil stood at US$ 44.84 per barrel during the quarter, down 3.8% YoY (up 11.2% QoQ). In rupees terms, the net realizations grew by 23.5% QoQ, up 7.8% YoY on the back of rupee depreciation. The sales volumes for oil and gas from ONGC and JVs registered a decline of 1.8% QoQ. During the quarter, ONGC's burden of under recoveries stood at around Rs 138 bn (82.5% of the total burden shared by upstream segment during the quarter), up 11.9% YoY.

  • For the half year, the net realizations stood at US$ 42.56 per dollar, down 8.1% YoY. In rupees terms also, the net realizations declined by 0.8% YoY to Rs 2,515 per barrel. For the half year, ONGC shared a subsidy burden of Rs 264 bn, up 7.1% YoY.

  • The operating profits margins for the quarter improved to 44.8% from 41.7% in 2QFY13. Apart from higher net realizations, the margins received a boost due to decline in the statutory levies , exploration costs write offs and staff expenses(all as percentage of sales). However, the gain was partially offset by increase in 'other costs' and cost of materials consumed.

  • ONGC's net profits grew at a relatively modest rate of 2.8% YoY on account of increase in depreciation, depletion and amortization costs and decline in the other income. The net impact of the subsidy burden on profit after tax stood at Rs 7.6 bn,

    Cost break-up...
    Rs m 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Cost of materials consumed 42 1,196 2753.2% 2,744 1,980 -27.8%
    as a % of sales 0.0% 0.5%   0.7% 0.5%  
    Employee benefit expenses 5,449 4,427 -18.8% 8,753 10,324 17.9%
    as a % of sales 2.7% 2.0%   2.2% 2.5%  
    Statutory levies 55,853 58,242 4.3% 108,532 113,962 5.0%
    as a % of sales 28.1% 26.0%   27.1% 27.3%  
    Other costs 33,820 39,248 16.0% 65,607 85,051 29.6%
    as a % of sales 17.0% 17.5%   16.4% 20.4%  
    Exploration costs w/off 20,793 20,707 -0.4% 32,798 36,389 10.9%
    as a % of sales 10.5% 9.2%   8.2% 8.7%  
    Total costs 115,956 123,818 6.8% 218,435 247,705 13.4%
    as a % of sales 58.3% 55.2%   54.5% 59.4%  
What to expect?
The management has given production guidance (including JV share) of 27.24 million tonnes per annum. The management expects the production to pick up from the next month from marginal fields and cluster fields. The capex for FY14 is expected at around Rs 350 bn.

The subsidy burden continues to drag bottomline and there is further concern regarding the ageing fields. While increase in the gas prices is a positive, the lack of clarity on subsidy burden may limit the benefits for ONGC. At current price of Rs 270, ONGC is trading at a PE (price to earnings ratio) of 12.1 x. While long term prospects of ONGC are bright, the decline in production rate from mature fields remains a concern. There is further concern regarding adhoc nature of subsidies. We maintain Sell recommendation on the stock.

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