ONGC (Q1 FY14)

India Infoline News Service | Mumbai |

Net sales fall 4.3% yoy driven by lower net realizations for crude oil

CMP Rs278, Target Rs330, Upside 18.7%

  • Net sales fall 4.3% yoy driven by lower net realizations for crude oil
  • Discount on crude oil reduced from US$63.27/bbl to US$62.73/bbl
  • Natural gas realization was at Rs8,527/tscm as compared to Rs8,141/tscm in Q1 FY13
  • For Q1 FY14 upstream contribution towards under recoveries is at 60% and ONGC share among upstream companies is at 82.5%
  • We maintain our BUY rating with a lowered 9-month target price of Rs330 mainly to factor in higher under recoveries and possibilities of limited earnings upside from gas price hike   
Result table
(Rs m) Q1 FY14 Q1 FY13 % yoy Q4 FY13 % qoq
Net sales 193,089 201,778 (4.3) 218,299 (11.5)
Purchases (Trading) (10) (9) 14.6 (8) 30.8
Raw material (774) (2,693) (71.3) (1,359) (43.0)
Personnel costs (5,897) (3,304) 78.5 (7,360) (19.9)
Statutory levies (55,720) (52,679) 5.8 (54,874) 1.5
Other overheads (45,803) (31,787) 44.1 (47,359) (3.3)
Operating profit 84,884 111,305 (23.7) 107,338 (20.9)
OPM (%) 44.0 55.2 (1,120) bps 49.2 (521) bps
Depreciation (39,007) (31,981) 22.0 (71,264) (45.3)
Interest (2) (293) (99.3) (1) 320.0
Other income 11,961 10,385 15.2 12,455 (4.0)
PBT 57,836 89,415 (35.3) 48,529 19.2
Tax (17,677) (28,638) (38.3) (14,642) 20.7
Effective tax rate (%) 30.6 32.0
Reported PAT 40,160 60,777 (33.9) 33,887 18.5
PAT margin (%) 20.8 30.1 (932) bps 15.5 528 bps
Ann. EPS (Rs) 18.8 28.4 (33.9) 15.8 18.5
Source: Company, India Infoline Research

Net sales lower than expectations, down 4.3% yoy
Oil and Natural Corporation Ltd (ONGC) reported 4.3% yoy decline in net sales to Rs193bn (including income from operations), lowest since Q1 FY12. Crude oil production was down 0.8% yoy on the back of 1% yoy decrease in crude oil and condensate production from nominated blocks of ONGC. Production from JV fields was up 0.6% yoy (mainly Cairn’s Rajasthan field). Gas production was down by 3.7% yoy mainly on account of 2.5% yoy fall in production from nominated blocks and 17.5% yoy fall in JV production. Crude oil revenues declined 5.3% yoy and 10.5% qoq driven by lower net realizations. Net realizations on sales volumes of crude oil from nominated blocks fell to US$40.17/bbl (lowest since Q4 FY11) as compared to US$46.62/bbl in Q1 FY13 as fall in crude prices was much steeper than the fall in discount levels. The discount reduced from US$63.27/bbl to US$62.73/bbl. 3.2% yoy depreciation in rupee against the US Dollar provided some respite to the revenue growth. Gas segment revenues were flattish as 4.7% yoy surge in rupee realizations was offset by the fall in production levels. Revenues for the VAP segment declined by 6.4% yoy mainly on account of the fall in realizations for LPG and Naphtha.

Subsidy burden at Rs126bn
Subsidy incidence at Rs126bn was lower than our estimates. As per the government notification for Q1 FY14 subsidy sharing pattern, the total upstream contribution was at Rs153bn, which contributes to about ~60% of the gross under recoveries. ONGC’s contribution to the upstream subsidy share was at 82.5% as compared to 82% in Q1 FY13.

OPM falls 1,120bps yoy and 521bps qoq
During Q1 FY14, ONGC reported 23.7% yoy fall in operating profit leading to a fall of 1120bps yoy in OPM to 44%, lowest since Q4 FY09. The key reason for the fall was 797bps yoy increase in other expenditure, 275bps increase in statutory levies as percentage of net sales on the back of higher royalty on crude oil production and 142bps yoy increase in staff costs as a percentage of net sales.

The increase is mainly in manpower expenditure Rs2.6bn, work over expenditure Rs1.5bn, pollution control expenditure Rs5.6bn, repair and maintenance expenditure Rs1bn, contractual payment Rs1.8bn, R&D expenditure Rs880mn, administrative expenses Rs8.8bn. The increase in these expenditures is mainly attributable to allocated portion of provision amounting to Rs16.1bn made towards one-time grant to the post-retirement benefit scheme for converting the defined benefit scheme to defined contribution scheme and Rs1bn towards the employer contribution in superannuation benefit in FY14 in terms of the guidelines issued by the department of public enterprises.

Cost Analysis
As a % of net sales Q1 FY14 Q1 FY13 bps yoy Q4 FY13 bps qoq
Raw materials 0.4 1.3 (93) 0.6 (22)
Personnel Costs 3.1 1.6 142 3.4 (32)
Statutory levies 28.9 26.1 275 25.1 372
Other overheads 23.7 15.8 797 21.7 203
Total costs 56.0 44.8 1,120 50.8 521
Source: Company, India Infoline Research

PAT lower than expectations at Rs40.1bn
Other income was higher by 15% yoy owing to Rs2.4bn income from bonds and IT refunds. Dry well expense was way ahead of estimates and was the key reason for below estimated performance at the PAT level. Depreciation and depletion was also higher by 42% and 10% yoy respectively. PAT was at Rs40.1bn was down 34% yoy and was lower than expectations.

Maintain BUY
ONGC has traded at a steep discount to its global peers over the past few years on the back of issues such as 1) subsidy burden and 2) government controlled gas prices (which are much lower than industry levels). However, of late government is trying to set right these issues by taking measures such as 1) partial de-regulation of diesel prices, 2) capping of sale of subsidised LPG cylinders and 3) showing intent to raise gas prices to about US$8/mmbtu as compared to current price of US$4.2/mmbtu. These steps, we believe, will lead to re-rating of ONGC towards its global peers. The recent correction has been on the back of depreciating rupee causing jitters regarding higher subsidy burden. Additionally, there have been concerns on the impact of gas price hike as the consumer price is yet to be determined. We factor this by cutting our gas price realization estimate. Nevertheless, we maintain our BUY rating with a revised 9-month price target of Rs330.

Financial summary (Consolidated)
Y/e 31 Mar (Rs m) FY12 FY13 FY14E FY15E
Revenues 1,473,068 1,623,863 1,777,379 1,973,250
yoy growth (%) 25.2 10.2 9.5 11.0
Operating profit 587,064 549,005 560,744 702,800
OPM (%) 39.9 33.8 31.5 35.6
Pre-exceptional PAT 250,031 242,196 239,828 329,960
Reported PAT 281,436 242,196 239,828 329,960
yoy growth (%) 25.3 (13.9) (1.0) 37.6

EPS (Rs) 29.2 28.3 28.0 38.6
P/E (x) 9.5 9.8 9.9 7.2
Price/Book (x) 1.7 1.6 1.5 1.3
BSE 178.90 [1.40] ([0.78]%)
NSE 178.90 [1.35] ([0.75]%)

***Note: This is a NSE Chart



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