Angel Broking neutral on ONGC

RELATED NEWS Buy Sun Pharma; target of Rs 1200: Deutsche Bank Buy Godrej Consumer; target of Rs 174: Angel Accumulate Nucleus Software: Edelweiss ML maintains buy on Cadila Healthcare; target of Rs 425 Buy La Opala RG; target of Rs 68: SKP Research ONGC BSE | NSE 28/05/12 Are Mutual Funds betting on ONGC?

Broking house, Angel Broking has recommended neutral rating on Oil and Natural Gas Corporation , ONGC.

 

Angel Broking report on ONGC:

 

Higher Subsidy and Wage payout impacts PAT:

 

For Q4FY2007, ONGC reported a yoy de-growth of 9.8% in PAT (before extraordinary items) at Rs 2,207 crore (Rs 2,445 crore). Net sales were marginally higher by 4.2% to Rs 12,397 crore (Rs 11,898 crore). These were a disappointing set of numbers, which were over 20% below our estimates. Revenues were impacted due to lower realisations from selling oil at discounted rate to the refiners. For FY2007, the average oil price was USD 66 per barrel but ONGC realised only USD 44 per barrel as it offered USD 22 per barrel discount to the state-owned refiners. This resulted in mounting subsidy, which for the quarter stood at Rs 4,668 crore.   

 

One-time wage provisions inflate yoy Wage Bill by 209%:

 

Staff cost for Q4FY2007 was up a whopping 209.3% to Rs 1,555 crore (Rs 503 crore) on the back of one-time provision of Rs 1,287 crore. The provision included Rs 400 crore towards contribution to the PRBS Trust, Rs 270 crore towards pay settlement, Rs 390 crore towards post retirement benefits and Rs 227 crore towards Golden Jubilee incentives. Going ahead, we expect the staff costs to remain under check.   

 

Insurance claim and higher Other Income helps increase PAT:

 

During Q4FY2007, ONGC received Rs 475 crore (Rs 641crore) from insurance claims for damage to the BHN platform in the Mumbai High Field during an accident in FY2006. Other Income also shot up by 245.9% to Rs 2,179 crore (Rs 630 crore) due to receipt of Rs 1160 crore from the Gas Pool account to compensate for selling of richer gas fractions to GAIL at a discounted price.

 

Performance Highlights Crude oil production up 9%:

 

Crude oil production during FY2007 went up by 9% to 26.05 million metric tons (MMt) from 24.40MMt in FY2006. Gas production remained stagnant due to disruption in operations at the Hazira plant during floods in August last year. It remained at 22.44billion cubic meter (BCM) compared to 22.57BCM. Total Oil plus Oil equivalent (O+OEG) production was up 3.2% at 48.49MTOE (46.97MTOE). JV crude oil production was up at 1.89MMt (1.71MMt) and natural gas production was up at 2.47BCM (2.43BCM). Sale of crude oil was higher by 8.7% at 24.41MMt (22.45MMt) whereas natural gas remained flat at 20.30BCM (20.50BCM). Sale of value-added products declined marginally at 3.179MMt (3.373MMt).

 

Exploration efforts paying off:

 

During FY2007, the exploratory efforts culminated into 22 discoveries, of which nine are new prospects (three deep water, one shallow water and five onshore) and 13 are new pools. ONGC recorded in-place reserves accretion of 169.52MTOE, highest in 11 years after 1995-96. It also recorded ultimate reserve accretion of 80.29MTOE (ONGC operated fields - 65.56MTOE, domestic JVs - 4.77MTOE, overseas JVs - 9.96MTOE). The company drilled a total of 88 exploratory and 178 development wells during the year.

 

Standalone PAT up 10.0% for FY2007:

 

For FY2007, ONGC reported standalone PAT (before extraordinaries) of Rs 15,168 crore (Rs 13,790 crore). Net Sales for the same period were up 18.2% to Rs 56633 crore (Rs 47924 crore). PAT was largely impacted due to higher subsidy burden and higher Wage Bill. The company shelled out the highest-ever subsidy pay-out which was up a whopping 42.4% at Rs 17,024 crore (Rs 11,957 crore) and because of the one-time provisions, the Wage Bill was inflated by 134.4% at Rs 2,982 crore (Rs 1,272 crore) both of which affected the bottom-line. Although, relief came in from higher Other Income due to aid from the Gas Pool account, it was not sufficient to boost the bottom-line. On a consolidated basis, ONGC reported 16.4% rise in Net Sales to Rs 82,253 crore (Rs 70,642 crore) whereas PAT (before extraordinaries) was up 17.2% to Rs 17,295 crore (Rs 14,757 crore). This includes a larger contribution from ONGC Videsh.

 

Aggressive future capex plans:

 

During the year, ONGC's capital expenditure rose by 25.6% at Rs 13,305 crore (Rs 10,591cr), which was primarily spent on Exploration and Production (E&P) activities. For the XI Five Year Plan (2007-2012), ONGC has set an aggressive target of USD 16 billion (approximately Rs 75,984cr) to raise the crude oil production to 140MMt (up by 10MMt over X Plan) and natural gas production to 112BCM. The company plans to utilise internal accruals and partly raise debt to fund the expansion plans. This move is towards gaining self-sufficiency for crude oil and natural gas in India.

 

Dividend yield of over 3%:

 

During FY2007, ONGC allotted bonus shares in the 1:2 ratio to its shareholders thus increasing the equity base to Rs 2,139cr. Over the expanded capital, it recommended dividend of 130%, which works out to Rs31/ share. The dividend payout is highest ever by an Indian corporate at Rs 6,631cr.

 

Outlook and Valuation

 

We expect ONGC to post marginal top-line growth of 5.0% during FY2008E to Rs 86,358cr with a PAT of Rs 18,683 cr, which works out to an EPS of Rs87.3. However, the mounting burden of subsidies is affecting performance of the company and in turn its profitability is getting depressed. We believe that the government policies over sharing of under-recoveries will hamper the company's performance going forward as well. In the wake of these uncertainties, we remain Neutral on the stock.