Investment Shastra

Company Shastra – ONGC Ltd.

Will the subsidy burden, overburden this oil and gas major?

ONGC Ltd.: Company Highlights

ONGC Ltd. – India’s biggest energy explorer – A Maharatna Company

Market View of ONGC Ltd (as of 05/01/2012)

Latest Stock Price: Rs. 262.30

Latest Market Cap: Rs. 227533.27 Cr. (Large Cap Stock)

52 Week High Stock Price: Rs. 325.50

52 Week Low Stock Price: Rs. 241.90

Latest P/E: 10.06

Latest P/BV: 2.08

Tell me more about ONGC Ltd…

Oil and Natural Gas Corporation Limited is a “Maharatna”company mainly engaged in the oil and gas exploration and production activities. It has two segments: 1) exploration & production 2) Refining. The refining segment of the company is on account of its 71.62% stake in MRPL (Mangalore Refinery and Petrochemicals Ltd.). ONGC mainly operates in India, however it also has global presence (13% of revenue) through its 100% subsidiary ONGC Videsh Limited. (OVL).

ONGC is the only fully integrated Petroleum Company in India, operating along the entire hydrocarbon value chain. The entire value chain along with its products/services and end-users of each product is explained in the diagram below:

Product segment

The main products for the parent company are oil and gas. However due to its holding in MRPL, the company’s products on a consolidated basis also include LPG, Naphtha, Petrol, Diesel, Kerosene amongst others. The company derives majority of its revenues from the exploration and production division, which accounts for 54% of the revenues for the company.

How has the financial performance of ONGC Ltd. been? Here’s the review…

Net Sales & EPS: The production of oil and gas from the Bombay high field which is the major source of oil and gas for ONGC has been constant. Increase in the sales is usually a result of the increase in the price of crude oil. Thus, net sales for the company, has been increasing over the period of last 10 years except in the last 2 years where the sales have dropped due to fall in the price of the crude. The impact of this is also visible in the EPS performance which has shown very subdued growth since FY08.

ONGC Declining margin trendDeclining Margins & Returns: Though, both the operating and net profit margins for the company have been high we can observe a declining trend for the past 6 years. This decrease in the margins is a result of increasing subsidy sharing by the company. As a result of the decreasing margins the EPS has grown at a much lower rate as compared to the growth in the net sales. The ROE and ROIC for the company have also shown a declining trend due to the subdued growth rate in net profit as a result of decreasing margins.

Healthy Debt to Equity: The company has maintained a very healthy debt/equity ratio of 0.23:1 and as a result the Debt to Net Profit ratio for the company has been 1.5, which is an indication of good financial position of the company.

Subsidy Policy ONGC Ltd.

From the above analysis we observe that the net sales for the company has been increasing and the company has been able to maintain a very healthy debt position, however due the declining margins we can say that the 10 YEAR X-RAY appears to be ORANGE(‘Somewhat good’).

ONGC 10 Year X-Ray - Orange

What can we expect in the Future? Here is the Fundamental Analysis of ONGC Ltd…

In the Short Term…

The Company was planning to come up with an FPO somewhere in the month of Sept’11. However, as the stock was not trading at attractive valuations and due to less than expected interest in the market by investors, the company decided to postpone the issue. The financial performance of the company has been stable over the years and we expect the same going into the future. Also, in the last 2 quarters the company has registered a good growth in Net Sales and profit. Few of the projects are supposed to be commissioned by the end of this financial year. However, these projects are not going to add any significant profits to the bottom line.

The company has recently announced that it plans to invest $2.894 billion (about Rs 15,340 Cr.) in developing its ultra-deep sea, UD-1, gas discovery in the Krishna Godavari Basin by 2016-17. This will have a positive impact on the revenues of the company in the long term as the company believes that the new field will add about 20 MMSCMD of gas for a period of about 14-15 yrs.

In Fy’11, out of the total subsidy, oil exploration companies (like ONGC) had to bear 38.8% burden as against past practise of 33.3%. Out of this 38.8% ONGC had to bear 82% of the entire subsidy. In rupee terms this accounted to Rs. 24,892 Crs. If in this year the Government resets the contribution from oil exploration companies to 33.3%, ONGC may benefit in the short term.

Considering the above factors, the short-term of the company is expected to be Orange(‘Somewhat Good’).

In the Long Term…

Buoyant demand for crude and natural gas

Major revenue for ONGC comes from selling crude oil and natural gas. Due to the current economic slowdown there may be a temporary drop in the prices of crude but in long term the demand for crude is going to be high due the wide application of its derivatives. Natural gas demand in India is increasing as its acceptance increases as an alternative auto fuel. Also due to the decrease in the output from KG-D6 basin the demand for gas is going to be higher than its supply. Being the largest player in this segment, ONGC is expected to benefit from this demand in the future.

ONGC's Competitive advantage
*ONGC Videsh, a 100% susidiary is present in E&P activities outside India

ONGC and the Krishna-Godavari (KG) block

ONGC is planning to make an investment of $4 billion for the development of the ultra-deepwater gas find and produce about two trillion cubic feet (TCF) of gas from its Krishna-Godavari basin block.The field is expected to commence production by 2014-2015.  ONGC as block operator holds 90% interest in the block. The rest is with Cairn India Limited. This investment will help the company increase its crude oil production capacity and hence cater to the future demand.

Large NELP (National Exploration Licensing Policy) acreage to provide long-term growth

ONGC has more than 50% of the total NELP exploration acreage allotted. It has bagged 120 of the 238 Blocks awarded in the 8 rounds of bidding, under the NELP of the Indian Government. With increased efforts towards E&P, it is expected that the Company will report more oil and gas finds, going forward.

US$ 1 billion rig acquisition drive

Once a company has taken a decision to drill a particular site, the first requirement is of drilling rig. For the same, ONGC has outlined an investment of around Rs. 4,580 Cr. (around $1 billion) to buy 14 rigs as it looks to control drilling costs. It wants to acquire 10 onshore rigs for Rs. 900 Cr. from state-owned Bharat Heavy Electricals Limited (BHEL) and tender for four offshore rigs that may require an investment of Rs. 3,680 Cr.

Capacity expansion plan of ONGC Ltd.

The acquisition of these rigs has helped ONGC make a provision for its rig requirement to produce oil in the future once it decide to produce oil at a particular site.

Industry Prospect

The Indian oil and gas sector is one of the six core industries in India and has very significant forward linkages with the entire economy. India has been growing at a decent rate annually and is committed to accelerate the growth momentum in the years to come. This would translate into India’s energy needs growing many times in the years to come. Given this context coupled with the fact that India remains vastly unexplored territory by far with only a small portion of its sedimentary basins have been explored and developed, the Oil and Gas sector in India presents significant opportunity to the industry. Being a well-established player here, ONGC is well-placed to benefit from this opportunity.

Key Concerns:

  • Subsidy Burden: Government regulates prices of most of the petroleum products in India. This price regulation is done through subsidising of prices of petroleum products. ONGC along with other PSUs in the hydrocarbon industry has to share the subsidy on prices with the government. This subsidy burden will be a cause of concern for the company. In fact, in FY11 the subsidy outgo for the company has been Rs 24,892 Crs which is higher than the net profit of the company which is Rs. 22,824 Crs.
  • Competition: Until a few years back ONGC was the major player in the E&P business in India. However off late the sector has seen increased interest from both foreign and domestic players alike. Reliance, Cairn, British Petroleum along with BPCL are notable amongst the new entrants in the field. The presence of these players has intensified the competition for ONGC to acquire new blocks under future NELP rounds.

Thus, we observe that the company has enormous expansion plans and there is huge demand for the products of the company. However, due the subsidy burden we believe that the future prospects for ONGC are Orange (‘Somewhat Good’).

Long term future prospects of ONGC Ltd.

So, is it an investment-worthy company?

The company has huge expansion plans and the demand for its product is set for a robust growth in future. Operating in one of India’s six core industries ensures it continuous success. However, the huge subsidy burden and the government dependence are a huge dampener to the company’s profitability. Yes, ONGC Ltd. is an investment worthy company, but only if bought at a hefty discount!!

Currently, its stock price is at Rs. 262.25 (as on 5th Jan’ 2012). But, does this price offer an attractive discount to its right value (MRP) or is it over-priced? It is always best to invest at an attractive discount to its MRP, to get maximum returns at minimum risk. Become a member of to know its sensible buy- price and hence take the right action for this company.

Company Shastra – ONGC Ltd.

ONGC Ltd.: Company Highlights

ONGC Ltd. – India’s biggest energy explorer / A Maharatna Company

Market View of ONGC Ltd (as of 05/01/2012)

Latest Stock Price: Rs. 262.30

Latest Market Cap: Rs. 227533.27 Cr. (Large Cap Stock)

52 Week High Stock Price: Rs. 325.50

52 Week Low Stock Price: Rs. 241.90

Latest P/E: 10.06

Latest P/BV: 2.08

Gajanan Patil - Team MoneyWorks4me

1 comment

  • ONGC may not be trading at its cheapest valuations, but we must understand that it has a so called ‘moat’ which have already been enlisted as strengths in your post. It also has a good dividend paying history. For a long term investor, ONGC is a good buy.