ONGC: Subsidy spill

Crude prices may be soaring but ONGC, has only partially leveraged the 64 per cent y-o-y rise in the March 2008 quarter. Net sales improved 26 per cent to Rs 15,626 crore (stand-alone without MRPL), even though production was marginally lower at 6.44 million tonnes.

However, ONGC's subsidies to oil marketing companies, that sell auto-fuels at below cost, soared 82 per cent. Despite this, the oil major's operating profit margin was up140 basis points to 37 per cent.

That's thanks to a smaller rise in statutory levies -as a percentage of net sales"" and a tight check on costs. Statutory levies are paid by ONGC to state governments for its oil drilling activity.

For FY08, given that crude production was flat, revenues grew just short of 6 per cent to Rs 59,849 crore while higher subsidies meant that the operating profit too rose just marginally.

However, the numbers for the consolidated entity (including the Rs 32,575 crore subsidiary MRPL) were somewhat better in FY08. The top line grew 17.7 per cent to Rs 96,782 crore, while t net profit was up 14 per cent at Rs 20,221crore.

MRPL may not fork out subsidies but it has to grapple higher global prices of crude. Looking ahead, ONGC's subsidy burden of around Rs 39,000 crore for FY 09, is not as high as was expected before the hike in prices of petroleum products.

At Rs 864, the stock trades at a reasonable 7 times consolidated (with MRPL) estimated FY 09 earnings, while RIL at Rs 2,135, trades at 19 times estimated FY 09 earnings, possibly because of potential in oil exploration retail businesses.

The ONGC stock should do well because the subsidy burden for FY09 has been lower than expected and moreover, crude prices are seen to be staying strong.