Subsidy pulls down ONGC net 43%

THE country’s largest oil explorer ONGC has disappointed investors by reporting a 43% year-on-year drop in third-quarter net profit to Rs 2,475 crore — its lowest profit figure in the last 18 quarters.
While a global crash in crude oil prices and a fall in onshore oil production has dragged profits lower, ONGC’s large subsidy burden has also taken the market by surprise.
At Rs 4,899 crore, the subsidy burden substantially overshot expectations of about Rs 3,770 crore. The company’s total income declined by 18% to Rs 12,521 crore compared with Rs 15,218 crore in the corresponding quarter in the previous year. ONGC reported a 1.1% dip in its net profit at Rs 13,920 crore compared with Rs 14,075 crore in the same period previous year.
The ever-mounting subsidy burden has been a constant cause of pain for the company as it has risen at a pace faster than ONGC’s sales or profits over the last few quarters. The subsidy burden now occupies a significantly larger proportion in its financial numbers. As percentage of sales, the subsidy burden has shot up to nearly 55% in the nine months ended December 31, 2008 from just over 25% in FY 2006.
This resulted in net realisation — the difference between the average price per barrel of crude during the quarter and the discount given to state oil marketing companies — falling to levels not seen in at least the last three years. ONGC’s net realisation fell to $34 per barrel from $54 per barrel a year ago.
Operating margin during the quarter crashed by 1,270 basis points to 40.7% as operating costs rose. A strong 47% jump in its other income to Rs 1,119 crore could do little to support the profit figures due to higher depreciation.
Going forward, falling production at ONGC’s onshore oil wells and offshore gas producing centres will remain a major concern. During the third quarter, onshore oil production fell by 6% year-on-year, while offshore gas output dropped by 1.4%.
On the positive side, the subsidy burden on the company is likely to lighten considerably as downstream oil marketing companies turn profitable thanks to low crude oil prices. Similarly, the rising proportion of output from ONGC Videsh and new exploration blocks in its production portfolio will reduce uncertainties related to the subsidy burden.

Falling crude, stagnant output may dent ONGC’s bottomline

Lower Subsidy Burden, Rupee Depreciation May Not Help Much

INDIA’S biggest oil explorer Oil and Natural Gas Corporation (ONGC) is expected to post a sharp decline in profit for the quarter ended December 2008 as falling crude prices and stagnant output offset gains from a projected drop in the company’s subsidy burden due to discounted crude oil sales to state-run refiners.
Estimates by ET Intelligence Group ahead of its third quarter results announcement on Wednesday show that the country’s largest petroleum company may post a 31% fall in net profit to Rs 3,026 crore on a 5% dip in sales to Rs 14,315 crore. The financial burden on the company due to subsidised sales is estimated to be 38% lower at Rs 3,770 crore.
While several broking houses are also projecting a sharp contraction in ONGC’s October-December bottomline, some of them see the state-run firm posting a profit on the lower subsidy and favourable currency movements.
Angel Broking estimates that ONGC’s net profit will fall by more than a third while Khandwala Securities expects it to shrink by nearly a quarter. ICICI Securities sees a 17% drop in profits at Rs 3,368 crore. A Reuters poll of 16 brokerage houses estimates that an 8.2% drop in bottomline.
The most optimistic view is from Karvy Stock Broking, which sees ONGC’s profit rising by nearly a fifth to Rs 4,839 crore.
“Though the current crude oil price is below $50/barrel, we believe that the lower subsidy burden and weak rupee are expected to provide a major relief,” Karvy said in a recent report.
Following the recent fall in crude oil prices, the average gross realisation for ONGC during the quarter is estimated at $61 per barrel, nearly a third lower compared to the same period in 2007.
The negative impact of the price slump is likely to be offset by some extent due to the rupee depreciation. This is because ONGC’s crude selling contracts are denominated in US dollars and the company realises the contract value at the prevailing rupee-dollar exchange rate.
During the third quarter of 2008-09, the rupee fell by 23.6% against the dollar.
“ONGC’s oil price realisation post subsidy would be 22% lower at $44.4 per barrel. However, a weaker rupee will mean the Q3FY09 oil price realisation net of subsidy is just 4% lower in rupee terms,” says a report by brokerage Merrill Lynch.

MRPL: Unprecedented losses

INDIA'S LARGEST public sector standalone petroleum refiner Mangalore Refinery and Petrochemicals (MRPL) posted negative gross refining margins (GRMs) and net losses in the December quarter — for the first time in the last five years. MRPL posted a net loss of Rs 285.1 crore on sales of Rs 7,537.1 crore, which was down 7% y-o-y despite a 6% improvement in sale volume to 2.9 million tonnes indicating an average 12% fall in gross realisations. The company's desulphuriser unit remained closed for three weeks during the quarter to change catalyst, resulting in production of high-sulphur diesel. This necessitated the company to export more and that too at a lower price. The exports fell 10% y-o-y despite a 22% improvement in volumes as the realisations crumbled 26% against the similar period of last year. MRPL reported an inventory loss of Rs 1,062 crore during the December quarter as against Rs 646 crore in the September 2008 quarter and reported a negative GRM at $2.77 per barrel. Crude oil prices crashed by another 55% in the quarter, in addition to the 35% fall in the September 2008 quarter. The weakness in the rupee also added to the company's woes, which recorded a Rs 78.85 crore of exchange fluctuation loss during the December quarter as against an exchange gain of Rs 12.84 crore in the corresponding quarter of the previous year. During the quarter, MRPL's refinery reported a 3% growth in its crude oil throughput to 3.11 MT, representing 128% capacity utilisation on its nameplate capacity.

Operational cost bleeds Great Offshore

GREAT OFFSHORE'S results for the December quarter were better than market expectations, as the company was able to get a higher utilisation level for its offshore supply vessels (OSVs), coupled with the company commencing billing on its lumpsum turnkey engineering contract with ONGC. In Q3FY09, Great Offshore had booked revenues to the tune of Rs 36 crore from this contract with ONGC. However, higher operational costs put pressure on Great Offshore's operating profit margins. As a result, the company's operating profit was virtually flat on a y-o-y basis at Rs 109.5 crore in the last quarter, while its income from operations rose 42.2% to Rs 275.8 crore. Its operating profit margin also declined 1,640 basis points to 39.7 % due to other expenses as a percentage of its income from operations rising 645 bps to 20.6% on repairs and maintenance costs rising 540 bps to 13.7 %. Growth in the company's top line in Q3FY09 was also driven by four vessels that became operational, and it was in contrast to the situation in the September quarter. As a result, during the December quarter, the utilisation level for Great Offshore's OSVs were 94% as compared to 91% a year earlier. Great Offshore has attempted to minimise the risk from weakening spot day rates for its fleet of 60 vessels, with only a small percentage of its fleet on spot contracts. Meanwhile, the company’s consolidated PAT of Rs 78.1 crore rose 2.7 times q-o-q, driven by commencement of contributions from two acquired offshore service companies - KEIRSOS Maritime and Rajahmahendri Shipping.

Clariant Chemicals:True Colours

INDIA’S LEADING dyestuff manufacturer, Clariant Chemicals, posted almost nil net profit for the December ‘08 quarter. Nevertheless, a generous dividend payout announced by its board of directors boosted the scrip. The board is proposing to pay dividend of Rs 19 per share, which translates to a handsome dividend yield of 11.5%, considering Friday’s closing price of the Clariant scrip.
In the last couple of years, the company had distributed more than 100% of its book profits by way of dividends to its shareholders. However, considering the strong profit growth reported by the company during the year ‘08, the dividend payout ratio is likely to remain below 100% this year. For the entire year ‘08, the company posted a 127% higher net profit at Rs 67 crore on a consolidated basis.
Similar to other chemical companies, the December ‘08 quarter results of the company were marred by the economic slowdown, crash in commodity prices and the credit squeeze. The company posted an 8% drop in net sales to Rs 201 crore. The operating margins and other income, too, deteriorated marginally, resulting in an 18% fall in PBDIT at Rs 18.3 crore. The company wrote off Rs 7.3 crore towards impairment of assets and another Rs 0.5 crore towards VRS expenditure. These extraordinary write-offs resulted in the company’s pretax profit falling 64% below year-ago levels. As the company wrote off another Rs 2.5 crore towards prior period taxes, the net profit stood 94% down at just Rs 0.66 crore.
The problems of economic slowdown were faced by all the company’s business segments including intermediates and colorants, dyes and specialty chemicals, and masterbatches. The losses in the intermediates business increased, while the profits nearly halved in the dyes segment.
The December ‘08 quarter was an exceptionally bad quarter for the chemical industry due to a slowdown in demand and falling prices. However, the March ‘09 quarter is expected to be better with stable prices and demand improving for the chemical industry. Clariant is expected to continue doing well in the coming months, while the healthy dividends will keep its scrip afloat.

RIL profit slips 10% on margin pressure

INDIA’S biggest private company, Reliance Industries (RIL), unveiled its first ever drop in quarterly sales in around six years and its first profit decline in three years on Thursday, hit by a steep fall in petroleum product margins in what its chairman called “one of the most challenging” periods faced by the company.
The Mukesh Ambani-controlled RIL, which runs one of the world’s biggest oil refineries and is also among the world’s biggest petrochemicals producers, reported a 8.75% drop in net sales for the three months to end-December to Rs 31,563 crore – the first decline since the first quarter of 2002-03. Its net profit, excluding exceptional items, fell 9.8% to Rs 3,501 crore during the period compared with Rs 3,882 crore in the year-earlier period, ahead of expectations. ETIG had expected RIL to announce a net profit of Rs 2,739 crore.
Refining margins likely to remain flat till 2010-11
“This was one of the most challenging quarters for Reliance with volatility in prices and margins. Producers and consumers are coming to terms with slower global trade and economic outlook. Reliance performed commendably in this environment, with high operating rates. We also reached an important milestone in start up of the RPL refinery,” said RIL chairman and managing director Mukesh Ambani.
RIL’s keenly-watched gross refining margins (GRM) — the difference between the value of petroleum products and the price of crude oil — for its 660,000 barrel-a-day refinery in Gujarat came in at $10 per barrel, substantially lower than the corresponding period’s $15.04 per barrel, but some $6.4 per barrel higher than the region’s benchmark Singapore complex.
Worldwide refining margins for refineries fell during the December quarter, as the global economic slowdown brought down prices of petroleum products such as gasoline and naphtha. The slump in demand forced some of the world’s big oil companies, including Exxon Mobil, to shut units for seasonal maintenance.
The company, which has been maintaining GRMs better than the Singapore benchmark, said it managed to sustain its margins “primarily on the back of efficient sourcing of crude oil, ability to produce globally accepted products and flexibility in its crude bucket”.
“RIL’s performance exceeded our expectations. This is mainly driven by higherthan-expected revenues from the petrochemical segment and better GRMs. RIL has surprised the market on the upside, hence would have positive impact on the market,” said Amitabh Chakravarty, president for equities at Religare Capital Markets.
RIL shares ended 1.21% at Rs 1,132.95 on Thursday ahead of the results, which were announced after the market closed. The stock slipped 37% in the December quarter, underperforming a 25% drop in the BSE Sensex and a 33% loss in the sector index during the same period.
Analysts said RIL’s earnings drop was temporary and would be reversed in the fiscal fourth quarter, when it is due to start producing 30-40 million cubic metres of natural gas a day in the second half of February. The company’s earnings and sales will see benefits from its new refinery which was commissioned on December 25.
Refining margins are, however, likely to remain flat till 2010-11 due to overcapacity and slower demand growth amid a global economic downturn. RIL’s refinery is almost entirely export-focussed, leaving the company particularly exposed to a drop in global demand for petroleum products.
The net profit fall would be steeper at 57%, if exceptional gains of Rs 4,733 crore in December 2007 — booked by RIL for selling shares of its subsidiary Reliance Petroleum (RPL) — were taken into account. RIL had posted net profit of Rs 8,079 crore, including exceptional gains, in December 2007 quarter.
RIL’s operating profit margins stood at 17% in the quarter, little-changed from 16.9% in the year-ago period, but higher than the 14.6% achieved in the first six months of the year. Interest outgo was higher at Rs 663 crore compared with Rs 241 crore because of a weak rupee. A big chunk of the company’s debt is dollar-denominated.
RIL’s refining business contributed Rs 1,881 crore to its profit before tax of Rs 4,225 crore during the quarter, while the petrochemicals business contributed Rs 1,657 crore.
The company’s cash reserves jumped to more than Rs 28,500 crore, boosted by the conversion of 12 crore equity warrants, which brought in over Rs 15,000 crore to the company in October. RIL said 95% of the reserves was invested in fixed deposits, and the rise in the deposits helped it expand its other income during the quarter to Rs 663 crore from Rs 241 crore in the year-ago period.
For the nine months ended December, RIL’s net profit, excluding exceptional items, increased by 3.4% to Rs 11,733 crore, while its revenues rose 21% to Rs 121,698 crore. Despite a 3.4% rise in refinery throughput to 7.86 million tonnes during the quarter, revenues from this segment dipped 17%. Production of most of its petrochemicals and polymers fell 3%-6% during the quarter, but the fall in revenues was less than 1%. The refining and petrochemicals segments account for 97% of the company’s total turnover. RIL said it has spent Rs 110 crore during the quarter at its Patalganga plant to finance a voluntary retirement scheme for 430 employees.

Dip in petro prices may erode RIL numbers

INDIA’S largest private sector company Reliance Industries (RIL) is likely to report dismal numbers when it publishes its third quarter results on Thursday. The steep crash in petroleum product prices and subsequent fall in demand for petrochemicals are sure to take their toll on RIL’s numbers.
However, despite the dip in profits expected in December 2008 quarter, most analysts are gungho about the company’s future due to the commissioning of its mega-projects.
If the Q3 results announced by two refining companies — Mangalore Refinery (MRPL) and Bongaigaon Refinery (BRPL) — are any indication, RIL is likely to have a tough time this quarter. Both the companies have posted unprecedented losses with negative refining margins. The crude oil prices crashed nearly 55% during the December 2008 quarter to $40 per barrel.
In such a scenario, the refineries have to sell their products at prices below their cost due to the time gap between purchase of crude and sale of refined products. Besides, the inventory available with the company at the end of the period has to be marked down to market price, which is lower than its cost.
According to ETIG’s estimates, RIL is likely to report a gross refining margin (GRM) of $10 per barrel and would report net profit of Rs 2,739 crore. During the quarter ended December 2007, the company had reported a net profit of Rs 8,079 crore, which included Rs 4,733 crore of extraordinary profit on sale of stake in Reliance Petroleum.
Sanjeev Prasad of Kotak Securities expects the company to post a GRM of $8.2 per barrel for the December 2008 quarter. “With the crude oil and petro-product prices crashing, the company will incur heavy inventory losses. Also, the demand for its polymers and petrochemicals has been lower impacting its margins. We expect the company to post net profit of around Rs 2,300 crore,” he added.
Almost all the leading brokerage houses expect a fall in RIL’s profits. Macquarie Research, in its recent research report on the company, has projected a net profit of Rs 3,590 crore in Q3. Motilal Oswal forecasts a net profit of Rs 3,395 crore; ICICI Securities expects Q3 net profits at Rs 3,329 crore, while Khandwala Securities has pegged RIL’s net at Rs 2,950 crore.

ONGC performance set to slip on sinking onshore output

THE production of crude oil and natural gas from ONGC’s ageing onshore oil fields is falling fast, which will have an adverse impact on its performance in the future. In the December 2008 quarter, ONGC’s production from its onshore assets is likely to report a 7% fall in crude oil and 1% in natural gas.
ONGC’s onshore production from its onshore fields in Assam, Gujarat, Andhra Pradesh and Tamil Nadu contributes nearly 30.5% of its total domestic production of 26 million tonnes per annum, or 0.52 million barrels per day. These onshore fields also represent over 26.4% of ONGC’s annual natural gas production of 22.3 billion cubic meters, or around 62 million cubic meters per day.
ONGC has more than 120 producing onshore oilfields, out of which 32 fields, comprising 15 major and 17 medium, contribute 85% of the total production. All these fields are more than 30 years old. “All our onshore fields are mature and are in the natural declining phase. We have been successful in restricting the fall at around 1.5% annually. Unless there are new discoveries, the production from our onshore fields will continue to fall at around 1.5-2% annually,” informed ONGC director (onshore) AK Hazarika.
Adding new fields to its portfolio is the only option available with ONGC to ensure its petroleum production grows in future. However, a number of its recent discoveries have been gas fields. This would mean pipeline connectivity for monetisation. ONGC is currently setting up a power plant in Tripura to utilise the available gas, which can’t be shipped outside the region due to lack of connectivity.
ONGC is planning to spend around Rs 2,000 crore on revamping these onshore fields during FY2010 in a bid to maintain their production level. “With crude oil prices at $40 per barrel levels, the economics of the capex plans will have to be re-evaluated. In next year’s budget, we are projecting around 1.5% fall in our onshore production from the current year,” added Mr Hazarika.
The onshore crude oil production of ONGC, which grew 6% YoY in May 2008, reported a 1% growth in June but fell 2% YoY in July, followed by a 3% fall in August, 4% in September and was 8% lower in November 2008 compared with the November 2007 production. The onshore production in the month of November 2008 at 614,000 tonne was the lowest in at least two years as revealed by the petroleum ministry figures. In case of natural gas, the onshore production has remained almost flat in 2008 compared to 2007.
ONGC’s crude oil production from Assam has been suffering from local issues preventing it from operating these fields continuously. The oil and gas production from Assam fields has remained consistently lower on a YoY basis in 2008. In November 2008, ONGC’s production of crude oil was 10% down and natural gas was 5% down compared with November 2007 figures.
The production from Gujarat is suffering from reduction in reservoir pressure, leading to increase in water content of the total production and also a lack of continuous power supply. Gujarat reported a 4% fall in natural gas and an 8% fall in crude oil produced during November 2008. Although the crude oil production in Tamil Nadu is on a sharp decline over past few months, ONGC has been able to increase the natural gas production from these fields substantially. Despite the problems on the onshore front, ONGC’s offshore oil production from the Mumbai High oilfield continues to remain on track and is not expected to report any fall on YoY basis, although the natural gas production is declining at around 2%.

Fall in crude, refinery margins may dent oil cos’ bottomline

INDIA’S petroleum majors are likely to post a fall in profits as well as revenues when they announce their results for the quarter-ended December 31, 2008, later in the month. The crash in crude oil and polymer prices, coupled with a decline in refining margins, is likely to result in heavy inventory losses. On the other hand, the current scenario could also serve as a springboard for some of them — particularly companies with oil marketing and gas transmission operations — to report a better performance in the year-ending quarter.
Oil prices fell by over 55% during the December quarter, much steeper than the 30% fall in the September 2008 quarter. Thus, going by the September quarter’s performance of domestic petroleum firms — PSU oil refiners posted unprecedented losses — the December quarter could be worse. The weak rupee will also have a negative impact for refiners, but bring a relief for oil producers.

Petroleum producers
Due to standstill production and lower realisations, ONGC's profitability is likely to stagnate in the quarter. Merrill Lynch, which expects flat earnings from the company, says in its Q3 preview report, “The weaker rupee and a fall in subsidy are likely to make up for the decline in ONGC’s oil and product price realisation.” Brokerage Prabhudas Leeladhar estimates ONGC’s profits to slip by 2.5% to Rs 4,257 crore. According to ETIG estimates, ONGC may post a 30% drop in net profit to Rs 3,026 crore with net realisation in the quarter at $45 a barrel. Although its net sales are expected to be lower on a year-on-year basis, the net profit of Cairn India is likely to receive a boost from higher income courtesy other investments.

Refiners
Benchmark Singapore refining margins fell 66% to an average of $1.29 a barrel during the quarter as against $3.74 in the same quarter last fiscal. Fall in margins, besides inventory losses, will thrust India's standalone refiners, such as MRPL and Chennai Petroleum, into the red. Private refiners Reliance Industries and Essar Oil, too, will face the heat but to a lesser extent. RIL, which had shown no fluctuations in its gross refining margins in the two preceding quarters despite fluctuating oil prices, is not expected to report any impact of the inventory loss in the December quarter as well. Brokerages have estimated RIL to post refining margins between $8.5 and $10 a barrel. Its petrochemicals business may take a hit due to fall in prices, margins and demand. ETIG's estimates put RIL's Q3 profit at Rs 2,739 crore, down 31% against the same quarter last year adjusted for profit on sale of RPL stake

Marketers
Oil marketing firms are expected to post losses in view of the lower refining margins, inventory losses and uncertainty over oil bonds. Merrill Lynch estimates the cumulative losses of Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum at Rs 8,660 crore. However, brokerages are positive on the future of the firms, which are making profits on sale of petrol and diesel. At the same time, falling crude is expected to bring down their debt. “Even at an oil price of $60 a barrel and downstream share in under-recoveries at 22% in FY10, OMCs’ earnings would be significantly positive at current product prices,” said a Motilal Oswal report.

Natural gas
The natural gas transmission companies are unlikely to post any spectacular numbers for the December quarter. India's largest gas-transmission company Gail is expected to take a hit on its petrochemical and liquid hydrocarbon business, while the transmission business is estimated to post a growth. Motilal Oswal expects a 45% fall in Gail’s Q3 profit, while Merrill Lynch pegs the fall at 14%. ETIG estimates a net profit of Rs 576 crore, which is 7% lower on a y-o-y basis. Gujarat State Petronet, Gujarat Gas and Indraprastha Gas, are expected to post flat results. RIL’s KG basin fields are likely to commence natural gas production in the March 2009 quarter, which will double the natural gas availability in India over the next two years.

ONGC: Falling numbers

THE PRODUCTION from ONGC’s onshore oilfields is falling fast, which will have an adverse impact on the company’s performance during the December 2008 quarter. ONGC's onshore production from its onshore fields in Assam, Gujarat, Andhra Pradesh and Tamil Nadu contributes nearly 30.5% of its total domestic production of 26 million tonnes per annum or 0.52 million barrels per day. The onshore production of ONGC, which grew 6% y-o-y in May 2008, reported a 1% growth in June but fell 2% y-o-y in July, followed by a 3% fall in August, 4% in September and was 8% lower in November 2008 compared to the November 2007 production. The onshore production in the month of November 2008, at 614,000 tonnes, was the lowest in at least two years as revealed by the petroleum ministry figures. ONGC's production from Assam, which has been suffering from environmental issues, is likely to report an 8% fall to around 290,000 tonnes for the December 2008 quarter. The production from Gujarat, which is suffering due to a reduction in reservoir pressure, leading to an increase in water content of the total production, would report a 6% fall at 1.56 million tonnes. Production in Andhra Pradesh was lower in November 2008 as production could begin from only two wells out of eight. Despite the problems on the onshore front, ONGC's offshore production from the Mumbai High oilfield, continues to remain on track and is not expected to report any fall on y-o-y basis.

Gujarat State Petronet: Growth in the Pipeline

Gujarat State Petronet is likely to emerge as a key beneficiary of rising availability of natural gas in the country. This makes it an attractive investment in the long term

GUJARAT STATE Petronet (GSPL) is India's only company that transmits natural gas for its clients without trading in it. The company's longterm contracts with Torrent Power and Reliance Industries (RIL) for transmission of natural gas are likely to become effective in the March 2009 quarter, which will boost its profits substantially.

BUSINESS:
GSPL's 1,130-km pipeline network is spread across the state of Gujarat and connects natural gas producers on the west coast of Gujarat to their clients in nearly 33 districts of Gujarat. Some of GSPL's prominent clients are Gujarat Power, Essar Steel, Essar Power, Arvind Mills, GNFC and GSFC. The company operates its pipeline network on an open access basis and is not involved in buying and selling gas.

GROWTH FACTORS:
Presently, GSPL transports about 17 million metric standard cubic metres of gas a day (MMSCMD), which will double once its contracts with RIL and Torrent Power become effective. GSPL has signed a 15-year agreement with RIL to transport 11 MMSCMD and another contract with Torrent Power to transport 4.5 MMSCMD for 20 years. Torrent Power's 1,147.5 MW Sugen power plant is scheduled to commence operations in the quarter ending March 2009. In the same quarter, RIL is also slated to start production of natural gas from the KG basin. The company is extending its pipeline network to 2,000 km by 2010 at a capex of Rs 1,900 crore. With the Petroleum and Natural Gas Regulation Board (PNGRB) now in place, the company will get competitive advantage while bidding for new projects in the adjacent areas. GSPL's return on capital is low at present. So, there is little risk that GSPL will have to reduce transport tariffs in future. GSPL also holds strategic stakes in gas distribution companies in three cities-two in Gujarat and one in Andhra Pradesh. Over the next two years, the availability of natural gas in India is expected to double. Apart from RIL's gas, Petronet LNG's project to double its regassification capacity to 10 million tonnes per annum is likely to be completed in January 2009.

FINANCIALS:
The natural gas transported by the company grew 17% from 14.6 MMSCMD in FY '07 to 17.1 MMSCMD in FY '08 but has stagnated since then. This is mainly due to the stagnation in the availability of natural gas and situation is likely to improve in the near future. The company has consistently increased its revenues per unit of gas transported. The company is currently carrying a debt of around Rs 1,200 crore at an average cost of 9.5%. The company has been consistently generating healthy cash flows from operating activities.
Being capital intensive, interest and depreciation are the most important costs for the company, which grew at a CAGR of 33.7% and 42.3%, respectively, in the last five years. During the same period its net sales grew at a CAGR of 31.4% and pre-tax profit grew at 70.3%.
GSPL currently assumes 12 years of working life, which increases the annual depreciation charged on its pipelines compared to 30 years working life assumed by India's largest gas transporter GAIL. This indicates the need to examine GSPL's cash profits rather than its book profits for its valuation. The company's cash profits have grown at a CAGR of 58.6% in last five years.

VALUATIONS:
The company is likely to post a 21% increase in its gas volumes in the second half of FY '09 to 20.6 MMSCMD. This will drive its H2 FY '09 revenues 36% up on y-o-y basis to Rs 309 crore. The net profit for the period is expected to go up 40% to Rs 91.8 crore. As a result, the company is expected to end FY '09 with an EPS of Rs 2.7 and cash EPS of Rs 5.8. The current price of Rs 34.8 translates this to a P/E of 12.7 based on book EPS and just 6, if we consider the cash EPS.

KEY RISKS:
The company is currently conducting a postal ballot seeking shareholders' view to contribute 30% of pre-tax profits for social development as requested by the chief minister of Gujarat. Presently, 50.2% of the company's equity capital is held by five companies, which are controlled by the Gujarat State government. The company's EPS will erode proportionately, if its shareholders accept the resolution.

ONGC: Falling numbers

THE PRODUCTION from ONGC’s onshore oilfields is falling fast, which will have an adverse impact on the company’s performance during the December 2008 quarter. ONGC's onshore production from its onshore fields in Assam, Gujarat, Andhra Pradesh and Tamil Nadu contributes nearly 30.5% of its total domestic production of 26 million tonnes per annum or 0.52 million barrels per day. The onshore production of ONGC, which grew 6% y-o-y in May 2008, reported a 1% growth in June but fell 2% y-o-y in July, followed by a 3% fall in August, 4% in September and was 8% lower in November 2008 compared to the November 2007 production. The onshore production in the month of November 2008, at 614,000 tonnes, was the lowest in at least two years as revealed by the petroleum ministry figures. ONGC's production from Assam, which has been suffering from environmental issues, is likely to report an 8% fall to around 290,000 tonnes for the December 2008 quarter. The production from Gujarat, which is suffering due to a reduction in reservoir pressure, leading to an increase in water content of the total production, would report a 6% fall at 1.56 million tonnes. Production in Andhra Pradesh was lower in November 2008 as production could begin from only two wells out of eight. Despite the problems on the onshore front, ONGC's offshore production from the Mumbai High oilfield, continues to remain on track and is not expected to report any fall on y-o-y basis.