Interview- ONGC: Oiling The Wheels

ONGC CFO DK Sarraf feels the co’s biggest challenge is the uncertainty & opacity surrounding huge oil subsidy

Being the finance director of the biggest oil producer in the country, can you elaborate on the immediate challenges ONGC is facing?
We are currently passing through a unique phase in our history. On the one hand, crude prices are going up, raising investors’ expectations regarding topline and bottomline growth, in line with the returns generated by other domestic or global oil producers. On the other hand, the company is burdened with subsidies, even as domestic production is stagnating partly. In fact, even maintaining the production from our old fields requires heavy investments.
Competition in the exploration business is growing, while the assets carrying out exploration work have become scarce. Scarcity of talent has also emerged as a key issue with substantial increase in exploration activity globally. Liaisoning with the government for various issues such as subsidies is another challenge.

You have been in talks with the government over the issue of subsidies for a long time. When can we expect a solution for this issue?
Yes, subsidy-sharing remains a bone of contention between the government and ONGC. However, disagreement is more on the method, rather than its validity. With crude oil prices soaring, we are generating additional profits.
Hence, we do not mind sharing a part of that with the government. However, what we seek is a transparent mechanism. Today, we get to know our share of subsidy some time after the quarter ends, which we want to change.
We have proposed that the government should decide a level of crude oil prices for which no subsidy will be required. And whatever be the incremental realisation, let the government retain a large portion of that as subsidy.
This way, we will have sufficient revenues to take care of increasing costs and bring in visibility on our future earnings and profits. Visibility on future earnings is important for investors as lack of it increases risk. This clarity will attract better valuations for ONGC. The government is paying attention to our problem and it has set up the Chaturvedi committee to look into the matter. Mr Chaturvedi was earlier the petroleum secretary and is well aware of the industry’s problems. We have already sent our recommendations to the committee with supporting data. We are hopeful of a solution soon.

Crude prices have nearly doubled over the past one year and continue to increase by the day. What is your view on the current crude price rally? Is it sustainable in the long run?
It is difficult to hazard a guess on crude oil prices. While demand-supply forces are affecting oil prices, speculation is certainly adding fuel to the fire. However, I think that crude oil prices will remain firm, as we don’t see any big increase in supply in the near future. Ultimately, crude prices will fall for sure, because when they increase beyond a point, the burden will be shifted to consumers. Once that happens, consumers will shift towards conservation — either improving efficiencies or cutting down on consumption altogether — and this will bring down prices, though it is difficult to guess to what extent.

Despite being out of the subsidy-sharing burden, why didn’t ONGC Videsh (OVL) gain much from rising crude oil prices in FY08?
Higher crude oil prices did benefit OVL. Its profit after tax (PAT) for FY08 rose 44% to Rs 2,397 crore. And this was despite paying Rs 725-crore interest to ONGC, which was not paid in the previous year. Further, OVL wrote off Rs 627 crore of depreciation on pipelines due to a change in accounting policy last year. Also, some provisions were created for its exploration projects, mainly in line with our conservative accounting policy. These provisions can be written back in future, based on the exploratory successes. If you consider these factors, you will notice a big jump in OVL’s profit.

Are high crude oil prices affecting OVL’s investment plans in oil fields?
High oil prices are creating many complications in valuation of assets. The sellers are asking for higher valuations, while as a buyer, we have to be more prudent. In that respect, it has become more difficult to strike a deal as a buyer. However, the deals are still being struck, though it is becoming more and more difficult to convince sellers of the valuations. Again, convincing ourselves of the new reality is also difficult.

What is your outlook on OVL’s production?
OVL’s production has been growing at a fast pace over the past few years. In FY03, it didn’t produce anything, but today, OVL’s production has crossed 8.8 million tonnes of oil equivalent (mtoe). During FY08, OVL’s crude oil production grew by around 18% to 6.81 mtoe and total production was up 11% to nearly 8.8 mtoe.

It’s A Balancing Act
HOWEVER, PRODUCTION may stagnate in FY09, as the existing fields have reached a plateau and no new fields are scheduled to commence production. That is, of course, provided we don’t make any acquisition. In the first half of FY10, OVL’s Brazil block is likely to start production. Similarly, our blocks in Egypt and Myanmar will commence production over the next couple of years. Besides, there are a number of exploration blocks in various stages of development and the option of acquisitions is always open.

OVL has been acquiring oil fields in the past. What is your financial strength for similar acquisitions in future?
ONGC’s balance sheet is quite strong with net worth of Rs 75,000 crore. It is a debt-free company with high cash reserves. This gives us a strong leverage of over Rs 1 lakh crore to finance our growth plans as well as acquisitions.

ONGC’s production has remained stagnant for the past few years. How do you expect your crude oil production to increase in India?
All of ONGC’s producing fields are old, wherein the production is naturally declining. Hence, a lot of investment is needed just to maintain the production. The costs of production, repair and maintenance are also high. Despite this, ONGC is wonderfully maintaining its production. Due to our exploration efforts, we have achieved a reserve replacement (RR) ratio of over 1. Higher reserve accretion than our production means that we won’t run out of oil soon. Going forward, we have three long-term strategies to improve our production.
Firstly, we want to add 20 billion tonnes of oil equivalent reserves by ’20. Secondly, we will take the oil recovery factor to 40% from 28%. So, we will produce more oil from each of our current fields.
Thirdly, we are looking at overseas assets for production growth. Our stated goal is to produce 20 million tonnes overseas by ’20, but we may even achieve this goal earlier. For the short term, redevelopment of older fields, marginal fields and Rajasthan fields, wherein we hold 30% stake, will lead to production growth for ONGC.

What is your dividend policy? Considering that ONGC is a cash-rich company, will it continue to declare hefty dividends as in the past?
As per government guidelines, we need to pay 30% of our profits as dividend. However, our dividend payout ratio is close to 50%. We are the largest dividend-paying company in India and since we have surplus money, we follow a liberal dividend policy. Going forward, we intend to maintain our dividend payout ratio.

Considering that the government has imposed restrictions on the company’s profitability, what is your message to ONGC’s retail investors?
If we compare ONGC with global oil majors, most of them do not have a high RR ratio. Our RR ratio has stayed above 1 in the past four years, which indicates that we are adding more to our reserves than our annual production. This ensures long-term future production growth.
While global oil companies are witnessing a fall in production, ONGC’s total production is increasing. The only problem is ad-hoc subsidies, which we are trying to do away with.
However, if we club together the profits of ONGC, OVL and Mangalore Refinery and Petrochemicals (MRPL), we see our consolidated profits growing steadily in future. Besides, we also have a consistent dividend policy. Hence, I believe retail investors should not be concerned with the short-term fluctuations in ONGC’s share price.

Crude woes to hit oil cos’ June numbers

THE petroleum industry has been in the limelight for most of the last quarter, thanks to the sustained growth in crude oil prices which gained nearly 30% between April and June 2008. In the first week of June, the government allowed some increase in retail prices of petroleum products and adjusted duty structure to absorb a part of the impact of rising crude oil prices. However, this is hardly going to benefit the Indian petroleum industry, when they publish their quarterly results for the period ended June 2008.

Upstream Oil
India’s largest petroleum producer ONGC is unlikely to emerge a winner, as it needs to share a part of the subsidy. Most brokerage houses, including Prabhudas Leeladhar, Religare and CLSA, among others, expect a single-digit growth in ONGC’s net profit in the quarter ended June 2008.
High crude oil prices are likely to benefit private sector producer Cairn India in improving its quarterly profit. However, they will have little meaning, considering the fact that the company’s valuations mainly depend on its crude reserves and future production from its Rajasthan fields.

Standalone Refining
The gross refining margins (GRMs), which represent the differential between petroleum product prices and the cost of crude oil, remained strong during the June 2008 quarter due to high diesel prices, benefiting the standalone PSU refiners such as MRPL and Chennai Petroleum, besides Reliance Industries and Essar Oil in the private sector. The analyst community is expecting sterling performance from RIL, which derives nearly two-thirds of its revenues from petroleum refining business. “We expect RIL to report GRM of around $16.5/bbl,” mentions a Motilal Oswal report. Most brokerage houses are expecting RIL to turn in profit growth of 23-27%. However, weak margins in the petrochemicals business could eat into RIL’s profits. Hence, taking a cautious view, CLSA and Morgan Stanley have projected just 9-12% profit growth for RIL in Q1 FY09. Essar Oil’s refinery commissioned commercial production this quarter, which means it will start reporting profits. Similarly, companies such as MRPL and Chennai Petroleum would report healthy results in the quarter.

Refining and Marketing
India’s state-owned oil marketing companies — Indian Oil, BPCL and HPCL — continue to suffer from under-recoveries and their profitability will remain unpredictable till the timing and quantum of oil bonds are known. “For the past two years, the government did not issue any oil bonds in the first quarter. It issued oil bonds in the second quarter for both first and second quarters,” noted the Motilal Oswal report. As a result, most brokerage firms expect the losses of OMCs to widen. CLSA mentions, “We expect the R&Ms to report aggregate losses of Rs 24,000 crore despite higher refining margins and inventory gains due to spiralling under-recoveries and lack of oil bond support." Exploration support industry
The companies providing support to petroleum companies in exploration activities are likely to post good numbers. Companies such as Aban Offshore, Shivvani Oil, Asian Oilfields and Deep Industries may turn out surprises. Morgan Stanley expects Aban’s Q1 profits to triple, while Citi’s projection is a modest 57% growth and Religare’s just 35%. Other companies in this space, such as Garware Offshore and Great Offshore, too are expected to do well.

Gas Transportation
The results of most of the gas transporters are unlikely to be exciting. India’s largest gas transporter GAIL will continue to reel under the pressure of subsidies. “While higher gas transmission volumes will allow GAIL to offset the impact of the gas price increase (which impact petchem and LPG margins), leading to a 25% Y-o-Y rise in core EBITDA, subsidy sharing is expected to double during the June 2008 quarter to Rs 550 crore. This will restrict net profit growth to a modest 2% Y-o-Y,” mentions CLSA’s report. Smaller players such as Gujarat Gas, Indraprastha Gas and Petronet LNG are likely to report profit growth of around 10%. Gujarat State Petronet could turn out to be an outperformer in this league.

Interview-Petronet LNG: All Ready To Roll

Petronet LNG hopes to ride the expected boom in LNG capacity in India. CFO A Sengupta elaborates

Tell us about the current global LNG scenario. What kind of changes do you see in the way business is shaping up over a period of time?
LNG is nothing but natural gas. Just for transportation purpose, we need to liquefy it. Natural gas demand is increasing throughout the world, thanks to two reasons. Firstly, it is very clean fuel and secondly, wherever it is used, the efficiency improves. Today, there are three distinct LNG markets in the world. Asia Pacific includes Japan, Korea, Taiwan, China and India. Then there are the European and the US markets.
Over the next 10 years, while the global LNG supply will double, we believe both Europe and the US will get flooded by piped natural gas. Europe already has pipelines supplying gas from Russia, while another one is being built from Algeria in North Africa to Italy. Similarly, Nigeria is likely to get connected with Europe soon. Across the Pacific, the US is witnessing growing natural gas supplies from Canada.
These pipeline projects will stagnate the LNG demand in these regions over a period of time. As a result, the Asia Pacific region will emerge as the major demand hub for LNG. Even logistically, this region is placed favourably with regard to the two major LNG producing hubs — Middle East and Australia. Over the next 10 years, Australia is likely to emerge a major LNG supplier with a liquefaction capacity of around 50 million tonnes.

Gas availability in India is likely to go up substantially in the next few months. In such a scenario, will there be sufficient demand for costly LNG?
It is true that the availability of gas will go up in future. However, the main question is: by when and how much. If the availability increases by say, 120 million standard cubic metres per day (mmscmd) of gas within the next one year, then, yes, we will have a lot of competition. However, if it goes up in phases over a period of 2-3 years, the likely growth in demand will be higher.
Our estimates, as well as the government’s data, show that by ’12, the domestic demand for natural gas will be 283 mmscmd and domestic supply will be 180 mmscmd. Hence, imported gas will have to fill up the gap, which is huge. Again, if there is any problem in the short term, it will only affect the spot cargos, because our longterm contracts have back-to-back long-term sell arrangements.

You are doubling your current LNG capacity to 10 million tonnes by next year. What is your strategy to ensure sustained capacity utilisation?
The expansion of our Dahej terminal will be completed by the end of ’09. We already have a 7.5-mtpa contract with RasGas, of which, 2.5 mtpa will start flowing in when the expansion is over. We have also approached various other suppliers for middle-term contracts and we are hopeful of securing some of them. Otherwise, the spot cargo potential is always there. Hence, I don’t think Dahej will remain under-utilised at all. For long-term contracts, we will import only if we have back-to-back sell agreements, as the exposures are very high. However, in future, we will not book our entire capacity with long-term contracts, which takes away flexibility from the business. When the volumes are very high, any downstream disturbance may have high repercussions, as all our contracts are take-or-pay contracts.

When will the RasGas contract come up for price revision? Considering the current high energy prices, what will be the likely impact?
It’s due on January 1, ’09. However, it’s not price revision. The formula remains the same for 25 years, which is linked to Japanese Crude Cocktail (JCC). It’s just that for the first five years, the reference JCC price was fixed at a certain level, which will go out from ’09 and the formula will be followed. However, there is a cap and a floor price, so it will remain within that. Similarly, the five-year average JCC price is taken for reference. Hence, the current spurt in energy prices won’t have any immediate impact on the LNG contract prices. At the same time, thanks to the back-to-back selling arrangements, we won’t see any change in volumes.

What is the current status of your Kochi LNG project? Have you tied up for the LNG supply? What kind of return on capital do you expect from it?
We have already started awarding contracts for the 5-mtpa Kochi LNG terminal, which is scheduled to come up by end of ’11. We have split up the entire project into three distinct parts, viz, storage tanks, marine work and vapourisors. Since the storage tanks are highly specialised equipment, we have already placed orders for the same. For the other two facilities, we will award contracts through a global bidding process by the end of the current year.

We’ve Got The Power FOR THE LNG supply to Kochi, we have had long negotiations with Exxon Mobil for its share from the Gorgon LNG project in Australia and have submitted our final price quote. We are highly hopeful of securing the contract. There are two aspects to return on capital. Firstly, the capital cost will be higher, at around $650 million, for the Kochi terminal, compared to around $400 million for the first phase of Dahej. Secondly, our earnings will depend on the volumes we handle or capacity utilisation, since it is just the regasification margins that we earn. However, Kochi and the nearby areas lack pipeline connectivity and hence, our LNG won’t have much competition, thus enabling us to utilise full capacity. All in all, we may not be able to sustain the current RoCE of above 25%, but it will remain healthy.

What kind of synergies do you expect from your latest venture in power generation?
We are proposing to set up a 1,200-mw power plant in Dahej near our LNG terminal at a capital cost of Rs 3,500 crore. We have inherent strategic advantages for entering the power generation business, thanks to the availability of ‘cold energy.’ We will be setting up three 350-mw turbines totalling 1,050 mw, but our output will be 1,200 mw. LNG is transported and stored at temperature as low as minus 160 degree Celsius. Hence, when it gets regasified, it brings down the temperature of water to zero. This water is then used for cooling in turbines improving their efficiency. Besides the savings of 12.5% value-added tax (VAT) on fuel, this will ensure that our power will be the cheapest among all gas-based projects in India. We are currently waiting for the state government to allocate us land to set up the power plant.

Currently your debt-equity ratio is above 1. How do you plan to finance new projects, including the Kochi terminal and the proposed power plant?
For us, the acceptable level of debt-equity ratio is 2.3, so we have huge borrowing capacity. At present, we can borrow around Rs 2,200 crore, while internal accruals will contribute another Rs 500 crore every year. Hence, financing the new projects will not be much of a problem for us.

Fertiliser stocks: A Matter Of Faith?

Fertiliser stocks have been outperforming market benchmarks, so far. But things do not appear too bright going ahead, as the industry’s fortunes are wedded to policy reforms

STOCKS OF fertiliser companies have been rising steadily for over a year now and have also outperformed the broader market benchmarks in the current turbulent times. While the problems faced by the industry are hardly a secret, expectations of a better policy environment are driving up valuations. In face of the shortage of fertilisers in the country, the government is mulling policy changes to induce investments in the sector, which are likely to be introduced in the near future. A few policies have been already announced, which are favourable for the industry. However, considering the nature of the industry and political compulsions, radical changes are not expected. Hence, doubts remain as to whether fertiliser manufacturers will be able to sustain their current rich valuations. Investors are advised to observe extra caution while dealing in these scrips.

GROWTH PANGS:
The government took a number of policy decisions for the fertiliser industry in June ’08. It has reduced the prices of complex fertilisers while maintaining the retail prices of urea, muriate of potash (MOP), diammonium phosphate (DAP) and single super phosphate (SSP). The recent policy on potassic and phosphatic fertilisers recognises a number of costs while calculating subsidy for the industry, which will enable the companies to recover their costs fully. Although these policies will not improve the industry’s operating profits, companies can benefit from higher production. The industry is still waiting for the investment policy on brownfield and greenfield expansions.

The expectations of an improved policy environment are reflecting in the performance of most fertiliser scrips. Over the past 12 months, the ET Fertiliser index has outperformed the BSE Sensex by a wide margin. The ET Fertiliser index has generated over 56% returns since June ’07, while the Sensex returns are at a mere 6%. In the same period, the ET Fertiliser index witnessed a steady growth in its price-to-earnings (P/E) multiple, indicating growing investor confidence. The P/E of ET Fertiliser index grew from 8.5 in June ’07, peaked at 25 in the first week of January ’08 before easing down to 12 currently — still higher than the level in June ’07. On the contrary, the Sensex P/E, which was at 20.7 in June ’07 and crossed 28.5 at its peak in January ’08, has fallen to 17.2 now — below last year’s level.

While investors have been betting on a better future for the fertiliser industry, the growth in its aggregate results has not been impressive. For the year ended March ’08, the aggregate net profit of 15 fertiliser companies was almost flat at Rs 1,477 crore, despite a 17% growth in sales. Even the growth in operating profits was restricted at 5%, indicating a pressure on operating margins. The industry, which had posted operating margins of 12.7% during the year ended March ’06, recorded a margin of 10.5% in FY07 and just 9.4% in FY08.

Due to rigid policies, the fertiliser industry has become highly unattractive for fresh investments. As a result, rising demand has outpaced stagnating supplies and India today has to depend on costly imports for its fertiliser needs. The unsustainability of the current scenario is forcing the government to introduce policy reforms, which are likely to benefit both the industry, as well as the government. Considering the expected spurt in the availability of natural gas in India, the policy reforms appear long overdue.

IT’S ALL ABOUT GAS:
Over the next six months, as Reliance Industries’ (RIL) KG basin starts producing gas, the domestic availability of natural gas will go up by nearly 75%. Sufficient and continuous supply of natural gas will ensure higher production of fertilisers — particularly urea — and reduce the government’s subsidy burden. Natural gas is an important feedstock for manufacturing urea and the lack of adequate availability forces domestic manufacturers to use naphtha, which is a costly feedstock. Similarly, natural gas can also replace expensive fuels such as fuel oil and low sulphur heavy stock (LSHS). However, cheap natural gas will lead to a reduction in the government’s subsidy burden and no significant benefit will accrue to the manufacturers.

National Fertilisers, Gujarat Narmada Valley Fertilisers (GNFC), Gujarat State Fertilisers (GSFC), Tata Chemicals, Chambal Fertilisers, Rashtriya Chemicals and Fertilisers (RCF), Southern Petrochemical Industries (SPIC) and Mangalore Chemicals are the important urea manufacturers in India. Fertiliser and Chemicals Travancore (FACT), SPIC, TCL, Coromandel Fertilisers and Rama Phosphates manufacture phosphatic fertilisers. Higher availability of natural gas will provide volume-led growth to companies, expanding the capacity of companies like Tata Chemicals and Aditya Birla Nuvo. Tata Chemicals is expanding its urea capacity to 1.2 million tonnes (mt) from the current 0.875 mt by October ’08. But the plant will remain shut for a month subsequently for integration purpose.

Again, not everyone is likely to get access to natural gas in the near future. Fertiliser plants located in South India do not have any gas connectivity. The government plans to provide gas connectivity to all fertiliser plants by FY12. Fertiliser companies such as Goa-based Zuari Industries, Kochi-based FACT, Mangalore-based Mangalore Chemicals & Fertilisers (MCFL), Tuticorin-based SPIC, Chennai-based Madras Fertilisers and three plants of National Fertilisers — at Panipat, Nangal and Bhatinda — are awaiting gas connectivity.

GREENER PASTURES:
Over the past few years, most fertiliser companies have diversified into other chemical businesses to create value for their shareholders, as the fertiliser business stagnated. The most noteworthy example is probably Nagarjuna Fertilisers, which is setting up a petroleum refinery in Tamil Nadu.

Similarly, companies such as Deepak Fertilisers and Oswal Chemicals have ventured into the real estate business. Chambal diversified into textiles, shipping and food processing, while Rama Phosphate entered the soya oil business. Today, almost all the domestic fertiliser companies, barring National Fertilisers and Coromandel Fertilisers, have diversified into chemicals or other businesses to improve cash flows and drive growth.

The fortunes of fertiliser companies depend on the government’s policy reforms. The changes introduced so far, which encourage domestic manufacturers to produce more, have met the industry expectations. However, investors must realise that considering its nature, the fertiliser industry is unlikely to become fully de-regulated in the foreseeable future. Hence, the current prices of fertiliser stocks appear to have a downside risk.

ONGC Q4 net slips 2% on subsidy burden

Rise in Crude Prices Fails To Lift Profit As Employee Costs Too Show Huge Spurt

SOARING crude oil prices did not help India’s largest oil producer as expected, as ONGC fell short of crossing the Rs 20,000 crore annual profit mark in FY08. ONGC’s fourth quarter profits slipped 2% below year ago levels to Rs 2,627 crore. A huge spurt in employee costs, subsidy burden and heavy write-offs were the culprits. The oil major reported consolidated profits of Rs 19,872 crore on sales of Rs 1,01,835 crore during the year ended March 2008.

The company provided nearly Rs 2,000 crore for the pay revision including gratuity thereon, which was pending since January 2007. “We have made a provision of Rs 1,050 crore towards the arrears of employees on account of pay committee recommendations. Also, Rs 850 crore has been earmarked towards gratuity liabilities. This has impacted profit, as 80% of the spending would have gone to the topline if pay committee recommendations were not there,” ONGC director finance DK Sarraf said while addressing a post result conference in New Delhi.

“There is lot of confusion due to ONGC’s changes in accounting policy regarding employee costs. However, one thing is for sure that their net realisation has fallen to around $52,” an analyst working with an international investment bank commented.

In the same quarter, the company wrote off Rs 610.5 crore spent over last three years on a deep-sea oil block, on account of abundant prudence as the block needed more time for completion of appraisal programme. This oil block in the Krishna-Godavari (KG) basin was taken over in 2005 from Cairn for Rs 371 crore. ONGC has found in-place hydrocarbon reserves in this block last year making it India’s first ultra-deep water discovery at 2,841 metres of water depth. The conceptual development plan for this field is underway and appraisal programme is expected to begin in October this year.

The subsidy burden proved to be the other villain. ONGC’s subsidy burden during the quarter shot up 82% to Rs 8,473 crore. This took the total discount offered to the oil marketing companies during the entire year 29% higher to Rs 22,001 crore. “There is a lot of uncertainty because of the ad hoc subsidy mechanism. I would request the government to move to ad-valorem cess instead of the present ad-hoc mechanism,” said ONGC chairman and managing director Mr RS Sharma.

The company witnessed a sharp rise in its other expenditure, which rose to 24.6% of net sales from 18% in corresponding quarter of previous year. This was mainly on account of increase in hiring cost for rigs, floaters and other materials.

Employee, staff costs take toll on Tata Chemicals

IN THE quarter when the soda ash major was much in the limelight for its $1 billion acquisition in the US, Tata Chemicals (TCL) had faced severe pressure on its operating performance. TCL’s normalised net profits halved during the quarter ended March 2008 to Rs 40 crore, while operating profit margins tumbled by a massive 820 basis points to 12.2%.
Consolidated sales grew 18% to Rs 1,460.3 crore. It was the profit of Rs 487.47 crore on sale of investments that boosted its net profit to Rs 527.68 crore. Incidentally, the company had a poor Q3 with topline stagnating and net profits down 42%. Rise in staff and fuel costs was the main reason behind erosion of operating margins.
Staff costs as a percentage to net sales jumped to 9.8% from 4.9% earlier. Due to the US acquisition, TCL had to provide for pension liabilities of Rs 34.54 crore, whereas in the corresponding previous quarter, it had written back an equivalent amount due to reduction in pension liabilities. Thus, staff costs rose nearly two-and-a-half times to Rs 160 crore. A rise in fuel costs led to the fuel bill rising 50% to Rs 290 crore. As a result, the fuel cost in proportion to net sales grew 370 basis points to 17.7%.
TCL’s chemicals business had a tough time while the fertilizer segment did well, something similar to the preceding quarter. Profit margins in TCL’s inorganic chemicals business crashed 1160 basis points to just 5.8% while the margins in fertilizers inched up slightly to 14%. Thus, despite a 20% growth in chemicals sales its profits fell by 60%. As against this, the fertilizers segment grew 15% and 20% in sales and profits, respectively.
The company is debottlenecking its Babrala urea plant to increase its rated capacity to 1.2 million tonne from 0.8. The process is expected to be complete by October 2008. However, the entire plant will remain closed for one month for the integration and commissioning work.
The company has progressed on its new businesses. It commissioned the Khet-Se project with the first collection-cum-distribution centre near Ludhiana in May 2008. The second distribution centre will come up at Kalyan, near Mumbai. TCL has also commissioned a 50,000 tonne per annum sodium bicarbonate plant in the Netherlands. Similarly, civil construction at site for the ethanol project at Nanded has commenced with completion expected by the end of this year.

ONGC to clock windfall profits

Despite Output Stagnation, Soaring Crude May Help Co Post Rs 20,000-Cr FY08 Profit

SCALING a major milestone, ONGC — India’s largest oil and gas producing company — is expected to report a net profit in excess of Rs 20,000 crore for the year ended March 2008 — a feat no other Indian company has enjoyed so far. ONGC will be publishing its results for FY08 on June 25, 2008.

While ONGC’s production of oil and gas continues to stagnate, its performance will get a boost from higher crude oil prices. “Crude oil price moved up to $100/barrel in Q4FY2008 from $60/barrel a year ago, which more than offset the negative impact of 10% Y-o-Y appreciation in rupee against dollar,” noted a research report by Karvy Stock Broking. The brokerage house expects ONGC to post net profit of Rs 20,755 crore for the financial year ended March 2008.

Another factor which will boost the company’s performance is the improving performance of its subsidiaries. Thanks to improved business environment, MRPL — a 72% subsidiary of ONGC — reported 142% spurt in profits for FY08 to Rs 1,272 crore Similarly, net profit of its wholly-owned subsidiary ONGC Videsh (OVL) jumped 44% to Rs 2,397 crore in FY08 assisted by higher production. OVL’s crude oil production jumped 18% to 6.81 million tonne during FY08 as against 5.77 million tonne in previous year. However, OVL has not benefited fully from the rising crude oil prices. “In the regions where OVL operates, the governments take away a significant chunk of the price benefit. That’s why OVL is not able to draw full benefit of the high crude oil prices,” said a senior research analyst with an international broking firm. The firm projects per share earnings (EPS) of Rs 95 for ONGC for the whole year, which is 14.5% higher on Y-o-Y basis.
At ONGC’s current market price of Rs 845, this will translate in a price-to-earnings multiple (P/E) of 8.9 — a level last seen four years back in June 2004. The company has already paid interim dividend of Rs 18 per share and considering the Rs 31 dividend paid last year, is likely to declared another Rs 13 as final dividend.

ONGC has to share the burden of subsidy to the oil marketing companies by way of discounts on sale of crude oil. During the year ended March 2008, discounts offered by the company increased 29% to Rs 22,000 crore.