ONGC: Crude affair

ONGC's subsidy burden will rise on recent policy measures

A higher subsidy burden has once again limited ONGC's ability to leverage the buoyant trend in crude oil prices.

Operating profit for Q4 FY06 has grown 5.47 per cent y-o-y to Rs 6725.42 crore compared with 2 per cent fall in net sales to Rs 11,898.37 crore. For FY06, consolidated operating profit rose 10.76 per cent y-o-y to Rs 31074.3 crore.

Production of crude oil in the March 2006 quarter was at 4.9 million tonne compared with 5.29 million tonne a year earlier. Last year, its production was disrupted owing to a fire at Bombay High.

Gross realisations are estimated to have risen 31 per cent y-o-y to $63 per barrel in Q4. However, the company's subsidy burden has jumped to Rs 3,406 crore in Q4 FY06 compared with Rs 990 crore a year earlier.

The subsidy amounted to Rs 11,956 crore in FY06 compared with Rs 4,104 crore a year earlier. The street appears to be concerned about the rising subsidy burden "" the stock has fallen about 10.7 per cent since the beginning of CY06 compared with 8.4 per cent gain in the Sensex.

The company, however, kept a tight check on operating costs. As a result, operating profit margin went up by 401 basis points y-o-y to 56.5 per cent in the March 2006 quarter.

However, with depreciation amounting to Rs 3157.38 crore in Q4 FY06 compared with Rs 1758.43 crore a year earlier, the quarterly net profit slipped 18.75 per cent to Rs 3085.89 crore.

For FY06, its consolidated operating profit margins fell 300 basis points y-o-y to 44 per cent.

The company's subsidy burden is expected to rise, given the recent policy measures announced by the petroleum minister while hiking fuel prices. As a result, the stock gets a discounting of about 7.5 times estimated FY07 earnings.

VSNL: Revenue blues

VSNL's standalone numbers for the March 2006 quarter were reasonably good with the operating profit margin up at 24.3 per cent, a rise of 330 basis points sequentially and 190 points y-o-y.

Operating profit at Rs 230 crore, showed 13.5 per cent increase q-o-q and 15.1 per cent y-o-y. These improved margins resulted from a lower licence fee on ILD and DLD revenues.

Moreover, adjusted for extraordinary items, the net profit at Rs 180 crore, was up 106 per cent q-o-q and 39 per cent y-o-y.

That's probably why the stock was up 9 per cent on Tuesday, even though revenues in Q4FY06 were down about 2 per cent q-o-q thanks to falling incoming settlement rates.

The revenue growth has been poor because, as the management points out, despite volumes in voice, data and bandwidth businesses growing, there is a lack of pricing power given the competition.

VSNL's consolidated revenues for FY06 were Rs 4,800 crore, after including revenues of its two subsidiaries""Tyco Global Network (TGN) and Teleglobe for a part of the year.

Net consolidated income at Rs 70 crore compared with the net standalone income of Rs 480 crore implies a net loss of Rs 410 crore for the two subsidiaries, with most of the losses stemming from TGN.

At the operating level, the combined operating profit is between Rs 5-6 crore with Teleglobe being marginally positive.

VSNL's consolidated valuations at 17 times FY08 earnings probably build in the growth in the near-term though from a longer-term perspective, the strengthening of the network through acquisitions and focus on enterprise will pay off.

TVS Motor: Margin pressure

It's been a disappointing year for TVS Motor, with net sales up by just 12.5 per cent to Rs 3,235 crore on higher volumes of 15 per cent.

Operating profit margin fell 100 basis points to an abysmal 6.3 per cent, the result of rising raw material costs. As a result, operating profit fell 3.3 per cent.

The March quarter numbers too were not encouraging with net sales increasing by 16.8 per cent y-o-y on a volume growth of 18 per cent, though motorcycle volumes were up an impressive 24 per cent y-o-y.

However, what is really disappointing is the sequential fall in operating margin, which dropped 130 basis points to 5.7 per cent.

While operating profit grew by 37 per cent to Rs 48.2 crore, the increasing share of entry-level Star and its variants led to a sequential fall in average realisations.

With demand for two-wheelers expected to be strong in the next couple of years, TVS should continue to post strong volumes "" the Apache and Star should post unit sales of 1.5 lakh and 6 lakh units respectively in FY07.

However, its margins are likely to remain under pressure since it does not yet have the scale to be able to counter rising raw material costs.

Besides, its share of low-margin entry level motorcycles is high so much so that margins could actually contract in the next few years by about 50 basis points.

At the current price of Rs 95, the stock trades at 15 times estimated FY07 earnings and just under 12 times estimated FY08 earnings and is not expensive. However, margins need to stabilise before investors re-rate the stock.

With contributions from Amriteshwar Mathur and Shobhana Subramanian