ONGC's bottomline on course for doubling

Oil and Natural Gas Corporation Ltd's net profit is likely to rise 110 per cent on year to Rs 3,602 crore for October-December, according to an average of estimates of eleven brokers polled by Crisil MarketWire.

Analysts said the doubling of profit will be on the back of sharply higher global crude oil prices during the quarter. Revenues for the third quarter of 2004-05 (April-March) are seen rising 52 per cent to Rs 11,476 crore.

For the quarter, the oil and gas exploration major's net profit forecasts vary from a low of Rs 2,371 crore to a high of Rs 4,290 crore. Revenue forecasts range between Rs 8,998 crore to Rs 12,784 crore.

On a sequential basis, the December quarter net profit is likely to increase 6 per cent , although revenues could decline 7 per cent. ONGC will detail its third quarter results Monday.

The company is expected to post strong results for the quarter, mainly due to the steep rise in international crude oil prices.

Average Brent price, which is a benchmark for the Dubai mix consumed by Indian oil companies, averaged $44.5 a barrel as compared with $30 a barrel in the second quarter (July-September).

"With crude prices averaging a record $44.5/bbl, the third quarter of 2004-05 will see ONGC post its best ever quarter with profits," said an earnings preview note from foreign brokerage firm, CLSA.

Another factor that could contribute to highr on-year growth is that upstream companies ONGC and GAIL in the October-December quarter of 2003-04 had paid out LPG/kerosene subsidy loss arrears of the previous quarters, thereby pulling their profitability lower.

As a result, ONGC's on-year growth is likely to be higher due to the lower base effect, analysts said.

Among the negative factors, increased subsidy burden is likely to weigh down profit, analysts said.

"Despite the November increase in LPG prices by Rs 20, average loss on sale of liquefied petroleum gas increased 2.5 times in the third quarter to Rs 157 per cylinder, compared to loss of Rs 66 per cylinder a year ago," according to an earnings preview note of brokerage, Fortis Securities.

In addition, some analysts expect the government to exempt GAIL from sharing kerosene subsidy losses booked by oil marketing companies, as it does not produce the product and hence does not benefit from the global price increase.

"Even in this case, the current one-third share of upstream companies is not likely to be changed and ONGC is likely to bear the additional burden," said an analyst with a city-based brokerage.

This would count as a negative factor for the company, as it would directly hit the bottomline, he added.

Market players believe the medium-term outlook for the ONGC stock remains positive as global crude oil prices are still higher than last year's levels. Analysts expect Brent crude prices to stabilise in the $38-43 level over the medium term.

However, there are concerns over ONGC's of lack of success in its exploration activity, which may also result in higher write-offs on dry wells, although the timing and degree of the rise is not clear.

ONGC shares are trading slightly lower from the share price at the beginning of January. Dealers said the current price has factored in the strong results, and the stock is likely to hover around these levels.