ONGC: Case of crude gain

Higher oil prices more than offset ONGC's subsidy burden

The ONGC stock went up by around 3 per cent on Monday, despite the Ministry of Petroleum announcing a higher subsidy burden on the company. Why did the stock move up?

The ministry has reportedly estimated the subsidy for LPG and kerosene oil that will have to be given to the oil marketing companies for the July-September quarter at Rs 4,200 crore. With international prices of LPG and kerosene having gone up, the under-recovery is higher than that the previous quarter's Rs 3600 crore.

One third of this amount approximately Rs 1400 will be borne by the upstream oil firms ONGC, OIL and GAIL together, of which ONGC's share has been pegged at Rs 1025 crore. In the previous quarter, ONGC had forked out about Rs 800 crore towards the subsidy, so it will pay around 25 per cent more this time round.

However, with crude prices remaining high, the gross realisation for the company from sales of crude this quarter is being pegged at $40 per barrel compared with $35 per barrel last quarter.

On sales of approximately six million tonnes for the quarter, this could translate into incremental sales of approximately Rs 1000 crore over Rs 10,294 crore in Q1.

So even if it gives away an incremental Rs 200 crore as subsidy, it will still have higher sales. Analysts say that if gross realisations for ONGC averages $38 for the full year FY04-05, on full year sales of 26 million tonnes, sales could touch Rs 37,040 verses Rs 32,063 for FY04. That means an estimated EPS of around Rs 76. At Rs 802, the stock trades at a P/E of 10.6.

H-1B visas

The cap of 65,000 new H-1B visas for the fiscal year 2005, which runs from October 1, 2004, to September 30, 2005, has already been reached, according to reports. A big chunk of these guest worker visas are used by software professionals. Does this mean that the restriction could hurt Indian IT companies?

In the short-term, it's unlikely that established IT companies would be impacted by the shortage of H1-B visas. Simply because most of them have a reserve of H1-B visa holders, which would meet their onsite demand needs for the next couple of years.

However, if the restrictions remain the same going forward, there could be an impact on both growth and profitability. Needless to say, the increased competition for visas would mean increased cost of acquisition of visas/visa holders for IT companies.

Besides, Indian IT companies are growing at a fast pace, and could add manpower in the region of a lakh this fiscal. For a typical software services provider, 30 per cent of the effort is onsite.

So roughly there's a need for around 30000 visas from Indian software professionals, which would only increase if volumes continue to grow. Of course, not all of them go the US. But at the same time, not all of the 65000 H1-B visas are issued to Indians.

Analysts estimate that Indians account for around 20000-30000 of the issuance. If the cap remains at 65000 and if the IT industry continues to grow at a fast pace, there could be problems going ahead. But there's already talk of relaxing the policies. In any case, there isn't any major immediate impact on the Indian IT industry.

National Aluminium

National Aluminium Company Ltd (Nalco) has raised prices of aluminium by up to Rs 2,500 per tonne. The hike was due as domestic prices for aluminium have risen at a slower pace vis-a-vis LME prices.

In the local market, aluminium prices have moved up by approximately 2.65 per cent since the end of April '04 (excluding transport and allied costs), while the corresponding LME price has moved by up around 8 per cent.

The price hike led to a 1.7 per cent jump in the price of Nalco, slightly higher than the rise in the Sensex. However, the outlook for the price of aluminium is not rosy "" according to the Australian Bureau of Agricultural and Resource Economics (ABARE), growth in world aluminium demand is expected to slow in the short term in line with a weaker world economic outlook.

ABARE has forecast aluminium prices to average around $1,660 a tonne in 2004 and drop to $1,610 a tonne in 2005. The price on September 30 was $1,822 a tonne.

Indian aluminium companies have also had to grapple with an increase in input costs. Coal prices have risen by approximately 10 per cent in the September quarter and in addition, the cost of calcined petroleum coke has increased by approximately 14 per cent over the last 4- 5 months.

With Nalco utilising cash flows for retiring its balance debt of approximately Rs 700 crore, lower interest payments coupled with a tight check on costs like staff costs is expected to help Nalco 's September quarter profit rise 15 - 20 per cent.

With contributions from Shobhana Subramanian, Mobis Philipose and Amriteshwar Mathur