ONGC: Cooling down

Surge in subsidy burden and rising cost structure impacts ONGC's operating profits

ONGC's performance in the December 2007 quarter was adversely affected by a surge in subsidy burden and rising cost structure.

As a result, the company's operating profit declined 9.8 per cent y-o-y to Rs 8031.7 crore in the last quarter and net sales fell 2.85 per cent to Rs 15,120.8 crore.

Its operating profit margin declined 410 basis points y-o-y to 53.1 per cent in Q3 FY08.

The company's margins were pressurized by the subsidy burden of Rs 6,080 crore in the December 2007 quarter compared with Rs 2,204 crore a year earlier.

The total operating costs rose 6.5 per cent y-o-y in the last quarter.

In contrast, the operating profit margin expanded 460 basis points y-o-y to 54.6 per cent in Q2 FY08.

Going forward, the uncertainty regarding size of the subsidy sharing burden continues in the medium term.

The stock trades at a reasonable 10.2 times estimated FY08 and 9.6 times FY09 earnings.

Ranbaxy: Good health

Ranbaxy reported an improved performance in the December 2007 quarter. The strong growth in CIS countries, India, Germany and Romania helped to offset the 11-12 per cent y-o-y appreciation of the rupee.

As a result, the pharma company's operating profit grew 11.7 per cent y-o-y to Rs 297.7 crore in Q4 CY07, while its total operational income expanded 7.1 per cent to Rs 1902.3 crore.

Its operating profit margin improved 60 basis points y-o-y to 15.6 per cent in the last quarter. The net profit from core activities (excluding other income and extra-ordinary items) grew 12 per cent y-o-y in rupee terms and 26 per cent in dollar terms in the last quarter.

In the key US market, the company's sales were $104 million (Rs 409 crore) in Q4 CY07. This represents a growth of 8 per cent y-o-y after excluding sales of first-to-file products.

In Europe, the company's sales grew by an impressive 37 per cent y-o-y to $106 million (Rs 418 crore), thanks to a 23 per cent growth in Romania and 170 per cent in Germany. Similarly, in the domestic market, the company's sales grew 30 per cent y-o-y in Q4 CY07.

Going forward, Ranbaxy has forecast an 18-20 per cent y-o-y growth in dollar terms, coupled with a 17.5-18 per cent operating profit margins and a 20-25 per cent growth in profit after tax.

At the price of Rs 365, the stock trades at a reasonable 16 times estimated CY08 earnings.