ONGC: Holding fort

ONGC has managed better numbers despite subsidy burden

Oil and Natural Gas Corporation's (ONGC) December 2005 quarterly results were broadly in line with analyst expectations, given the mounting subsidy burden.

ONGC's operating profit rose 17.1 per cent y-o-y to Rs 7,361.09 crore in Q3 FY06 on strong crude prices. Gross realisations (prior to the subsidy) were pegged at $58 per barrel in the last quarter, about 30 per cent higher on a y-o-y basis, point out analysts.

However, the subsidy burden ballooned to Rs 2843.17 crore in the December quarter compared with Rs 1332.02 crore a year earlier.

Also, the company's production of oil was lacklustre in the last quarter on a y-o-y basis, as steps are still being taken to ensure normal production after the recent fire at Bombay High.

As a result, ONGC's crude oil production was approximately 6.4 million tonne in Q3 FY06 compared with 7.1 million tonne a year earlier. Nevertheless, a larger turnover helped operating profit margin grow 707 basis points y-o-y to 59 per cent in Q3 FY06.

The company's oil production is expected to improve given its planned expansion in Syria and Brazil, and on efforts taken to restore output at Bombay High.

However, ONGC's ability to leverage strong crude prices is expected to be hit once again by the subsidy burden. The stock appears reasonably valued at about 8.7 times estimated FY06 earnings.

Hero Honda: Slower sales growth

Better per unit realisations coupled with a lower proportion of raw material costs have helped Hero Honda expand its operating margins in the December 2005 quarter.

The top line growth was a trifle disappointing at 15.6 per cent y-o-y "" it was 23 per cent y-o-y in the September quarter"" and competitor Bajaj Auto's sales growth of 25 per cent.

The company seems to be finding it difficult to scale up from these levels. Volumes in the quarter were up just 12.1 per cent but the company managed higher realisations of Rs 28,996 per vehicle compared with Rs 28,113 in Q3 FY05, which helped improve profitability.

Hero Honda's operating profit was up a strong 22 per cent y-o-y to Rs 378 crore. Thanks to a lower raw material to sales ratio of 69.18 per cent compared with 70.9 per cent in Q3 FY05, the operating margin too expanded by about 90 basis points to 16.3 per cent.

Its operating margin had dipped slightly in the September quarter on a y-o-y basis but had improved sequentially. In Q3 FY06, margins have improved both sequentially and y-o-y.

At Rs 856, the stock trades at 17.12 times estimated FY07 earnings and at a discount to Bajaj Auto, which trades at around 20 times FY07 EPS. The gap is likely to remain given Bajaj Auto's better topline performance and margin expansion.

BHEL: A powerful quarter

BHEL's results for the December 2005 quarter have pleasantly surprised the market. Its operating profit grew by 70.79 per cent y-o-y in Q3 FY06. Operating profit margin went up by 269 basis points to 18.12 per cent over December 2004 quarter.

With increasing investments in power generation, stocks of power equipment companies have more than doubled in the past year.

BHEL's power division revenues grew a huge 55 per cent, compared with a 15.51 per cent growth in the industry division. Its order book stood at Rs 33,800 crore in Q3 FY06, up a modest 6.6 per cent.

During the quarter, the company commissioned the first of four 150 mw gas turbine generator in Libya and received the Indian government's approval to set up a 1,000 mw plant in Sudan.

It also signed a technology transfer agreement with Alstom, France to manufacture large boilers, which will enable it to take up 800 mw projects.

In Q3 FY06, revenues grew by 45.5 per cent y-o-y to Rs 3326.7 crore, but raw material costs went up by 51.9 per cent. Analysts say that despite lower steel prices during the quarter, higher non-ferrous metal prices led to this rise.

The company managed to control other expenditure and staff costs, which helped in better operating performance.

Going forward, the company will need a better control on costs to maintain margins. The stock gained 5.6 per cent on Tuesday, and trades at about 22 times FY07 earnings, a fair valuation for the growth potential.

With contributions from Amriteshwar Mathur and Shobhana Subramanian