ONGC: Just in time

A drop in subsidy burden somewhat negated the rupee impact.

Oil and Natural Gas Corporation (ONGC) was able to report an improved performance in the June 2007 quarter thanks to a fall in its subsidy burden on a y-o-y basis. However, an appreciating rupee curtailed growth in its top line and bottom line.

As a result, operating profit (excluding other income) declined 2.3 per cent y-o-y to Rs 7922.3 crore in the last quarter, while net sales declined 6.3 per cent to Rs 13687.7 crore. The company highlighted that the rupee appreciation affected its top line by Rs 1,500 crore in the last quarter, while net profit was hit by Rs 900 crore.

Meanwhile, crude oil production was 6.88 million tonne in Q1 FY08 compared with 6.93 million tonne a year earlier. It is understood that the company had to grapple with processing problems at its Nawagam desalter plant, which affected production from Mehsana and Ahmedabad oil fields.

In addition, its gross realisation (prior to subsidy sharing) was $71.77 a barrel in the last quarter compared with $71.39 a year earlier. Of crucial importance is that the company's subsidy burden was Rs 3649 crore in Q1 FY08, compared with Rs 5120 crore a year earlier. As a result, operating profit margin grew 240 basis points y-o-y to 57.9 per cent in the June 2007 quarter. The stock rose nearly 2 per cent to Rs 934 on Wednesday.

In contrast, in the March 2007 quarter, the subsidy burden jumped 37 per cent y-o-y, which resulted in its operating margin declining 2090 basis points y-o-y to 35.6 per cent.

Going forward, the underlying concern for the company remains the uncertainty in the size of the subsidy sharing burden. As a result, the stock gets a discounting of 9.5 times estimated FY08 earnings.

HDFC: Keeping the faith

HDFC has once again surpassed analysts' expectations in its June 2007 quarter results. If there were concerns of a slowdown in home buying owing to expensive real estate and high interest rates, then with a 29 per cent y-o-y rise in both loan approvals and sanctions, HDFC was not affected. Even its non-performing loans are lower compared with the June 2006 quarter. The fully diluted earnings grew by 24 per cent y-o-y in Q1 FY08.

Its loan portfolio increased by 23 per cent y-o-y in Q1 FY08. HDFC was able to improve its net interest margin by 5 basis points sequentially and 8 basis points y-o-y, with net interest income growing 40.7 per cent. This indicates that HDFC has been able to pass on higher interest costs to borrowers. If interest costs have gone up 55 per cent y-o-y, that's because of growth in business as well as higher interest rates.

With its preferential allotment to Carlyle and Citigroup, HDFC has collected Rs 3100 crore to fund its investments in HDFC Bank and HDFC Standard Life Insurance, which is book accretive. While banks are going slow on home loans, it is an opportunity for HDFC to improve its market share.

In FY07, analysts say HDFC's market share improved by 250 basis points y-o-y to 25.2 per cent. The outlook on interest rates for the short term is benign and HDFC should continue growing its loan book by over 25 per cent, say analysts. After adjusting for its holdings in its subsidiaries and associate companies, HDFC trades at less than 4 times its estimated FY09 book value, which is attractive.