ONGC's Syrian conquest

India, China ends dogfight, finally

The ONGC stock gained almost one per cent to Rs 1160 after the company announced that it had jointly acquired PetroCanada's stake in the Syrian oilfields. Clearly, this joint acquisition with Chinese company CNPC does signal that the two countries are no longer engaged in a virtual dogfight to acquire oil fields overseas.

Earlier, a subsidiary of CNPC had beaten the Indian combine of ONGC-Mittal Energy with its bid of $4.18-billion bid for Petrokazakhstan.

Media reports highlight that the ONGC-CNPC combine will have access to almost 58,000 barrels of crude per day via this acquisition in Syria.

This output will be shared between the two upstream players and this deal is expected to enhance the ONGC output by approximately 29,000 barrels per day.

ONGC's total production of crude oil in the first half of 2005-06 was approximately 13.1 million tonnes or 1.05 million barrels of oil per day.

The Indian-Chinese combine will pay $578 million, or Rs 2543 crore, for this deal and they would get access to almost 24.2 million barrels of oil reserves. Hence, the acquisition of oil reserves works out to $24 per barrel, a reasonable price, given that crude prices are hovering well above $50 per barrel. Analysts, however, do point out that the Syrian oil fields have been showing a declining trend in terms of production, implying that the ONGC-CNPC combine may not be fully able to leverage the entire oil reserves.

ONGC's proven oil equivalent reserves amounted to approximately 104.78 million barrels at the end of March 2005.

The ONGC stock has gained about 10.5 per cent over the last fortnight as compared to a 6.6 per cent gain in the Sensex. Investors shrugged off the aborted Nigerian investment, and the sentiment has been buoyed by the upstream player's planned expansion in Brazil and its latest acquisition in Syria. The stock trades at about eight times estimated 2005-06 earnings, and appears reasonably priced.

MRF: Input cost woes

Raw material costs have plagued MRF's performance for the September quarter. Higher input prices, mainly of rubber, have seen MRF's operating margin decline by 48 basis points to 7.856 per cent in the September 2005 quarter.

The only benefit of the boom in auto industry on tyre companies is a strong topline growth. MRF's net sales grew by 15.14 per cent y-o-y to Rs 781.15 crore in the fourth quarter of FY05 (September year-end), but this is not as good as competitor Apollo Tyres, which managed a topline growth of 24.65 per cent in the same period.

Rubber prices, which were high even last year, went up further in the September quarter, with an average spot price at Rs 6241 a quintal compared to Rs 5735 a quintal in the first six months of 2005. Rubber accounts for over half of MRF's raw material costs. As a result, raw material costs as a percentage of net sales went up to 74.66 per cent in the September 2005 quarter as compared to 72.9 per cent in Q4 FY04. For the full year, raw material expenses are even higher at 71.66 per cent compared to 67.17 per cent in 2003-04.

Tyre manufacturers have not been able to pass on rising costs to customers due to severe competition. MRF benefited by retaining 4 per cent of the 8 per cent excise duty cut effected in last Budget, as well as a price hike earlier this year, but it was not enough to offset the rise in input costs.

Also, its other income jumped to Rs 28.61 crore in FY05 as compared to Rs 9.98 crore last year. Going forward, rubber prices are again making highs, with the average spot price at Rs 6663 a quintal this quarter so far.

The stock market seemed pleased with MRF's announcement of a price hike going forward, after a price hike in October, as well as the 200 per cent dividend payout for FY05. After the result, the stock has flared up by about 3.5 per cent.

At its current price of Rs 2959, its 2004-05 EPS is discounted 31 times. Considering that the business is not in the best of shapes, the stock is not cheap.