Riding on realisations

Subsidy burden, recent fire partially dent ONGC's gains

ONGC's September quarter results illustrate the strong realisations that the upstream player had, despite surging subsidies and the recent fire at the company's facilities at Bombay High. As a result, operating profit margin has grown 262 basis points y-o-y to 56.43 per cent in the quarter.

The company's production of crude oil amounted to 5.44 million tonne in the last quarter as compared to 5.07 million tonne in Q2FY05. Production at its other oil fields could not make up for the disruption in production at Bombay High in mid-Q2FY06.

Meanwhile, ONGC's (pre-subsidy) gross realisations were estimated at $63 a barrel in Q2FY06 vis-à-vis $40 per barrel in FY05. Its gross realisations were estimated at $52 a barrel in the June quarter.

However, ONGC's gains were partially nullified with its subsidy burden expanding 192 per cent y-o-y to Rs 2,827.18 crore in the September 2005 quarter.

The company's subsidy burden amounted to Rs 2,876 crore in the June quarter. Reduced production resulted in the company's operating profit margin shrinking 893 basis points on a sequential basis, in the September quarter.

Investor concerns regarding the company's subsidy burden have resulted in the ONGC stock underperforming the Sensex over the past one month. The counter declined almost 13 per cent as compared to a 7.2 per cent dip in the broader market.

Meanwhile, the company's operating profit increased 12.53 per cent y-o-y to Rs 7,155.34 crore in the September quarter, which was more or less in tune with the growth in profit before tax (PBT). Helped by its other income having swelled 82.52 per cent, ONGC's PBT grew 14.74 per cent y-o-y to Rs 6,076.99 crore in Q2FY06.

This revenue stream has grown, thanks to OVL and MRPL (approximately Rs 265 crore) apart from interest income from surplus cash on its books.

Going forward, with the upcoming winter season in the northern hemisphere, crude oil prices are expected to remain buoyant. The ONGC stock does appear under-valued given that it trades at about 7.6 times its estimated FY06 earnings.

Alumunium: Going strong

Domestic aluminium players like Nalco have hiked aluminium prices by Rs 3,350 per tonne, broadly in tune with the hike in non-ferrous prices over the last one month on the London Metal Exchange. Why have aluminium prices been moving up, recently?

Analysts highlight that rising input costs like alumina and energy prices have led to higher production costs of non-integrated players, especially in China.

As a result, aluminium prices have shown signs of remaining buoyant. This hike in product prices helped the Nalco stock rise 4.7 per cent to Rs 169.85 today.

The company has reported a 850 basis points dip in its operating profit margin in the September quarter, largely owing to surging power and fuel costs.

The operating cost has risen because the company resorted to importing coal and also making spot purchase of power from the state grid in the last quarter. Power and fuel cost rose 36.6 per cent y-o-y to Rs 261.01 crore in Q2 FY06.

Nalco's aluminium divison saw segment revenue increase 17.37 per cent y-o-y to Rs 770.42 crore in the last quarter, helped by production volume expanding 9.3 per cent to 90, 944 tonne.

Also, average aluminium price realisations were estimated at $1,830 (approximately Rs 81,435) per tonne during Q2FY06 compared with $1,790 (approximately Rs 79,655) per tonne in the corresponding period of the previous year. However, higher input costs resulted in the segment profit rising a mere 4.5 per cent to Rs 163.81 crore.

Meanwhile, spot international alumina prices were estimated at $490 per tonne in Q2FY06, a growth of about 4 per cent y-o-y. However, higher operational costs resulted in the company's chemical business (which includes alumina) reporting a 21.9 per cent drop in the segment profit to Rs 235.71 crore in the last quarter. As a result, the company's overall operating profit fell 10.37 per cent y-o-y to Rs 458.87 crore in Q2FY06.

Going forward, aluminium prices are expected to remain strong, thanks to rising costs of inputs like alumina. And this scenario is likely to help both the domestic integrated players - Nalco and Hindalco.

So, the Nalco stock, discounting about 7.5 times its estimated FY06 earnings, does appear attractively priced.