The Hindu Business Line : ONGC gains 11% in March

Improved performance
A recent survey by ICICI Direct suggests an earning estimate growth of 30% for 2006-07.
The 2006-07 results may show higher profit by ONGC Videsh Ltd.

Kolkata March 30

Exploration and production stock ONGC has recovered by over 11 per cent in March. In the last one week, the counter has gained around 4.14 per cent. But the current market valuation of Rs 878 is considered a pale shadow of its peak-traded price of Rs 1,514, hit in May 2006.

The operatives of the company in the terminal month of 2006-07, which saw steady upward movement in global crude oil price, may not influence the bottomline much in the fourth quarter.

Earnings Expectations

A recent survey by ICICI Direct among the analysts of 20 brokerages such as Merrill Lynch, Deutsche Bank Securities, ABN Amro Global Research, HSBC Credit Suisse, CLSA Asia Pacific, First Global, JP Morgan Securities, Macquarie Research Equities and Bear Stearn & Co suggests an earning estimate growth of 30 per cent for 2006-07. The study also indicates that earnings expectations have improved in the last two months.

ONGC's market valuation has generally lagged behind that of its global peers on price regulation, burden sharing and subsidisation formula.

According to industry observers, the crude price rise or a fall as such does not influence the profitability of ONGC directly or proportionately.

Global Benchmark

The price parity is maintained through discounts to the downstream oil companies such as Bharat Petroleum, Hindustan Petroleum and Indian Oil. A substantial part of the difference between the relevant global benchmark price (reviewed fortnightly on the basis of the so-called India basket of crudes) and selling price to the marketing companies is shared by ONGC.

"The first two months of this quarter had seen weaker crude price compared to now. As a result, the price discounts and subsidy elements had also been lower. The current firm trend owing to tension around British soldiers taken into custody by the Iranian authorities is unlikely to turn into an explosive situation. But, if the price trend remains strong a little longer than expected for some reason or the other, it may benefit ONGC," an industry insider said.

Big Boost

However, according to Mr Manoj Joshi of Karvy Stock Broking, in the medium to long term perspective, the subsidy burden alleviates the risk of sales realisation going down if crude prices fall globally.

The 2006-07 results, expected by the middle of next month, may show higher profit by ONGC Videsh Ltd, a 100 per cent subsidiary of ONGC. "We estimate that OVL's share in ONGC's consolidated production would also keep increasing. This could provide a big boost to the profitability as well because OVL's production would fetch international prices of crude sans the subsidy burden, Mr Joshi in a recent report said.

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