GMP 2014-15 Section B

MANAC Analysis of
financial information: Oil
and Natural Gas
Corporation Limited

Ambuj Tripathi (G14065)

Mahendra Nutakki (G14085)
Mayank sood (G14087)
Rajat Mittal (G14099)
Rohit Bhargava (G14103)
Sriram B (G14112)

We have carried out financial and ratio analysis of ONGC from the audited financial reports of the
company for FY 2013, FY 2012, and FY 2011.

1. Background Information
Oil and Natural Gas Corporation (ONGC) is a Government of India (GoI) owned (69% stake) oil and gas
exploration company. ONGC is also engaged in the petroleum product refining business via its subsidiary
Mangalore Refinery and Petrochemicals Ltd. ONGC is the largest producer of Oil & Natural Gas in India
contributing 69% and 62% of crude oil and natural gas production in India for the fiscal year ended
March 2013, respectively. As of March 31, 2013 ONGC had net estimated proved reserves of 949.53
MMtoe (million tonnes of oil equivalent). 3P reserves (Proved, Probable and Possible) totalled to
1,759.43 MMtoe.
Oil & Gas Industry Trends
a. Global Trends 2012-13

Crude Oil Production rose by 2.2% to 86.2 million barrels per day, the increase was mainly led by
increased consumption in emerging economies like China and India

Brent crude oil prices averaged $110.3 per barrel compared to $114.3/barrel in the previous year

Natural gas production increased by around 1.9%, however, gas prices were subdued in the major
North American markets; Asia & Europe demand supported a partial increase in gas prices

Shale gas discoveries continue to increase, however, technical and economic feasibility outside US
remains uncertain

b. Indian Oil & Gas Industry

Crude oil production fell by 0.6% in FY13 due to natural decline in mature oil fields owned by ONGC
and Oil India

Natural Gas production declined by 14.5% due to fall in production privately owned fields in East
Coast

However, consumption of petroleum products continued to rise with an increase of 5%

c. Subsidy Mechanism for Petroleum products in India

The GoI follows a regulated pricing mechanism for major refined petroleum products except Petrol in
India. The Oil Marketing Companies (all majority owned by GoI) sell Diesel, Kerosene and LPG at GoI
administered prices which have historically been below the market prices. The under recovery burden is
shared between the government and upstream companies like GAIL, ONGC and OIL. ONGC shared an
under recovery burden of INR494.21 billion during FY13, an increase of 11% Y-o-Y. The burden is shared
by way of discounts and thus ONGC gave an average discount of $62.7/barrel resulting in net realization
of $47.9/barrel in FY13.

2. Trend Analysis
a. Income Statement
ONGCs sales growth is subject to growth in crude oil and natural gas production from its domestic
fields, refinery throughput in its Mangalore Refinery and price realization per unit sale of crude oil and
gas. Crude oil production has largely been flat with an 8% decline observed in FY2012-13, natural gas
production from ONGC owned fields has largely been stable around 28BCM, and however, contribution
from JVs shows a declining trend. Group sales from crude oil declined by 3.2% in FY2012-13 compared
to the previous year, however, sales from natural gas and value added products rose by 16.8% and
20.1%, respectively. Value added products sales increase has largely been led by higher throughput of
14.4MMT (+12.3%) in Mangalore Refinery. Sales growth in the latest fiscal is largely subdued compared
to previous years due to lower crude oil sales, however, supported by increase in value added product
sales.
Gross Profit and PBIT (operating profit) show a declining trend with higher cost of production and lower
realizations on sale of crude oil. PBIT declined by 10% in the latest fiscal 2012-13. Overall profitability at
the net level has also declined mainly due to the factors affecting costs of production.
b. Balance Sheet
Growth in Shareholders Funds has been mainly on account of profit retention by ONGC which has been
65% to 70% annually between 2009-10 and 2012-13.
Non-Current liabilities are increasing annually due to higher long-term borrowings and increasing
provisions for site abandonment costs. ONGC has focused on high investment in exploration and

production activities and strategic acquisition of stakes in energy assets. This is also visible in the trend
of tangible assets and production properties which show a significant increase.

3. Common Size Analysis

a. Income Statement (Analysis as a percentage of net sales)
Cost of Goods Sold forms the largest proportion of costs accounting for about 61% of sales in 2012-13. It
mainly comprises Raw Material. Stores and Spares costs followed by Royalty and Cess paid to State
and Central Governments. Other operational expenses and overheads comprise ~18% of total sales.
b. Assets & Liabilities (Analysis as a percentage of total assets)
Current and non-current liabilities form approximately 20% each of total liabilities and equity. Non
Current Liabilities mainly comprise LT provisions on site abandonment costs.
Shareholder Funds comprise a significant 60% of total liabilities and equity. This indicates that ONGC is
not able to fully leverage its equity capital for new growth avenues.
ONGC is into a capital intensive business and its fixed assets and capital work in progress form 60% to
65% of total assets. ONGC also has large cash balance (7.7% of assets in 2012-13).

4. Ratio Analysis
a. Profitability & Return
Profitability & Return Ratios
Particulars

31-Mar-

31-Mar-

31-Mar-

12

11

10

10.26%

25.23%

15.59%

Gross Profit Ratio

38.94%

43.10%

46.28%

49.03%

Operating Profit Ratio

19.54%

23.97%

23.66%

25.23%

Net Profit Ratio

14.91%

19.11%

19.09%

19.07%

Return on Equity

15.88%

20.63%

19.47%

19.13%

Return on Assets

15.47%

19.41%

17.76%

19.00%

Sales Growth

31-Mar-13

Cost & Profitability Analysis Ratios

Profitability has also been on a declining trend. Gross Profit Ratio has fallen to 38.9% in 2012-13
from 49% in FY2009-10 mainly because of higher subsidy burden and thus lower realization on crude
oil sales and, weak profitability in the refinery business. ONGC has negligible interest burden with
finance costs accounting for 0.3% of net sales. Thus, the decline in net profit ratio is in line with
gross margin decline. ONGCs realization from crude oil sales has declined from $55.94/barrel in
2009-10 to $47.85 in 2012-13.

Return on Equity has declined from 19.13% in 2009-10 to 15.88% in 2012-13. This indicates that
ONGC has been unable to deploy its equity capital profitably. Return of Assets has also shown a
similar trend. ONGCs profitability decline has been a major factor in lower returns and due to long
gestation periods of its fresh investments via ONGC Videsh Limited, accretion to earnings from these
investments has not been significant.

b. Efficiency Analysis
Efficiency Analysis Ratios
Particulars

31-Mar-13 31-Mar-12

31-Mar-11 31-Mar-10

Fixed Asset Turnover Ratio

1.46

1.61

1.40

1.35

Net Working Capital Turnover Ratio

-13.66

-8.97

-9.63

-25.80

ONGCs Fixed Asset Turnover Ratio has shown a partial uptrend over the four fiscal years between 200910 and 2012-13. ONGC has negative working capital given its strong market share and strong bargaining
power with its customers, mainly the PSU Oil Marketing Companies.
c. Working Capital Analysis
Working Capital Analysis Ratios
Particulars

31-Mar-13 31-Mar-12

31-Mar-11 31-Mar-10

Current Ratio

0.75

0.67

0.66

0.88

Quick Ratio

0.49

0.40

0.42

0.62

Working Capital Leverage

1.38

1.37

1.40

1.34

Inventory Turnover Ratio

12.71

11.19

13.73

12.35

Debtors Turnover Ratio

10.55

12.57

11.79

14.25

Creditors Turnover Ratio

3.32

2.66

2.06

1.97

Inventory Holding Period

29

33

27

30

Debtors Holding/Collection Period

35

29

31

26

Creditors Holding/Payment Period

110

137

177

185

ONGCs current ratio and quick ratio show a declining trend and have been historically comfortable
below 1. This indicates that the company does not have significant cash blocked in working capital and is
able to employ its cash flows into fixed asset generation. This is expected to help the company generate
better revenues in the medium to long term.
Overall working capital management is robust given a negative cash conversions cycle (Inventory
Holding Period + Collection Period Payment Period). ONGCs creditors holding period has historically
been high, however, the company has focused on reducing the same, evident from a declining trend in
Creditors Holding Period.
d. Liquidity Analysis
Liquidity Analysis Ratios
Particulars

31-Mar-13 31-Mar-12

31-Mar-11 31-Mar-10

Liquidity Ratio

40.56%

55.40%

57.12%

46.59%

Cash Flow Yield

184.56%

163.91%

218.58%

148.34%

Free Cash Flow Yield

7.81%

18.04%

34.38%

26.69%

ONGC has a strong cash flow generation profile and has maintained a high cash balance historically. Its
production profile has been stable and there is strong domestic market for the company given energy
deficit situation in India. India has limited domestic production of Oil & Gas and ONGC has been able to
enjoy a strong position in the market. Liquidity Ratio is high due to healthy annual cash accruals. Cash
Flow Yield is high at over 180%. However, Free Cash Flow yields have declined to a low of 7.81% in 201213 mainly due to ONGCs increasing investment in exploration activities across domestic and
international markets and acquisitions undertaken by OVL in oilfields across the world.
ONGCs high cash balance also indicates its limited ability to acquire new assets given high geo-political
risks overseas, competition from global players in acquiring assets and also due to policy related delays

in the domestic markets. Deployment of cash to acquire or develop new assets is also limited due to
risks related to economic and technical feasibility of potential reservoirs under exploration.
e. Capital Structure Ratios
Financing/Capital Structure Analysis Ratios
Particulars

31-Mar-13 31-Mar-12

31-Mar-11 31-Mar-10

Debt-Equity Ratio

0.06

0.04

0.03

0.04

Debt-Asset Ratio

0.05

0.04

0.03

0.04

Total Leverage Ratio

1.34

1.33

1.36

1.33

Interest Coverage Ratio (PBIT/Finance Cost)

65.60

81.18

63.61

51.12

ONGC has largely relied on internally generated capital for its fresh investments and has limited debt on
its balance sheet. Long-term Debt to Equity is low at 0.06 while Total Leverage Ratio has been stable at
around 1.3. Its current balance sheet profile with high amount of cash and strong cash generation
indicates limited need to raise debt in the near-future unless the company undertakes a large
acquisition relative to its size. Lower leverage also means that ONGC is not exposed to risk of significant
decline in RoE in the current weak economic scenario.

5. Du-Pont Analysis
Particulars

31-Mar-13 31-Mar-12

31-Mar-11 31-Mar-10

I. Return on Equity

15.88%

20.63%

19.47%

19.13%

Net Profit Margin

14.91%

19.11%

19.09%

19.07%

Total Asset Turnover Ratio

0.79

0.81

0.75

0.75

Total Leverage Ratio

1.34

1.33

1.36

1.33

II. Return on Equity

15.88%

20.63%

19.47%

19.13%

Return on Investment (Return on Assets)

15.47%

19.41%

17.76%

19.00%

Total Leverage Ratio

1.34

1.33

1.36

1.33

1/(Degree of Financial Leverage)

0.76

0.80

0.81

0.76

ONGCs Total Asset Turnover and Total Leverage have remains stable over 2009-10 to 2012-13. Its
RoE has declined mainly on account of lower profitability. The same is also evident from our analysis
of Gross Profit and Operating Profit ratios.

Return on Assets has declined due to inability to employ capital profitably and long gestation period
of fresh investments.

6. Conclusion
ONGC has a robust cash generation profile as it owns mature oil fields in India and enjoys a dominant
market share in the domestic market. However, high subsidy burden and limited earning accretion from
fresh investments remain a bottleneck to its growth and profitability. ONGC has a conservative financial
profile with limited long-term debt as it has largely relied on its internal cash accruals for investing
activities. Working Capital management is sound and we do not foresee any challenges in near-term.
Challenges remain with respect to increasing production from existing assets as fresh investments are
still in the development stage. Profitability in the medium term (next 3 to 5 years) remains uncertain
given regulated pricing environment in India.