ICFAI UNIVERSITY DEHRADUN

Name: Gopal KrishanUID No.: 0901202792

Enrollment No.: 09BS0002792Semester: III

Course Code: SLFI611Course Title: Financial Statement Analysis

Submitted on: 2nd September, 2010Submitted to: Saujanya G. K.

Title of the assignment: Financial statement analysis of ONGC with industry comparison

Sign Student Sign Faculty

ContentsCompany intro:...........................................................................................................................3

Oil and Natural Gas Sector in India:..........................................................................................3

Competitors:...............................................................................................................................4

Performance of company for past 5 years..................................................................................4

Ratios Analysis...........................................................................................................................6

Profitability ratios:.................................................................................................................7

Turnover ratios:......................................................................................................................8

Liquidity Ratios:.....................................................................................................................8

Solvency ratios:......................................................................................................................8

Du-Pont Analysis:..................................................................................................................9

Investment Valuation ratios:................................................................................................10

Analysis on non financial parameters of ONGC:.....................................................................11

Company intro: Oil and Natural Gas Corporation (ONGC) is Asia’s largest oil producing and exploring company which produces close to 30% of India’s crude oil consumption. It deals in the oil and natural gas commodities which is one of the prominent sector on which many economies of the world are dependant and these two commodities make the largest share of world trade as well.

The company was formed as an effort to make India have its own resources of oil and natural gas. It was done in the year 1955 and an oil and natural gas directorate was formed with an alliance with the geological survey of India. Soon the directorate was enhanced to a commission giving more powers and resources and in the year 1959 the commission was converted to a statutory body. As per the act of parliament through which the change happened states the function of ONGC as "to plan, promote, organize and implement program for development of Petroleum Resources and the production and sale of petroleum and petroleum products produced by it, and to perform such other functions as the Central Government may, from time to time, assign to it ".

Since then ONGC is doing its job well. Oil reserves have been found in Gujarat and Bombay high. During 1990s when the country went for globalization reforms, major disinvestment was made in ONGC and government stake came down to 84.11%. ONGC has cross holding in Gas Authority of India (GAIL) and MRPL from Aditya Birla Group. With this it diversified into downstream sector. ONGC is also making investments outside India like Vietnam, Sudan and Sakhalin.

Presently it is ranked 3rd oil and natural gas Exploration and Production Company in the world and 23rd among leading global energy players as per Platts 250 Global Energy Companies list for the year 2009.

Address / Contact of ONGCJeevan Bharti Building, Tower II,

124, Indira Chowk, 8th Floor,New Delhi 110001

Website: www.ongcindia.comTel: 91-11-23301000Fax: 91-11-23316413

E-mail: ent@delhi.ongc.co.in

Oil and Natural Gas Sector in India: Oil and natural gas are major source of energy and India is the 4th largest energy consumer in the world after United States (US), China and Japan. Close to 40% of the total energy demand is fulfilled by oil and natural gas. Biggest consumers of natural gas are fertilizer and energy sector which have a share close to 75% in total consumption. Oil is consumed for transportation, energy sector and industrial sector. According to report of Indian Brand Equity Foundation (IBEF) the consumption of natural gas has grown at a Compounded Average Growth Rate (CAGR) of 2.74% per year but production has grown at only 2.25% only between years 2000 and 2005. The rate has increased for both by the year 2010 but production is far less than what consumption is in the nation. Through new explorations and production of oil and natural gas, the country is just

trying to mitigate a small proportion of money that it has to spend otherwise in import of that amount of oil and gas. Close to 75% of the total demand of crude oil is met through imports only. But, according to report of BP Statistical Energy Survey, India had proved oil reserves of 5.459 billion barrels at the end of 2007. Since in the coming years also major portion of energy consumption will be met through crude oil only and the demand for oil and gas is likely to increase, the sector will perform well again. Due to the global crisis there was a downturn in the market and industrial production also went into a slump, but the conditions are improving now. But natural gas prices in India come under regulated market and government of India fix the price of natural gas. The prices sometimes are set so low in the market that at that rate it directly competes with the coal market and thus natural gas business is not generating much of revenues to the companies. However, companies like Gas Authority of India Limited (GAIL) holds absolute monopoly in distribution and transmission of natural gas in the economy. Thus the structure of the energy market in India is good for oil extraction and production business.

Competitors: ONGC, being a public sector unit surely has a competitive advantage over its competitors as it controls close to three-fourth of the market share. Government on the rising note of energy demand has deregulated the hydrocarbon sector and as a result a number of private players also emerged apart from different state owned enterprises. Companies like Gujarat State Petroleum Corporation Ltd, Oil India Limited and Tata Petrodyne Ltd. are direct competitors to ONGC. There are close to 8 companies in India which are directly competing with ONGC on oil exploration and extraction. For this analysis the following 8 companies are chosen for industry analysis due to data constraints from prowess.

Oil & Natural Gas Corpn. Ltd. O N G C Videsh Ltd.Bombay Gas Co. Ltd. Oil India Ltd.Gujarat State Petroleum Corpn. Ltd. Selan Exploration Technology Ltd.Hindustan Oil Exploration Co. Ltd. Tata Petrodyne Ltd.

Performance of company for past 5 years: The performance of ONGC can be seen through the graphs given below.

Mar 2004

Mar 2005

Mar 2006

Mar 2007

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Mar 2009

200003000040000500006000070000

Sales and Expenses

Sales Expenses

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5000

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35000

Profitability of ONGC

PAT PBT EBITDA

Mar 2004 Mar 2005 Mar 2006 Mar 2007 Mar 2008 Mar 2009 0

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Income from financial services

If we observe over past 5 years, the performance of ONGC is not satisfactory. Though the sales are increasing, it is increasing at a decreasing rate but at the same time the expenses are increasing at a higher rate as compared to sales. Also the growth in profit after tax has turned into negative growth after 4 years of continuous fall. The profitability of the firm has quite a bit stabilized and as it can be seen the curves are flattened. Moreover an interesting thing to observe is that though the profits are stabilizing for the company from sales, the income from financial services has been continuously increasing. The core operation of the company is oil and natural gas. Thus it can be said that the company is trying to inflate its earnings by using financial instruments.

Mar 2005 Mar 2006 Mar 2007 Mar 2008 Mar 2009 -10%

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Taking another look at some of the figures depicting the profitability of the sector and company, it can be seen that the percentage share of ONGC in the sector has come down by almost 7.5 percent points in terms of share in profit and close to 13 percent points. This is definitely a thing to worry for ONGC. It has happened in a period of just 5 years.

2005 2006 2007 2008 2009ONGC % share in profits 0.875 0.841 0.839 0.842 0.796ONGC % Sales 0.88 0.85 0.83 0.76 0.75ONGC Dividend Payout 0.47 0.47 0.45 0.44 0.44

Industry dividend payout 0.50 0.51 0.49 0.48 0.50Similarly, the dividend payout ratio has come down by almost 3 percent points for ONGC, but at the same time the industry average is still at 50%. Thus, the condition is not good for the investors as their payout has decreased over past 5 years.

Also looking at the graph below, the performance of company cannot be said to be good over past few years. Looking at the CAGR for the company in terms of sales and Profit after Tax (PAT), it can be seen that it is continuously declining and growth in past 1 year has turned to negative also.

Over 15 yr Over 10 yr Over 7 yr Over 5 yr Over 3 yr Over 1 yr-5.00

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CAGR

Sales PAT

Similarly, seeing the performance of the sector also, a not so good picture can be seen. The CAGR for the PAT and Sales of the sector has been declining over past 4 years. Thus, it can be said that the sector has entered or very soon will enter the stage of flattening the growth curve which is not good for any sector.

4 Years 3 Years 1 Year0.00%

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CAGR

PAT Sales

Ratios Analysis for the year 2008-2009 and Comparison with Industry Average:

(Latest available annual report for the company is 2008-2009)1

The ratio analysis for ONGC and comparison with the industry average is actually biased towards ONGC positively because of the simple reason that ONGC has more than 70% of market share in its sector. Thus seeing the performance of ONGC in isolation will be almost similar to that of industry average except for a few occasions. Thus a few ratios are calculated in this analysis which can tell about the performance of oil and natural gas industry as a whole.

Profitability ratios:

Ratio (%)Industry Average ONGC

Net profit Margin 26.3% 28.0%Return on Fixed Assets 23.5% 25.5%Return on Net Worth 20.8% 20.7%Return on Investments 26.1% 31.6%

1. Net profit margin tells us the amount of sales2 that resulted into net profit or profit after tax. ONGC is able to manage 1.7% higher net profit margin as compared to the industry which is good for the company despite of the high oil prices in the year.

2. Return on fixed assets3: Return on fixed assets is very important ratio in this particular sector because this sector requires a huge amount of investment in the fixed assets. If one is not able to get sufficient returns on such a large amount of investment, the business can face problems. Here the return is quite excellent giving almost 23.5% returns for the industry and at the same time ONGC is able to make 2% higher returns compared to industry.

3. Return on net worth4: This particular ratio is important from investor’s point. It tells about the return which the equity shareholders’ fund is giving. The industry average and ONGC both the returns are equal and the return is also good being close to 21%.

4. Return on investments5: Return on investments or capital employed becomes crucial if the company is playing with financial leverage. Here ONGC has negligible debt in its capital structure but other private companies have significant amount of debt. It is evident by the figures that industry average of return on investments is lower than ONGC.

1 Prowess data base is used to extract the data for the company i.e. ONGC as well as other companies in the sector. Please see the footnotes for further clarification on treatment of several items different from that of actual financial statements issued by the company and the items which are included in calculation of a particular variable.2 Sales taken for the ratio analysis is the industrial sales as per prowess database which takes into consideration only the sale of goods, in this case sale of oil and natural gas. Thus actual sales figure is different in the financial statements.3 Fixed assets include capital work in progress, producing properties (part of plant and machinery) and exploratory wells-in-progress)4 Net worth includes equity share capital, security premium reserves, capital and investment and other reserves, general reserves, and balance of profit and loss account. Miscellaneous expenses to the extent not written off are deducted from the above sum to get a better picture of the net worth of equity share holders.5 Investments include the net worth and borrowings. PBIT is used here as the numerator.

Turnover ratios:

Turnover (times)Industry Average

ONGC

Fixed Assets Turnover 0.89 0.91Inventory Turnover Ratio 17.20 15.26Total Asset Turnover 0.38 0.39

1. Fixed assets turnover ratio6: It tells us how many times the total fixed assets are converted into sales. The ratio is not good as it is less than 1 in both the cases i.e. the industry average and ONGC standalone. This actually speaks of the investment that is required in such a business.

2. Inventory turnover ratio: This ratio tells the number of times inventory is converted to sales. The figures are quite good being close to 17 times for the industry. However ONGC has it less that the industry average. This ratio also tells us that ONGC is able to sell its inventories in 23 days. The cycle is however smaller for the industry being at around 21 days.

3. Total asset turnover ratio: This ratio tells us how many times the total assets are converted to sales. The ratio is quite low, but as we have already seen this is the nature of the industry that a huge amount of investment is required. Thus lowering the turnover.

Liquidity Ratios:Liquidity Ratios Industry

averageONGC

Current Ratio 1.2 1.0Quick Ratio 0.45 0.39

1. Current ratio7: The ONGC and the industry both have a current ratio equal to one. This may not be good for the company and it may face short term liquidity crisis.

2. The quick ratio however is even though lesser. ONGC has comparatively lesser ratio as compared to industry average. This is not a good sign for the company. Thus overall short term liquidity position of the company seeing this is not good. But company deals in a lot of financial instruments, thus it may cover its liquidity problem from the same.

Solvency ratios: Solvency Ratios Industry

averageONGC

Debt Equity 0.26 0.00Interest Coverage 39.91 207.31Financial Leverage8 1.03 1.00

6 In this ratio the work in progress and producing properties should be deducted from fixed assets because those are the properties which have not started operating yet. But due to constraints of data the net fixed assets is taken. The results may change if proper treatment is given to fixed assets for this ratio.7 In the prowess database current assets and provisions both are inflated by a huge amount as compared to the actual figures of annual report the reason for which could not be traced. Thus assuming that the similar treatment would be for the other companies, the current ratio is calculated.8 Financial leverage is calculated by dividing the EBIT with the EBT.

1. Solvency ratios are not of much use to calculate here because ONGC has very small amount of debt component in its capital structure. As it can be seen that there is no financial leverage also.

2. Other companies have some debt but that again becomes insignificant because of the huge share of ONGC in the market. If ONGC is excluded from the sector, there is actually a debt equity ratio of 1.34 and a financial leverage of 1.11. Thus, we can say that ONGC is not using a debt into its capital structure and that is why it has got almost same return on net worth as that of industry average.

3. Due to small amount of debt, the interest coverage ratios are also quite good. Thus there seems to be no problem with the solvency of the company.

Du-Pont Analysis:

Figure 1: Du-Pont analysis of ONGC

ROE (20.5%)

Net profit margin (0.28)

Net profit (16126.32)

Sales (57530.94)

Asset turnover (0.39)

Sales (57530.94)

Assets (145910.77)

Equity multiplier (1.85)

Assets (145910.77)

Equity (78735.4)

Figure 2: Du-Pont analysis of the industry

Using the Du-Pont analysis, it can be clearly seen that the only problem is with the asset turnover ratio. It has to be more so that the ROE can be improved. But, the industry is performing in a similar way; it is not of much a concern. As the fixed investments required in an oil extraction and production business is very large in terms of sites purchased, huge plants setup, land purchase, etc, and production capacity is still low, the asset turnover ratio is less. The company should aim at increasing their production capacity in near term. The capital work in progress and production properties are for the same purpose. Thus once the capacity is improved an increase in the wealth of the company and ROE would be seen. Thus, with increasing consumption of oil and natural gas, the future prospects for the company seem to be very good.

Investment Valuation ratios: These ratios are very important from the investor’s point of view. Thus along with other things we need to check if the company is good for investment purpose or not.

Investment Valuation Ratios

Industry average

ONGC

Earning Per Share 75.40Book Value Per Share 365.07Dividend Payout Ratio 0.50 0.44Price/Earning Ratio9 (P/E) 10.35Price to Book Value (P/B) 2.14

ONGC has an EPS of f75.40 and a book value per share of f365.07 (market value being at 780.2 as on 31st March 2009 closing on NSE). The P/E ratio of the company is high with the

9 The price to book value ratio and P/E ratio are calculated as on 31st March 2009 using the closing price of ONGC as on 31st March 2009. The current ratios are 2.88 and 17.7 respectively.

ROE (20.7%)

Net profit margin (0.26)

Net profit (20255.41)

Sales (77008.91)

Asset turnover (0.38)

Sales (77008.91)

Assets (200809.61)

Equity multiplier (2.05)

Assets (200809.61)

Equity (97946.24)

kind of returns it is giving. The dividend payout ratio is 44% which is less than the industry average. Also the P/B ratio is 2.14 which are quite high. Thus it can be said to be an expensive investment at present with good future return prospects.

Analysis on non financial parameters of ONGC: 1. Stock prices of ONGC: As it can be seen in the graph below, we can clearly see that

the share prices of ONGC have been declining over past 5 years. The data taken is till 31st March 2009. The prices have slightly recovered after that and as a result the current P/E ratio has also increased.

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2. Impact of global downturn and oil prices: During the past 2-3 years, when the whole world entered a downturn, energy sector also was not untouched by the same. Moreover, the rise in oil prices which went up to $135 per barrel and then suddenly declined to $39 per barrel hit the oil companies badly. The demand of oil decreased drastically during the slump and so did the prices. However, present condition is better as the economies are recovering and the industrial production is taking pace again.

3. Future prospects: The Company is looking forward to a number of joint ventures. One of them is with TERI called ONGC TERI Bio-tech ltd. ONGC is also starting operational activities in Middle East and has got big contracts in Kuwait. It has taken up a project to explore the surface of Krishna-Godavari basins. ONGC is also entering into renewable energy development programs. It has already started a 50MW Wind energy project at Bhuj in Gujarat.

4. Social responsibilities: The Company is actively engaged in Corporate Social Responsibility and to increase its contribution towards society. The R&D department at ONGC is continuously in work to provide green energy at the best prices. They have concerns for climate and have adopted measures for hydrocarbon waste disposals in a safer manner. The company has increased funds allocation from 0.75% to 2% of net profits to various CSR projects.

Conclusion:ONGC is a public sector enterprise and it is the oldest organization in the business of oil exploration in India. This gives an intrinsic value to the company. Also, as long as there is oil reserves there will be consumption and demand. ONGC has the largest market share in the industry and thus it differentiates it from other companies in the sector. It has a better profitability and solvency as compared to the industry average. However, the concern is that the profits have started to decline or has become stable at the current rate for ONGC as well as the sector. The profit share of the company is declining in the industry and so is the market share. Thus, there is a need to take some corrective measures so that the situation doesn’t become worse from bad. ONGC has huge amount of investments but it is not able to generate good sales on the same. Thus the asset utilization and production capacity has to be increased in order to increase the asset turnover ratio. Also, the short term liquidity position has to be improved by either reducing the current liabilities or by increasing current assets. Also, the company has paid its debt over past 5 years and now is not having any leverage. It can raise debt to increase EPS and subsequently dividend payout as well. But as the coming years, the demand of oil is going to increase and so is the prices of crude oil, there are good prospects to generate better revenues for the company.