State-owned explorer Oil & Natural Gas Corp (ONGC) today reported a 5 per cent

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drop in its net profit in the quarter ended December 31 as a sharp rise in fuel subsidy output offset one-time gains it made from Cairn India's Rajasthan oilfields.

ONGC reported a net profit of Rs 6,741.41 crore in the October-December quarter as opposed to Rs 7,083.23 crore a year ago, the company said in filing to the stock exchanges.

The state-owned firm said the royalty it pays not just on its 30 per cent stake but also 70 per cent interest of Cairn India on crude oil produced from prolofic Rajasthan block is now being treated as cost recoverable.

Cairn India does not pay royalty on its 70 per cent interest and prior to its takeover by London-based mining group Vedanta Resources, it considered royalty paid by ONGC was not recoverable from revenues earned from oil sales. But post the Vedanta deal, Cairn India treats royalty as a cost recoverable item like other taxes.

"As a result, an income of Rs 3,142 crore received from Cairn India towards royalty paid for the period August 2009 to September 2011 has been disclosed as an exceptional item," ONGC said.

Further, for the period October to December 2011, an amount of Rs 627 crore has been accounted as receivable.

ONGC said its board of directors has declared an interim dividend of Rs 6.25 per share (125 per cent) amounting to Rs 5,347.18 crore.