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Reiterate Hold: Diversified Earnings Mix; Lowest Marketing
Exposure
Reiterate Hold — IOC has the most diversified earnings mix across the
OMCs, esp. with the recent commissioning of the Panipat naphtha cracker.
However, even on our new target price, we do not see any meaningful upside
from current levels, and accordingly reiterate our Hold rating.
Risk adjusted TP of Rs427 — We value IOC by evaluating its earnings
potential in an environment of nil losses, adjusted for probability by applying
appropriate valn discounts, and base our TP on sum of: (i) 6x FY12E
EV/Ebitda in a base-case scenario of 1/3rd upstream sharing, 50% gov't
share, and diesel deregulation, (ii) 1.5x FY12E EV/Ebitda (i.e., 25% riskweightage)
to incremental earnings in an upside scenario of nil net losses
(i.e., full compensation), and (iii) value of investments (Rs95).
Balanced earnings profile — Besides refining and marketing, IOC also earns
revenues from pipelines, and the newly commissioned naphtha cracker
which we now explicitly incorporate in our estimates. Thus, IOC’s earnings in
the nil net under-recovery scenario are just 1.2x the earnings in our base
case, (vs. 1.3x for BPCL and 1.4x for HPCL) indicating its more balanced
earnings profile. With diesel deregulation and other positives already priced
in, we fail to see any significant triggers for further stock performance in the
near term.
No value ascribed to the Paradip refinery — IOC is setting up a 15 MMTPA
refinery at Paradip (in Orissa). While the company expects the project to be
completed by mid-2012, we believe that there exists a possibility of it getting
delayed, and accordingly do not ascribe any value to this project.
Consequently, we strip off the estimated capex incurred on the project from
our net debt assumptions for the purpose of valuation.
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