IOC: Healthy 2QFY11 results, maintain positive view- Kotak Sec

Visit http://indiaer.blogspot.com/ for complete details �� ��


Indian Oil Corporation (IOCL)
Energy
Healthy 2QFY11 results, maintain positive view. IOCL reported better-thanexpected
2QFY11 (standalone) net income at `52.9 bn versus our estimate of –`8.6 bn
due to compensation of `72.2 bn from the government for 1HFY11 versus nil assumed
by us. IOCL reported 2QFY11 refining margins at US$6.6/bbl versus US$3/bbl in
1QFY11 and US$3.5/bbl in 2QFY10. We maintain our ADD rating on the stock with a
revised target price of `500 (`480 previously). We see (1) diesel deregulation and
(2) positive government action on subsidy-sharing scheme before the proposed
disinvestment as key triggers for the stock.





Cash compensation from government boosts 2QFY11 earnings
IOCL reported 2QFY11 EBITDA (standalone) at `68.9 bn versus –`26.7 bn in 1QFY11 and `6.1 bn
in 2QFY10; our estimate was at –`5.6 bn. The stronger-than-expected performance was due to
compensation of `72.2 bn from the government for 1HFY11 versus nil assumed by us. We note
that IOCL has borne `43.9 bn as net under-recovery in 1HFY11. However, we would not
extrapolate the subsidy-sharing arrangement for 1HFY11 to estimate FY2011E earnings as the final
subsidy-sharing arrangement will not be known until 4QFY11 results.

Refining margins improve; sales volumes increased 1% yoy
IOCL’s 2QFY11 refining margin improved significantly to US$6.6/bbl versus US$3/bbl in 1QFY11
and US$3.5/bbl in 2QFY10. 2QFY11 sales volumes increased 1% yoy to 15.7 mn tons. The modest
yoy growth in sales despite strong growth in gasoline sales reflects (1) modest growth in diesel
sales and (2) decline in sales of bitumen, fuel oil and naphtha.

Earnings will depend on crude prices which have been extremely volatile in the near term
The earnings of downstream companies will depend on crude prices which will, in turn determine
the gross under-recoveries in the system and net under-recoveries to be borne by downstream
companies. We would advise investors to take a view on crude prices based on fundamentals of
demand and supply. Crude prices can swing sharply in the short term based on (1) speculative
positions, (2) weekly changes in inventory positions, (3) disruption in a source of supply for a short
period etc. In our view, short-term and medium-term fundamentals of crude oil do not support
current level of crude oil prices given (1) ample OPEC spare capacity (6 mn b/d), (2) comfortable
global inventories and (3) rising supply of alternative energy in CY2010-11E.

Revised earnings; stock offering good upside to current target price
Our revised target price is `500 (`480 previously) based on 11X FY2012E EPS plus value of
investments. We have revised our FY2011-13E EPS to `39 (+2%), `40 (-4%) and `43 (-4%) to
reflect (1) 2QFY11 results, (2) stronger rupee, (3) higher crude price and (4) other changes.