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IOCL |
Results above expectation, ACCUMULATE |
ACCUMULATE
CMP: Rs.403 Target Price: Rs.458
n IOCL reported results which were above our estimates at EBIDTA and PAT Level, primarily due to inventory gain and issuance of oil bonds/Cash receivables during the quarter
n EBIDTA at Rs.68.9bn, against Rs.6.1bn a year ago, mainly due to Inventory gain and issuance of oil bonds/cash receivables from the government of India
n Average gross refining margin for 1H FY11 was at $4.7/bbl as compared to $5.4/bbl (declined by 13% YoY) above our expectation of $3.5/bbl.
n Valuations look attractive at 1.4x FY12E ABV, mainly due to recent change in reforms, Accumulate rating with TP of Rs.458
Highlights of the results
IOCL reported results which were above our estimates at EBIDTA and PAT Level,
primarily due to inventory gain of Rs.24.5bn and issuance of oil bonds/cash receivables
of Rs.72.2bn during the quarter. Revenue for the quarter was at Rs.773bn (against our
expectation of Rs.729bn), growth of 27% YoY, mainly on account of cash compensation
received from the GOI. EBITDA during the quarter was at Rs.68.9bn, against Rs.6.1bn
a year ago. During the quarter Inventory gain were at Rs.24.4bn as compared to
inventory gain of Rs.43.8bn in Q2 FY10. Interest cost has increased by 46% to
Rs.5.1bn, YoY. During the quarter the company reported net profit of Rs.52.9bn, as
against Rs.2.8bn YoY, mainly due to Inventory gain and issuance of oil bonds/cash
receivables by the government.
The company received upstream discount of Rs. 58bn, in respect of crude Oil/LPG/SKO
purchased from them has been accounted during the quarter. The company has
received budgetary support of Rs.72.2bn from the GOI for the under-recovery of
cooking fuel and auto fuel during the quarter.
Better clarity on subsidy sharing mechanism
After years of ad-hoc subsidy arrangements, a proper subsidy sharing mechanism is
being worked out. The Oil secretary S Sudarshan has clarified that the 1/3rd of the
under recovery would be absorbed by the upstream companies, the government would
certainly absorb 50% or more, the balance 17% would be based on the companies
performance over the quarter.
Increase in Interest cost
During the quarter, interest costs increased by 46% from Rs.3.4 in Q2 FY10 to Rs.5.1bn
in Q2 FY11.
Average GRM was at $6.6 per bbl as against $3.5 per bbl on YoY
Lower product demand, especially in light distillate, has seen product spreads reducing
in Q1FY11. During the quarter average gross refining margin was at $6.6/bbl as
compared to $3.5/bbl (Increase by 89%, YoY). However, we expect GRM’s to improve
in the coming quarters, in tandem with the improvement in the global economy, which
helps to improve the petro product spreads.
Valuations
Though in the last few years, OMC’s have been de-rated due to rising crude oil price and
lack of policy initiatives from the government. Historic evidence suggests that OMC’s have
been re-rated on expectations of policy initiatives, despite increase in the crude oil prices.
We note that in FY03-04, OMC’s P/BV increased from 1.2-1.3x to 2x despite crude prices
increasing from US$30/bbl to US$40/bbl. With the new reform, scenario has changed with
better clarity in policy. Currently OMC’s are trading in the range of 1-1.4x FY12 BV and we
believe it to command higher multiple (20% premium, compared to current level of 1.2 -
1.4x) backed by A) the expected implementation of diesel deregulation over next 6-8months
B) Better clarity on sharing mechanism (upstream companies sharing entire 1/3rd of the
total under recovery) C) Expectation of increase in either diesel and petrol prices or change
in duty structure by the GOI (backed by higher crude prices to reduce the under recovery)
D) Improvement in the earnings due to deregulation. However, pressure on the US dollar
has been diverting interest of investors towards commodities including crude oil. If US dollar
continues to remain under pressure, the commodities are likely to stay firm including crude
oil, hurting the OMC’s performance.
Though there has been some clarity on sharing mechanism more budgetary support from
GOI is needed to keep IOCL in black. We expect GOI’s budgetary support to increase only
if it is able to garner larger funds from disinvestment or by full implementation of Kirit Parekh
committee recommendation. At CMP of Rs.403, the stock trades at 1.6x and 1.4x FY11E
and FY12E P/BV. We have upgraded our target multiple from 1.4x to 1.6x for FY12E P/BV
and upgrade our target price to Rs.458 (Rs.392, earlier), based on the above mention
rationale. Despite of higher valuation, we cut our rating on the stock from BUY to
ACCUMULATE due to limited upside.
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