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Indian Oil Corporation (IOCL)
Energy
Results boosted by cash compensation. IOCL reported better-than-expected 3QFY11
(standalone) EBITDA at `32.9 bn versus our estimate of `3.6 bn due to compensation of
`44.4 bn from the government in 3QFY11 versus nil assumed by us. This was partly
compensated by (1) lower-then-expected adventitious gains and (2) lower refining
margins at US$6.3/bbl versus US$6.7/bbl assumed by us. We maintain our BUY rating
on the stock with a revised target price of `440 (`500 previously). Key downside risk
stems from higher-than-expected net under-recoveries.
Cash compensation from government boosts 3QFY11 earnings
IOCL reported 3QFY11 EBITDA (standalone) at `32.9 bn versus `68.9 bn in 2QFY11 and `27.7 bn
in 3QFY10; our estimate was at `3.6 bn. The stronger-than-expected performance was due to
compensation of `44.4 bn from the government in 3QFY11 versus nil assumed by us. We note
that IOCL has borne `57.2 bn as net under-recovery in 9MFY11. However, we would not
extrapolate the subsidy-sharing arrangement for 9MFY11 to estimate FY2011E earnings as the
final subsidy-sharing arrangement will not be known until 4QFY11E results.
Refining margins decline modestly; domestic sales volumes increase 4.6% yoy
IOCL’s 3QFY11 refining margin declined modestly qoq to US$6.3/bbl versus US$6.6/bbl in 2QFY11
and US$3.7/bbl in 3QFY10. 3QFY11 sales volumes increased 4.6% yoy to 17.3 mn tons. The yoy
growth in sales was led by strong growth in gasoline, diesel, LPG and ATF sales which was
partially offset by decline in sales of fuel oil and naphtha. The adventitious gains were at `3.3 bn in
3QFY11 which seems low versus `3.2 bn reported by BPCL and `4.8 bn reported by HPCL.
Earnings will depend on net under-recoveries
The earnings of downstream companies will depend on net under-recoveries which will depend on
the final subsidy-sharing scheme. We assume the government will restrict the amount of net
under-recoveries at around `70 bn for FY2011E and `75 bn for FY2012E (higher than `56 bn in
FY2010) for the downstream oil companies. We note that government has given sufficient
compensation at various levels of crude prices, from US$67-89/bbl in FY2008-10, to maintain the
profitability of downstream companies at a reasonable level.
Revised earnings; stock offering good upside to current target price
We retain our BUY rating on the stock noting 40% upside to our revised target price of `440
(`500 previously) based on 11X FY2012E EPS plus value of investments. We have revised our
FY2011-13E EPS to `35 (-8.2%), `35 (-12.7%) and `40 (-5.6%) to reflect (1) higher net underrecoveries,
(2) delay in diesel deregulation to FY2013E, (3) higher crude price assumption and (4)
other minor changes.
Key financial and operating details of 3QFY11 results
Exhibit 1 gives key highlights of IOCL’s 3QFY11 results and compares the same on yoy and
qoq basis. We do not see merit in a comparison of quarterly results given high volatility in
the timing and quantum of compensation from government and upstream companies.
Refining margins declined modestly qoq. IOCL’s 3QFY11 refining margin declined to
US$6.3/bbl versus US$6.6/bbl in 2QFY11 and US$3.7/bbl in 3QFY10. We are surprised by
the qoq decline in refining margins given that benchmark margins had improved
modestly qoq. We also note that the company had reported adventitious gains of `3.3 bn
in 3QFY11 versus a loss of `351 mn in 2QFY11.
Compensation (cash) from the government and discounts from the upstream oil
companies. IOCL received `44.4 bn as compensation from the government in 3QFY11.
IOCL received `28.9 bn of discounts from the upstream companies in 3QFY11 compared
to `44.8 bn in 3QFY10 and `72.2 bn in 2QFY11. Its net under-recovery was `57.2 bn in
9MFY11 compared to under-recovery of `79.4 bn in 9MFY10.
Refining throughput and sales volumes improve. IOCL’s refineries processed 13.3 mn
tons of crude in 3QFY11 compared to 12.1 mn tons in 2QFY11 and 12.5 mn tons in
3QFY10. IOCL’s sales volume (domestic sales) was 17.3 mn tons (+10.1% qoq, +4.6%
yoy).
Petchem EBIT negative. IOCL reported a negative EBIT of `5.5 bn from sale of
petrochemical products versus a loss of `5 bn in 2QFY11 and a gain of `230.5 mn in
3QFY10. The qoq decline in performance reflects lower petrochemical sales volumes at
0.186 mn tons versus 0.248 mn tons in 2QFY11. The sharp qoq decline in petchem sales
volumes is similar to the decline reported by GAIL and raises concerns on potential
demand in the country.
Staff expenses declined 12% qoq and 16% yoy. IOCL’s staff expenses declined to
`14.1 bn (-12% qoq and -16% yoy), modestly lower than our estimate of `14.6 bn.
Adventitious gain. IOCL’s reported an adventitious gain of `3.3 bn versus a loss of `351
mn in 2QFY11 and gain of `9.5 bn in 3QFY10.
Earnings revisions and key assumptions behind earnings model
We have revised FY2011E, FY2012E and FY2013E EPS estimates to `34.8, `35.2 and `40.2
from `37.9, `40.3 and `42.6. We discuss key assumptions behind our earnings model below.
Refining margins. We model refining margin (standalone) for IOCL at US$5.6/bbl in
FY2011E, US$6/bbl in FY2012E and US$6.4/bbl in FY2013E compared to US$5.3/bbl in
9MFY11. We assume adventitious gains at `9.3 bn in FY2011E in line with 9MFY11’s
`8.1 bn and nil gains or losses for the future years.
Crude throughput. We model crude throughput at 52 mn tons, 54.8 mn tons and 54.8
mn tons in FY2011E, FY2012E and FY2013E versus 50.7 mn tons in FY2010. The yoy
jump in crude throughput in FY2011E reflects full year of operation of Panipat’s
expanded capacity (15 mtpa).
Marketing margins. We model marketing margin on gasoline and diesel at –`2,525/ton
and –`2,154/ton in FY2011E and `1,350/ton and -`2,892/ton in FY2012E compared to –
`3,929/ton and `1,113/ton and in FY2010. We expect diesel prices to be deregulated by
April 1, 2012 with the easing of inflationary concerns. We do not assume any increase in
LPG and kerosene retail prices throughout our forecast period.
Compensation from government and discount from upstream companies. We
model IOCL to receive compensation of `225.8 bn, `246.8 bn and `143.5 bn from the
government in FY2011E, FY2012E and FY2013E. We assume IOCL to receive discount of
`132.1 bn for FY2011E, `143.9 bn for FY2012E and `89.2 bn for FY2013E from the
upstream companies. We assume net under-recoveries at `38.3 bn, `40.9 bn and `35 bn
for FY2011E, FY2012E and FY2013E.
Exchange rate. We assume `/US$ exchange rate for FY2011E, FY2012E and FY2013E at
`45.6/US$, `45.5/US$ and `44/US$. A stronger rupee is moderately negative for earnings
of IOCL for the refining segment although it is positive for marketing margins of
controlled products in that under-recoveries will be likely lower.
CPCL 3QFY11 results—higher refining margins qoq boost earnings
CPCL reported 3QFY11 net income of `1.5 bn compared to `978 mn in 2QFY11 and `2.2
bn in 3QFY10. The qoq increase in net income reflects (1) higher refining margins at
US$5.3/bbl versus US$4.1/bbl in 2QFY11 and (2) forex gains of `678 mn in 3QFY11 versus
forex loss of `268 mn in 2QFY11.
We model FY2011E and FY2012E EPS at `22.6 (`3.4 bn net income) and `23.3 (`3.5 bn net
income). We model FY2011E and FY2012E refining margin at US$4.3/bbl and US$4.8/bbl
versus US$3.9/bbl in 9MFY11; all figures include adventitious gains/losses. The yoy increase
in FY2012E net income reflects (1) higher refining margins and (2) higher crude throughput.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Oil Corporation (IOCL)
Energy
Results boosted by cash compensation. IOCL reported better-than-expected 3QFY11
(standalone) EBITDA at `32.9 bn versus our estimate of `3.6 bn due to compensation of
`44.4 bn from the government in 3QFY11 versus nil assumed by us. This was partly
compensated by (1) lower-then-expected adventitious gains and (2) lower refining
margins at US$6.3/bbl versus US$6.7/bbl assumed by us. We maintain our BUY rating
on the stock with a revised target price of `440 (`500 previously). Key downside risk
stems from higher-than-expected net under-recoveries.
Cash compensation from government boosts 3QFY11 earnings
IOCL reported 3QFY11 EBITDA (standalone) at `32.9 bn versus `68.9 bn in 2QFY11 and `27.7 bn
in 3QFY10; our estimate was at `3.6 bn. The stronger-than-expected performance was due to
compensation of `44.4 bn from the government in 3QFY11 versus nil assumed by us. We note
that IOCL has borne `57.2 bn as net under-recovery in 9MFY11. However, we would not
extrapolate the subsidy-sharing arrangement for 9MFY11 to estimate FY2011E earnings as the
final subsidy-sharing arrangement will not be known until 4QFY11E results.
Refining margins decline modestly; domestic sales volumes increase 4.6% yoy
IOCL’s 3QFY11 refining margin declined modestly qoq to US$6.3/bbl versus US$6.6/bbl in 2QFY11
and US$3.7/bbl in 3QFY10. 3QFY11 sales volumes increased 4.6% yoy to 17.3 mn tons. The yoy
growth in sales was led by strong growth in gasoline, diesel, LPG and ATF sales which was
partially offset by decline in sales of fuel oil and naphtha. The adventitious gains were at `3.3 bn in
3QFY11 which seems low versus `3.2 bn reported by BPCL and `4.8 bn reported by HPCL.
Earnings will depend on net under-recoveries
The earnings of downstream companies will depend on net under-recoveries which will depend on
the final subsidy-sharing scheme. We assume the government will restrict the amount of net
under-recoveries at around `70 bn for FY2011E and `75 bn for FY2012E (higher than `56 bn in
FY2010) for the downstream oil companies. We note that government has given sufficient
compensation at various levels of crude prices, from US$67-89/bbl in FY2008-10, to maintain the
profitability of downstream companies at a reasonable level.
Revised earnings; stock offering good upside to current target price
We retain our BUY rating on the stock noting 40% upside to our revised target price of `440
(`500 previously) based on 11X FY2012E EPS plus value of investments. We have revised our
FY2011-13E EPS to `35 (-8.2%), `35 (-12.7%) and `40 (-5.6%) to reflect (1) higher net underrecoveries,
(2) delay in diesel deregulation to FY2013E, (3) higher crude price assumption and (4)
other minor changes.
Key financial and operating details of 3QFY11 results
Exhibit 1 gives key highlights of IOCL’s 3QFY11 results and compares the same on yoy and
qoq basis. We do not see merit in a comparison of quarterly results given high volatility in
the timing and quantum of compensation from government and upstream companies.
Refining margins declined modestly qoq. IOCL’s 3QFY11 refining margin declined to
US$6.3/bbl versus US$6.6/bbl in 2QFY11 and US$3.7/bbl in 3QFY10. We are surprised by
the qoq decline in refining margins given that benchmark margins had improved
modestly qoq. We also note that the company had reported adventitious gains of `3.3 bn
in 3QFY11 versus a loss of `351 mn in 2QFY11.
Compensation (cash) from the government and discounts from the upstream oil
companies. IOCL received `44.4 bn as compensation from the government in 3QFY11.
IOCL received `28.9 bn of discounts from the upstream companies in 3QFY11 compared
to `44.8 bn in 3QFY10 and `72.2 bn in 2QFY11. Its net under-recovery was `57.2 bn in
9MFY11 compared to under-recovery of `79.4 bn in 9MFY10.
Refining throughput and sales volumes improve. IOCL’s refineries processed 13.3 mn
tons of crude in 3QFY11 compared to 12.1 mn tons in 2QFY11 and 12.5 mn tons in
3QFY10. IOCL’s sales volume (domestic sales) was 17.3 mn tons (+10.1% qoq, +4.6%
yoy).
Petchem EBIT negative. IOCL reported a negative EBIT of `5.5 bn from sale of
petrochemical products versus a loss of `5 bn in 2QFY11 and a gain of `230.5 mn in
3QFY10. The qoq decline in performance reflects lower petrochemical sales volumes at
0.186 mn tons versus 0.248 mn tons in 2QFY11. The sharp qoq decline in petchem sales
volumes is similar to the decline reported by GAIL and raises concerns on potential
demand in the country.
Staff expenses declined 12% qoq and 16% yoy. IOCL’s staff expenses declined to
`14.1 bn (-12% qoq and -16% yoy), modestly lower than our estimate of `14.6 bn.
Adventitious gain. IOCL’s reported an adventitious gain of `3.3 bn versus a loss of `351
mn in 2QFY11 and gain of `9.5 bn in 3QFY10.
Earnings revisions and key assumptions behind earnings model
We have revised FY2011E, FY2012E and FY2013E EPS estimates to `34.8, `35.2 and `40.2
from `37.9, `40.3 and `42.6. We discuss key assumptions behind our earnings model below.
Refining margins. We model refining margin (standalone) for IOCL at US$5.6/bbl in
FY2011E, US$6/bbl in FY2012E and US$6.4/bbl in FY2013E compared to US$5.3/bbl in
9MFY11. We assume adventitious gains at `9.3 bn in FY2011E in line with 9MFY11’s
`8.1 bn and nil gains or losses for the future years.
Crude throughput. We model crude throughput at 52 mn tons, 54.8 mn tons and 54.8
mn tons in FY2011E, FY2012E and FY2013E versus 50.7 mn tons in FY2010. The yoy
jump in crude throughput in FY2011E reflects full year of operation of Panipat’s
expanded capacity (15 mtpa).
Marketing margins. We model marketing margin on gasoline and diesel at –`2,525/ton
and –`2,154/ton in FY2011E and `1,350/ton and -`2,892/ton in FY2012E compared to –
`3,929/ton and `1,113/ton and in FY2010. We expect diesel prices to be deregulated by
April 1, 2012 with the easing of inflationary concerns. We do not assume any increase in
LPG and kerosene retail prices throughout our forecast period.
Compensation from government and discount from upstream companies. We
model IOCL to receive compensation of `225.8 bn, `246.8 bn and `143.5 bn from the
government in FY2011E, FY2012E and FY2013E. We assume IOCL to receive discount of
`132.1 bn for FY2011E, `143.9 bn for FY2012E and `89.2 bn for FY2013E from the
upstream companies. We assume net under-recoveries at `38.3 bn, `40.9 bn and `35 bn
for FY2011E, FY2012E and FY2013E.
Exchange rate. We assume `/US$ exchange rate for FY2011E, FY2012E and FY2013E at
`45.6/US$, `45.5/US$ and `44/US$. A stronger rupee is moderately negative for earnings
of IOCL for the refining segment although it is positive for marketing margins of
controlled products in that under-recoveries will be likely lower.
CPCL 3QFY11 results—higher refining margins qoq boost earnings
CPCL reported 3QFY11 net income of `1.5 bn compared to `978 mn in 2QFY11 and `2.2
bn in 3QFY10. The qoq increase in net income reflects (1) higher refining margins at
US$5.3/bbl versus US$4.1/bbl in 2QFY11 and (2) forex gains of `678 mn in 3QFY11 versus
forex loss of `268 mn in 2QFY11.
We model FY2011E and FY2012E EPS at `22.6 (`3.4 bn net income) and `23.3 (`3.5 bn net
income). We model FY2011E and FY2012E refining margin at US$4.3/bbl and US$4.8/bbl
versus US$3.9/bbl in 9MFY11; all figures include adventitious gains/losses. The yoy increase
in FY2012E net income reflects (1) higher refining margins and (2) higher crude throughput.
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