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Indian Oil Corporation
Watch out for petchem
3QFY11 net profit of Rs16.34bn was below our expectations mainly due to lower
inventory gains. Petrochemical sales volumes were below operable capacity due
to planned shutdowns and should rebound sharply in subsequent quarters. IOC
is also benefiting from current record PTA/PX margins. Maintain Buy, TP Rs400.
Full-year results based on our target ROE likely to be met, in our view
For 3QFY11, IOC reported a net profit of Rs16.3bn, below our expectations due to lowerthan-expected inventory gains and higher-than-expected losses on petrochemicals. Inventory
gains were Rs3.26bn, virtually equal to that reported by Bharat Petroleum (Rs3.19bn).
Normally, IOC’s numbers are at least double that of its two peers due to its larger-size, inland
refineries. Upstream and government contributions towards under-recovery was 85% for
3QFY11 and 78% for 9MFY11. We continue to expect a higher contribution in 4QFY11 to
ensure that even the weakest player (HPCL) reports at least 11-12% ROE.
Petchem a drag in 9MFY11, set for turnaround
IOC’s petrochemical operations have reported losses at the EBIT level for the first three
quarters as operations have not yet stabilised at its new cracker. In addition, both the cracker
and the PX/PTA plant were shutdown during part of 3QFY11 to enable completion of the
Panipat refinery expansion (from 12mmt to 15mmt). Hence, volumes sold as a percentage of
capacity was hardly 43% for PX/PTA, 40% for MEG and just 2% for polymers (PE/PP). We
expect operations at all the plants to stabilise in the current quarter and, with PTA integrated
margins at all-time highs, we believe that petrochemical operations will provide a significant
earnings boost in FY12/13.
Maintain Buy, Rs400 target price
Our assumed HPCL ROE of 11-12% would yield IOC a 16-17% FY11 ROE, which we
assume climbs higher in FY12/13F due to a greater petrochemical business contribution.
Hence, we maintain our core business valuation for IOC at Rs330/share based on 1.4x
FY11F P/B (18-19% ROE in FY12/13F). If we add the value of the company’s ONGC and
GAIL investments (Rs70/share), our total target price rises to Rs400 – we maintain our Buy
rating.
Watch out for petchem
We believe that most of the bad news on under-recoveries and lack of deregulation is in
the price and, at current valuations, we believe investors should buy and wait patiently for
difficult-to-predict positive news flow to emerge.
Full-year results based on target ROE look likely to be met
For 3QFY11, IOC reported a net profit of Rs16.4bn, which included product inventory gains of
Rs3.3bn. This was virtually equal to that reported by BPCL (Rs3.19bn). Although numbers could
differ on a quarterly basis, IOC’s numbers are normally at least double those of its peer due to its
larger-size, inland refineries. In FY10, IOC reported inventory gains of Rs38.4bn compared to
BPCL’s Rs8bn.
Upstream and government contributions towards under-recovery was 85% in 3QFY11 and 78% in
9MFY11. We continue to expect higher contribution in 4QFY11.
IOC’s operational results were in line with expectations in terms of refining and pipeline
throughput, sales volumes, GRMs, etc. The main disappointment was in terms of petrochemical
volumes, where operations were impacted by a shutdown at the Panipat refinery during 3QFY11
Quarterly results for the oil marketing companies tend to be unreliable indicators of full-year
profitability as the government adjusts the compensation mechanism in the fourth quarter. Our
earnings estimates (which are unchanged) for the core business assume the status quo, ie: 1)
some price hikes; 2) no deregulation; 3) continued under-recoveries; and 4) Indian government
(GOI) compensation being pegged at levels that ensure ongoing ROE of 11-12% for the weakest
player (HPCL). We estimate that such a return for HPCL would imply a 16-17% return for IOC due
to the latter’s higher contribution from refining, pipelines and now petrochemicals. Given this
assumption, we maintain our earnings estimates on the core refining and marketing (R&M)
operations, even though oil prices and resultant gross under-recoveries seem likely to end up
higher than we were expecting.
Petchem a drag in 9MFY11, but looks set for turnaround
IOC’s petrochemical operations mainly involve a 0.6mmt PX/PTA plant and a new 0.9mmt cracker
which commenced operations in March 2010 (in addition to a smaller 140kt LAB plant).
The PX/PTA plant was shut down for 90 days spread over 2Q and 3QFY11 to implement an 8%
capacity increase via debottlenecking. Hence, 3QFY11 sales volumes were just 43% of total
capacity. This plant has recommenced operations and we expect capacity utilisation of 95% in the
next two years. We see potentially high upside from these volumes as integrated PTA margins
have shot up in the last few months, touching new highs.
Meanwhile, the cracker which produces MEG, PE and PP has had teething problems, and output
has taken time to stabilise – the cracker was shutdown for 45 days of 3QFY11 to match the
Panipat refinery capacity expansion. Hence volumes sold during the quarter were low at 40% of
capacity for MEG and just 2% for polymers (PE/PP). Current capacity utilisation is around 80%,
and we forecast average utilisation of 80% in FY12 before rising to 90% in FY13 as initial
production hiccups are sorted out.
Given the fixed costs in the business, the petchem segment reported losses for the first three
quarters of FY11. However, we expect a sharp turnaround in profitability once volumes start
flowing through, especially as margins in the business remain very strong.
Maintain Buy, Rs400 target price
We maintain our valuation of IOC’s core business at 1.4x FY11F P/B (Rs330) based on our
estimated ROE which translates into a target price of Rs400. We estimate core ROE for the
business at 18-19% over FY12-13F. After deducting the value of investments, IOC’s core
business is currently trading at 0.9x P/B on a 12-month rolling basis. In our view, a realistic bottom
valuation on an adjusted price/book basis is 0.8x, indicating that, at worst, there is a further 12%
potential downside. However, historical price charts suggest that buying at these bottom
valuations has provided returns of 30-40% in less than 12 months in the past.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Oil Corporation
Watch out for petchem
3QFY11 net profit of Rs16.34bn was below our expectations mainly due to lower
inventory gains. Petrochemical sales volumes were below operable capacity due
to planned shutdowns and should rebound sharply in subsequent quarters. IOC
is also benefiting from current record PTA/PX margins. Maintain Buy, TP Rs400.
Full-year results based on our target ROE likely to be met, in our view
For 3QFY11, IOC reported a net profit of Rs16.3bn, below our expectations due to lowerthan-expected inventory gains and higher-than-expected losses on petrochemicals. Inventory
gains were Rs3.26bn, virtually equal to that reported by Bharat Petroleum (Rs3.19bn).
Normally, IOC’s numbers are at least double that of its two peers due to its larger-size, inland
refineries. Upstream and government contributions towards under-recovery was 85% for
3QFY11 and 78% for 9MFY11. We continue to expect a higher contribution in 4QFY11 to
ensure that even the weakest player (HPCL) reports at least 11-12% ROE.
Petchem a drag in 9MFY11, set for turnaround
IOC’s petrochemical operations have reported losses at the EBIT level for the first three
quarters as operations have not yet stabilised at its new cracker. In addition, both the cracker
and the PX/PTA plant were shutdown during part of 3QFY11 to enable completion of the
Panipat refinery expansion (from 12mmt to 15mmt). Hence, volumes sold as a percentage of
capacity was hardly 43% for PX/PTA, 40% for MEG and just 2% for polymers (PE/PP). We
expect operations at all the plants to stabilise in the current quarter and, with PTA integrated
margins at all-time highs, we believe that petrochemical operations will provide a significant
earnings boost in FY12/13.
Maintain Buy, Rs400 target price
Our assumed HPCL ROE of 11-12% would yield IOC a 16-17% FY11 ROE, which we
assume climbs higher in FY12/13F due to a greater petrochemical business contribution.
Hence, we maintain our core business valuation for IOC at Rs330/share based on 1.4x
FY11F P/B (18-19% ROE in FY12/13F). If we add the value of the company’s ONGC and
GAIL investments (Rs70/share), our total target price rises to Rs400 – we maintain our Buy
rating.
Watch out for petchem
We believe that most of the bad news on under-recoveries and lack of deregulation is in
the price and, at current valuations, we believe investors should buy and wait patiently for
difficult-to-predict positive news flow to emerge.
Full-year results based on target ROE look likely to be met
For 3QFY11, IOC reported a net profit of Rs16.4bn, which included product inventory gains of
Rs3.3bn. This was virtually equal to that reported by BPCL (Rs3.19bn). Although numbers could
differ on a quarterly basis, IOC’s numbers are normally at least double those of its peer due to its
larger-size, inland refineries. In FY10, IOC reported inventory gains of Rs38.4bn compared to
BPCL’s Rs8bn.
Upstream and government contributions towards under-recovery was 85% in 3QFY11 and 78% in
9MFY11. We continue to expect higher contribution in 4QFY11.
IOC’s operational results were in line with expectations in terms of refining and pipeline
throughput, sales volumes, GRMs, etc. The main disappointment was in terms of petrochemical
volumes, where operations were impacted by a shutdown at the Panipat refinery during 3QFY11
Quarterly results for the oil marketing companies tend to be unreliable indicators of full-year
profitability as the government adjusts the compensation mechanism in the fourth quarter. Our
earnings estimates (which are unchanged) for the core business assume the status quo, ie: 1)
some price hikes; 2) no deregulation; 3) continued under-recoveries; and 4) Indian government
(GOI) compensation being pegged at levels that ensure ongoing ROE of 11-12% for the weakest
player (HPCL). We estimate that such a return for HPCL would imply a 16-17% return for IOC due
to the latter’s higher contribution from refining, pipelines and now petrochemicals. Given this
assumption, we maintain our earnings estimates on the core refining and marketing (R&M)
operations, even though oil prices and resultant gross under-recoveries seem likely to end up
higher than we were expecting.
Petchem a drag in 9MFY11, but looks set for turnaround
IOC’s petrochemical operations mainly involve a 0.6mmt PX/PTA plant and a new 0.9mmt cracker
which commenced operations in March 2010 (in addition to a smaller 140kt LAB plant).
The PX/PTA plant was shut down for 90 days spread over 2Q and 3QFY11 to implement an 8%
capacity increase via debottlenecking. Hence, 3QFY11 sales volumes were just 43% of total
capacity. This plant has recommenced operations and we expect capacity utilisation of 95% in the
next two years. We see potentially high upside from these volumes as integrated PTA margins
have shot up in the last few months, touching new highs.
Meanwhile, the cracker which produces MEG, PE and PP has had teething problems, and output
has taken time to stabilise – the cracker was shutdown for 45 days of 3QFY11 to match the
Panipat refinery capacity expansion. Hence volumes sold during the quarter were low at 40% of
capacity for MEG and just 2% for polymers (PE/PP). Current capacity utilisation is around 80%,
and we forecast average utilisation of 80% in FY12 before rising to 90% in FY13 as initial
production hiccups are sorted out.
Given the fixed costs in the business, the petchem segment reported losses for the first three
quarters of FY11. However, we expect a sharp turnaround in profitability once volumes start
flowing through, especially as margins in the business remain very strong.
Maintain Buy, Rs400 target price
We maintain our valuation of IOC’s core business at 1.4x FY11F P/B (Rs330) based on our
estimated ROE which translates into a target price of Rs400. We estimate core ROE for the
business at 18-19% over FY12-13F. After deducting the value of investments, IOC’s core
business is currently trading at 0.9x P/B on a 12-month rolling basis. In our view, a realistic bottom
valuation on an adjusted price/book basis is 0.8x, indicating that, at worst, there is a further 12%
potential downside. However, historical price charts suggest that buying at these bottom
valuations has provided returns of 30-40% in less than 12 months in the past.
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