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Indian Oil Corporation (IOCL)
Energy
Weak 4QFY11 results. IOCL reported 4QFY11 net income at `39.1 bn lower than our
estimate of `46 bn. The negative variance reflects (1) higher-than-expected employee
costs, (2) lower-than-expected other income and (3) higher-than expected interest cost.
This was partially mitigated by (1) better-than-expected performance of refining
segment and (2) lower-than-expected tax. We maintain our ADD rating on the stock
with a revised target price of `410 (`420 previously). Key downside risk stems from
higher-than-expected net under-recoveries.
4QFY11 earnings impacted by higher employee cost and lower other income
IOCL reported 4QFY11 EBITDA (standalone) at `57.8 bn versus `32.9 bn in 3QFY11 and `86.5 bn
in 4QFY10. The weak operating performance despite in 4QFY11 despite net over-recovery of `19
bn reflects (1) higher employee costs at `24.4 bn (+25.3% yoy and +73.4% qoq), (2) sharp
increase in other expenditure to `57.4 bn (+113% yoy and +71%qoq) and (3) lower other income
at `4.8 bn (-8.2% yoy and -39.1% qoq). We note that IOCL has borne `38 bn as net underrecovery
in FY2011 versus `32 bn in FY2010.
Refining margins improve; domestic sales volumes increase 6.6% yoy
IOCL’s 4QFY11 refining margin increased qoq to US$7.9/bbl versus US$6.3/bbl in 3QFY11 and
US$3.4/bbl in 4QFY10. 4QFY11 sales volumes increased 6.6% yoy to 17.7 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. IOCL reported adventitious loss of `2.6
bn in 4QFY11 which is surprising given adventitious gains reported by BPCL (`2.9 bn) and HPCL
(`3.9 bn).
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 `74 bn for FY2012-13E higher than `69 bn for FY2011 and `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 FY2008-11, to maintain the
profitability of downstream companies at a reasonable level.
Revised earnings; stock offering good upside to current target price
We retain our ADD rating on the stock noting 28% upside to our revised target price of `410
(`420 previously) based on 10X FY2013E EPS plus value of investments. We have revised our
FY2012-14E EPS to `30.3 (-2.1%), `35.1 (-2.2%) and `38.3 (-4.6%) to reflect (1) 4QFY11 results
and (2) other minor changes.
Earnings revisions and key assumptions behind earnings model
We have revised FY2012E, FY2013E and FY2014E EPS estimates to `30.3, `35.1 and `38.3
from `30.9, `35.9 and `40.2. We discuss key assumptions behind our earnings model below.
Compensation from government and discount from upstream companies. We
model IOCL to receive compensation of `384 bn, `326 bn and `146 bn from the
government in FY2012E, FY2013E and FY2014E. We assume IOCL to receive discount of
`271 bn for FY2012E, `183 bn for FY2013E and `93 bn for FY2014E from the upstream
companies. We assume net under-recoveries at `39.6 bn, `39.3 bn and `39.5 bn for
FY2012E, FY2013E and FY2014E.
Refining margins. We model refining margin (standalone) for IOCL at US$6.2/bbl in
FY2012E, US$6.4/bbl in FY2013E and US$6.4/bbl in FY2014E compared to US$6/bbl in
FY2011. We assume no gains or losses for the future years versus adventitious gains of
`5.5 bn (US$0.3/bbl) in FY2011.
Crude throughput. We model crude throughput at 55.1 mn tons for FY2012-14E versus
53 mn tons in FY2011.
Marketing margins. We model marketing margin on gasoline and diesel at `675/ton
and –`10,503/ton in FY2012E and `1,900/ton and –`6,849/ton in FY2013E compared to
–`2,984/ton and –`3,243/ton in FY2011. We do not assume any increase in diesel, LPG
and kerosene retail prices throughout our forecast period.
Exchange rate. We assume `/US$ exchange rate for FY2012E, FY2013E and FY2014E at
`45.5/US$, `44/US$ 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 4QFY11 results—higher refining margins qoq boost earnings
CPCL reported 4QFY11 net income of `3.1 bn compared to `1.5 bn in 3QFY11 and –`611
mn in 4QFY10. The qoq increase in net income reflects (1) higher refining margins at
US$8.3/bbl versus US$5.3/bbl in 3QFY11 and (2) higher other income of `988 mn in
4QFY11 versus `124 mn in 3QFY11.
We model FY2012E and FY2013E EPS at `18.2 (`2.7 bn net income) and `13.3 (`2 bn net
income). We model FY2012E and FY2013E refining margin at US$4.7/bbl and US$4.9/bbl
versus US$5/bbl in FY2011; 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
Weak 4QFY11 results. IOCL reported 4QFY11 net income at `39.1 bn lower than our
estimate of `46 bn. The negative variance reflects (1) higher-than-expected employee
costs, (2) lower-than-expected other income and (3) higher-than expected interest cost.
This was partially mitigated by (1) better-than-expected performance of refining
segment and (2) lower-than-expected tax. We maintain our ADD rating on the stock
with a revised target price of `410 (`420 previously). Key downside risk stems from
higher-than-expected net under-recoveries.
4QFY11 earnings impacted by higher employee cost and lower other income
IOCL reported 4QFY11 EBITDA (standalone) at `57.8 bn versus `32.9 bn in 3QFY11 and `86.5 bn
in 4QFY10. The weak operating performance despite in 4QFY11 despite net over-recovery of `19
bn reflects (1) higher employee costs at `24.4 bn (+25.3% yoy and +73.4% qoq), (2) sharp
increase in other expenditure to `57.4 bn (+113% yoy and +71%qoq) and (3) lower other income
at `4.8 bn (-8.2% yoy and -39.1% qoq). We note that IOCL has borne `38 bn as net underrecovery
in FY2011 versus `32 bn in FY2010.
Refining margins improve; domestic sales volumes increase 6.6% yoy
IOCL’s 4QFY11 refining margin increased qoq to US$7.9/bbl versus US$6.3/bbl in 3QFY11 and
US$3.4/bbl in 4QFY10. 4QFY11 sales volumes increased 6.6% yoy to 17.7 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. IOCL reported adventitious loss of `2.6
bn in 4QFY11 which is surprising given adventitious gains reported by BPCL (`2.9 bn) and HPCL
(`3.9 bn).
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 `74 bn for FY2012-13E higher than `69 bn for FY2011 and `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 FY2008-11, to maintain the
profitability of downstream companies at a reasonable level.
Revised earnings; stock offering good upside to current target price
We retain our ADD rating on the stock noting 28% upside to our revised target price of `410
(`420 previously) based on 10X FY2013E EPS plus value of investments. We have revised our
FY2012-14E EPS to `30.3 (-2.1%), `35.1 (-2.2%) and `38.3 (-4.6%) to reflect (1) 4QFY11 results
and (2) other minor changes.
Earnings revisions and key assumptions behind earnings model
We have revised FY2012E, FY2013E and FY2014E EPS estimates to `30.3, `35.1 and `38.3
from `30.9, `35.9 and `40.2. We discuss key assumptions behind our earnings model below.
Compensation from government and discount from upstream companies. We
model IOCL to receive compensation of `384 bn, `326 bn and `146 bn from the
government in FY2012E, FY2013E and FY2014E. We assume IOCL to receive discount of
`271 bn for FY2012E, `183 bn for FY2013E and `93 bn for FY2014E from the upstream
companies. We assume net under-recoveries at `39.6 bn, `39.3 bn and `39.5 bn for
FY2012E, FY2013E and FY2014E.
Refining margins. We model refining margin (standalone) for IOCL at US$6.2/bbl in
FY2012E, US$6.4/bbl in FY2013E and US$6.4/bbl in FY2014E compared to US$6/bbl in
FY2011. We assume no gains or losses for the future years versus adventitious gains of
`5.5 bn (US$0.3/bbl) in FY2011.
Crude throughput. We model crude throughput at 55.1 mn tons for FY2012-14E versus
53 mn tons in FY2011.
Marketing margins. We model marketing margin on gasoline and diesel at `675/ton
and –`10,503/ton in FY2012E and `1,900/ton and –`6,849/ton in FY2013E compared to
–`2,984/ton and –`3,243/ton in FY2011. We do not assume any increase in diesel, LPG
and kerosene retail prices throughout our forecast period.
Exchange rate. We assume `/US$ exchange rate for FY2012E, FY2013E and FY2014E at
`45.5/US$, `44/US$ 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 4QFY11 results—higher refining margins qoq boost earnings
CPCL reported 4QFY11 net income of `3.1 bn compared to `1.5 bn in 3QFY11 and –`611
mn in 4QFY10. The qoq increase in net income reflects (1) higher refining margins at
US$8.3/bbl versus US$5.3/bbl in 3QFY11 and (2) higher other income of `988 mn in
4QFY11 versus `124 mn in 3QFY11.
We model FY2012E and FY2013E EPS at `18.2 (`2.7 bn net income) and `13.3 (`2 bn net
income). We model FY2012E and FY2013E refining margin at US$4.7/bbl and US$4.9/bbl
versus US$5/bbl in FY2011; 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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