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IOCL reported EBITDA loss of INR5.6b for 2QFY12 (v/s our estimate of positive EBITDA of INR52b) primarily due to (1) nil
government compensation v/s our estimate of INR79b, (2) negative GRM (-USD0.03/bbl v/s our estimate of USD6.8/bbl;
adjusted for forex loss, GRM was USD2.8/bbl), and (3) forex loss of INR23b. Net loss for the quarter was INR75b, v/s net
profit of INR53b in 2QFY11 and loss of INR37b in 1QFY12.
Net under-recovery sharing at 67% in 2QFY12, 44% in 1HFY12; model 4% in FY12
Of the gross under-recovery of INR118b in 2QFY12, IOCL received INR39b from upstream as discounts on crude
purchases, but the government did not pay any compensation during the quarter. The net subsidy burden was
INR78b.
For FY12, we model upstream share at 38.7%, government share at ~57% and OMCs' share at 4%.
Reported GRM negative; GRM adjusted for forex at USD2.8/bbl
GRM for 2QFY12 was negative (-USD0.03/bbl v/s our estimate of USD6.8/bbl) as against USD6.6/bbl in 2QFY11 and
USD4.7/bbl in 1QFY12. IOC's reported GRM includes forex loss component on crude liability. Adjusting for the forex
loss of INR12.3b, GRM would be USD2.8/bbl. Further, the large underperformance v/s the regional benchmark Reuters
Singapore GRM (USD9.1/bbl in 2QFY12) in recent quarters is due to the difference in the product slate - IOCL is a
diesel-heavy refiner and cracks of diesel were down QoQ in 2QFY12.
Valuation and view
We model Brent oil price of USD110/95/90/85/bbl for FY12/FY13/FY14/long-term in our estimates. Similar to earlier
years, we expect the government subsidy sharing to be finalized towards the end of the year.
IOCL's petrochemical division reported positive EBIT of INR635m after continued losses for five quarters. Positive
contribution from this division would help IOCL to maintain its superior RoE compared with other OMCs.
To account for the lower GRM in 2QFY12, we cut our consolidated EPS estimate for FY12 by 10% to INR30.7. The
stock trades at 9.4x FY12E consolidated EPS of INR30.7 and 1.1x FY12E BV. Valuations are reasonable; maintain
Buy.
Valuation and view
We model Brent oil price of USD110/95/90/85/bbl in FY12/FY13/FY14/long-term in
our estimates.
Similar to earlier years, the govt. subsidy sharing is expected to be finalized towards
the end of the year. Led by delay in the government compensation we continue to
model higher debt levels (leading to higher interest costs) for the next 2 quarters and
expect bulk of the government compensation to come in 4QFY12. In view of likely
ONGC FPO, we expect government to spell out a likely sustainable subsidy sharing
formula over the coming period.
IOC's petrochemical division reported positive EBIT of INR635m after a continued
loss for 5 quarters. Positive contribution from IOC's petchem division would help IOC
to maintain its superior ROE compared with other OMC's.
- To account for lower GRM performance in 2QFY12, we cut our FY12 cons. EPS by
10% to INR30.7. The stock trades at 9.4x FY12E cons. EPS of INR30.7 and 1.1x
FY12E BV. Valuations reasonable, Maintain Buy.
Company description
A Fortune500 company, Indian Oil Corp (IOCL) is the
largest refining and marketing company in India. It operates
eight refineries (including BRPL) with a capacity of
49.7mmtpa and has 52% stake in CPCL (10.5mmt refining
capacity). IOCL controls a refining capacity of 65.7 mmtpa.
It has a pipeline network of >10,300km (62mmtpa capacity),
has 18,278 petrol/diesel outlets and has interests in
petrochemicals and upstream oil and gas. IOC is a public
sector company with 80.35% government of India stake.
Key investment arguments
IOCL's profitability is determined by the quantum of
under-recovery and sharing mechanism, rather than
fundamentals.
Growth will come from (1) expansion of the Panipat
refinery from 12 to 15mmtpa, (2) INR144b naphtha
cracker (commissioned) at Panipat and (3) Setting up
a INR256b integrated refinery (15mmtpa)/petchem
complex at Paradip.
Post deregulation and subsidy rationalization, IOCL's
valuations should benefit due to improvement in (1)
earnings quality, (2) RoCE and RoE, (3) cash cycle
and (4) lower debt.
Key investments risks
Maintaining market share and margins on auto fuels in
view of likely competition from private players.
Planning of mega investments in view of ad hoc subsidy
sharing.
Non-commensurate increase in retail fuel prices as oil
price rises, leads to under-recoveries for IOCL and
the ad hoc nature of subsidy sharing impacts profits.
Recent developments
The government initiated the process of decontrol of
retail fuel prices, starting with petrol prices. It is
expected to gradually also decontrol diesel, LPG and
kerosene prices in the coming months. The FPO of
IOCL and ONGC could be key triggers to start the
decontrol process for LPG, kerosene and diesel.
Valuation and view
The stock trades at 9.4x FY12E EPS of INR30.7 and
1.1x FY12E BV. Valuations are reasonable with implied
dividend yield of 3%. Maintain Buy.
Sector View
We expect refining margins to remain range-bound
amid a mixed trend in the global economy and supply
side situation. However, the ceiling will be capped in
the near term due to new capacities coming online in
FY12 and FY13. We expect the demand-supply gap
to correct only through refinery closure of simple
refiners and continuous pick-up in global demand.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IOCL reported EBITDA loss of INR5.6b for 2QFY12 (v/s our estimate of positive EBITDA of INR52b) primarily due to (1) nil
government compensation v/s our estimate of INR79b, (2) negative GRM (-USD0.03/bbl v/s our estimate of USD6.8/bbl;
adjusted for forex loss, GRM was USD2.8/bbl), and (3) forex loss of INR23b. Net loss for the quarter was INR75b, v/s net
profit of INR53b in 2QFY11 and loss of INR37b in 1QFY12.
Net under-recovery sharing at 67% in 2QFY12, 44% in 1HFY12; model 4% in FY12
Of the gross under-recovery of INR118b in 2QFY12, IOCL received INR39b from upstream as discounts on crude
purchases, but the government did not pay any compensation during the quarter. The net subsidy burden was
INR78b.
For FY12, we model upstream share at 38.7%, government share at ~57% and OMCs' share at 4%.
Reported GRM negative; GRM adjusted for forex at USD2.8/bbl
GRM for 2QFY12 was negative (-USD0.03/bbl v/s our estimate of USD6.8/bbl) as against USD6.6/bbl in 2QFY11 and
USD4.7/bbl in 1QFY12. IOC's reported GRM includes forex loss component on crude liability. Adjusting for the forex
loss of INR12.3b, GRM would be USD2.8/bbl. Further, the large underperformance v/s the regional benchmark Reuters
Singapore GRM (USD9.1/bbl in 2QFY12) in recent quarters is due to the difference in the product slate - IOCL is a
diesel-heavy refiner and cracks of diesel were down QoQ in 2QFY12.
Valuation and view
We model Brent oil price of USD110/95/90/85/bbl for FY12/FY13/FY14/long-term in our estimates. Similar to earlier
years, we expect the government subsidy sharing to be finalized towards the end of the year.
IOCL's petrochemical division reported positive EBIT of INR635m after continued losses for five quarters. Positive
contribution from this division would help IOCL to maintain its superior RoE compared with other OMCs.
To account for the lower GRM in 2QFY12, we cut our consolidated EPS estimate for FY12 by 10% to INR30.7. The
stock trades at 9.4x FY12E consolidated EPS of INR30.7 and 1.1x FY12E BV. Valuations are reasonable; maintain
Buy.
Valuation and view
We model Brent oil price of USD110/95/90/85/bbl in FY12/FY13/FY14/long-term in
our estimates.
Similar to earlier years, the govt. subsidy sharing is expected to be finalized towards
the end of the year. Led by delay in the government compensation we continue to
model higher debt levels (leading to higher interest costs) for the next 2 quarters and
expect bulk of the government compensation to come in 4QFY12. In view of likely
ONGC FPO, we expect government to spell out a likely sustainable subsidy sharing
formula over the coming period.
IOC's petrochemical division reported positive EBIT of INR635m after a continued
loss for 5 quarters. Positive contribution from IOC's petchem division would help IOC
to maintain its superior ROE compared with other OMC's.
- To account for lower GRM performance in 2QFY12, we cut our FY12 cons. EPS by
10% to INR30.7. The stock trades at 9.4x FY12E cons. EPS of INR30.7 and 1.1x
FY12E BV. Valuations reasonable, Maintain Buy.
Company description
A Fortune500 company, Indian Oil Corp (IOCL) is the
largest refining and marketing company in India. It operates
eight refineries (including BRPL) with a capacity of
49.7mmtpa and has 52% stake in CPCL (10.5mmt refining
capacity). IOCL controls a refining capacity of 65.7 mmtpa.
It has a pipeline network of >10,300km (62mmtpa capacity),
has 18,278 petrol/diesel outlets and has interests in
petrochemicals and upstream oil and gas. IOC is a public
sector company with 80.35% government of India stake.
Key investment arguments
IOCL's profitability is determined by the quantum of
under-recovery and sharing mechanism, rather than
fundamentals.
Growth will come from (1) expansion of the Panipat
refinery from 12 to 15mmtpa, (2) INR144b naphtha
cracker (commissioned) at Panipat and (3) Setting up
a INR256b integrated refinery (15mmtpa)/petchem
complex at Paradip.
Post deregulation and subsidy rationalization, IOCL's
valuations should benefit due to improvement in (1)
earnings quality, (2) RoCE and RoE, (3) cash cycle
and (4) lower debt.
Key investments risks
Maintaining market share and margins on auto fuels in
view of likely competition from private players.
Planning of mega investments in view of ad hoc subsidy
sharing.
Non-commensurate increase in retail fuel prices as oil
price rises, leads to under-recoveries for IOCL and
the ad hoc nature of subsidy sharing impacts profits.
Recent developments
The government initiated the process of decontrol of
retail fuel prices, starting with petrol prices. It is
expected to gradually also decontrol diesel, LPG and
kerosene prices in the coming months. The FPO of
IOCL and ONGC could be key triggers to start the
decontrol process for LPG, kerosene and diesel.
Valuation and view
The stock trades at 9.4x FY12E EPS of INR30.7 and
1.1x FY12E BV. Valuations are reasonable with implied
dividend yield of 3%. Maintain Buy.
Sector View
We expect refining margins to remain range-bound
amid a mixed trend in the global economy and supply
side situation. However, the ceiling will be capped in
the near term due to new capacities coming online in
FY12 and FY13. We expect the demand-supply gap
to correct only through refinery closure of simple
refiners and continuous pick-up in global demand.
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