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Key highlights
IOCL lost UP entry tax case in Allahabad High court, liability of
INR84bn: Allahabad High Court has dismissed IOCL's petition and upheld the
UP Entry Tax Act 2007, whereby UP govt is entitled to levy an entry tax/octroi on
crude oil at 5% (USD5.5/bbl at current oil prices) for its Mathura refinery. IOCL
will have net liability of INR84bn (refer table on page 2) including last ten-year
demand with interest. Hon'ble Supreme Court while accepting the review petition
has asked IOCL to deposit 50% of the accrued tax liability (INR42bn) and furnish
bank guarantee for the balance within next few months. Hon'ble Supreme Court
has also asked IOCL to pay the tax at the prevailing rates for the future period till
the review petition is decided.
Entry tax - an irrecoverable item for refiners, to make Mathura
refinery unviable: Entry tax has been an irrecoverable item for refiners and not
included as part of the refinery transfer price (RTP) as it is based on import parity
price and does not include local taxes. Entry tax burden of USD5.5/bbl is huge
with respect to average USD6.1/bbl GRMs made by Mathura refinery (8mmtpa)
during FY09-11 and an average net margin of USD3.9/bbl.
Full price hike in marketing looks difficult, we expect 2.5% underrealisation:
IOCL will require MoP&NG approval (largely political clearance)
for raising prices on regulated products in UP to cover this additional tax. On nonregulated
products, IOCL will face the problem of substitution, as products imported
from nearby states will attract entry tax in UP, which can be fully set-off against
VAT. We believe that when Central Govt. itself is looking to raise prices of regulated
products, it would be very difficult for IOCL to separately raise price in UP to pass
through the entire entry tax leading to irrecoverable expense of ~2.5%.
Impact on earnings: IOCL has to provide for this entire liability of INR84bn in
one go, wiping off FY12e earnings. Also payment of INR42bn in next few months
will increase interest liability by INR3.4bn in FY13e. Assuming 2.5% less pass
through, IOCL recurring EBITDA would be impacted by INR7.4bn annually (INR2.1/
sh post tax) on IOCL's recurring earnings.
Valuation and outlook
Downgrade to HOLD: Considering Hon'ble SC doesn't reverse High Court
order, we have reduced our earnings for FY12-14e. We have revised our valuation
methodology and now value IOCL at an average of: i) FY12e 0.8x BV at INR174/
share; and ii) FY13e 10x EPS at INR200/share (FY13e revised EPS of INR20).
We value listed investments at INR80/share. We downgrade the stock to HOLD in
light of the above changes with a revised target price of INR267/share (earlier
INR314/share).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key highlights
IOCL lost UP entry tax case in Allahabad High court, liability of
INR84bn: Allahabad High Court has dismissed IOCL's petition and upheld the
UP Entry Tax Act 2007, whereby UP govt is entitled to levy an entry tax/octroi on
crude oil at 5% (USD5.5/bbl at current oil prices) for its Mathura refinery. IOCL
will have net liability of INR84bn (refer table on page 2) including last ten-year
demand with interest. Hon'ble Supreme Court while accepting the review petition
has asked IOCL to deposit 50% of the accrued tax liability (INR42bn) and furnish
bank guarantee for the balance within next few months. Hon'ble Supreme Court
has also asked IOCL to pay the tax at the prevailing rates for the future period till
the review petition is decided.
Entry tax - an irrecoverable item for refiners, to make Mathura
refinery unviable: Entry tax has been an irrecoverable item for refiners and not
included as part of the refinery transfer price (RTP) as it is based on import parity
price and does not include local taxes. Entry tax burden of USD5.5/bbl is huge
with respect to average USD6.1/bbl GRMs made by Mathura refinery (8mmtpa)
during FY09-11 and an average net margin of USD3.9/bbl.
Full price hike in marketing looks difficult, we expect 2.5% underrealisation:
IOCL will require MoP&NG approval (largely political clearance)
for raising prices on regulated products in UP to cover this additional tax. On nonregulated
products, IOCL will face the problem of substitution, as products imported
from nearby states will attract entry tax in UP, which can be fully set-off against
VAT. We believe that when Central Govt. itself is looking to raise prices of regulated
products, it would be very difficult for IOCL to separately raise price in UP to pass
through the entire entry tax leading to irrecoverable expense of ~2.5%.
Impact on earnings: IOCL has to provide for this entire liability of INR84bn in
one go, wiping off FY12e earnings. Also payment of INR42bn in next few months
will increase interest liability by INR3.4bn in FY13e. Assuming 2.5% less pass
through, IOCL recurring EBITDA would be impacted by INR7.4bn annually (INR2.1/
sh post tax) on IOCL's recurring earnings.
Valuation and outlook
Downgrade to HOLD: Considering Hon'ble SC doesn't reverse High Court
order, we have reduced our earnings for FY12-14e. We have revised our valuation
methodology and now value IOCL at an average of: i) FY12e 0.8x BV at INR174/
share; and ii) FY13e 10x EPS at INR200/share (FY13e revised EPS of INR20).
We value listed investments at INR80/share. We downgrade the stock to HOLD in
light of the above changes with a revised target price of INR267/share (earlier
INR314/share).
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