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IOCL reported EBITDA of INR107.2b for 3QFY12 (v/s our estimate of INR8.7b), primarily due to net overrecovery
of INR70b (v/s estimated net under-recovery of INR40.3b), led by higher government compensation.
Adjusted PAT was INR86.6b v/s estimated loss of INR11.7b. Comparative PAT was INR16.3b in 3QFY11 and a loss
of INR74.9b in 2QFY12. IOCL reported a PAT of INR24.9b due to one-time provision of INR61.7b towards entry
tax for its Mathura refinery in UP. It made this provision as per Supreme Court directives for a stay on Allahabad
High Court's order, which had directed IOCL to pay the entry tax. The Supreme Court had agreed to give
conditional stay if IOCL deposits 50% of the liability and provides bank guarantee for the rest. However, the
actual amount to be provided will be known only after the Supreme Court's ongoing hearing.
Given the ad-hoc subsidy sharing, we believe quarterly financials are not indicative of the likely full-year
performance. We now model OMCs' subsidy sharing at nil in FY12 (similar to FY09 v/s 2% earlier) and upstream
sharing at ~40%, with the rest being borne by the government.
3QFY12 reported GRM stood at USD4.3/bbl v/s USD6.3/bbl in 3QFY11 and adj. GRM of USD2.8/bbl in 2QFY12.
IOCL has restated its 2QFY12 GRM to USD2.76/bbl (v/s reported USD0/bbl). The restatement is on account of
new PPAC directive to exclude exchange gain/(loss) on crude liabilities for the purpose of GRM calculation.
Valuation and view
We model Brent oil price of USD112/100/95/90/bbl in FY12/FY13/FY14/long-term. For FY12/13, we model
upstream share at 40%/38.7% and OMCs' share at nil/9%, with the rest being borne by the government.
We continue to believe that while reforms in the sector are extremely necessary over the long term, in the
near-term, price hikes are inevitable.
The stock trades at 9.5x FY12E EPS of INR29.1 and 1.1x FY12E BV. Key things to watch (apart from subsidy
sharing) are positive contribution from its petchem division and GRM performance. Buy.
Valuation and view
We model Brent oil price of USD112/100/95/90/bbl in FY12/FY13/FY14/long-term
in our estimates. For FY12/13, we model upstream share at 40%/38.7%, OMCs'
share at nil/9% and rest to be borne by Government.
We continue to believe that over the long term, while reforms in the sector are
extremely necessary, in the near-term, price hikes are inevitable. We believe
that the political compulsion would ease post five state assembly elections making
some room for tough decisions in the sector. While, as the headline inflation
number has reduced from double digit levels to 7.4% in Dec-11 and moderating,
we expect some price hikes to take place.
The stock trades at 9.5x FY12E EPS of INR29.1 and 1.1x FY12E BV. Key event to watch
(apart from subsidy sharing) is the positive contribution from its petchem division
and the GRM performance. Maintain Buy.
Company description
A Fortune-500 company, IOC is the largest refining and
marketing company in India. It operates 8 refineries (incl
BRPL) with a capacity of 49.7mmtpa and has a 52% stake
in CPCL (10.5mmt refining capacity). The company
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
IOC's profitability continues to be determined by
the quantum of under-recoveries and sharing
mechanism, rather than fundamentals.
Growth would come from (1) Expansion of Panipat
refinery from 12 to 15mmtpa, (2) INR144b Naphtha
cracker (commissioned) at Panipat and (3) Setting
up INR256b integrated refinery(15mmtpa) /petchem
complex at Paradip.
IOC's valuations should benefit due to improvement
in (1) earnings quality, (2) RoCE & RoE, (3) cash cycle
and (4) lower debt levels.
Key investments risks
Maintaining marketing 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 the retail fuel prices
as oil price rises, leads to under recoveries for the
company and ad-hoc nature of subsidy sharing
impacts the profits.
Recent developments
Government has 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
IOC and ONGC could be the key triggers to start the
decontrol process for LPG, kerosene and diesel.
Valuation and view
Stock trades at 9.5x FY12E cons. EPS of INR29.1 and
1.1x FY12E BV. Valuations are attractive. Buy.
Sector view
Global economic environment (particularly Europe)
will continue to weigh heavily on refining margins.
While economic outlook continues to remain
uncertain, we expect GRMs to remain range bound.
However, the ceiling will be capped in the near term
due to new capacities coming online in FY13 and
FY14. 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 of INR107.2b for 3QFY12 (v/s our estimate of INR8.7b), primarily due to net overrecovery
of INR70b (v/s estimated net under-recovery of INR40.3b), led by higher government compensation.
Adjusted PAT was INR86.6b v/s estimated loss of INR11.7b. Comparative PAT was INR16.3b in 3QFY11 and a loss
of INR74.9b in 2QFY12. IOCL reported a PAT of INR24.9b due to one-time provision of INR61.7b towards entry
tax for its Mathura refinery in UP. It made this provision as per Supreme Court directives for a stay on Allahabad
High Court's order, which had directed IOCL to pay the entry tax. The Supreme Court had agreed to give
conditional stay if IOCL deposits 50% of the liability and provides bank guarantee for the rest. However, the
actual amount to be provided will be known only after the Supreme Court's ongoing hearing.
Given the ad-hoc subsidy sharing, we believe quarterly financials are not indicative of the likely full-year
performance. We now model OMCs' subsidy sharing at nil in FY12 (similar to FY09 v/s 2% earlier) and upstream
sharing at ~40%, with the rest being borne by the government.
3QFY12 reported GRM stood at USD4.3/bbl v/s USD6.3/bbl in 3QFY11 and adj. GRM of USD2.8/bbl in 2QFY12.
IOCL has restated its 2QFY12 GRM to USD2.76/bbl (v/s reported USD0/bbl). The restatement is on account of
new PPAC directive to exclude exchange gain/(loss) on crude liabilities for the purpose of GRM calculation.
Valuation and view
We model Brent oil price of USD112/100/95/90/bbl in FY12/FY13/FY14/long-term. For FY12/13, we model
upstream share at 40%/38.7% and OMCs' share at nil/9%, with the rest being borne by the government.
We continue to believe that while reforms in the sector are extremely necessary over the long term, in the
near-term, price hikes are inevitable.
The stock trades at 9.5x FY12E EPS of INR29.1 and 1.1x FY12E BV. Key things to watch (apart from subsidy
sharing) are positive contribution from its petchem division and GRM performance. Buy.
Valuation and view
We model Brent oil price of USD112/100/95/90/bbl in FY12/FY13/FY14/long-term
in our estimates. For FY12/13, we model upstream share at 40%/38.7%, OMCs'
share at nil/9% and rest to be borne by Government.
We continue to believe that over the long term, while reforms in the sector are
extremely necessary, in the near-term, price hikes are inevitable. We believe
that the political compulsion would ease post five state assembly elections making
some room for tough decisions in the sector. While, as the headline inflation
number has reduced from double digit levels to 7.4% in Dec-11 and moderating,
we expect some price hikes to take place.
The stock trades at 9.5x FY12E EPS of INR29.1 and 1.1x FY12E BV. Key event to watch
(apart from subsidy sharing) is the positive contribution from its petchem division
and the GRM performance. Maintain Buy.
Company description
A Fortune-500 company, IOC is the largest refining and
marketing company in India. It operates 8 refineries (incl
BRPL) with a capacity of 49.7mmtpa and has a 52% stake
in CPCL (10.5mmt refining capacity). The company
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
IOC's profitability continues to be determined by
the quantum of under-recoveries and sharing
mechanism, rather than fundamentals.
Growth would come from (1) Expansion of Panipat
refinery from 12 to 15mmtpa, (2) INR144b Naphtha
cracker (commissioned) at Panipat and (3) Setting
up INR256b integrated refinery(15mmtpa) /petchem
complex at Paradip.
IOC's valuations should benefit due to improvement
in (1) earnings quality, (2) RoCE & RoE, (3) cash cycle
and (4) lower debt levels.
Key investments risks
Maintaining marketing 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 the retail fuel prices
as oil price rises, leads to under recoveries for the
company and ad-hoc nature of subsidy sharing
impacts the profits.
Recent developments
Government has 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
IOC and ONGC could be the key triggers to start the
decontrol process for LPG, kerosene and diesel.
Valuation and view
Stock trades at 9.5x FY12E cons. EPS of INR29.1 and
1.1x FY12E BV. Valuations are attractive. Buy.
Sector view
Global economic environment (particularly Europe)
will continue to weigh heavily on refining margins.
While economic outlook continues to remain
uncertain, we expect GRMs to remain range bound.
However, the ceiling will be capped in the near term
due to new capacities coming online in FY13 and
FY14. 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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