Q3FY12 Result update/Estimate change IOC:: Centrum

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Q3FY12 Result update/Estimate change

IOC    

Buy

Target Price: Rs372

CMP: Rs274

Upside: 29.2%

Provisioning dampens profitability for Q3

Like other OMCs, IOC also reported profits for Q3 but lower at Rs24.9bn due to provisioning for entry tax of Rs61.7bn. The company benefitted during the quarter due to expansion in petroleum product cracks (primarily naphtha and fuel oil) which led to average GRMs of US$4.3/bbl. The company received subsidies of Rs83.4bn and accounted for government compensation of Rs164.2bn during Q3. Sequentially, throughput and market sales also jumped 9.2% and 4.4% respectively.

m  Higher volumes and realisations lead to revenue jump: IOC reported 42.9% YoY and 29.7% QoQ rise in revenues at Rs1,156.4bn owing to higher volumes and high product prices (due to higher crude prices). Crude throughput jumped by 6.6% YoY and 9.2% QoQ to 14.2mmt while market sales were flattish YoY yet jumped 4.4% QoQ to 18.5mmt.

m  Provisioning for dispute over entry tax dampens profitability: IOC accounted for Rs164.2bn government compensation for Q3. Also, it received Rs83.4bn subsidies from the upstream.  Thus the company was partially compensated for the under-recoveries incurred in 9MFY12. Due to expansion in Naphtha and Fuel Oil cracks simple refiners benefitted during the quarter and hence IOC was also able to report healthy GRMs of US$4.3/bbl against US$2.8/bbl in Q2FY12. However, IOC made a provisioning of Rs61.7bn for the dispute over entry tax in the sate of Uttar Pradesh. Also, the company incurred forex loss of over Rs2.0bn which was partially offset by inventory gains of about Rs1.0bn. Provisioning along with some forex loss led to dampening of profitability for Q3. However, due to absorption of over Rs70.0bn of under-recoveries for 9MFY12, the company incurred a loss of Rs87.2bn during 9MFY12.

m  Petchem holds the key for IOC in medium term: IOC’s profitability for Q3 and 9MFY12 got impacted due to provisioning for dispute over entry tax. However, the company is on track with its capex plans and has incurred capex of over Rs100.5bn during 9MFY12. The company expects to attain 100% capacity utilisation by the end of FY12 and its benefit would be observed from FY13E onwards. We believe petchem remains a key catalyst for IOC incrementally. Although, we remain apprehensive about the petchem cycle in H1CY12, we are optimistic over petchem in the medium to long term and believe that the cycle’s upturn will be in H2CY12. We have changed our estimates for FY12E and FY13E marginally but maintain ‘Buy on the stock with a revised price target of Rs372 (earlier Rs365).

Thanks & Regards,