Disappoints due to high inventory losses… • IOC :: ICICI Securities, link

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Disappoints due to high inventory losses…
• IOCL reported its Q2FY15 numbers with revenue increase of 1.2%
YoY to | 1,11,663.8 crore and loss of | 898.5 crore
• EBITDA (loss) of | 356.1 crore came below our estimate of an
EBITDA of | 4519.1 crore mainly on account of negative GRM of $2
per barrel for the quarter (our estimate: positive GRM of $1.6 per
barrel) due to inventory valuation loss of | 4272 crore
• Subsequently, the company reported a loss of | 898.5 crore against
expected profit of | 2008.6 crore
Diesel deregulation and lower crude oil prices to reduce under-recoveries
The government’s positive move in H1CY13 to allow OMCs to hike diesel
prices by 50 paise/month was a major step to bring down the diesel
under-recovery. The rupee appreciation and consistent diesel price hikes
over the past few months had brought down diesel losses and,
subsequently, there was over recovery in diesel sales. The government
took a bold decision to deregulate diesel prices, which was a major
reform step for OMCs. The move to deregulate diesel prices will lead to a
decline in crude oil gross under-recoveries, with only kerosene and LPG
prices under the regulatory regime. Given our assumptions on Brent
crude at $90/barrel and exchange rate of | 61 per US dollar, we expect
gross under-recovery of | 88,091.5 crore and | 73,978.9 crore in FY15E
and FY16E, respectively. The government has recently announced an
excise duty hike on petrol and diesel by | 1.5 per litre. We expect OMCs
to pass this indirectly to consumers by adjusting the price revision that is
done fortnightly. The government has also taken a decision to fix the
subsidy for LPG at | 20/kg. The subsidy above this amount will be shared
by oil companies. We expect the decision on the subsidy sharing
mechanism to come sooner than later, given the strong government and
political sensitivity of the decision being the least. We now assume
downstream subsidy share of 1% and 0.5% for FY15E and FY16E,
respectively, of the total under-recoveries.
Performance needs to improve, lower interest costs in future positive
IOCL reported negative GRMs of $2 per barrel in Q2FY15, which was
lower than our estimate of positive GRM of $1.6/barrel mainly due to
inventory loss of | 4272 crore on a decline in crude oil prices We estimate
GRM of $1.6/bbl (on account of higher inventory losses) and $4.3/bbl for
FY15E and FY16E, respectively. With diesel deregulation and lower crude
oil prices, we expect an improvement in IOC’s working capital scenario,
which will lead to a reduction in interest costs from | 5084.4 crore in FY14
to | 3878.1 crore in FY16E.
Plan ahead
The 15 MMT, | 30,000 crore refinery complex at Paradip is expected to
get commissioned by Q1FY16. Even though the decline in fuel subsidies
will improve the visibility of earnings, an improvement in refining margins
will be the key. Reforms in subsidy sharing mechanism would be an
important factor, going forward. We maintain our BUY recommendation
on the stock with a target price of | 421 (based on average of P/BV
multiple: | 449/share and P/E multiple: | 392/share)

LINK
http://content.icicidirect.com/mailimages/IDirect_IndianOil_Q2FY15.pdf