INDIAN OIL-Positive surprise on GRM: Edelweiss

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􀂄 Refinery throughput at 12.1 mmt; blended GRM at USD 6.6/bbl

Indian Oil Corporation (IOCL) reported refining throughput at 12.1 mmt in
Q2FY11, down 8.6% Q-o-Q and 2.2% Y-o-Y. Quarterly blended GRM, at USD
6.6/bbl, surprised positively and was up 118.3% Q-o-Q and 89.6% Y-o-Y on the
back of higher inventory gains during the quarter. Blended GRM for H1FY11 stood
at USD 4.7/bbl compared to USD 5.4/bbl in H1FY10. Domestic marketing sales for
the quarter, at 15.7 mmt, were flat Y-o-Y but dipped 9.1% Q-o-Q due to the
impact of heavy monsoon. Marketing sales declined (Y-o-Y) primarily due to lower
demand from the auto fuels segment with petrol (1,495 TMT) and diesel (6,939
TMT) retail sales dipping 11.0% and 13.0% Q-o-Q, respectively. Pipeline
throughput, at 15.54 mmt, was flat Y-o-Y, but pipeline EBITDA came in higher at
INR 9,467 mn (up 4% Q-o-Q and 15.8% Y-o-Y).


􀂄 Subsidy sharing of INR 72.2 bn by government leads to over-recovery
The company’s marketing gross under-recoveries for the quarter were at INR 60.2
bn. The government provided a subsidy of INR 72.2 bn as partial compensation for
H1FY11, while IOCL also received upstream discounts of INR 21.4 bn from ONGC
/OIL/GAIL (equal to 33.2% of gross under-recoveries in Q2FY11). It, thus, made a
net over-recovery of INR 33.4 bn in Q2FY11 with the cumulative net underrecovery
in H1FY11 at INR 43.9 bn. With provision of government subsidy, IOCL
reported PAT of INR 52.9 bn. This compares with a loss of INR 33.8 bn in Q1FY11
and profit of INR 2.8 bn in Q2FY10 due to zero subsidy sharing by government.

􀂄 Outlook and valuations: SOTP at INR 445; upgrade to ‘HOLD’
IOCL has the most diversified earnings mix amongst OMCs with a significant
contribution to earnings from its pipeline and chemical segments. With its new
petrochemical plant commencing production and naptha cracker benefitting from
the start-up of Panipat refinery, petrochemical earnings are set to grow from FY12.

We are positive on an uptick in GRMs and believe that IOCL’s growth in earnings
will continue to be driven majorly by refining. We are rolling forward our valuations
to March 2012 from March 2011 earlier and have revised our SOTP to INR 445. We
believe the only overhang on the stock is the company’s earnings from marketing
getting capped due to a run up of crude prices, resulting in higher underrecoveries.

Although we have a bullish stance on crude and believe that diesel deregulation
may not happen in the near term, IOCL shows lowest sensitivity to
earnings from marketing (amongst OMCs) with only a 10% contribution to its
SOTP fair value. With a 10% upside from current levels, we are upgrading the
stock to ‘HOLD/SP’ recommendation/rating from ‘REDUCE/SU’ earlier. At INR
403, IOCL trades at 8.4x and 7.2x our FY11E and FY12E EV/EBITDA, respectively.