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Indian Oil Corporation (IOCL)
Energy
A loss in the quarter, but not to worry. IOCL reported 1QFY12 net loss of `37.2 bn
versus net income of `39 bn in 4QFY11; our estimated loss was `110 bn. The positive
variance despite lower-than-expected refining margins reflects government
compensation of `82 bn (nil assumed by us). We highlight that the quarterly results are
not indicative of the yearly earnings of the downstream companies as the government
compensation for the full year is decided only at the end of the year. We maintain our
ADD rating on the stock with a revised target price of `420 (`435 previously).
Net under-recovery results in loss of `37 bn in 1QFY12
IOCL reported 1QFY12 EBITDA (standalone) at –`18.6 bn versus `57.8 bn in 4QFY11 and –`26.7
bn in 1QFY11. The sharp qoq swing in EBITDA reflects (1) net under-recovery of `76.7 bn versus
over-recovery of `19.2 bn in 4QFY11 and (2) lower refining margins at US$4.7/bbl (-US$3.2/bbl
qoq). This was partly compensated by (1) lower staff cost at `11.7 bn (-52.3% qoq) and (2) lower
other expenditure at `40 bn (-30.4% qoq). 1QFY12 net income (standalone) was at –`37.2 bn
versus `39.1 bn in 4QFY11 and –`33.9 bn in 1QFY11.
Refining margins decline; domestic sales volumes increase 5.6% yoy
IOCL’s 1QFY12 refining margin declined sharply qoq to US$4.7/bbl versus US$7.9/bbl in 4QFY11
and US$3/bbl in 1QFY11; refining margin reflects an adventitious/inventory loss of US$2.35/bbl in
the quarter. 1QFY12 domestic sales volumes increased 5.6% yoy to 18.2 mn tons. The yoy growth
in sales was led by strong growth in gasoline, LPG and ATF sales which was partially offset by
decline in sales of fuel oil and naphtha. IOCL reported adventitious gain of `14 bn in 1QFY12 for
its marketing segment.
Not much to look into quarterly results; earnings will depend on what the government will allow
We do not attach much significance to quarterly results given quarterly earnings for downstream
companies depend significantly on the net under-recovery which, in turn, is dependent on
compensation from the government. We assume that the government will ensure profits of the
downstream oil companies at a certain ‘minimum’ level as there is no other basis to forecast
earnings of the downstream oil companies in the current environment. We see the recent decline
in crude oil prices as giving more confidence on this philosophy. Please see our note ‘Some relief
finally but it should last’ released on August 10, 2011 for the impact of decline in crude prices
on the investment thesis for the sector.
Revised earnings; stock offering good upside to current target price
We retain our ADD rating on the stock noting 29% upside to our revised target price of `420
(`435 previously) based on 10X FY2013E EPS plus value of investments. We have revised our
FY2012-14E EPS to `33.1 (+4.2%), `35.7 (-3.4%) and `40.9 (+3.3%) to reflect (1) 1QFY12
results, (2) higher crude prices, (3) revised exchange rate assumptions and (4) other minor changes.
Refining margins declined sharply qoq. IOCL’s 1QFY12 refining margin declined to
US$4.7/bbl versus US$7.9/bbl in 4QFY11 and US$3/bbl in 1QFY11.
Compensation (cash) from the government and discounts from the upstream oil
companies. IOCL received `82 bn as compensation from the government in 1QFY12
versus `109.4 bn in 4QFY11. IOCL received `79.3 bn of discounts from the upstream
companies in 1QFY12 compared to `80.1 bn in 1QFY11 and `36.7 bn in 4QFY11. IOCL’s
net under-recovery for 1QFY12 was `76.7 bn compared to over-recovery of `19.2 bn in
4QFY11 and under-recovery of `73.4 bn in 1QFY11.
Refining throughput and sales volumes improve. IOCL’s refineries processed 14.3 mn
tons of crude in 1QFY12 compared to 14.2 mn tons in 4QFY11 and 13.3 mn tons in
1QFY11. IOCL’s sales volume (domestic sales) was 18.2 mn tons (+2.7% qoq, +5.6% yoy).
Petchem EBIT negative. IOCL reported a negative EBIT of `4.1 bn from sale of
petrochemical products versus a loss of `1.7 bn in 4QFY11 and a loss of `4.8 bn in
1QFY11. The qoq decline in performance reflects lower petrochemical sales volumes at
0.232 mn tons versus 0.318 mn tons in 4QFY11 and lower petchem margins
Staff expenses declined 52.3% qoq. IOCL’s staff expenses declined to `11.7 bn (-
52.3% qoq and +18.5% yoy). The sharp reduction qoq reflects a provision of `6.9 bn in
4QFY11 due to modification of employee’s superannuation pension scheme to defined
contributory scheme effective from January 1, 2007.
Interest expenses increased 19.6% qoq. IOCL’s interest expense increased to `10.4 bn
(+19.6% qoq and +81.7% yoy), led by higher debt levels and increase in interest rates.
Adventitious gain. IOCL’s reported an adventitious gain of `14 bn versus a loss of `2.6
bn in 4QFY11 and gain of `5.2 bn in 1QFY11. We highlight that this reflects the
adventitious gains on the marketing side of the business.
Earnings revisions and key assumptions behind earnings model
We have revised FY2012E, FY2013E and FY2014E EPS estimates to `33.1, `35.7 and `40.9
from `31.8, `36.9 and `39.6. We discuss key assumptions behind our earnings model below.
Compensation from government and discount from upstream companies. We
model IOCL to receive compensation of `290 bn, `164 bn and `105 bn from the
government in FY2012E, FY2013E and FY2014E. We assume IOCL to receive discount of
`211 bn for FY2012E, `130 bn for FY2013E and `93 bn for FY2014E from the upstream
companies. We assume net under-recoveries at `40.1 bn, `40.1 bn and `40.6 bn for
FY2012E, FY2013E and FY2014E.
Refining margins. We model refining margin (standalone) for IOCL at US$5.9/bbl in
FY2012E, US$6.4/bbl in FY2013E and US$6.7/bbl in FY2014E compared to US$6/bbl in
FY2011. We assume no gains or losses for the future years versus adventitious gains of
`5.5 bn (US$0.3/bbl) in FY2011.
Crude throughput. We model crude throughput at 55.9 mn tons in FY2012E, 56.2 mn
tons in FY2013E and 56.2 mn tons in FY2014E versus 53 mn tons in FY2011.
Marketing margins. We model marketing margin on gasoline and diesel at `675/ton
and –`6,534/ton in FY2012E and `1,900/ton and –`581/ton in FY2013E compared to –
`2,984/ton and –`3,243/ton in FY2011. We do not assume any increase in diesel, LPG
and kerosene retail prices throughout our forecast period.
Crude oil price assumption. We have revised our crude oil (Dated Brent) prices for
FY2012E, FY2013E and FY2014E to US$110/bbl, US$100/bbl and US$95/bbl versus
US$105/bbl, US$95/bbl and US$90/bbl previously.
Rupee-dollar exchange rate. We have revised our exchange rate assumption for
FY2012E, FY2013E and FY2014E to `44.75/US$, `45.63/US$ and `45/US$ versus
`45.5/US$, `44/US$ and `44/US$ previously. A weaker rupee is moderately positive for
earnings of IOCL for the refining segment although it is negative for marketing margins
of controlled products in that under-recoveries will be likely higher.
CPCL 1QFY12 results—sharply lower refining margins qoq result in losses
CPCL reported 1QFY12 net loss of `551 mn compared to profit of `3.1 bn in 4QFY11 and
loss of `553 mn in 1QFY11. The qoq decline in net income reflects (1) sharply lower refining
margins at US$2.4/bbl versus US$8.3/bbl in 4QFY11 and (2) lower other income of `42 mn
in 1QFY12 versus `988 mn in 4QFY11.
We model FY2012E and FY2013E EPS at `9.4 (`1.4 bn net income) and `15.6 (`2.3 bn net
income). We model FY2012E and FY2013E refining margin at US$4.2/bbl and US$4.7/bbl
versus US$5/bbl in FY2011; all figures include adventitious gains/losses.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Oil Corporation (IOCL)
Energy
A loss in the quarter, but not to worry. IOCL reported 1QFY12 net loss of `37.2 bn
versus net income of `39 bn in 4QFY11; our estimated loss was `110 bn. The positive
variance despite lower-than-expected refining margins reflects government
compensation of `82 bn (nil assumed by us). We highlight that the quarterly results are
not indicative of the yearly earnings of the downstream companies as the government
compensation for the full year is decided only at the end of the year. We maintain our
ADD rating on the stock with a revised target price of `420 (`435 previously).
Net under-recovery results in loss of `37 bn in 1QFY12
IOCL reported 1QFY12 EBITDA (standalone) at –`18.6 bn versus `57.8 bn in 4QFY11 and –`26.7
bn in 1QFY11. The sharp qoq swing in EBITDA reflects (1) net under-recovery of `76.7 bn versus
over-recovery of `19.2 bn in 4QFY11 and (2) lower refining margins at US$4.7/bbl (-US$3.2/bbl
qoq). This was partly compensated by (1) lower staff cost at `11.7 bn (-52.3% qoq) and (2) lower
other expenditure at `40 bn (-30.4% qoq). 1QFY12 net income (standalone) was at –`37.2 bn
versus `39.1 bn in 4QFY11 and –`33.9 bn in 1QFY11.
Refining margins decline; domestic sales volumes increase 5.6% yoy
IOCL’s 1QFY12 refining margin declined sharply qoq to US$4.7/bbl versus US$7.9/bbl in 4QFY11
and US$3/bbl in 1QFY11; refining margin reflects an adventitious/inventory loss of US$2.35/bbl in
the quarter. 1QFY12 domestic sales volumes increased 5.6% yoy to 18.2 mn tons. The yoy growth
in sales was led by strong growth in gasoline, LPG and ATF sales which was partially offset by
decline in sales of fuel oil and naphtha. IOCL reported adventitious gain of `14 bn in 1QFY12 for
its marketing segment.
Not much to look into quarterly results; earnings will depend on what the government will allow
We do not attach much significance to quarterly results given quarterly earnings for downstream
companies depend significantly on the net under-recovery which, in turn, is dependent on
compensation from the government. We assume that the government will ensure profits of the
downstream oil companies at a certain ‘minimum’ level as there is no other basis to forecast
earnings of the downstream oil companies in the current environment. We see the recent decline
in crude oil prices as giving more confidence on this philosophy. Please see our note ‘Some relief
finally but it should last’ released on August 10, 2011 for the impact of decline in crude prices
on the investment thesis for the sector.
Revised earnings; stock offering good upside to current target price
We retain our ADD rating on the stock noting 29% upside to our revised target price of `420
(`435 previously) based on 10X FY2013E EPS plus value of investments. We have revised our
FY2012-14E EPS to `33.1 (+4.2%), `35.7 (-3.4%) and `40.9 (+3.3%) to reflect (1) 1QFY12
results, (2) higher crude prices, (3) revised exchange rate assumptions and (4) other minor changes.
Refining margins declined sharply qoq. IOCL’s 1QFY12 refining margin declined to
US$4.7/bbl versus US$7.9/bbl in 4QFY11 and US$3/bbl in 1QFY11.
Compensation (cash) from the government and discounts from the upstream oil
companies. IOCL received `82 bn as compensation from the government in 1QFY12
versus `109.4 bn in 4QFY11. IOCL received `79.3 bn of discounts from the upstream
companies in 1QFY12 compared to `80.1 bn in 1QFY11 and `36.7 bn in 4QFY11. IOCL’s
net under-recovery for 1QFY12 was `76.7 bn compared to over-recovery of `19.2 bn in
4QFY11 and under-recovery of `73.4 bn in 1QFY11.
Refining throughput and sales volumes improve. IOCL’s refineries processed 14.3 mn
tons of crude in 1QFY12 compared to 14.2 mn tons in 4QFY11 and 13.3 mn tons in
1QFY11. IOCL’s sales volume (domestic sales) was 18.2 mn tons (+2.7% qoq, +5.6% yoy).
Petchem EBIT negative. IOCL reported a negative EBIT of `4.1 bn from sale of
petrochemical products versus a loss of `1.7 bn in 4QFY11 and a loss of `4.8 bn in
1QFY11. The qoq decline in performance reflects lower petrochemical sales volumes at
0.232 mn tons versus 0.318 mn tons in 4QFY11 and lower petchem margins
Staff expenses declined 52.3% qoq. IOCL’s staff expenses declined to `11.7 bn (-
52.3% qoq and +18.5% yoy). The sharp reduction qoq reflects a provision of `6.9 bn in
4QFY11 due to modification of employee’s superannuation pension scheme to defined
contributory scheme effective from January 1, 2007.
Interest expenses increased 19.6% qoq. IOCL’s interest expense increased to `10.4 bn
(+19.6% qoq and +81.7% yoy), led by higher debt levels and increase in interest rates.
Adventitious gain. IOCL’s reported an adventitious gain of `14 bn versus a loss of `2.6
bn in 4QFY11 and gain of `5.2 bn in 1QFY11. We highlight that this reflects the
adventitious gains on the marketing side of the business.
Earnings revisions and key assumptions behind earnings model
We have revised FY2012E, FY2013E and FY2014E EPS estimates to `33.1, `35.7 and `40.9
from `31.8, `36.9 and `39.6. We discuss key assumptions behind our earnings model below.
Compensation from government and discount from upstream companies. We
model IOCL to receive compensation of `290 bn, `164 bn and `105 bn from the
government in FY2012E, FY2013E and FY2014E. We assume IOCL to receive discount of
`211 bn for FY2012E, `130 bn for FY2013E and `93 bn for FY2014E from the upstream
companies. We assume net under-recoveries at `40.1 bn, `40.1 bn and `40.6 bn for
FY2012E, FY2013E and FY2014E.
Refining margins. We model refining margin (standalone) for IOCL at US$5.9/bbl in
FY2012E, US$6.4/bbl in FY2013E and US$6.7/bbl in FY2014E compared to US$6/bbl in
FY2011. We assume no gains or losses for the future years versus adventitious gains of
`5.5 bn (US$0.3/bbl) in FY2011.
Crude throughput. We model crude throughput at 55.9 mn tons in FY2012E, 56.2 mn
tons in FY2013E and 56.2 mn tons in FY2014E versus 53 mn tons in FY2011.
Marketing margins. We model marketing margin on gasoline and diesel at `675/ton
and –`6,534/ton in FY2012E and `1,900/ton and –`581/ton in FY2013E compared to –
`2,984/ton and –`3,243/ton in FY2011. We do not assume any increase in diesel, LPG
and kerosene retail prices throughout our forecast period.
Crude oil price assumption. We have revised our crude oil (Dated Brent) prices for
FY2012E, FY2013E and FY2014E to US$110/bbl, US$100/bbl and US$95/bbl versus
US$105/bbl, US$95/bbl and US$90/bbl previously.
Rupee-dollar exchange rate. We have revised our exchange rate assumption for
FY2012E, FY2013E and FY2014E to `44.75/US$, `45.63/US$ and `45/US$ versus
`45.5/US$, `44/US$ and `44/US$ previously. A weaker rupee is moderately positive for
earnings of IOCL for the refining segment although it is negative for marketing margins
of controlled products in that under-recoveries will be likely higher.
CPCL 1QFY12 results—sharply lower refining margins qoq result in losses
CPCL reported 1QFY12 net loss of `551 mn compared to profit of `3.1 bn in 4QFY11 and
loss of `553 mn in 1QFY11. The qoq decline in net income reflects (1) sharply lower refining
margins at US$2.4/bbl versus US$8.3/bbl in 4QFY11 and (2) lower other income of `42 mn
in 1QFY12 versus `988 mn in 4QFY11.
We model FY2012E and FY2013E EPS at `9.4 (`1.4 bn net income) and `15.6 (`2.3 bn net
income). We model FY2012E and FY2013E refining margin at US$4.2/bbl and US$4.7/bbl
versus US$5/bbl in FY2011; all figures include adventitious gains/losses.
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