IOCL’s Q3 Ebitda was ahead of our estimate adjusting for a large one-off entry tax provision. The beat was contributed by all major segments and helped by higher than expected inventory gains. The company is on track to achieve our full year estimate, which is well ahead of consensus. Ramp-up of Paradip refinery remains key going forward. Despite strong performance over last 12 months, valuations remain reasonable at 8-9x P/E and 5.5-6x EV/Ebitda.
Beat in Q3FY17 adjusting for one-off entry tax provision: IOCL’s reported Q3 Ebitda of R79 bn included a one-off hit in other expense to the tune of R19.7 bn on account of prior period entry tax provisions. Adjusting for this, Ebitda would have been R99 bn, nearly 18% above our estimate. GRM surprised positively at $7.7/bbl vs. our estimate of $7/bbl, due to higher inventory gains at R21 bn ($2.6/bbl). Marketing earnings also surprised positively, helped in part by higher than expected inventory gains of R9.6 bn. Performance of petrochemical segment was also better than expected.
Dividend of R13.5/share: IOCL also announced an interim dividend of R13.5/share amounting to 42% of 9MFY17 earnings and 35% of estimated full year earnings.
On track for 90% earnings growth in FY17e: IOCL has achieved 80% of our full year estimates in 9M and is on track to achieve nearly 90% growth in earnings in FY17e. We note that our estimates are 25% ahead of consensus.
Ramp-up at Paradip remains key to watch out for: Management indicated that Paradip refinery operated at close to 60% utilisation in Q3 but is currently operating at close to 90% utilisation. Ramp-up of Paradip refinery is key to earnings growth in IOCL over FY18-19e, offsetting the impact of employee cost revision on account of 7th Pay Commission and likely lower inventory gains.
Updating Three Factor Valuation Framework —Maintain Buy: We update our model to reflect higher GRM in FY17e and better marketing margins over FY17-19e. We also update and roll forward our Three Factor Valuation Framework to get a fair value of R436.
Valuation/Risks: Our SOTP fair value of R436 (prev. R356) implies 9-10x P/E and 7-7.5x EV/Ebitda on FY18/19E earnings Key risks: (i) Sharp rise in crude price to over $75/bbl (ii) Adverse government action particularly those related to subsidies, duties and retail prices of petrol and diesel.
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Company description: IOCL is India’s largest oil marketing and refining company and is majority owned by the government. It has ~50% market share in retailing of petrol and diesel. It has total refining capacity of 69 MMTPA. It also has a majority stake in CPCL, a smaller refining company.