IOC reported earnings before interest, taxes, depreciation and amortisation (Ebitda)of Rs 73 bn for 4QFY10 versus our estimate of Rs 110 bn. The significant variation from our estimate was due to: (a) lower-than-estimated compensation from the government at Rs 81 bn (versus our estimate of Rs 109 b), (b) lower- than-estimated gross refining margins (GRM) at $3.4/bbl, and (c) higher than estimated staff cost of Rs 19.5 bn (versus our estimate of Rs 12.9 bn). Profit after tax (PAT) was Rs 55.6 bn (versus our estimate of Rs 61.6 bn), down 16% year-on-year (YoY) and up 8x quarter-on-quarter.
For the full year, FY10, standalone PAT was Rs 102.2 bn, up 247% YoY, led by lower interest costs (Rs 15 bn vs Rs 39 bn in FY09), higher other income (Rs 66 bn vs Rs 45 bn in FY09) and lower effective tax rate of 27.5% (vs 32% in FY09).
Against the backdrop of uncertainty throughout FY10 on subsidy sharing and likely fear of loss in FY10, IOC reported positive PAT. The focus now is on government decision on Kirit Parikh recommendations (meeting scheduled on June 7). Any partial deregulation (petrol /diesel) and subsidy rationalisation will be positive for the stock in terms for earnings predictability and could result in rerating.
Other income at Rs 18.7 bn in Q4FY10 (up 86% YoY and 36% QoQ) included forex gain of Rs 6.9 bn. Unlike HPCL and BPCL that have provided for diminution for the oil bonds value in Q4FY10, IOC had already provided for the same in Q4FY10 (to the tune of Rs 17.2 bn). HPCL has provided for Rs 7.6 bn and BPCL has provided Rs 10.9 bn in Q4FY10 for the diminution in the value of oil bonds. Gross debt as on March 31, 2010 stood at Rs 445 bn (versus Rs 428 bn as on March 31, 2009). Bonds on the books stood at Rs 190 bn at the end of FY10 (versus Rs 290 bn in Q4FY09).
Similar to M9FY10, upstream shared 100% of IOC’s auto fuel (petrol and diesel) under-recoveries of Rs 32.5 bn in Q4FY10. Of its FY10 domestic fuel (LPG and kerosene) losses of Rs 184 bn, the government is compensating Rs 152bn, and IOC has to bear the balance. We expect to get more clarity on retail fuel pricing and subsidy sharing post the government decision on the Kirit Parikh Committee recommendations.
A Fortune-500 company, IOC is the largest refining & marketing company in India. It operates eight refineries (including BRPL), with a capacity of 49.7 mmtpa and has a 52% stake in CPCL (10.5 mmt refining capacity). It has a pipeline network of >10,300 km (62 mmtpa capacity), has 18,278 petrol/diesel outlets and has interests in petrochemicals and upstream oil & gas. The government owns 80.35 % stake in IOC.
IOC’s profitability continues to be determined by the quantum of under-recoveries and sharing mechanism rather than fundamentals. However, the empowered group of ministers (EGoM) has planned meetings to discuss the recommendations of the Kirit Parikh panel on fuel deregulation. Possible implementation of these recommendations is a significant positive. Compared to other oil marketing companies, IOC’s profitability is protected to some extent due to its income from pipeline business and income from investment.
Medium to long-term growth would come from its several projects: (1) Capacity expansion of the Panipat refinery from 12 mmtpa to 15 mmtpa, (2) the Rs 144-bn naphtha cracker with downstream polymer units at Panipat (which is currently ramping up), and (3) the setting up Rs 256 bn integrated refinery and petchem complex at Paradip.
The government’s policy of controlling fuel prices remains a concern for the stock. Non-commensurate increase in fuel prices with reference to oil prices leads to under-recoveries for the company and the adhoc nature of subsidy sharing impacts profits.
The stock trades at 10.3x FY11E earnings per share (EPS) of Rs 33.2 and 1.3x FY11E book value of Rs 256. Maintain Buy.
The refining outlook remains weak, given the low product demand and new significant capacity hitting the market. We expect refining margins to remain subdued in the medium term and expect refinery closures, guided by poor refinery economics. This will lead to rationalisation in the demand-supply.
?Motilal Oswal Securities