Indian Oil Corp rated ‘Add’; Kotak says refining, marketing woes offset

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Published: September 3, 2016 6:02:51 AM

Robust petchem & pipeline segments and lower operating expenses and interest cost offset refining and marketing woes

Indian Oil’s ‘normalised’ Ebitda of R64 bn and net income of R31 bn (EPS of R12.9) were above our estimates, as weaker underlying performance of refining and marketing segments was offset by robust contribution from petchem and pipeline segments and lower operating expenses and interest cost. Reported results were boosted by large adventitious gains of R76 bn. Add stays on IOCL—our preferred pick amongst downstream PSUs.

Normalised net income was above estimate led by lower operating expenses and interest cost: IOCL’s normalised Ebitda was above our estimate at R64 bn in Q1FY17, adjusted for large adventitious gains of R23.8 bn from the marketing segment and $6.4/bbl (R52.6 bn) from the refining segment—both benefiting in a rising crude price environment. Underlying weakness in refining and marketing segments was offset by 7% y-o-y reduction in operating expenses to R87 bn despite recent commissioning of Paradip refinery. Normalised net income at R31 bn (EPS of R12.9) in Q1FY17 also benefited from a sharp 36% q-o-q decline in interest cost to R6.8 bn. IOCL’s debt reduced rather sharply to R395 bn as of June 30, 2016 from R525 bn at the end of the previous quarter.

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Strong petchem and pipeline performance: Contribution from petchem and pipelines segment increased to R20.3 bn (+26% y-o-y) and R16.1 bn (+13% y-o-y) in Q1FY17, driven by robust 13% and 9% growth in volumes and strong underlying margins. Normalised marketing contribution was low at R17.2 bn in Q1FY17, as compared to R81.6 bn in FY2016.

Robust operational performance with moderate growth in volumes across segments: Crude throughput was higher at 16.1 mt in Q1FY17 as compared to 15 mt in Q4FY16 and 13.6 mt in Q1FY16, due to incremental volumes processed at Paradip refinery. IOCL’s domestic sales volumes increased by 5.4% y-o-y to 20.4 mt in Q1FY17. Petchem sales volumes grew 9% y-o-y to 0.6 mt and pipeline throughput increased 13% y-o-y to 21.4 mt.

Retain Add with no change in estimates and target price: We retain our add rating on

IOCL stock with our unchanged target price of R595 based on 5.5X FY2018e Ebitda. We retain our estimates; however, we do see downside risks from continued weakness in refining margins—$1/bbl decline in refining margins impacts IOCL’s EPS by 15%. We prefer IOCL over BPCL and HPCL, given its relatively inexpensive valuations.

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