Indian Oil Corporation (INDOIL) 390

Transcription

1 Result Update Rating matrix Rating : Buy Target : 420 Target Period : 12 months Potential Upside : 10% What s changed? Target Changed from 335 to 420 EPS FY17E Changed from 36.7 to 38.4 EPS FY18E Changed from 30.6 to 33 EPS FY19E Changed from 31.3 to 35 Rating Changed from Hold to Buy Quarterly performance Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) Revenue 115, , , EBITDA 7, , , EBITDA (%) bps bps PAT 3, , , Key financials Crore FY16 FY17E FY18E FY19E Revenues 350, , , ,960.0 EBITDA 20, , , ,399.6 Net Profit 10, , , ,000.5 EPS ( ) Valuation summary FY16 FY17E FY18E FY19E P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 185,495.4 Total Debt (FY16) ( Crore) 52,467.1 Cash and Investments (FY16) ( Crore) 10,513.0 EV ( Crore) 227, week H/L 392/172 Equity capital ( Crore) 2,428.0 Face value ( ) 10.0 Price performance Return % 1M 3M 6M 12M HPCL BPCL IOCL ONGC Research Analyst Mayur Matani mayur.matani@icicisecurities.com Akshay Gavankar akshay.gavankar@icicisecurities.com Performance to remain strong... February 3, 2017 Indian Oil Corporation (INDOIL) 390 Indian Oil Corporation s (IOC) Q3FY17 results were in line with our estimates on the topline front. Revenues increased 15.3% QoQ to crore, in line with our estimate of crore Reported EBITDA was at crore, marginally below our estimated EBITDA of crore due to higher-than-expected other expenses (provision made in the matter of entry tax for Uttar Pradesh). However, GRMs came in at US$7.7/bbl, above our estimate of US$6.7 /bbl due to inventory gains PAT increased 28% QoQ to crore but came in below our estimate of crore. There was no subsidy burden this quarter Government policies continue to provide comfort The government s decision to deregulate diesel prices was a major positive for OMCs. It led to a decline in crude oil gross under-recoveries, with only kerosene and LPG prices under the regulatory regime. Also, the hike of 25 paise per month in kerosene prices and scheme of Direct Benefit Transfer (DBT) for LPG cylinders has led to lower gross underrecoveries. Given our assumptions on Brent crude at US$55/barrel and exchange rate of 67 per US dollar, we expect gross under-recovery of crore and crore in FY18E and FY19E, respectively. The government s decision to cap its sharing of kerosene subsidy at 12/litre and LPG at 15/kg and the rest by upstream companies is a welcome move for OMCs. Hence, we assume no downstream subsidy share for FY18E and FY19E of total under-recoveries. GRMs remain robust due to inventory gains Reported GRMs of IOC were at US$7.7/bbl in Q3FY17 vs. our estimate US$6.7/bbl mainly on account of higher operational efficiency and inventory gains. The refining products inventory gains came in at 2094 crore in Q3FY17 vs. 45 crore in Q2FY17. With the revival seen in GRMs due to complete commission of the Paradip refinery, we estimate reported GRMs of US$6.8/bbl, $6/bbl and $6.3/bbl for FY17E, FY18E and FY19E, respectively. The marketing products inventory gains came in at 957 crore in Q3FY17 vs. loss of 731 crore in Q2FY17. We estimate throughput of 64.9 MMT, 68.4 MMT and 69.2 MMT for FY17E, FY18E and FY19E, respectively. Going forward, we expect the interest cost to remain at comfortable levels of crore, crore and 3335 crore in FY17E, FY18E and FY19E, respectively, due to working capital efficiencies on account of diesel price deregulation, DBT for LPG cylinders. Paradip ramp up to strengthen position The successful commissioning of 15 MMTPA Paradip refinery marks a major shift for IOC as a pivotal player in complex refineries. The refinery s capacity utilisation during the quarter was at 63% with further ramp up expected in coming quarters. The ability to process heavy crude oils with major secondary processing units like FCC, delayed coking unit (DCU), etc, will further improve GRMs. Going forward, steady petroleum sales volume and normalised marketing margins would augur well for the company over the next two years. Hence, we have a BUY recommendation on the stock with a target price of 420 (based on average of P/BV multiple: 397/share and P/E multiple: 443/share). ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3FY17 Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) Comments Total Revenues 115, , , , Raw materials costs 73, , , , Employees Cost 1, , , , Other Expenses 32, , , , Total Expenditure 107, , , , Provision for entry tax in Uttar Pradesh led to higher other expenses EBITDA 7, , , , EBITDA margins (%) bps bps Depreciation 1, , , , EBIT 6, , , , Interest Higher due to interest implications of Paradip Refinery and higher oil prices Other Income Extra Ordinary Item NA PBT 6, , , , Total Tax 2, , , , PAT 3, , , , Key Metrics Exchange rate ( /$) Under-recoveries ( cr)* Downstream share (%) NA 0.0 NA The company did not bear any subsidy for the quarter Net Under-recovery ( cr) NA Throughput (mmt) Sales (mmt) GRM ($/barrel) * Includes Direct Benefit Transfer(DBT) of LPG Change in estimates FY17E FY18E ( Crore) Old New % Change Old New % Change Comments Revenue 440, , , , EBITDA 33, , , , Increase in crude oil throughput and higher marketing profitabilty led to increase in FY18E estimates EBITDA Margin (%) bps bps PAT 18, , , , EPS ( ) Assumptions FY15 FY16 FY17E FY18E FY17E FY18E Comments Exchange rate ( /$) Under-recoveries ( cr) 76, , , , ,382.6 Estimates increased due to higher crude oil prices Downstream share (%) Net Under-recovery ( cr) 1, Assuming no downstream share for FY17E and FY18E Throughput (mmt) Sales (mmt) GRM ($/barrel) Current Earlier ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Government policies continue to provide comfort The government s decision to deregulate diesel prices was a major positive for OMCs. It led to a decline in crude oil gross under-recoveries, with only kerosene and LPG prices under the regulatory regime. Also, the hike of 25 paise per month in kerosene prices and scheme of Direct Benefit Transfer (DBT) for LPG cylinders, has led to lower gross underrecoveries. Given our assumptions on Brent crude at US$55/barrel and exchange rate of 67 per US dollar, we expect gross under-recovery of crore and crore in FY18E and FY19E, respectively. The government s decision to cap its sharing of kerosene subsidy at 12/litre and LPG at 15/kg and the rest by upstream companies is a welcome move for OMCs. Hence, we assume no downstream subsidy share for FY18E and FY19E of the total under-recoveries. Exhibit 1: IOC s share of net under-recoveries Year FY15 FY16 FY17E FY18E FY19E Products ( Cr) HSD 10, LPG 40, , , , ,706.3 SKO 24, , , , ,934.4 Total Sharing Macro (%) Upstream 56.1% 4.5% 0.0% 2.8% 2.5% Downstream 2.9% 0.1% 0.0% 0.0% 0.0% Government 41.0% 95.4% 100.0% 97.2% 97.5% Total 100.0% 100.0% 100.0% 100.0% 100.0% Sharing ( Cr) Upstream 42, , Downstream 2, Government 31, , , , ,015.5 Total IOCL share of net under-recoveries ( Cr) ICICI Securities Ltd Retail Equity Research Page 3

4 Core GRMs continue to be strong The reported GRMs of IOC were at US$7.7/bbl in Q3FY17 vs. our estimate of US$6.7/bbl mainly on account of higher operational efficiency and inventory gains. The refining products inventory gains came in at 2094 crore in Q3FY17 vs. 45 crore in Q2FY17. With the revival seen in GRMs due to complete commission of the Paradip refinery, we estimate reported GRMs of US$6.8/bbl, $6/bbl and $6.3/bbl for FY17E, FY18E and FY19E, respectively. Exhibit 2: Refining margins trend US$ / bbl FY14 FY15 FY16 FY17E FY18E FY19E Exhibit 3: Retail sales trend (mmt) FY14 FY15 FY16 FY17E FY18E FY19E The commissioning of new 15 MMT refinery complex at Paradip begun operations in Q4FY16 and is ramping up its production with capacity utilisation of ~63% in current quarter. Hence, we have assumed the throughput will increase from 56.7 MMT in FY16 to 69.2 MMT in FY19E. The marketing sales volume reported 5.3% YoY growth to 20.1 MMT in Q3FY17, which led to higher marketing segment profitability. We expect marketing margins to remain stable over the next few months. ICICI Securities Ltd Retail Equity Research Page 4

5 Interest costs to remain at comfortable levels Going forward, interest costs are estimated to increase marginally but are expected to remain at comfortable levels of crore, crore and 3335 crore in FY17E, FY18E and FY19E, respectively. The working capital efficiencies on account of diesel price deregulation, DBT for LPG cylinders will continue to benefit the company Exhibit 4: Interest cost trend crore FY14 FY15 FY16 FY17E FY18E FY19E ICICI Securities Ltd Retail Equity Research Page 5

6 Outlook & Valuation The successful commissioning of 15 MMTPA Paradip refinery marks a major shift for IOC as a pivotal player in complex refineries. The refinery s capacity utilisation during the quarter was at 63% with further ramp up expected in coming quarters. The ability to process heavy crude oils with major secondary processing units like FCC, delayed coking unit (DCU), etc, will further improve GRMs. Going forward, steady petroleum sales volume and normalised marketing margins would augur well for the company over the next two years. Hence, we have a BUY recommendation on the stock with a target price of 420 (based on average of P/BV multiple: 397/share and P/E multiple: 443/share). Valuation Valuation based on Price / BV Multiple Adjusted Book Value for FY19E ( Crore) Adjusted number of shares (Crore) Adjusted Book Value per share ( ) Multiple 1.6 Value of core business ( per share) Add: Listed investments (25% discount to CMP)+ Other Investments 59.8 Fair Value per share ( ) 397 Valuation based on P / E multiple Profit after tax for FY19E ( Crore) Less: Other Income adjusted for tax ( Crore) Adjusted profit after tax for FY19E ( Crore) Number of shares (Crore) Adjusted EPS for FY19E ( ) 30.6 Multiple 12.5 Fair value per share without investments ( ) 383 Add: Value of Investments ( per share) Listed investments (25% discount to CMP) 44.6 Other Investments 15.2 Fair value per share ( ) 443 Weighted Target Price ( per share) 420 Source: ICICIdirect.com Research Exhibit 5: Valuations Year Sales EPS EPS Gr. PE RoNW ( Crore) (%) ( ) (%) (x) EV/EBITDA (x) (%) RoCE (%) FY16 350, FY17E 450, FY18E 533, FY19E 544, ICICI Securities Ltd Retail Equity Research Page 6

7 Recommendation history vs. consensus estimate ( ) Jan-15 Apr-15 Jun-15 Aug-15 Nov-15 Jan-16 Apr-16 Jun-16 Sep-16 Nov Feb-17 (%) Price Idirect target Consensus Target Mean % Consensus with BUY Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Jun-11 Nov-11 May-12 Jan-13 Event Indian government announced increase in petroleum product prices, eliminated custom duty on crude oil and reduced in excise duties on petrol and diesel Under recoveries on diesel remain high due to depreciation of Indian rupee. Gross under recovery on petroleum products likely to increase sharply QoQ Petrol prices increased sharply by per litre The government took a brave and bold decision and asked the oil marketing companies (OMCs) to periodically hike diesel prices by 50 paise/month May-13 Finance ministry plans to implement Export Parity Pricing (EPP) for pricing of petroleum products for refiners from the current trade parity pricing model. The move if implemented would have a huge negative impact on profitability of companies Jun-13 Cabinet clears 10% disinvestment in IOC Oct-14 Government announces Diesel deregulation Oct-14 Government announces gas pricing policy Dec-14 Crude oil prices decline by nearly 50% from the 2014 high's Aug-15 Government of India divests its 10% stake in IOC Feb-16 Prime Minister inaugurates IOC's 15 MMTPA Paradip Refinery Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Government of India 25-Jan Oil and Natural Gas Corporation Ltd 31/Dec/ Life Insurance Corporation of India 31-Dec Oil India, Ltd. 31/Dec/ IOC BRPL Merger Scheme Trust 31-Dec The Vanguard Group, Inc. 31/Dec/ Norges Bank Investment Management (NBIM) 31-Dec Birla Sun Life Asset Management Company Ltd. 31/Dec/ Reliance Nippon Life Asset Management Limited 31-Dec Goldman Sachs Asset Management (India) Private Ltd. 31/Dec/ Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Promoter FII DII Others Recent Activity Investor name Investor name Investor name Value(m) Shares(m) Investor name Value(m) Shares(m) DSP BlackRock Investment Managers Pvt. Ltd Government of India Reliance Nippon Life Asset Management Limited Life Insurance Corporation of India Tata Asset Management Limited SBI Funds Management Pvt. Ltd Grantham Mayo Van Otterloo & Co LLC JM Financial Asset Management Pvt. Ltd UTI Asset Management Co. Ltd Goldman Sachs Asset Management (US) Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement Crore (Year-end March) FY16 FY17E FY18E FY19E Revenue 350, , , ,960.0 Growth (%) (Inc.)/(Dec.) in stock in trade Raw material Costs Purchase of Products Employee Costs Other Expenditure Op. Expenditure EBITDA 20, , , ,399.6 Growth (%) Depreciation EBIT Interest Other Income PBT Growth (%) Tax Reported PAT 10, , , ,000.5 Growth (%) EPS Cash flow statement Crore (Year-end March) FY16 FY17E FY18E FY19E Profit after Tax 10, , , ,000.5 Less: Dividend Paid 4, , , ,817.7 Add: Depreciation 4, , , ,863.8 Add: Others Cash Profit 13, , , ,346.6 Increase/(Decrease) in CL , , ,811.0 (Increase)/Decrease in CA 3, , , ,962.7 CF from Operating Activities Purchase of Fixed Assets 14, , , ,000.0 (Inc)/Dec in Investments Others CF from Investing Activities -14, , , ,000.0 Inc/(Dec) in Loan Funds -2, , , Inc/(Dec) in Sh. Cap. & Res Others CF from financing activities -3, , , Change in cash Eq , , Op. Cash and cash Eq , ,667.3 Cl. Cash and cash Eq , , ,787.6 Balance sheet Crore (Year-end March) FY16 FY17E FY18E FY19E Source of Funds Equity Capital 2, , , ,855.9 Preference capital Reserves & Surplus 71, , , ,339.5 Shareholder's Fund 73, , , ,195.4 Loan Funds 52, , , ,467.1 Deferred Tax Liability 9, , , ,068.2 Minority Interest Source of Funds 135, , , ,730.7 Application of Funds Gross Block 150, , , ,059.0 Less: Acc. Depreciation 59, , , ,621.1 Net Block 90, , , ,437.9 Capital WIP 21, , , ,522.2 Total Fixed Assets 111, , , ,960.1 Investments 23, , , ,975.3 Inventories 38, , , ,721.6 Debtor 8, , , ,690.8 Cash , , ,787.6 Loan & Advance, Other CA 43, , , ,892.4 Total Current assets 90, , , ,092.5 Current Liabilities 58, , , ,117.3 Provisions 31, , , ,179.9 Total CL and Provisions 90, , , ,297.2 Net Working Capital , , ,204.7 Miscellaneous expense Application of Funds 135, , , ,730.7 Key ratios (Year-end March) FY16 FY17E FY18E FY19E Per share data ( ) Book Value Cash per share EPS Cash EPS DPS Profitability & Operating Ratios EBITDA Margin (%) PAT Margin (%) Fixed Asset Turnover (x) Inventory Turnover (Days) Debtor (Days) Current Liabilities (Days) Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) PE Price to Book Value EV/EBITDA EV/Sales Leverage & Solvency Ratios Debt to equity (x) Interest Coverage (x) Debt to EBITDA (x) Current Ratio Quick ratio ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (Oil & Gas) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Bharat Petroleum (BHAPET) Hold 50, Cairn India (CAIIND) Hold 51, Castrol India (CASIND) Buy 24, GAIL (India) (GAIL) Buy 60, Gujarat Gas (GUJGAS) Hold 8, Gujarat State Petronet (GSPL) Buy 8, Gulf Oil Lubricants (GULO) Hold 3, Hindustan Petroleum (HINPET) Hold 55, Indian Oil Corporation (INDOIL) Buy 189, Indraprastha Gas (INDGAS) Buy 13, Mangalore Refinery (MRPL) Buy 18, ONGC (ONGC) Hold 257, Petronet LNG (PETLNG) Buy 28, ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 10

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