(IOCL IN) Rating: ACCUMULATE CMP: Rs148 TP: Rs142 November 2, 2018 Q2FY19 Result Update Change in Estimates Target Reco Change in Estimates Current Previous FY19E FY20E FY19E FY20E Rating ACCUMULATE ACCUMULATE Target Price 142 142 Sales (Rs. m) 6,062,411 6,767,975 6,062,411 6,767,975 % Chng. - - EBITDA (Rs. m) 326,547 358,016 326,547 358,016 % Chng. - - EPS (Rs.) 16.5 20.0 16.5 20.0 % Chng. - - Key Financials FY17 FY18 FY19E FY20E Sales (Rs. bn) 3,554 4,215 6,062 6,768 EBITDA (Rs. bn) 340 416 327 358 Margin (%) 9.6 9.9 5.4 5.3 PAT (Rs. bn) 191 208 160 195 EPS (Rs.) 40.3 21.9 16.5 20.0 Gr. (%) (9.5) (45.6) (24.9) 21.7 DPS (Rs.) - - - - Yield (%) - - - - RoE (%) 23.6 23.2 15.6 16.8 RoCE (%) 20.2 22.6 13.4 13.5 EV/Sales (x) 0.3 0.5 0.4 0.3 EV/EBITDA (x) 3.6 4.7 7.8 6.0 PE (x) 3.7 6.8 9.0 7.4 P/BV (x) 0.8 1.5 1.3 1.2 Key Data IOC.BO IOCL IN 52-W High / Low Rs.214 / Rs.105 Sensex / Nifty 35,012 / 10,553 Market Cap Rs.1,440bn/ $ 19,854m Shares Outstanding 9,712m 3M Avg. Daily Value Rs.2910.47m Shareholding Pattern (%) Promoter s 56.86 Foreign 5.98 Domestic Institution 11.05 Public & Others 26.11 Promoter Pledge (Rs bn) - Stock Performance (%) 1M 6M 12M Absolute (3.7) (8.0) (28.5) Relative 0.5 (7.6) (31.5) Avishek Datta avishekdatta@plindia.com 91-22-66322254 Tepid performance Quick Pointers: Core operations remain weak; inventory gains accounted for 63% of H1FY19 EBIDTA. Multiple state and Central elections in a crude inflationary environment will be an overhang in stock performance. Maintain ACCUMULATE Core performance for IOCL remain weak, H1FY19 inventory gains of Rs122.7bn account for 63% of EBIDTA. IOCL reported muted Q2FY19 results with EBITDA of Rs67.6bn (-46%QoQ) and PAT of Rs32.5bn (-52%QoQ). Recent government directive to curb marketing margins in a busy election schedule and high crude price means, risk-reward for the sector remain unfavorable. Maintain ACCUMULATE. Muted earnings: IOCL reported muted Q2FY19 results with EBITDA of Rs67.6bn (PLe Rs89.9bn; -46%QoQ) and PAT of Rs32.5bn (PLe Rs46.9bn; -52%QoQ) led by higher costs. The core EBIDTA for the quarter, adjusted for forex loss and inventory gains and other one off charges were at Rs50.8bn (-22% QoQ). Foreign exchange loss, part of other expenses, of Rs26.2bn also dragged core-operating earnings. IOCL s marketing volumes lagged industry run rate for HSD (1.7% YoY vs 2.8% for industry), and MS (3.2% YoY against industry rate of 6.6%YoY) respectively. Recent government directive to curb marketing margins will push volumes away from private players and help OMCs. Core refining marings lower than benchmark: IOCL s refining margins for Q2FY19 came in at US$6.81/bbl (Q1FY19 at US$10.2/bbl) and included inventory gains of Rs30.1bn or US$3.3/bbl. However, company calculates core GRMs at US$5.88/bbl to adjust for inventory gains and price lag impact. Refining margins were impacted by lower light distillate spreads and higher fuel and oil losses from higher crude prices. However, global GRM s are likely to remain stable as global demand outstrips net capacity addition over the next five years. In addition, OMCs with ~40% diesel product slate remain well placed to benefit from IMO2020 regulation which will increase diesel demand by >1mbpd if they are implemented without delays. For Q2, refining throughput was at 17.8MTPA (17.7MTPA in Q1). Marketing earnings was down sequentially: IOCL s Q2FY19 marketing EBIDTA was at Rs42.1bn against Rs43.7bn in Q1FY19. However, core marketing earnings for Q2 improved to Rs28.2bn (Rs24.2bn in Q1) following lifting of restrictions in price changes due to Karnataka elections. However, recent government directive to curb marketing margins will help recover some volumes from private players even as margins are likely to remain compressed. Steady performance by petrochemicals and pipeline business: For Q2FY19, petrochemicals and pipeline EBIDTA were at Rs15.6bn and Rs16.1bn. During the quarter, IOCL, provided for one-time employee provision of Rs12.7bn and earnings got a boost from write back of provision of Rs11.6bn post directive from tax tribunal. November 2, 2018 1
Q2FY19 Result Overview (Rs mn) Y/e March Q2FY19 Q2FY18 YoY gr. (%) Q1FY19 H1FY19 H1FY18 YoY gr. (%) Net sales 1,515,666 1,106,371 37.0 1,497,469 3,013,135 2,388,276 26.2 Inc/dec in stock (45,857) (4,042) NA (27,845) (73,701) 63,151 NA Purchases 451,091 349,757 29.0 456,523 907,614 704,730 28.8 Raw material cons 694,471 387,265 79.3 616,859 1,311,329 843,345 55.5 Duties 195,319 200,704 (2.7) 202,719 398,037 428,266 (7.1) Staff cost 37,061 23,640 56.8 23,686 60,747 47,780 27.1 Other expenditure 115,962 75,315 54.0 99,767 215,729 147,275 46.5 Exp (1,448,047) (1,032,638) NA (1,371,708) (2,819,755) (2,234,548) NA Operating profit 67,620 73,732 (8.3) 125,761 193,380 153,728 25.8 Interest (11,878) (7,726) NA (10,311) (22,189) (14,906) NA Depreciation (18,091) (16,970) NA (17,879) (35,970) (34,183) NA Other income 10,407 5,878 77.1 5,853 16,260 18,154 (10.4) Profit before tax 48,057 54,914 (12.5) 103,424 151,482 122,792 23.4 Current tax (7,618) (9,351) NA (23,334) (30,953) (23,113) NA Profit after current tax 40,439 45,563 (11.2) 80,090 120,529 99,679 20.9 Deferred tax (7,970) (8,601) NA (11,776) (19,746) (17,231) NA Net profit 32,469 36,963 (12.2) 68,314 100,783 82,448 22.2 Source: Company, PL IOCL internals EBIDTA (Rs mn) Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Refining 44240 33820 86970 40300 58170 Marketing 9080 17130 25940 29910 43690 Pipeline 15900 14240 15710 17470 16270 Petrochem 18190 10340 15620 16890 16300 Others 4860 4080 1980 8120-2830 Total 92270 79610 146220 112690 131600 GRM ($/bbl) 7.98 12.32 9.12 10.21 6.79 Thruput MTPA 16.10 18.23 17.15 17.70 17.82 Source: Company, PL November 2, 2018 2
Financials Income Statement (Rs m) Net Revenues 3,553,790 4,214,918 6,062,411 6,767,975 YoY gr. (%) 2.7 18.6 43.8 11.6 Cost of Goods Sold 2,751,593 3,368,464 5,247,643 5,892,701 Gross Profit 802,197 846,454 814,768 875,273 Margin (%) 22.6 20.1 13.4 12.9 Employee Cost - - - - Other Expenses 462,390 430,522 488,221 517,258 EBITDA 339,807 415,932 326,547 358,016 YoY gr. (%) 45.0 22.4 (21.5) 9.6 Margin (%) 9.6 9.9 5.4 5.3 Depreciation and Amortization 68,059 76,635 71,878 76,900 Balance Sheet Abstract (Rs m) Non-Current Assets Gross Block 1,271,518 1,426,726 1,665,632 1,673,635 Tangibles 1,271,518 1,426,726 1,665,632 1,673,635 Intangibles - - - - Acc: Dep / Amortization 121,788 196,852 226,091 294,995 Tangibles 121,788 196,852 226,091 294,995 Intangibles - - - - Net fixed assets 1,149,730 1,229,874 1,439,542 1,378,641 Tangibles 1,149,730 1,229,874 1,439,542 1,378,641 Intangibles - - - - EBIT 271,748 339,297 254,670 281,116 Margin (%) 7.6 8.0 4.2 4.2 Net Interest 37,213 38,105 54,301 31,207 Other Income 38,622 34,199 36,120 36,191 Capital Work In Progress 177,622 201,949 122,094 150,679 Goodwill 10 10 - - Non-Current Investments 315,090 312,007 594,919 622,763 Net Deferred tax assets (68,887) (123,679) (140,884) (168,550) Other Non-Current Assets 31,532 45,652 - - Profit Before Tax 273,157 335,391 236,488 286,099 Margin (%) 7.7 8.0 3.9 4.2 Total Tax 75,704 118,239 71,708 86,597 Effective tax rate (%) 27.7 35.3 30.3 30.3 Profit after tax 197,453 217,152 164,780 199,502 Minority interest 6,400 9,112 4,781 4,842 Share Profit from Associate - - - - Adjusted PAT 191,053 208,041 159,999 194,660 YoY gr. (%) 81.0 8.9 (23.1) 21.7 Margin (%) 5.4 4.9 2.6 2.9 Extra Ord. Income / (Exp) - - - - Reported PAT 191,053 208,041 159,999 194,660 YoY gr. (%) 81.0 8.9 (23.1) 21.7 Margin (%) 5.4 4.9 2.6 2.9 Other Comprehensive Income - - - - Total Comprehensive Income 191,053 208,041 159,999 194,660 Equity Shares O/s (m) 4,739 9,479 9,712 9,712 EPS (Rs) 40.3 21.9 16.5 20.0 Current Assets Investments 74,694 81,988 - - Inventories 658,843 705,679 995,241 819,332 Trade receivables 88,992 106,965 162,614 185,657 Cash & Bank Balance 4,098 4,943 12,058 16,332 Other Current Assets 36,222 35,991 31,020 30,802 Total Assets 2,640,089 2,846,238 3,476,403 3,323,121 Equity Equity Share Capital 47,393 94,787 97,118 97,118 Other Equity 795,647 855,898 1,004,913 1,117,430 Total Networth 843,041 950,684 1,102,031 1,214,548 Non-Current Liabilities Long Term borrowings 255,459 230,605 129,146 129,145 Provisions 32,259 24,227 - - Other non current liabilities 7,524 13,612 - - Current Liabilities ST Debt / Current of LT Debt 332,841 390,805 989,465 609,989 Trade payables 311,697 367,667 665,725 703,002 Other current liabilities 484,422 640,169 228,159 272,052 Total Equity & Liabilities 2,557,690 2,768,669 3,288,349 3,135,067 November 2, 2018 3
Cash Flow (Rs m) Key Financial Metrics Year PBT 279,558 335,391 236,488 286,099 Per Share(Rs) Add. Depreciation 68,486 76,635 71,878 76,900 EPS 40.3 21.9 16.5 20.0 Add. Interest 37,213 38,105 54,301 31,207 CEPS 54.7 30.0 23.9 28.0 Less Financial Other Income 38,622 34,199 36,120 36,191 BVPS 177.9 100.3 113.5 125.1 Add. Other 42,977 - - - FCF 47.9 - - - Op. profit before WC changes 428,234 450,131 362,667 394,207 DPS - - - - Net Changes-WC (76,220) (187,311) (165,773) 234,254 Return Ratio(%) Direct tax (70,334) (76,483) (48,990) (58,931) RoCE 20.2 22.6 13.4 13.5 Net cash from Op. activities 281,680 186,337 147,904 569,529 ROIC 10.6 12.3 7.4 8.5 Capital expenditures (54,704) - - - RoE 23.6 23.2 15.6 16.8 Interest / Dividend Income - - - - Balance Sheet Others (121,659) (207,544) (25,196) (27,844) Net Debt : Equity (x) 0.6 0.6 1.0 0.6 Net Cash from Invt. activities (176,363) - - - Net Working Capital (Days) 45 39 30 16 Issue of share cap. / premium - - - - Valuation(x) Debt changes 46,388 84,606 243,190 (379,477) PER 3.7 6.8 9.0 7.4 Dividend paid (127,736) (101,273) (75,152) (91,827) P/B 0.8 1.5 1.3 1.2 Interest paid (28,022) (38,105) (54,301) (31,207) P/CEPS 52.2 28.7 22.8 26.7 Others - (58,412) (62,315) (67,215) EV/EBITDA 3.6 4.7 7.8 6.0 Net cash from Fin. activities (109,371) (113,185) 51,422 (569,727) EV/Sales 0.3 0.5 0.4 0.3 Net change in cash (4,054) - - - Dividend Yield (%) - - - - Free Cash Flow 226,976 - - - Quarterly Financials (Rs m) Y/e Mar Q3FY18 Q4FY18 Q1FY19 Q2FY19 Net Revenue 1,106,669 1,173,685 1,294,750 1,320,348 YoY gr. (%) 18.9 17.0 22.8 45.8 Raw Material Expenses 873,541 947,484 1,045,537 1,099,705 Gross Profit 233,128 226,201 249,213 220,643 Margin (%) 21.1 19.3 19.2 16.7 EBITDA 132,687 110,213 125,761 67,620 YoY gr. (%) 80.0 (16.9) 14.1 - Margin (%) 12.0 9.4 9.7 5.1 Depreciation / Depletion 17,151 19,336 17,879 18,091 EBIT 115,537 90,876 107,881 49,529 Margin (%) 10.4 7.7 8.3 3.8 Net Interest 6,549 13,029 10,311 11,878 Other Income 13,534 2,481 5,853 10,407 Profit before Tax 122,522 80,329 103,424 48,057 Margin (%) 11.1 6.8 8.0 3.6 Total Tax 43,690 28,148 35,110 15,588 Effective tax rate (%) 35.7 35.0 33.9 32.4 Profit after Tax 78,832 52,181 68,314 32,469 Minority interest - - - - Share Profit from Associates - - - - Adjusted PAT 78,832 52,181 68,314 32,469 YoY gr. (%) 97.3 40.2 50.2 (12.2) Margin (%) 7.1 4.4 5.3 2.5 Extra Ord. Income / (Exp) - - - - Reported PAT 78,832 52,181 68,314 32,469 YoY gr. (%) 97.3 40.2 50.2 (12.2) Margin (%) 7.1 4.4 5.3 2.5 Other Comprehensive Income - - - - Total Comprehensive Income 78,832 52,181 68,314 32,469 Avg. Shares O/s (m) - - - - EPS (Rs) - - - - Key Operating Metrics Crude /bbl 49 58 80 85 US$/Rs 67 65 71 74 GRM (US$/bbl) 8 8 8 8 Refining volume (MTPA) 65 71 72 73 Net subsidy burden (Rs m) 76,990 118,882 November 2, 2018 4
Price Chart Recommendation History (Rs) 250 210 170 131 91 Nov-15 May-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 No. Date Rating TP (Rs.) Share Price (Rs.) 1 17-Nov-17 BUY 514 392 2 13-Dec-17 BUY 514 402 3 10-Jan-18 BUY 514 392 4 12-Feb-18 BUY 514 379 5 15-Mar-18 BUY 257 192 6 13-Apr-18 BUY 257 165 7 23-May-18 BUY 257 154 8 23-May-18 BUY 257 162 9 21-Jun-18 BUY 257 170 10 28-Jun-18 BUY 234 155 Analyst Coverage Universe Sr. No. CompanyName Rating TP (Rs) Share Price (Rs) 1 Bharat Petroleum Corporation Accumulate 326 277 2 GAIL (India) BUY 435 368 3 Hindustan Petroleum Corporation Hold 219 230 4 I.G. Petrochemicals BUY 810 388 5 Indian Oil Corporation Accumulate 142 140 6 Indraprastha Gas BUY 333 235 7 Mahanagar Gas BUY 1,179 794 8 NOCIL NR - 94 9 Oil & Natural Gas Corporation BUY 223 172 10 Oil India Accumulate 238 209 11 Petronet LNG BUY 300 214 12 Reliance Industries Accumulate 1,152 1,122 PL s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly November 2, 2018 5
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Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 www.plindia.com Bloomberg Research Page: PRLD <GO> November 2, 2018 6