RESULTS REVIEW Indian Oil Corporation Ltd. Hold Share Data Market Cap Rs. 439.99 bn Price Rs. 369.0 BSE Sensex 15,185.32 Reuters Bloomberg Avg. Volume (52 Week) IOC.BO IOCL IN 0.19 mn 52-Week High/Low Rs. 809.9/348.6 Shares Outstanding Valuation Ratios (Consolidated) 1,192.37 mn Year to 31 March 2009E 2010E EPS (Rs.) 45.0 51.3 +/- (%) (32.1%) 13.9% PER (x) 8.2x 7.2x EV/ Sales (x) 0.2x 0.3x EV/ EBITDA (x) 6.5x 7.1x Shareholding Pattern (%) Promoters 80 FIIs 2 Institutions 5 Public & Others 13 Relative Performance 850 700 550 400 250 100 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 IOCL Rebased BSE Index Price revision brings respite for OMCs Indian Oil Corporation (IOC) Ltd. reported an increase of 14% yoy in net sales for FY08 led by the strong demand for petrol and diesel during the year. The total sales volumes improved 8% yoy to 62.6 MMT in comparison with 57.8 MMT during the previous year. In addition, the average gross refining margin (GRM) for FY08 has almost doubled to USD 9.02/bbl due to the higher regional refining margins and substantial inventory gains. FY08 has been a challenging year for oil marketing companies owing to the soaring prices of crude oil in the international market coupled with the price controls administered by the government in the domestic market. In consequence of the non-revision of retail selling prices in line with the international prices, the Company has suffered a net under realisation of Rs. 97.7 bn. With crude oil prices fluctuating around USD 135/bbl, the daily losses of IOC on fuel sales are estimated to be more than Rs. 2.4 bn. However, the recent revision in the fuel prices announced by the GoI has brought some respite to the OMCs. The prices of petrol, diesel, and domestic LPG have been revised upward by Rs. 5/litre, Rs. 3/litre, and Rs. 50/cylinder, respectively. Still, the above price increases will meet only a small portion of the OMCs under-recoveries projected for 2008-09. The major portion of the under-recoveries will continue to be absorbed by the public sector oil companies and the Government as the required price revision was Rs. 21.4/litre of petrol, Rs. 31.6/litre of diesel, and Rs. 353 per LPG cylinder. At the current price of Rs. 369, the stock trades at a forward P/E of 8.2x for FY09E and 7.2x for FY10E, respectively. Considering the liquidity crunch and under recoveries being incurred by the Company, we reiterate our Hold rating on the stock. Key Figures (Standalone) Quarterly Data Q4'07 Q3'08 Q4'08 YoY% QoQ% FY07 FY08 YoY% (Figures in Rs mn, except per share data) Net Sales 528,890 640,585 718,999 35.9% 12.2% 2,148,663 2,449,691 14.0% EBITDA 48,981 29,675 6,220 (87.3%) (79.0%) 100,078 101,412 1.3% Adj. Net Profit 15,027 20,907 (4,143) (127.6%) (119.8%) 50,903 69,626 36.8% Margins(%) EBITDA 9.3% 4.6% 0.9% 4.7% 4.1% NPM 2.8% 3.3% (0.6%) 2.5% 3.1% Per Share Data (Rs.) Normalized EPS 12.6 17.5 (3.5) (127.6%) (119.9%) 42.7 58.4 36.8% Please see the end of the report for disclaimer and disclosures. -1-
Result Highlights IOC reported an increase of 14% yoy in net sales to Rs. 2,279.5 bn for FY08 GRM jumped to USD 9.02/bbl in comparison to USD 4.19/bbl during FY07 led by an increase in sales volumes to 62.6 MMT (up 8% yoy). The increase in sales was also driven by 7.7% yoy increase in the refineries and 10.5% yoy increase in the pipeline throughput. Further, accounting for oil bonds worth Rs. 190 bn for FY08 issued by the GoI for under recoveries has also led to the growth in net sales. Key Indicators (in MMT) FY07 FY08 YoY% Product sales Domestic 54.84 59.29 8.1% Export 3.13 3.33 6.4% Refineries Throughput 44.00 47.40 7.7% Pipelines Throughput 51.69 57.12 10.5% Refinery throughput (in '000 tonnes) Yearly Data FY07 FY08 YoY% 1. Guwahati 839 920 9.7% 2. Barauni 5,469 5,630 2.9% 3. Koyali 12,953 13,709 5.8% 4. Haldia 5,836 5,714 (2.1%) 5. Mathura 8,883 8,032 (9.6%) 6. Digboi 586 564 (3.8%) 7. Panipat 9,435 12,823 35.9% Total 44,001 47,392 7.7% The Company has suffered net under recovery of Rs. 97.7 bn after receiving discounts from the upstream companies amounting to Rs. 15.4 bn and oil bonds worth Rs. 190 bn from the GoI. Despite more than four-fold increase in net under recoveries, EBITDA for FY08 increased 8.9% yoy to Rs. 127.2 bn. However, EBITDA margin witnessed a decline of 20 bps yoy to 5.6% owing to a steep rise in raw material prices and other expenditure during the year. The adj. net profit for the quarter went up 20.8% yoy to Rs. 79.1 bn, while the Effective tax rate increased 500 bps yoy to 31.5% net profit margin showed an improvement of 20 bps yoy to 3.5%. The growth in net profit was also attributable to 67% yoy jump in other income. Going forward, we believe that the increase in the borrowing cost due to the liquidity crunch would keep the margins under pressure. Please see the end of the report for disclaimer and disclosures. -2-
Key Events IOC and Oil India (OIL) have made a financial commitment of USD 27 mn for acquiring stake in the Reliance Industries Ltd s (RIL) offshore oil block in East Timor. Both IOC and OIL are planning to acquire the stake of 12.5% each in the project. The Company has sought shareholders approval for increasing its borrowing limits from the current limit of Rs. 550 bn to Rs. 800 bn. The increase borrowings are expected to meet the working capital requirements and capital expansion programme. Key Risks Key risks to our rating include: Crude prices have shown higher-than-expected volatility in the international market. Any further rise in the prices without a corresponding increase in retail prices would pressurise the Company s margins. Appreciation in the dollar vis-à-vis the rupee. Competition from the entry of private players. Outlook Soaring crude prices putting pressure on the margins The much awaited corrective action taken by the government in June 2008 to increase fuel prices in the domestic market has provided some respite to the OMCs. To combat the soaring global crude oil prices, the GoI has hiked prices by Rs. 5 per litre of petrol, Rs. 3 per litre of diesel, Rs. 50 per cylinder of domestic LPG. Despite a significant upward revision in retail selling prices, OMCs would still have to bear a significant portion of under recoveries along with the upstream companies and the government. In order to reduce its burden, IOC is planning to restrict the imports of diesel during FY09. Please see the end of the report for disclaimer and disclosures. -3-
However, we have concerns over the increasing borrowing cost due to working capital requirements and liquidity crunch. Subsidised sale of petroleum products is limiting the borrowing capacity of the Company and also adversely affecting their expansion plans. To improve its liquidity position, the Company is planning to sell its investments in ONGC as well as GAIL. Further, the Company is also seeking shareholders approval to raise the borrowing limit from the current limit of Rs. 550 bn to Rs. 800 bn. Consequently, we have incorporated the impact of higher interest cost in our estimates. At the current price of Rs. 369, the stock trades at a forward P/E of 8.2x for FY09E and 7.2x for FY10E, respectively. Considering the liquidity crunch and under recoveries being incurred by the Company, we reiterate our Hold rating on the stock. Key Figures (Consolidated) Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%) (Figures in Rs mn, except per share data) (FY08-10E) Net Sales 1,608,056 1,999,308 2,279,454 2,962,729 2,623,308 7.3% EBITDA 86,391 116,844 127,211 110,656 102,547 (10.2%) Adj. Net Profit 46,080 65,523 79,127 53,710 61,196 (12.1%) Margins(%) EBITDA 5.4% 5.8% 5.6% 3.7% 3.9% NPM 2.9% 3.3% 3.5% 1.8% 2.3% Per Share Data (Rs.) Normalized EPS 39.5 56.1 66.4 45.0 51.3 (12.1%) PER (x) 14.8x 7.1x 5.6x 8.2x 7.2x Please see the end of the report for disclaimer and disclosures. -4-
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