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IOC: The economy push

Feb 20, 2004

Indian Oil Corporation Limited (IOC), the flagship PSU, recently announced robust December quarter results. While the topline has shown a healthy growth of 13%, the bottomline has risen by an impressive 210% YoY. Operating margins have improved substantially by 710 basis points. The companyís nine-month performance has also been impressive with the topline registering 9% YoY growth while the bottomline has improved by 32%YoY.

Results at a glance
(Rs m) 3QFY03 3QFY04 Change 9mFY03 9mFY04 Change
Net sales 275,282 310,937 13.0% 780,421 851,335 9.1%
Other income 2,357 2,415 - 10,534 9,412 -
Expenditure 262,711 274,405 4.5% 715,256 774,416 8.3%
Operating profit (EBDITA) 12,571 36,533 190.6% 65,164 76,920 18.0%
Operating profit margin (%) 4.6% 11.7%   8.3% 9.0%  
Interest 1,764 1,435 -18.6% 6,359 3,432 -46.0%
Depreciation 4,207 4,690 11.5% 11,788 13,837 17.4%
Profit before tax 8,958 32,822 266.4% 57,552 69,063 20.0%
Tax 1,192 8,788 637.1% 18,399 17,514 -4.8%
Profit after tax/(loss) 7,766 24,034 209.5% 39,152 51,549 31.7%
Net profit margin (%) 2.8% 7.7%   5.0% 6.1%  
No. of shares (m) 1,168.0 1,168.0   1,168.0 1,168.0  
Diluted earnings per share (Rs)* 26.6 82.3   44.7 58.8  
P/E ratio (x)   5.8     8.2  
(* annualised)            

IOC caters to a vast spectrum of petro-products including lubricants, petrol, diesel and LPG. The topline growth of 13% comes on the back of strong volumes resulting from increased economic activity in the country. The 3QFY04 operating profits have grown by 191% YoY. This can be attributed to the fact that IOC has benefited from the recent subsidy sharing agreement whereby, GAIL and ONGC have also been roped in to share the subsidies provided on SKO and LPG. It must be noted that prior to this, it was only the oil-marketing majors, which used to bear the subsidies burden. Further, the gross refinery margins (GRM) for the company have improved to US$ 4 per barrel as compared to a GRM of US$ 2.8 per barrel during the corresponding period last fiscal.

Cost Break-up
(Rs m) 3QFY03 3QFY04 9mFY03 9mFY04
Raw materials consumption 87.6% 81.2% 83.6% 83.5%
Staff cost 1.3% 1.3% 1.3% 1.4%
Other expenditure 6.6% 5.8% 6.8% 6.1%
Total 95.4% 88.3% 91.7% 91.0%

The operating expenditure component, which accounted for 95% of the topline in 3QFY03, has come down to 88% during 3QFY04, thus aiding the improvement in operating margins. If we consider the reasons for this improvement (see table above), the improvement in raw material consumption (as a percentage of net sales) has been the key driver towards improving operating performance. Also, while staff costs have remained stagnant (as a percentage of net sales), some improvement has also been witnessed on the Ďother expendituresí front.

IOCís bottomline registered a strong 210% growth during 3QFY04 as compared to the corresponding period last fiscal. The company has been able to reduce its interest cost element by 19%, which has to some extent, contributed to the bottomline growth. High refinery margins along with wide network of pipelines provide the company an edge over its competitors. The company owns and operates 10 refineries across the country and has, therefore, a huge volumes push through its pipelines. Increasing demand for petro-products has had a trickle down effect on the bottomline.

Despite the fact that the Government of India (GOI) has opened up the petroleum sector for foreign investments through automatic route, IOC, which controls approximately 56% of the petro-products market, is well placed to take the competition head-on. While the company has recently forayed into the Sri Lankan markets and planned to set up a huge retail outlet network in the country, it already has a presence in the lubes segment in Dubai and other neighbouring countries. IOC is also a stakeholder in Petronet LNG (PLL), its joint venture with BPCL, GAIL and ONGC.

Historically, power and fertilizer industries have been major consumers of naphtha. However, with the recent discoveries of natural gas in domestic waters and the GoIís initiatives to import gas (a cheaper source compared to naphtha), it makes business sense for IOC to venture into the natural gas business so as not to lose out on its customers switching over from naphtha to gas.

The stock is trading at a P/E multiple of 8.2x its 9mFY04 earnings, which is similar to its peers HPCL and BPCL. IOC aims to be a transnational, integrated oil player and is now entering into joint ventures with other oil majors into upstream activities of exploration and production. The company also plans to foray into the petrochemicals sector with investments into projects worth Rs 64 bn already committed. IOC has planned a petrochemical complex at Panipat to conquer the yet untapped Indian petrochemicals market where the per capita consumption is a poor 4 kg as compared to the international average of 16 kg. The recent announcements of private participants in the retail segment of the petroleum sector fail to cause any concern to IOC, which has a reach and presence across the sector.

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