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IOC: Gets the hammering!

May 29, 2006

Performance summary
Indian Oil Corporation (IOC) announced its FY06 and 4QFY06 results. Despite a 21% growth in the topline, the operating profits fell by a staggering 89% (YoY). The dismal operating performance can be attributed to IOC's inability to pass on the rise in crude oil prices to the consumers. On the profitability front, margins dwindled by 260 basis points to 2.9%. For 4QFY06, the topline grew by 16% while the bottomline increased by 351%. This was aided by higher other income in the form of subsidy sharing, receipt of oil bonds and profit from its stake-sale in Gail.

Financial snapshot…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 382,185 442,129 15.70% 1,382,533 1,672,371 21.00%
Expenditure 367,569 455,539 23.90% 1,310,613 1,664,083 27.00%
Operating profit (EBDITA) 14,616 -13,410 -191.70% 71,920 8,288 -88.50%
EBDITA margin (%) 3.82% -3.03%   5.20% 0.50%  
Other income 2,905 77,701 2575.20% 15,296 91,026 495.10%
Interest 1,759 2,817 60.20% 5,831 10,222 75.30%
Depreciation 5,666 5,802 2.40% 21,834 22,033 0.90%
Profit before tax 10,096 55,672 451.40% 59,551 67,059 12.60%
Tax 1,167 15,367 1216.40% 10,638 17,909 68.30%
Profit after tax/(loss) 8,929 40,305 351.40% 48,913 49,150 0.50%
Net profit margin (%) 2.3% 9.1%   3.5% 2.9%  
No. Of shares (m) 1,168.00 1,168.00   1,168.00 1,168.00  
Diluted earnings per share (Rs) 7.6 34.51   41.88 42.08  
Price to earnings ratio (x)         11  

What is the company's business?
IOC is largest oil refining and marketing company in the country. The company, along with its subsidiaries, holds 10 out of 18 refineries in the country (43% of total refining capacity in India). Also, the company has 15,200 retail outlets in the country, which accounts for 56% petroleum products market share among public sector oil companies. IOC also has 9,000 kms of pipeline network that translates into a market share of 51% of total network in the country.

What has driven the performance in FY06?
Topline driven by realisations: The sales volume for the fiscal stood at 49.61 MMTPA, a decline of 2% YoY. Growth in volumes is in line with the industry trend. The industry has witnessed flat volume growth during FY06, mainly due to a higher base effect (more sales during previous fiscal due to elections) and increasing fuel efficiency as a result of improvement of infrastructure. The refining throughput for IOC recorded a growth of 5% YoY during the fiscal, on the back of higher capacity utilisation (93.1%). This has led to reduction of third party purchases as % of sales, from 28% in the FY05 to 22% in FY06. Realisations for the fiscal were also higher at Rs 33,720 per mmtpa (up 23% YoY). During 4QFY06, volumes contracted by 7% YoY, while the realisations grew by 24%.

Margins under pressure: Margins took a beating due to under-realisations to the tune of Rs. 47.7 bn on the sales of subsidised products (LPG, PDS kerosene, diesel, petrol). Operating margins tumbled by 470 basis points to meager 0.5% in FY06. Gross refining margins (GRM's) for the IOC was US $ 4.30 per barrel (net of discount) for FY06 as against US$ 6.21 per barrel recorded in the previous fiscal. For 4QFY06, lower sales volumes coupled with increasing input costs weighed heavily on the firms operating profits, which fell by 192% YoY over the previous quarter.

Expenditure break-up…
(%) Of sales 4QFY05 4QFY06 FY05 FY06
Consumption of raw materials 28.2% 42.7% 34.6% 39.3%
Purchase for resale 57.9% 53.7% 52.6% 54.0%
Staff cost 1.7% 1.2% 1.4% 1.1%
Other expenditure 8.4% 5.4% 6.3% 5.2%
Total expenditure as % of sales 96.2% 103.0% 94.8% 99.5%

Bottomline aided by other income: Whopping Increase in other income due special oil bonds from the government worth Rs. 65.7 bn (equivalent to 4% of sales) coupled with profit of Rs.4.4 bn on sale of equity stake of Gail helped the firm to post profits. Subsidy burden has also say on the company's cash flow, owing to which company had to borrow for the working capital requirement (up 52% from the last fiscal). Consequently, the interest expenditure for the company has increased by 75% YoY over the previous fiscal.

Performance over the recent past…
Particulars 4QFY06 3QFY06 2QFY06 1QFY06 4QFY05
Net sales growth 15.7% 21.0% 26.1% 22.0% 21.1%
Net profit growth 351.4% -100.5% -23.4% -103.7% -51.7%

What to expect:
At Rs 463, the stock is trading at 11 times its FY06 earnings. The board has recommended a dividend of Rs.12.5 per share (dividend yield 2.7%). Post its merger with IBP, IOC will have equally strong refining and marketing presence (refining capacity in tune with the sales), leading to lower third party purchases. This shall enhance the company's value-chain presence and help it diversify the risks associated with segmental businesses. In addition, the company's pipeline network of 9,000 kms (addition of 1,296 kms during the year) shall help it to lower the transportation costs associated with crude and petroleum products.

On the refining front, IOC has recently tied up with an US firm for improving its product quality for its Koyali refinery in Gujarat, which we believe is a step taken to increase the exports. The company is also building an export-oriented refinery at Paradeep (capacity 15MMTPA) to foray into export markets of South East Asian countries.

Further, in order to secure its crude oil requirements and diversifying across the value chain, the company is integrating backwards and forwards. During FY06, the company bagged two oil blocks in Libya in addition to 11 blocks domestically. IOC is also diversifying into the petrochemicals business. It has earmarked a sum of Rs 300 bn for investment by 2011-12 for this purpose.

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