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IOC: Margins led growth

Jun 25, 2003

Oil refining and marketing leader, Indian Oil Corporation (IOC), has recently announced its FY03 results. The company has posted a topline growth of about 7% while its bottomline spurted by over 112%. This was mainly because of increase in refining margins, which almost doubled during the year. Lets analyse the results in detail.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Net sales 242,061 301,612 24.6% 1,011,794 1,082,032 6.9%
Other Income 3,837 7,291 90.0% 11,811 17,825 50.9%
Expenditure 213,369 276,219 29.5% 948,268 991,475 4.6%
Operating Profit (EBDIT) 28,692 25,393 -11.5% 63,526 90,557 42.6%
Operating Profit Margin (%) 11.9% 8.4%   6.3% 8.4%  
Interest 3,489 1,266 -63.7% 15,419 7,625 -50.6%
Depreciation 2,969 4,830 62.7% 13,924 16,618 19.3%
Profit before Tax 26,070 26,588 2.0% 45,994 84,140 82.9%
Tax 13,096 4,592 -64.9% 17,147 22,991 34.1%
Profit after Tax/(Loss) 12,974 21,997 69.5% 28,847 61,149 112.0%
Net profit margin (%) 5.4% 7.3%   2.9% 5.7%  
No. of Shares 778.7 778.7   778.7 778.7  
Diluted Earnings per share* 66.6 113.0   37.0 78.5  
P/E Ratio   3.5     5.2  

IOC increased its refining utilization capacity from 88.5% last year to 92.5% in the current year. This apart, the increase in prices of petroleum products also added to the growth in the topline. In FY03, the company has increased the capacity of its Barauni Refinery from 4.2 m tonnes to 6 m tonnes. This will further add to the topline going forward. Also, IOC increased exports of its petroleum products from 0.9 m tonnes to 1.1 m tonnes during the year.

Expenses of the company also increased during FY03 primarily because of raw materials. Crude oil is the major raw material for the company. In FY03, the crude oil prices remained at a higher level on account of tension in Iraq, after remaining under pressure during FY02 (economic slowdown and poor demand led to fall in crude prices). If one were to look at the raw material cost as a percentage of net sales, the ratio increased from 31% in FY02 to 38% in FY03. However, topline increased at a faster clip as compared to expenses. Consequently, the operating margins of the company increased by 210 basis points. Margin expansion was also aided by reduction in average transportation cost on account of higher volumes supplied.

Apart from the increase in topline, refining margins of the company almost doubled during FY03. IOC also gained significantly from increased inventory levels due to prevailing higher crude prices. This apart, the company reduced its interest outgo by a significant 50%, which further added to the bottomline. This has helped the company to reduce the debt equity ratio from 1.3 in FY02 to 0.8 in FY03. Other income also increased by about 50% compared to its FY02 levels. This also contributed to the growth in the bottomline, which increased by about 112% YoY.

The company plans to invest about Rs 244 bn in next five years. The investment would be both upstream (exploration and natural gas transmission) and downstream (petrochemicals) to take advantage of the integration benefits. IOC has garnered 12 oil and gas blocks in the first three rounds of NELP in consortium with ONGC. This marks its entry into the upstream sector. It has recently started its retail outlets in Sri Lanka through its wholly owned subsidiary Lanka IOC Pvt. Ltd. and has about 20% market share in that region. Most of the investments will be financed through internal sources (about 70%).

At Rs 408, the stock is trading at a P/E multiple of 5.2x its FY03 earnings. Though the long term potential of the company looks good, in the medium term, FY03 bottomline growth is unlikely to become a trend going forward. Encouraged by the significant improvement in FY03 performance, IOC has recently declared a bonus issue of 1:2. The company has also decided to pay a final dividend of Rs 16 per share on the enhanced capital.

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