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IOC: Ballot boost

Jul 30, 2004

Introduction to results
India's largest oil company, IOC has announced its 1QFY05 results. Backed by strong volumes growth and strong refinery gate prices, the topline has grown by 14% YoY, while the bottomline has improved by an impressive 56% YoY.

What is the company's business?
IOC is India's largest oil marketing and refining company with a presence across the hydrocarbons value chain. The company controls nearly 48% of the petro products market share in India and along with its 41% refining capacity, is the dominant player across the sector. To put things in perspective, IOC accounts for nearly 70% of crude imports in the country. The company's major thrust now is on branded fuels of which it controls nearly 80% of the market share.

(Rs m) 1QFY04 1QFY05 Change
Net sales 278,452 316,506 13.7%
Other income 2,198 1,295 -41.1%
Expenditure 261,653 289,865 10.8%
Operating profit (EBDITA) 16,800 26,641 58.6%
Operating profit margin (%) 6.0% 8.4%  
Interest 1,150 1,266 10.1%
Depreciation 4,552 4,826 6.0%
Profit before tax 13,296 21,846 64.3%
Tax 3,849 7,124 85.1%
Profit after tax/(loss) 9,447 14,722 55.8%
Net profit margin (%) 3.4% 4.7%  
No. of shares (m) 778.7 1,168.0  
Diluted earnings per share (Rs)* 48.5 50.4  
P/E ratio (x)   8.0  
(* annualised)      

What has driven performance in 1QFY05?
Sales: Strong demand for diesel and petrol during the quarter on account of the election campaigning and also higher industrial activity assured higher volumes leading to topline growth of 14% (net of subsidies share) during the quarter. During the period, diesel sales recorded double-digit growth as against negative growth in 1QFY04. At the same time, petrol sales grew by 9% YoY. It should be noted that oil companies were not allowed to increase prices during most part of the quarter due to political concerns.
Expenditure break-up
(%) of sales 1QFY04 1QFY05
Purchase for resale 50.1% 45.7%
Raw materials consumed 36.8% 38.2%
Staff cost 1.4% 1.3%
Other expenditure 5.7% 6.5%

Operating margins: High realisations at the refinery gate coupled with discounts from upstream majors to the tune of nearly Rs 6.5 bn helped IOC increase operating margins by 240 basis points. We believe sales remained stagnant during the 1QFY04, as diesel (accounting for 40% of total petro product sales) witnessed negative growth and at the same time, this strong growth is due to the fact that refining margins witnessed record highs. To put things in perspective, average refining margins for IOC have more than doubled from US$ 3.2 per barrel in 1QFY04 to US$ 6.9 per barrel.

Net profit: Strong refining performance coupled with cost savings by way of discount on raw materials from ONGC and GAIL as part of their share in the subsidies towards LPG and kerosene, helped IOC propel the bottomline. Being the largest oil-marketing player, IOC is likely to be the largest beneficiary of this arrangement of subsidy sharing. The strong growth in the bottomline is despite the fact that other income has been eroded by 41% while interest outgo has increased by 10%. Also, the company has accounted for 2% education cess on taxes.

Over the last four quarters: The last four quarters have been volatile for IOC, with changing government policies on pricing and subsidies sharing creating havoc over the 4QFY04 when margins growth witnessed a dip. However, the strong growth in demand during the 1QFY05 has resulted in a significant jump in margins.

What to expect?
IOC is currently trading at Rs 401, implying a P/E multiple of 8x annualized 1QFY05 earnings. Going forward, with the limited autonomy and sharing of subsidies by upstream majors, IOC has an edge over its peers given the company's dominant position in the business. Also, IOC is venturing into lucrative petrochemicals business, which is currently witnessing an uptrend. In order to reduce its external dependence, IOC plans to acquire small and medium exploration firms. All this augurs well for the company in the long-term. However, given the huge capex, execution risks are high.

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