IOC: The 'Extra-ordinary effect' - Views on News from Equitymaster

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IOC: The 'Extra-ordinary effect'

Aug 1, 2006

Introduction to results
Indian Oil Corporation (IOC) announced its 1QFY06 results. Topline registered a growth of 26% YoY, while the operating margins turned negative. The dismal operating performance can be attributed to Oil marketing companies' (OMCs) inability to pass on the rise in crude oil prices to the consumers with IOC being no exception. Interest expenditure almost doubled during the quarter, damages from which were kept under check to an extent by a 50% YoY increase in other income. However, it was the capital gain on the sale of a stake in ONGC that helped the company register a positive bottomline

Financial snapshot…
(Rs m) 1QFY06 1QFY07 Change
Net sales 386,235 486,884 26.1%
Expenditure 381,575 495,329 29.8%
Operating profit (EBDITA) 4,661 (8,445) -
EBDITA margin (%) 1.2% -1.7%  
Other income 2,115 3,153 49.1%
Interest 1,684 3,344 98.6%
Depreciation 5,439 5,750 5.7%
Profit before tax (347) (14,387) -
Extraordinary income - 32,248 -
Tax 196 56 -71.4%
Profit after tax/(loss) (542) 17,805 -
Net profit margin (%) -0.1% 3.7%  
No. of shares (m) 1,168.0 1,168.0  
Diluted earnings per share (Rs) (1.9) 61.0  
P/E (times)* 14.7    
*Trailing twelve months earnings excluding profit from stake sale in ONGC & GAIL

What is company's business?
IOC is largest oil refining and marketing company in the country. Company along with its subsidiaries holds 10 out of 18 refineries in the country (41% of total refining capacity in India. The company also boasts of 15,200 retail outlets spread nationwide, which accounts for 47% petroleum products market share. IOC also has 9000 kms pipeline network that translates into 70% of the total network in India.

What has driven the performance in 1QFY07?
Realisation driven sales: The sales volumes for 1QFY07 stood at 13.07 million metric tonnes, a growth of 2.5% YoY. Thus, it was the 23% growth in realisations that led to 26% YoY growth in sales. The refining thruput increased from 9.18 MMTPA to 10.03 MMTPA, registering a growth of 9.3% YoY.

Refining upgradation paying off: The cost of raw material increased 51% YoY, on the back of higher crude oil prices. However, on account of subsidies, it was not able to pass on this hike fully to the consumers. IOC is losing Rs 6.3 per litre on MS (petrol), Rs 8.3 per litre on diesel, Rs 18.7 per litre on Kerosene and Rs 166 per domestic LPG cylinder.Under recoveries on the sales of subsidized products stood at Rs 490 m, while discounts from upstream oil companies was Rs 299 m, as a part of subsidy sharing agreement.

The business mix for IOC improved marginally as external dependency, which was 39% of 1QFY06 sales declined to 30% of 1QFY07 sales on the back increased refinery thruput. Also, with the modernisation and upgradation of its refineries, IOC was able to improve its refining margins significantly. The refining margins in 1QFY07 were US$ 6.70 per barrel (net of discounts), as against 6.17 per barrel (with out any discounts) during 1QFY06. Improvements in product yield and increased capability to handle sour crude led to the improvement in refining margins. Thus, it was superior refining performance, both on the thruput as well as refining margins front, which negated the marketing losses to an extent.

The pipeline thruput, registered an increase of 5.2% YoY. It seems that the company transported more products through its pipeline during 1QFY07 thus resulting into savings on the transportation costs front.

Better business mix, improved refining yields, costs savings due to pipeline network along with expertise in sourcing the crude oil are the reasons for the IOC delivering better performance than its peers at the operational level time and again.


Note: The operating margins for HPCL, BPCL are not comparable with IOC for 4QFY06, as topline for BPCL and HPCL included oil bonds received from Government, while IOC treated it as other income.

Expenditure break-up…
(Rs m) 1QFY06 1QFY07 Change
Consumption of raw material 134,402 202,318 50.5%
as a % of sales 34.8% 41.6%  
Staff Cost 4,355 4,893 12.4%
as a % of sales 1.1% 1.0%  
Purchase of product and crude of resale 221,652 262,155 18.3%
as a % of sales 57.4% 53.8%  
Other expenditure 21,166 25,963 22.7%
as a % of sales 5.5% 5.3%  

Bottomline analysis: The interest expenditure almost doubled during 1QFY07, due to increased borrowing for meeting working capital requirements. Other income increased by 50% YoY. Extra ordinary income from the sale of 20% of IOC's shareholding in ONGC helped, IOC to garner amount to the tune of Rs. 32. 2 bn, net of taxes. Thus, it led to a positive bottomline number and net margins of 3.7%. However, excluding the same the net profit margins would have stood negative (3%).

What to expect?
At Rs 389, the stock is trading at 14.7 times its trailing twelve months earnings (excluding the profit from the sale of stake in ONGC in 1QFY07 and Gail in 4QFY06). While the company is likely to get a cold shoulder from investors on account of government meddling, what is heartening is the improvement on the refining throughput and margins front. Also, a more favorable business mix along with expertise in crude oil purchasing and cost efficiency on the transportation front gives it an edge over its competitors. As and when the regulation scenario improves, we believe IOC will emerge as a frontrunner amongst the refining and marketing companies in India.

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