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IOC: Aiming for integration - Views on News from Equitymaster
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  • Aug 7, 2003

    IOC: Aiming for integration

    IOC (Indian Oil Corporation), India's largest company in terms of revenues, announced its 1QFY04 results recently. The company reported a topline growth of about 14% on account of higher realisations despite decline in volumes. The bottomline improved by about 51%, significantly higher than the topline growth.

    (Rs m) 1QFY03 1QFY04 Change
    Net sales 244,675 278,452 13.8%
    Other Income 2,061 2,198 6.7%
    Expenditure 231,031 261,653 13.3%
    Operating Profit (EBDIT) 13,645 16,800 23.1%
    Operating Profit Margin (%) 5.6% 6.0%  
    Interest 2,201 1,150 -47.7%
    Depreciation 3,965 4,552 14.8%
    Profit before Tax 9,540 13,296 39.4%
    Tax 3,290 3,849 17.0%
    Profit after Tax/(Loss) 6,250 9,447 51.1%
    Net profit margin (%) 2.6% 3.4%  
    No. of Shares 778.7 778.7  
    Diluted Earnings per share* 32.1 48.5  
    P/E Ratio   10.4  

    On the domestic front, volumes sold witnessed a decline of about 4% during June quarter. This could be due to the truckers strike in 1QFY04 that hampered not only demand but also supply of petroleum products. On the other hand, the company has increased its focus towards exports on account of surplus capacity in the domestic markets. As a result, exports increased significantly by about 65% during the quarter, albeit on a lower base (4% of total volumes sold). Though domestic sales were lower, sharp spurt in exports has resulted in lower decline in volumes sold.

    In case of realisations, the company witnessed a growth despite reduction in product prices thrice during 1QFY04. This was on account of lower prices prevailing during the same period last year. As a result, the company reported a topline growth of about 14% during the quarter.

    % of net sales
      1QFY03 1QFY04
    Stock in trade -2.9% 5.3%
    Purchase for resale 52.5% 50.1%
    Raw material 36.2% 31.6%
    staff costs 1.4% 1.4%
    Other Exp 7.3% 5.7%
    Total 94.4% 94.0%

    Though raw material and products purchased for resale costs have declined as a percentage of sales, inventory losses increased during the period. As a result, total expenses as a percentage of sales remained at the same levels. Consequently, operating profit margins improved by about 40 basis points.

    If one were to look at the segmental breakup, petroleum products witnessed a 13% growth in revenues while other businesses clocked a 6% growth. However, petroleum products witnessed an improvement in PBDIT margins while other businesses recorded a marginal dip. IOC managed to significantly reduce its interest outgo in 1QFY04, which were down by about 48% and contributed to the bottomline growth of 51%.

    (Rs m) 1QFY03 1QFY04 Change
    Petroleum products 260,655 294,491 13.0%
    PBDIT 10,555 14,167 34.2%
    PBDIT margin 4.0% 4.8%  
    Other businesses 23,477 24,915 6.1%
    PBDIT 87 77 -11.5%
    PBDIT margin 0.4% 0.3%  

    At Rs 505, the stock is trading at a P/E multiple of 10.4x its 1QFY04 annualised earnings. The valuation seem to be on the higher side compared to its peers viz. BPCL and HPCL. It has to be remembered that IOC has plans to enter into the petrochemicals business, which is cyclical in nature. IOC also has huge capital expenditure budgets on the exploration side and it has acquired exploration blocks in consortium with some of the existing players. About 30% of its planned investments are meant for diversification purposes (namely petrochemicals and exploration).



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