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IOC: Government to the rescue! - Views on News from Equitymaster

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IOC: Government to the rescue!

Nov 22, 2006

Performance summary
Indian Oil Corporation (IOC) recently announced its 2QFY07 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 increased by 45% during the quarter. However, it was the issuance of the oil bonds to the tune of Rs 72 bn (forming part of other income) that helped the company register a positive bottomline.

Financial snapshot…
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 400,452 505,985 26.4% 786,687 992,869 26.2%
Expenditure 385,607 537,306 39.3% 767,181 1,032,635 34.6%
Operating profit (EBDITA) 14,845 (31,321) - 19,506 (39,766) -
EBDITA margin (%) 3.7% -6.2%   2.5% -4.0%  
Other income 6,021 77,856 1193.1% 8,136 81,009 895.7%
Interest 2,497 3,619 44.9% 4,181 6,963 66.6%
Depreciation 5,215 6,650 27.5% 10,654 12,400 16.4%
Profit before tax 13,154 36,267 - 12,807 21,881 70.8%
Extraordinary income - - - - 32,248 -
Tax 3,657 5,765 57.6% 3,853 5,821 51.1%
Profit after tax/(loss) 9,497 30,503 - 8,955 48,308 439.5%
Net profit margin (%) 2.4% 6.0%   1.1% 4.9%  
No. of shares (m) 1,168.0 1,168.0   1,168.0 1,168.0  
Diluted earnings per share (Rs)* 8.1 26.1   7.7 41.4  
P/E (times)**         6.79  
*Based on trailing twelve months earnings.

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 2QFY07?

Note: BPCL and HPCL included oil bonds received from Government, while IOC treated it as other income, thus for the comparison we have included oil bonds as part of sales for IOC

Realisation driven sales: The sales volumes for 2QFY07 stood at 12.4 million metric tonnes (including exports), a growth of 4.0% YoY. Thus, it was the 21% growth in realisations that led to 26% YoY growth in sales. The refining thruput increased from 9.39 MMTPA to 10.51 MMTPA, registering a growth of 12% YoY.

Margin woes: The cost of raw material increased 78% 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. However, the subsidy pressure has eased to an extent with the fall in the crude oil prices by as much as 25% from their peaks. Net under recoveries on the sales of subsidized products stood at Rs 24.62 bn during 1HFY07.

Business mix of the company continues to improve as the purchase of products for resale in terms of volumes constituted 16% of the sales compared to 21% in the corresponding quarter previous fiscal.

Refining margins declined significantly on the back of inventory losses. Refining margins during the quarter were US$ 3.13 per barrel, however, as per our calculations, the core refining margins were higher at US$ 6.28 per barrel, which is heartening. Improvement in the core refining margins can be attributed to refinery upgradation processes undertaken by the company.

The pipeline thruput, registered an increase of 15.7% YoY. It seems that the company transported more products through its pipeline during 2QFY07 thus resulting into savings on the transportation costs front.

However, the inability of the company to pass through the increase in raw material cost had an adverse effect on the operating level with EBDITA margins turning negative during the quarter.

Expenditure break-up…
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Consumption of raw material 133,375 236,793 77.5% 267,777 439,111 64.0%
as a % of sales 33.3% 46.8%   34.0% 44.2%  
Staff Cost 4,334 6,188 42.8% 8,688 11,081 27.5%
as a % of sales 1.1% 1.2%   1.1% 1.1%  
Purchase of product and crude of resale 222,421 271,402 22.0% 444,073 533,557 20.2%
as a % of sales 55.5% 53.6%   56.4% 53.7%  
Other expenditure 25,477 22,923 -10.0% 46,643 48,886 4.8%
as a % of sales 6.4% 4.5%   5.9% 4.9%  

Note: BPCL and HPCL included oil bonds received from Government, while IOC treated it as other income, thus for the comparison we have included oil bonds as part of sales for IOC

Oil bond kicker: The interest expenditure increased by 45% YoY during 2QFY07, due to increased borrowing for meeting working capital requirements. Other income excluding oil bonds increased by 8% YoY. However it were oil bonds to that led to a positive bottomline number and net margins of 6% during the quarter.

What to expect?
At Rs 515, the stock is trading at 6.8 times its trailing twelve months earnings. Business model of the company has improved considerably. Renewed focus on the refining segment has led to improvement in the refining margins. The marketing to sales ratio has also improved significantly thereby reducing third party purchases. This also reduces the risks associated with marketing business. The macro factors have continued to play a major role in affecting the fortunes of the company. 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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Mar 25, 2019 09:19 AM