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IOC: Birds of a feather flock together

Nov 27, 2001

Performance of India's only Fortune 500 company, Indian Oil Corporation (IOC), tripped in the quarter ended September '01. Sales for the half-year of FY02 have been salvaged by a 6.4% growth in 1QFY02. That said, the performance is better compared to the other oil refining & marketing (R&M) majors, which reported an 8% drop in topline for 2QFY02.

(Rs m)2QFY012QFY02Change1HFY011HFY02Change
Net Sales 300,796 287,668 -4.4% 578,931 583,711 0.8%
Other Income 1,530 4,219 175.7% 3,378 6,305 86.7%
Expenditure 281,887 278,727 -1.1% 547,697 563,325 2.9%
Operating Profit (EBDIT) 18,910 8,942 -52.7% 31,234 20,387 -34.7%
Operating Profit Margin (%)6.3%3.1% 5.4%3.5% 
Interest 4,113 4,185 1.7% 7,346 8,319 13.3%
Depreciation 5,520 3,614 -34.5% 11,103 7,150 -35.6%
Profit before Tax10,8075,362-50.4%16,16311,223-30.6%
Tax 1,027 712 -30.7% 1,287 1,028 -20.1%
Profit after Tax/(Loss) 9,780 4,650 -52.5% 14,875 10,194 -31.5%
Net profit margin (%)3.3%1.6% 2.6%1.7% 
No. of Shares 778.7 778.7   778.7 778.7  
Diluted Earnings per share*50.223.9 38.226.2 
P/E Ratio  5.8    5.3  
(*annualised)      

The industry sales were hit on two counts. With the slowdown intensifying in the September '01 quarter, growth in refinery throughput was significantly lower compared to the previous year. In fact, diesel and kerosene, which account for the biggest share in petroleum product consumption, reported negative growth over the concerned period. Further, the global economic downturn put pressure on petroleum product prices, as demand dwindled. This led to reduced realisations and lower gross refining margins (GRMs).

Reflecting the same -- reduced GRMs -- is the OPM, which was lower by 320 and 190 basis points respectively for 2QFY02 and 1HFY02. During the quarter, refining margins continued to remain under pressure, as oil prices ruled in the region of $26 / barrel similar to levels in the corresponding period of the previous year. Raw material expenses, which constitute 27% of operating costs, fell by only 1.1% YoY for 1HFY02. Staff costs for the quarter decreased by 14.3% YoY. The company had carried out a voluntary retirement scheme (VRS) last fiscal and Rs 1.7 bn in expenses are yet to be written off.

Interest costs, which had spiraled in the previous fiscal are showing signs of stabilising. Last year, working capital requirement of the company is likely to have increased due to higher crude & final product prices and blockage of funds in the oil pool account (OPA). Consequently, leading to higher interest costs. In the current fiscal, the YoY effect is nullified.

Although pre-tax profits are down sharply, the same have been lifted by a significant jump other income. Adjusting for other income -- indicator of earnings from core activity -- pre-tax profits are almost wiped away declining by 88% YoY. Tax provision in the current year includes deferred tax liability. Aggregate liability upto March '01 will be provided at the end of the current fiscal from reserves.

At Rs 138 the scrip is trading on a multiple of 5.3x 1HFY02 annualised earnings. The reduced earnings have led to the higher valuation. At the end of FY01 the scrip traded on a multiple of 4.7x FY01 earnings.

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