Indian Oil Corporation - 3QFY12 Results Update - Motilal Oswal

IOCL reported EBITDA of INR107.2b for 3QFY12 (v/s our estimate of INR8.7b), primarily due to net overrecovery of INR70b (v/s estimated net under-recovery of INR40.3b), led by higher government compensation.

- Adjusted PAT was INR86.6b v/s estimated loss of INR11.7b. Comparative PAT was INR16.3b in 3QFY11 and a loss of INR74.9b in 2QFY12. IOCL reported a PAT of INR24.9b due to one-time provision of INR61.7b towards entry tax for its Mathura refinery in UP. It made this provision as per Supreme Court directives for a stay on Allahabad High Court's order, which had directed IOCL to pay the entry tax. The Supreme Court had agreed to give conditional stay if IOCL deposits 50% of the liability and provides bank guarantee for the rest. However, the actual amount to be provided will be known only after the Supreme Court's ongoing hearing.

- Given the ad-hoc subsidy sharing, we believe quarterly financials are not indicative of the likely full-year performance. We now model OMCs' subsidy sharing at nil in FY12 (similar to FY09 v/s 2% earlier) and upstream sharing at ~40%, with the rest being borne by the government.

- 3QFY12 reported GRM stood at USD4.3/bbl v/s USD6.3/bbl in 3QFY11 and adj. GRM of USD2.8/bbl in 2QFY12. IOCL has restated its 2QFY12 GRM to USD2.76/bbl (v/s reported USD0/bbl). The restatement is on account of new PPAC directive to exclude exchange gain/(loss) on crude liabilities for the purpose of GRM calculation.

Valuation and view

- We model Brent oil price of USD112/100/95/90/bbl in FY12/FY13/FY14/long-term. For FY12/13, we model upstream share at 40%/38.7% and OMCs' share at nil/9%, with the rest being borne by the government.

- We continue to believe that while reforms in the sector are extremely necessary over the long term, in the near-term, price hikes are inevitable.

- The stock trades at 9.5x FY12E EPS of INR29.1 and 1.1x FY12E BV. Key things to watch (apart from subsidy sharing) are positive contribution from its petchem division and GRM performance. Buy.

Source : Equity Bulls

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