IOC - No government support, higher forex losses, rising interest cost dent performance - Centrum

IOC reported one of the worst quarterly performances with a huge loss of Rs224.5bn impacted by multiple headwinds like the lack of government support for the under-recoveries incurred in the quarter, higher forex losses on crude & products and rising interest costs due to higher debt. Forex losses on crude and products led to negative GRMs at US$(4.8)/bbl. Crude throughput was lower at 13.6mmt due to shutdowns at some refineries during Q1. The loss was exacerbated by the lack of compensation from the government which we believe would even out in the coming quarters.

- Lack of government compensation hurts revenues despite higher product prices: IOC reported marginal 5.1% YoY jump in revenues at Rs969.0bn due to the lack of government compensation despite higher product prices. Crude throughput was lower by 4.9% YoY and 3.6% QoQ at 13.6mmt owing to shutdown in some of the refineries. However, market sales were marginally higher by 1.0% YoY and 0.1% QoQ at 19.4mmt.

- Forex losses lead GRMs into negative territory, no compensation from the government: Forex fluctuation took a toll on IOC with forex losses of Rs14.2bn on crude and Rs17.6bn on products totalling Rs31.8bn. GRMs thus were adversely impacted and turned into negative territory at US$(4.8)/bbl from US$4.2/bbl in Q1FY12 and US$4.7/bbl in Q4FY12. The company incurred under-recoveries of Rs255.3bn during Q1 of which Rs80.4bn was subsidy support from upstream companies but devoid of government compensation, the remaining Rs174.9bn was absorbed by IOC, impacting its performance.

- Higher borrowings lead to rise in interest costs: The company received only partial cash compensation of last tranche for Q4FY12 thus elevating the borrowing levels to Rs909bn by the end of Q1 from Rs754.5bn at the end of FY12. Higher borrowings thus led to interest cost shooting up by 77.7% YoY and 23.0% QoQ at Rs18.5bn. The lack of compensation from the government, forex losses and higher interest cost led to a massive loss of Rs224.5bn in Q1.

- Regulated fuel price hike remains the trigger: IOC reported the highest ever quarterly loss during Q1 exacerbated by multiple headwinds. However, government compensation in subsequent quarters would normalize IOC's performance going ahead. The company has already received about Rs120bn and is expected to receive the last tranche of Rs50bn from the government in the next couple of weeks thus relieving some stress. Petchem utilisation was lower in Q1 due to plant shutdown in the month of April which is expected to improve in Q2 thus benefitting performance (current utilisation at 70-80%). However, price hike in regulated fuels remains the key catalyst for the stock. We maintain 'Neutral' rating on the stock with a price target of Rs267.

Source : Equity Bulls

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