Buy Indian Oil Corporation - Motilal Oswal

Indian Oil Corporation (IOCL IN; Mkt Cap USD19.3b, CMP Rs372, Buy)

- Reports loss due to no subsidy payment by the government in 1QFY11: IOC reported EBITDA loss of Rs29b in 1QFY11. We had estimated an EBITDA of Rs25b. The large variation from our estimate was primarily due to no compensation from the government (v/s our estimate of Rs68b compensation) in 1QFY11. Product inventory gain of Rs5b and actual gross under-recoveries being Rs10b lower than our estimate provided some cushion. Reported net loss for 1QFY11 was Rs33.9b (v/s PAT of Rs36.8b in 1QFY10 and Rs55.6b in 4QFY10).

- GRM at US$3/bbl; marketing sales volume growth of 3.7% YoY: IOC reported blended GRM of US$3/bbl (v/s benchmark Singapore GRM of US$3.7/bbl), as against US$7.4/bbl in 1QFY10 and US$3.42/bbl in 4QFY10. Product sales were up 3.7% YoY and 3% QoQ at 18.3mmt. Throughput was in line with our estimate at 13.3mmt.

- Net 1QFY11 subsidy sharing at 67%; we model IOC's sharing at 11% in FY11: The government has not announced any compensation for 1QFY11 for the OMCs (HPCL, BPCL and IOC) till date, resulting in large burden of under-recoveries on the OMCs. IOC's net sharing post upstream discounts stood at Rs73.4b (67% of IOC's gross under-recoveries). Upstream share stood at 1/3rd level, leading to Rs36.7b discounts to IOC in 1QFY11.

- Maintain Buy: We assume that OMCs will share 11% of gross under-recoveries in FY11 and FY12. The stock trades at 10.7x FY11E EPS of Rs35 and 1.6x FY11E BV. We expect government to come out with a sustainable subsidy sharing formula. We expect stock to trade at higher valuations than recent past due to (1) better earnings quality, (2) higher RoCE and RoE, (3) improvement in cash cycle, and (4) lower debt levels. Maintain Buy.

Source : Equity Bulls

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