Motilal Oswal Maintains Buy on IOC

IOC 3QFY11: Below estimates due to higher net under recovery, loss in petchem business and higher staff costs; Expect subsidy clarity by end-FY11; Buy

IOC reported 3QFY11 EBITDA of Rs27.3b, up 8x YoY and down 58% QoQ. Lower than estimated EBITDA was due to (1) higher net under recoveries, (2) loss in petchem business, (3) higher staff cost, partially compensated by inventory gains.

3QFY11 PAT stood at Rs16.3b, up 135% YoY and down 69% QoQ. Positive impact of tax rate (at 25% v/s est 33.2%) was negated by higher interest cost.

During 9MFY11, IOC's gross under recovery stood at Rs261b, of which upstream shared Rs87b and government shared Rs117b.

As in previous years, subsidy sharing is likely to be finalized only towards the end of the year (in 4Q). IOC's 9MFY11 PAT now stands at Rs34b.

Valuation and view: The stock trades at 8x FY12E EPS of Rs38.7 and 1.2x FY12E BV. We expect government to spell out the sustainable subsidy sharing formula (at different oil prices) over the next few months which would translate into higher valuations for IOC. Maintain Buy.

Source : Equity Bulls

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