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February 3, 2017
Rating matrix
Rating
Target
:
:
Buy
| 420
Indian Oil Corporation (INDOIL) | 390
Target Period : 12 months
Potential Upside : 10%
Performance to remain strong...
Whats changed? Indian Oil Corporations (IOC) Q3FY17 results were in line with our
Target Changed from | 335 to | 420 estimates on the topline front. Revenues increased 15.3% QoQ to
EPS FY17E Changed from | 36.7 to | 38.4 | 115644.9 crore, in line with our estimate of | 116657.1 crore
EPS FY18E Changed from | 30.6 to | 33 Reported EBITDA was at | 7948.6 crore, marginally below our
EPS FY19E Changed from | 31.3 to | 35 estimated EBITDA of | 8075.6 crore due to higher-than-expected
Rating Changed from Hold to Buy other expenses (provision made in the matter of entry tax for Uttar
Pradesh). However, GRMs came in at US$7.7/bbl, above our estimate
Quarterly performance of US$6.7 /bbl due to inventory gains
Q3FY17 Q3FY16 YoY (%) Q2FY17 QoQ (%) PAT increased 28% QoQ to | 3994.9 crore but came in below our
Revenue 115,644.9 83,461.9 38.6 100,274 15.3 estimate of | 4401.5 crore. There was no subsidy burden this quarter
EBITDA 7,948.6 5,242.0 51.6 5,772.2 37.7
EBITDA (%) 6.9 6.3 59 bps 5.8 112 bps
Government policies continue to provide comfort
PAT 3,994.9 3,056.9 30.7 3,121.9 28.0 The governments decision to deregulate diesel prices was a major
positive for OMCs. It led to a decline in crude oil gross under-recoveries,
Key financials with only kerosene and LPG prices under the regulatory regime. Also, the
| Crore FY16 FY17E FY18E FY19E hike of 25 paise per month in kerosene prices and scheme of Direct
Revenues 350,603.1 450,170.1 533,390.9 544,960.0 Benefit Transfer (DBT) for LPG cylinders has led to lower gross under-
EBITDA 20,081.8 33,866.9 30,387.7 32,399.6 recoveries. Given our assumptions on Brent crude at US$55/barrel and
Net Profit 10,399.1 18,662.1 16,037.1 17,000.5 exchange rate of | 67 per US dollar, we expect gross under-recovery of
EPS (|) 21.4 38.4 33.0 35.0 | 23662.5 crore and | 24640.7 crore in FY18E and FY19E, respectively.
The governments decision to cap its sharing of kerosene subsidy at
Valuation summary | 12/litre and LPG at | 15/kg and the rest by upstream companies is a
FY16 FY17E FY18E FY19E welcome move for OMCs. Hence, we assume no downstream subsidy
P/E 17.8 9.9 11.6 10.9 share for FY18E and FY19E of total under-recoveries.
Target P/E 19.6 10.9 12.7 12.0
GRMs remain robust due to inventory gains
EV / EBITDA 9.2 5.5 6.1 5.7
P/BV 2.5 2.2 2.0 1.8 Reported GRMs of IOC were at US$7.7/bbl in Q3FY17 vs. our estimate
RoNW (%) 14.1 21.8 16.9 16.2 US$6.7/bbl mainly on account of higher operational efficiency and
RoCE (%) 12.0 22.3 17.2 17.1 inventory gains. The refining products inventory gains came in at | 2094
crore in Q3FY17 vs. | 45 crore in Q2FY17. With the revival seen in GRMs
Stock data due to complete commission of the Paradip refinery, we estimate
Particular Amount reported GRMs of US$6.8/bbl, $6/bbl and $6.3/bbl for FY17E, FY18E and
Market Capitalization (| Crore) 185,495.4 FY19E, respectively. The marketing products inventory gains came in at
Total Debt (FY16) (| Crore) 52,467.1 | 957 crore in Q3FY17 vs. loss of | 731 crore in Q2FY17. We estimate
Cash and Investments (FY16) (| Crore) 10,513.0 throughput of 64.9 MMT, 68.4 MMT and 69.2 MMT for FY17E, FY18E and
EV (| Crore) 227,449.5 FY19E, respectively. Going forward, we expect the interest cost to remain
52 week H/L 392/172 at comfortable levels of | 3153.3 crore, | 3147.5 crore and | 3335 crore in
Equity capital (| Crore) 2,428.0
FY17E, FY18E and FY19E, respectively, due to working capital efficiencies
Face value (|) 10.0
on account of diesel price deregulation, DBT for LPG cylinders.
Price performance Paradip ramp up to strengthen position
Return % 1M 3M 6M 12M
HPCL 22.1 15.9 27.5 100.4 The successful commissioning of 15 MMTPA Paradip refinery marks a
BPCL 9.0 2.5 16.5 57.4
major shift for IOC as a pivotal player in complex refineries. The refinerys
IOCL 15.5 15.5 38.5 86.0
capacity utilisation during the quarter was at 63% with further ramp up
ONGC 4.6 3.9 37.2 33.4
expected in coming quarters. The ability to process heavy crude oils with
major secondary processing units like FCC, delayed coking unit (DCU),
etc, will further improve GRMs. Going forward, steady petroleum sales
Research Analyst volume and normalised marketing margins would augur well for the
Mayur Matani company over the next two years. Hence, we have a BUY
mayur.matani@icicisecurities.com recommendation on the stock with a target price of | 420 (based on
Akshay Gavankar average of P/BV multiple: | 397/share and P/E multiple: | 443/share).
akshay.gavankar@icicisecurities.com
Interest 996.7 724.0 610.4 63.3 614.7 62.1 Higher due to interest implications of Paradip Refinery and higher oil prices
Other Income 792.9 693.2 650.0 22.0 854.1 -7.2
Extra Ordinary Item 0.0 0.0 473.1 -100.0 0.0 NA
PBT 6,190.7 6,569.4 4,585.4 35.0 4,506.9 37.4
Total Tax 2,195.8 2,167.9 1,528.6 43.7 1,385.0 58.5
PAT 3,994.9 4,401.5 3,056.9 30.7 3,121.9 28.0
Key Metrics
Exchange rate (|/$) 67.5 67.5 66.1 2.1 66.9 0.9
Under-recoveries (| cr)* 4614.3 4614.3 6151.4 -25.0 3731.3 23.7
Downstream share (%) 0.0 0.0 10.4 NA 0.0 NA The company did not bear any subsidy for the quarter
Net Under-recovery (| cr) 0.0 0.0 206.5 -100.0 0.0 NA
Throughput (mmt) 16.4 12.9 13.1 25.0 15.6 4.7
Sales (mmt) 20.1 19.9 19.1 5.3 18.5 9.0
GRM ($/barrel) 7.7 6.4 6.0 28.7 4.3 77.5
Change in estimates
FY17E FY18E
(| Crore) Old New % Change Old New % Change Comments
Revenue 440,250.9 450,170.1 2.3 481,410.4 533,390.9 10.8
Increase in crude oil throughput and higher marketing profitabilty led to
EBITDA 33,577.1 33,866.9 0.9 27,735.1 30,387.7 9.6 increase in FY18E estimates
EBITDA Margin (%) 7.6 7.5 -10 bps 5.8 5.7 -6 bps
PAT 18,817.2 18,662.1 -0.8 14,507.9 16,037.1 10.5
EPS (|) 39.7 38.4 -3.2 30.6 33.0 7.9
Source: Company, ICICIdirect.com Research
Assumptions
Current Earlier
FY15 FY16 FY17E FY18E FY17E FY18E Comments
Exchange rate (|/$) 61.1 65.4 67.3 67.5 67.1 67.0
Under-recoveries (| cr) 76,285.0 27,570.2 17,487.9 19,382.6 17487.9 19,382.6 Estimates increased due to higher crude oil prices
Downstream share (%) 3.0 0.1 0.0 0.0 0.0 0.0
Net Under-recovery (| cr) 1,200.5 9.1 0.0 0.0 0.0 0.0 Assuming no downstream share for FY17E and FY18E
Throughput (mmt) 53.6 56.7 64.9 68.4 64.5 68.0
Sales (mmt) 72.8 77.1 80.4 83.6 80.2 83.4
GRM ($/barrel) 0.3 5.1 6.8 6.0 6.4 6.0
Source: Company, ICICIdirect.com Research
Sharing (| Cr)
Upstream 42,822.2 1,251.2 0.0 651.2 625.2
Downstream 2,183.5 17.1 0.0 0.0 0.0
Government 31,279.3 26,301.9 17,873.5 23,011.3 24,015.5
Total 76285.0 27570.2 17873.5 23662.5 24640.7
IOCL share of net under-recoveries (| Cr) 1200.5 9.1 0.0 0.0 0.0
Source: Company, ICICIdirect.com Research
5.1 6.3
6.0 6.8
6.0
4.5
US$ / bbl
4.2
3.0
1.5
0.3
0.0
FY14 FY15 FY16 FY17E FY18E FY19E
100
83.6 86.9
77.1 80.4
80 71.1 72.8
60
(mmt)
40
20
0
FY14 FY15 FY16 FY17E FY18E FY19E
The marketing sales volume reported 5.3% YoY growth to 20.1 MMT in
Q3FY17, which led to higher marketing segment profitability. We expect
marketing margins to remain stable over the next few months.
5600 5084.4
4200
3435.3 3335.0
3000.1 3153.3 3147.5
| crore
2800
1400
0
FY14 FY15 FY16 FY17E FY18E FY19E
Valuation
Valuation based on Price / BV Multiple
Adjusted Book Value for FY19E (|Crore) 100951.3
Adjusted number of shares (Crore) 482.7
Adjusted Book Value per share (|) 209.1
Multiple 1.6
Value of core business (| per share) 336.7
Add: Listed investments (25% discount to CMP)+ Other Investments 59.8
Fair Value per share (|) 397
Exhibit 5: Valuations
Year Sales EPS EPS Gr. PE RoNW
(| Crore) (%) (|) (%) (x) EV/EBITDA (x) (%) RoCE (%)
FY16 350,603.1 -19.9 21.4 97.2 18.2 9.4 14.1 12.0
FY17E 450,170.1 28.4 38.4 79.5 10.1 5.6 21.8 22.3
FY18E 533,390.9 18.5 33.0 -14.1 11.8 6.2 16.9 17.2
FY19E 544,960.0 2.2 35.0 6.0 11.1 5.8 16.2 17.1
Source: Company, ICICIdirect.com Research
50.0
(%)
40.0
200 30.0
20.0
10.0
100 0.0
Jan-15 Apr-15 Jun-15 Aug-15 Nov-15 Jan-16 Apr-16 Jun-16 Sep-16 Nov-16 Feb-17
Key events
Date Event
Jun-11 Indian government announced increase in petroleum product prices, eliminated custom duty on crude oil and reduced in excise duties on petrol and diesel
Nov-11 Under recoveries on diesel remain high due to depreciation of Indian rupee. Gross under recovery on petroleum products likely to increase sharply QoQ
May-13 Finance ministry plans to implement Export Parity Pricing (EPP) for pricing of petroleum products for refiners from the current trade parity pricing model. The move if
implemented would have a huge negative impact on profitability of companies
Jun-13 Cabinet clears 10% disinvestment in IOC
Oct-14 Government announces Diesel deregulation
Oct-14 Government announces gas pricing policy
Dec-14 Crude oil prices decline by nearly 50% from the 2014 high's
Aug-15 Government of India divests its 10% stake in IOC
Feb-16 Prime Minister inaugurates IOC's 15 MMTPA Paradip Refinery
Source: Company, ICICIdirect.com Research
Recent Activity
Investor name Investor name
Investor name Value(m) Shares(m) Investor name Value(m) Shares(m)
DSP BlackRock Investment Managers Pvt. Ltd. 22.03 4.61 Government of India -180.66 -33.28
Reliance Nippon Life Asset Management Limited 19.14 4.00 Life Insurance Corporation of India -102.32 -21.39
Tata Asset Management Limited 12.24 2.56 SBI Funds Management Pvt. Ltd. -4.52 -0.94
Grantham Mayo Van Otterloo & Co LLC 8.50 1.98 JM Financial Asset Management Pvt. Ltd. -3.12 -0.65
UTI Asset Management Co. Ltd. 6.78 1.42 Goldman Sachs Asset Management (US) -4.40 -0.54
Source: Reuters, ICICIdirect.com Research
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
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report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial
instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their
receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific
circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate
the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any
loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the
risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to
change without notice.
ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment
in the past twelve months.
ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in
respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.
ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned
in the report in the past twelve months.
ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any
compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts
and their relatives have any material conflict of interest at the time of publication of this report.
It is confirmed that Mayur Matani, MBA and Akshay Gavankar, PGDM Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding
twelve months.
Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.
ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month
preceding the publication of the research report. ,
Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject
company/companies mentioned in this report.
It is confirmed that Mayur Matani, MBA and Akshay Gavankar, PGDM. Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report.
ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.
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publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities
described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and
to observe such restriction.
report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial
instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their
receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific
circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate
the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any
loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the
risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to
change without notice.
ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment
in the past twelve months.
ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in
respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.
ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned
in the report in the past twelve months.
ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its analysts did not receive any compensation
or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts have any
material conflict of interest at the time of publication of this report.
It is confirmed that Mayur Matani, MBA and Akshay Gavankar, PGDM, Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding
twelve months.
Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.