Despite a weak Q2 earnings performance, IOC seems to be positioned for future growth with an improvement in GRMs and steady sales volumes.
Indian Oil Corporation (IOC) reported a subdued set of Q2 numbers, held down due to one-offs and a low capacity utilization during the quarter. Revenue was up 10 percent YoY (year on year) but down 13 percent QoQ (quarter on quarter) mostly due to plant shut-downs and seasonal demand volatility. EBITDA at Rs 74 billion was much below Street estimates and 8 percent down QoQ. Net profits were up 18 percent YoY but down 18 percent sequentially, again below expectations.
Refining volumes dip
The refining throughput at 16.1 MT was down 8 percent QoQ mainly due to lower throughput with plant shut-downs at Panipat, Mathura, Gujarat and Barauni refineries. The GRM during the quarter was reported at a disappointing USD 8 per billion barrels; however, normalized GRM (adjusted for inventory impact and refinery transfer price anomalies) stood strong at USD 9.1/ bbl significantly above the average Singapore refining margins of USD 8.3/ bbl.
Paradip refinery update
The Paradip refinery reported a standalone profit for the first time in Q2FY18. Average capacity utilization at the refinery stood at 97 percent in Q2, above the 93 percent in Q1, and is expected to improve going further which would bring in operational efficiencies and enhance profitability. The management aims to introduce the refining of heavy crude from Q3 which would further enhance profitability. The refinery has 40 percent capacity for heavy crude refining. The company is also planning for full commissioning of the polypropylene plant at Paradip from December 18 onwards
The marketing volumes stood at 19.9 MMTpa, down 8 percent sequentially but up 7 percent YoY. The decline was majorly owing to seasonal volatility. The margins were significantly down due to an uptick in crude oil prices and a time lag in reflecting the same in the selling price and rupee depreciation during Q2. The segment was also impacted by a one-time of provision of Rs 3.2 billion for lease rentals for Kandla Port Trust.
Petrochemicals and Pipeline
The petrochemical segment came as a dampener to revenues with throughput down almost 26 percent both YoY and QoQ due to shut-downs at the Panipat petrochemical plant. Pipeline EBITDA was impacted by lower utilization on account of planned refinery shutdowns
The implementation of GST came as a dampener for most oil marketing companies. IOC has witnessed an additional tax burden of around Rs 300 crore due to the implementation of GST and non-availability of the benefits of input tax credit. The company expects the impact of this to expand to almost Rs 1000 crore for FY18, which could be a drag on full-year profits.
Despite a weak Q2 earnings performance, IOC seems to be positioned for future growth with an improvement in GRMs and steady sales volumes. All units are back in operation in Q3FY18 and the company expects an improvement in yields and contraction of fuel loss across refineries. With performance ramping up, Paradip refinery seems to be poised to provide the delta in revenues and profitability in the coming quarters. Increased focus on LPG brings in a healthy product mix which would benefit the marketing segment.
Deregulation of petrol and diesel retail prices has provided greater visibility about future performance and made OMCs attractive. The stock is trading at a PE of 10.1x FY18 earnings and 9.2x FY19 estimates and EV/EBITDA of 7.1x FY18 and 5.5x FY19 earnings, which is in line with the sector average.