Accumulate Indian Oil Corporation; target Rs 328: Emkay

“Indian Oil Corporation (IOCL) reported results which were above our and street estimates with EBIDTA at Rs.111.5bn and Net profit at Rs.24.8bn, while revenue grew by 43% YoY to Rs.1156bn. During the quarter company received budgetary support of Rs.164bn from the government, while discount from upstream company was Rs.83.3bn. Average gross refining margin for Q3 FY12 was at $.4.3/bbl as compared to $.2.76/bbl, growth of 56% QoQ, mainly led by higher product spread in heavy distillates segment especially in FO. Lowered our earnings for FY12E and FY13E on the back of overall higher under recovery for OMCs.”

“Valuations for IOCL have moved in one year forward P/BV band of between 1x to 1.5x in the last three years with average P/BV of 1.4x. Currently the stock trades at 1.2x one year forward P/BV. After touching low of Rs.250 in the January 2012, the stock has rallied on the back of strengthening Rupee and expectations of a fuel price hike post the state elections. For FY12E, total under recoveries are expected to be about Rs1,300bn. We expect OMCs to be reimbursed fully for the under recoveries, as their financial performance has been adversely affected from increase in interest cost on the back of burgeoning short term borrowings. In the current oil price scenario under recoveries are expected to remain above Rs1,000bn and we believe the only way forward for the government is to go for fuel price hikes. Although the pace of fuel price hike is uncertain going ahead, ultimately consumers would have to take the burden of higher energy prices. At CMP stock provides limited upside, we maintain Accumulate on the stock with revised target price of Rs 328 (at 1.3x P/bv) as against its three year average P/BV of 1.4x,” says Emkay Global Financial Services research report.

Bodies Corporate holding more than 50% in Indian cos

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