Buy Indian Oil Corporation: Motilal Oswal

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Buy Indian Oil Corporation: Motilal Oswal

Motilal Oswal is bullish on Indian Oil Corporation (IOC) and has recommended buy rating on the stock in its August 10, 2011 research report.

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Motilal Oswal is bullish on Indian Oil Corporation (IOC) and has recommended buy rating on the stock in its August 10, 2011 research report.

"Indian Oil Corp (IOCL) reported a 1QFY12 EBITDA loss of INR24b (v/s our estimate of EBITDA of INR35b) mainly due to (1) lower government compensation of INR82b v/s our estimate of INR148b, (2) lower-than-expected GRM of USD4.7/bbl (v/s our estimate of USD8.5/bbl) due to inventory loss of USD2.4/bbl. This however, was partially offset by a product adventitious gain of INR14b due to price hikes in June. 1QFY12 net loss was INR37b v/s net loss of INR33.9b in 1QFY11 and PAT of INR39b in 4QFY11. IOCL did not provide for income tax due to loss at the PBT level. Given the ad hoc subsidy sharing we believe quarterly financials are not indicative of the likely full-year performance."

"Of the gross under-recovery of INR238b in FY11, IOCL received INR79b from upstream as discounts on crude purchases and INR82b from the government as a cash subsidy resulting in a net burden of INR76.7b. For FY12 and FY13 we model upstream share at one-third, government share at ~55% and OMC share at 6-13%, enabling IOCL to report RoE of at least 10%. 1QFY12 GRM was USD4.7/bbl (against our estimate of USD8.5/bbl) against USD7.9/bbl in 4QFY11 and USD3/bbl in 1QFY11. GRM in 1QFY12 were impacted by inventory loss of USD2.4/bbl, led by an oil price drop of USD7/bbl in 1QFY12. The petrochemical division losses continued during the quarter and EBIT loss was INR4b partly due to a shutdown at a new cracker at Panipat. Comparative loss was at INR4.8b in 1QFY11 and INR1.7b in 4QFY11. IOCL expects the new cracker to stabilize in 3QFY12 and contribute from 4QFY12."

"We model Brent oil price of USD107/95/90/85/bbl in FY12/FY13/FY14/long-term respectively. We expect the government to spell out a likely sustainable subsidy sharing formula over the coming period. Positive contribution from IOCL's petchem division will help IOCL to maintain its superior RoE compared with other OMCs. The stock trades at 9.5x FY12E EPS of INR34.4 and 1.3x FY12E BV. Valuations are reasonable with implied dividend yield of 3%. Maintain Buy," says Motilal Oswal research report.

Non-Institutions holding more than 90% in Indian cos

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To read the full report click on the attachment