>INDIA OIL CORPORATION (RELIGARE)

■ Topline down 30%YoY, broadly in line with expectations: IOC reported a 29.5% YoY decline in revenues to Rs 609.7bn in Q2FY10, which was marginally below our estimate of Rs 632.4bn as the non-issuance of government bonds pushed up the subsidy burden during the quarter. The YoY decline in topline stemmed from a 68% drop in crude prices, which was partially offset by higher crude throughput and product sales. The company’s crude throughput increased 3.4% YoY to 12.4mmt, whereas product sales rose 7.7% to 16.7mmt. GRMs (combining its seven refineries) came in at US$ 3.5/bbl versus US$ 6.4/bbl in Q2FY09.

■ Margin up YoY but down sequentially in absence of government aid: In Q2FY10, IOC had to bear a subsidy burden of Rs 41.7bn (the entire cooking fuel underrecovery) as against our estimate of Rs 4.5bn (25% of auto fuel subsidy). Thus, despite being reimbursed fully for the auto fuel under-recovery of Rs 18bn, the company’s EBITDA margin suffered, clocking in at just 1% as against our estimate of 5%. However, the EBITDA margin improved significantly YoY from -6.8% in Q2FY09 on the sharp fall in crude prices and better refinery utilisation.

Skids on non-issuance of oil bonds

■ PAT below expectations: IOC reported a net profit of Rs 2.8bn in Q2FY10 as against a net loss of Rs 70.5bn in Q2FY09, primarily because of lower crude prices, higher other income and lower interest cost. The company witnessed a 62.7% YoY growth in other income and a 65% fall in interest costs in Q2FY10. However, net profit was significantly below our expectation of Rs 20.1bn due to non-issuance of oil bonds during the quarter. Adjusting for the impact of above-expected subsidy sharing, IOC’s PAT for Q2 would have been Rs 27.4bn.

■ Estimates pared: We have revised our crude price assumptions for FY10 and FY11 upwards to US$ 69/bbl and US$ 85/bbl from US$ 65/bbl and US$ 75/bbl respectively. We are also revising our rupee-dollar exchange rate assumption from Rs 48.5 and Rs 46 to Rs 47.5 and Rs 45 for FY10 and FY11 respectively. Consequently, we have increased our estimates for IOC’s under-recoveries to Rs 245bn in FY10 and Rs 424bn in FY11 from Rs 179bn and Rs 303bn respectively. Further, due to rising crude prices and the absence of oil bonds, we assume that upstream companies will bear 33% of the under-recoveries, government 47% through bond issuance, and OMCs 20%.

■ Rolling forward target price, maintain Hold: We are rolling forward our target price from FY10 to FY11, assigning a P/BV multiple of 1.1x on FY11E. This gives us a revised price target of Rs 335 from Rs 287 earlier (includes Rs 68 as value of IOC’s investments in ONGC, GAIL and Petronet: 30% holding discount). We feel that uncertainty in the subsidy sharing mechanism and rising crude oil prices would continue to depress valuations. We maintain a Hold rating on the stock.

To read the full report: INDIA OIL CORPORATION