>INDIAN OIL CORPORATION (MERRILL LYNCH)

■ Budget support keeps IOC in black in 3Q; Underperform: In 3Q, the government finally confirmed budget support to compensate R&M companies for subsidy. Indian Oil (IOC) accounted only 63% of budget support, which means recurring EPS of Rs26.3 in 9M. Outlook for 4Q is weak, despite recovery in refining margins. Hence, a cut in consensus FY10E EPS of Rs35.1 appears likely. IOC’s FY10E earnings outlook is better than peer,s but it is not cheap at 10.6x FY10E EPS. We retain our Underperform rating on IOC.

■ 3Q refining margins at US$3.7/bbl, lower than in 1H: IOC’s refining margin weakened to US3.7/bbl in 3Q FY10, thereby pulling down the 9M average to US$4.8/bbl from US$5.4/bbl in 1H.

Better outlook than peers but not cheap

■ 9M EPS Rs26; 63% of budget support accounted in 3Q: In 3Q, the government confirmed budgetary support of Rs71bn to IOC toward the FY10E subsidy hit. IOC accounted only Rs44.8bn (63%) in 3Q. IOC also got compensation from upstream companies to cover the entire auto fuel subsidy. This helped IOC remain in the black (EPS Rs10), despite weak refining margins in 3Q. 9M EPS stands at Rs26.3. IOC’s 3Q EPS would have been higher, at Rs17.1, and 9M at Rs33.4, if the entire budgetary support of Rs71bn was accounted in 3Q.

■ Poor 4Q outlook; downside to consensus FY10E EPS: IOC’s 9M EPS is Rs26.3. The outlook for 4Q is poor, despite a likely recovery in refining margins. IOC's share of the 4Q LPG-kerosene subsidy is expected to be Rs61-69bn, while budget support would be just Rs26.2bn. Without more support, 4Q EPS is likely to be Rs2 and FY10E EPS is likely to be Rs28.2 (close to BoFAML’s estimate). However, a cut in consensus FY10E EPS (Rs35.1) appears imminent.

To read the full report: INDIAN OIL