Business Standard

IOC: Marred by uncertainties

Though subsidies are reimbursed and IOC might not be allowed to end the year with a loss, delay in fuel price reforms and ad hoc subsidy sharing will impact financials & keep the stock under pressure

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(IOC) reported a massive loss of Rs 22,451 crore for the June quarter, the biggest by any Indian company. While the delay in compensation for under-recoveries from the government took a toll, the inability to raise retail fuel prices is making things worse.

Under-recoveries (subsidies) are the losses borne by the oil marketing companies (OMCs) for selling fuel at subsidised prices (or below cost). Thanks to the dip in crude oil prices, IOC also reported lower gross refining margins (GRMs), of a negative $4.8 per barrel (the lowest in its history) in the June quarter (partly due to inventory loss), adding to the woes.

No doubt, a large part of these issues are reflecting in the stock, not far from its three-year low of Rs 239. But, with uncertainties over the subsidy sharing mechanism and timing of compensation looming and fuel prices not being raised, it is having a negative bearing on stocks of such as IOC. In this backdrop, the stock (Rs 254), quoting below its estimated FY13 book value, will lag the broader markets.
 

MARGIN CONCERNS
In Rs crore FY12 Q1' FY13 FY13E
Net sales 407,231 96,897 413,645
% change y-o-y 31.8 -4.3 1.6
Ebitda 18,027 -19,942 16,042
EBITDA (%) 4.4 NA 3.9
Net profit 4,226 -22,451 5,809
% change y-o-y -46.0 NA 37.5
EPS (Rs) 17.4 -92.5 23.9
PE (x) 14.6

10.6
E: Estimates Source: Edelweiss Research

Hopes persist
Of the gross under-recoveries of Rs 25,500 crore (net subsidy at Rs 17,500 crore, as upstream companies provided a 31 per cent discount) in the June quarter, almost Rs 15,300 crore was on account of diesel sales. The under-recoveries, along with loss in the refining business, led to the huge loss in the quarter. Analysts, though, aren’t perturbed. Analysts at (MOSL) observe that given the ad hoc subsidy sharing, quarterly financials are not indicative of the likely full-year performance. The quarterly performance keeps getting impacted as government compensation for subsidies comes with a lag. Even in the September 2011 quarter, IOC had reported a loss of Rs 7,485 crore due to delays in reimbursements. However, higher compensation for past under-recoveries, received in the March 2012 quarter, led to a profit of Rs 14,099 crore (the highest in a quarter), leading to a 42 per cent rise in adjusted net profit (Rs 11,662 crore) for FY12.

Analysts say the OMCs also cannot be allowed to end the financial year in the red (which will impact their ratings), as they are importers of crude oil. They, thereby, have to bear minimal subsidy burden, with the majority borne by upstream companies (oil and gas producers) like ONGC, Oil India and GAIL. In FY12, upstream companies shared 40 per cent of the subsidy and the rest was borne by the government — OMCs were spared. Thus, most analysts believe OMCs will be reimbursed for the under-recoveries in the days to come.

MOSL analysts, in a report last week, noted, “We now model nil subsidy sharing for OMCs (earlier five per cent), upstream share at 40 per cent and the rest by the government. With high interest cost and crude prices, it would be difficult for OMCs to share any under-recovery.” Nevertheless, the government’s finances are not in good shape and global have increased recently (Brent is up eight to 10 per cent, to around $114 a barrel). Such issues suggest the company’s finances and the stock will remain under pressure.

In fact, it has already led to a rise in IOC’s debt. This rose from about Rs 75,000 crore as on March to Rs 90,000 crore in the June quarter, thereby pushing up interest costs (78 per cent year-on-year at Rs 1,849 crore for the quarter). Though the government reimbursed about Rs 12,000 crore in July, after the reimbursement its debt is estimated at about Rs 80,000 crore.

Diesel sales push under-recoveries
Clearly, the delays in oil pricing reforms continue hurting companies such as IOC. What’s more, even as petrol prices were raised sharply in May, OMCs continue to incur a loss on the sale of this fuel. Analysts estimate IOC to have incurred a loss of Rs 1,000 crore in the June quarter. The bigger issue is diesel, given the government’s reluctance to raise prices, as well as the share of diesel in total under-recoveries. For IOC, diesel sales volume increased eight per cent year-on-year during the quarter and analysts estimate it accounted for 60 per cent of the gross under-recoveries.

GRMs: Some hope
IOC’s GRMs, in general, remained weak during the quarter (the benchmark Singapore GRMs were down 10 per cent sequentially). The fall in global crude oil prices (by $25 a barrel) dented margins further, as consequent to the higher priced inventories. Analysts at Edelweiss estimate the inventory loss at Rs 4,060 crore (or $7.5 per barrel). Positively, Singapore GRMs are up again to around $10 from $4-5 a barrel in the June month, which should provide some support to profitability. In the petrochemicals business, where the loss was Rs 180 crore, the stabilisation of IOC’s Panipat cracker unit should help it return to profitability, believe analysts.

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