25 August 2015
Update | Sector: Oil & Gas
IOC
BSE Sensex
26,032
S&P CNX
7,881
CMP: INR395
TP: INR570 (+44%)
Buy
Largest OMC; diversification offers earnings stability
Marketing margins and Paradip to drive earnings; valuations attractive
with 4% dividend yield
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap.(INR b)/(USD b)
AvgVal(INRm)/Vol ‘000
Free float (%)
IOCL IN
2,428.0
465/307
-6/31/12
962.3/14.7
503/1357
31.4
Ongoing sector reforms reduced IOCL’s debt and we expect marketing margins to
improve over the next 12-18 months owing to pricing freedom.
We believe IOCL’s large asset base in refining and marketing is non-replicable and
its well-diversified earnings provide stability to earnings.
While refining margins would be governed by global demand-supply; likely higher
marketing margins provide predictability to its earnings and should lead to re-
rating, in our view.
The stock trades at 7.2x FY17E EPS of INR55. Our SOTP-based fair value stands at
INR570, implying 44% upside. Valuations attractive with 4% dividend yield. Buy.
Financial Snapshot (INR Billion)
Y/E Mar
2015 2016E 2017E
Sales
EBITDA
Adj. PAT
Adj. EPS (INR)
EPS Gr. (%)
BV/Sh.(INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
EV/EBITDA (x)
Div. Yield (%)
4,483 3,057 3,374
93.4 253.0 264.9
32.4 126.5 133.8
13.4
52.1
55.1
5.8
16.1
15.5
7.2
1.1
5.3
4.3
-39.2 289.9
4.7
6.4
29.7
1.4
15.8
1.7
17.2
16.4
7.6
1.2
5.8
4.0
Reforms beneficiary; debt reduced, now on to marketing margins
283.5 323.8 359.0
Indian oil sector witnessed unprecedented reforms (such as auto fuel de-
regulation) in the last two years, leading to more than 80% reduction in
under-recoveries.
IOCL’s debt reduced ~45% and the company is expected to benefit from
higher marketing margins owing to pricing power. We model marketing
margins at INR1.6/2.0/liter in FY16/FY17 v/s regulated margins of
INR1.4/liter in auto fuels.
Of the three OMCs, IOCL’s earnings are the most diversified—share of
refining at ~40%, marketing at ~30%, pipeline at 24% and petchem at 6%.
We believe IOCL’s asset base in non-replicable, with control over 11 of
India’s 22 refineries (35% capacity share), 71% of downstream pipelines and
46% (24,400) of retail outlets.
IOCL’s 15mmt (INR350b capex, 12.2 Nelson complexity) Paradip refinery is
nearing commissioning, with all units expected to start in 2HFY16.
We expect the refinery to stabilize by 2HFY17 and estimate break-even
GRM of USD7-8/bbl, with distillate yield of 81%. 700KTA planned
downstream propylene will boost refinery complexity and project IRR.
The medium-term refinery capacity additions will be brownfield (hence cost
effective) in nature and include expansion at Gujarat (13.7 to 18mmt),
Mathura (8 to 11mmt) and Panipat (15 to 20mmt).
Key risks include crude price (inventory losses) and INR/USD volatility and
any delay in the commissioning of Paradip refinery.
We value IOCL at 5.5x for refining/petchem and 8x for marketing to arrive
at a fair value of INR570, implying a 44% upside. The stock trades at 7.2x
(lowest among the three OMCs) FY17E EPS of INR55 and 1.1x FY17E BV.Buy.
Diversified earnings give stability; large non-replicable asset base
Shareholding pattern (%)
Jun-15 Mar-15
Promoter 68.6 68.6
DII
FII
Others
4.7
2.4
24.3
4.6
2.6
24.2
Jun-14
68.6
4.6
2.4
24.4
Paradip refinery nearing commissioning, full benefit in 2HFY17
Notes: FII includes depository receipts
Stock Performance (1-year)
500
450
400
350
300
IOCL
Sensex - Rebased
Valuation and view
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Investors are advised to refer through disclosures made at the end of the Research Report.
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.