Indian Oil preferred pick on valuation: Nomura

After very strong 4QFY15 and 1QFY16, we expected 2Q to be a difficult quarter for the oil marketing companies (OMCs). Due to a sharp fall in oil prices and INR depreciation, OMCs were likely to report high inventory/forex losses. While we estimated Indian Oil Corporation (IOC) to be barely in profits, its reported loss due to high inventory/forex loss does not surprise us much.

Despite the 2Q loss, we see low risk to our full year EPS of R47/share (reported 1H EPS of 25/share is 53% of our full year EPS). We see upside to Bloomberg consensus EPS of R44/share. The key positive was a sharp 6% y-y sales volume growth in 2Q, reflecting the sharp petroleum product demand growth this year

With both crude oil price and R relatively stable (vs sharp weakness in 2Q), it is unlikely that there will be significant inventory/forex losses in 3Q. Indian refiners will likely benefit from the recent increase in discounts on crude being offered by OPEC countries to Asian refiners.

Refining throughput was at 13.7mmt (up 2% y-y and 1% q-q). Pipeline throughput at 20mmt increased 5% y-y and q-q. Pipeline EBITDA was at R1,390 crore (up 1% q-q). Debt level as of Sep-15 was R56,600 crore (R52,500 crore as of June-2015). As expected, nearly the entire under-recoveries on kerosene and subsidies on direct benefit transfer for LPG were compensated to IOCL. Among the OMCs, IOC has been our preferred pick on valuation (ex investments, it trades at 1.0x FY17F book of R302 vs 1.5-1.6x for HPCL.

Indian Oil Corporation