We maintain ‘buy’ on Indian Oil Corporation (IOC) with a target price of Rs 325. We value IOC’s core refining and marketing business at 0.9x FY15F P/B, based on an adjusted book value of Rs 266/share. We value IOC’s investments in listed entities at a 20% discount to the market price.
We don’t assume any sharing by OMCs for FY14-15f. However, if OMCs were made to share under-recoveries, it would pose downside risks to our estimates. Lower-than-expected GRMs and higher inventory/forex losses could also be negatives.
Despite the recent good run (IOC up 18% vs Sensex down 4% for the past one month), IOC has underperformed the market in the past year (down 22% vs Sensex up 4%). The current valuation, at just 0.6x FY15f-adjusted P/B, appears undemanding.
Similar to other oil marketing companies, IOC also reported Q3 losses (Rs 960 crore) despite last-minute cash support of Rs 10,000 crore to OMCs (IOC’s share was Rs 5,200 crore) from the government. We were building in ‘nil’ government subsidy for Q3. The gap of Rs 6,800 crore between our estimated and reported Q3 Ebitda loss is largely explained by lower net under-recovery (R4,900 crore), inventory gains (R920 crore), forex gains on forward covers to hedge RBI swap liability (R210 crore) and higher refining margins ($4.5 vs our estimate of $3.3 per barrel).
The announced Q3 subsidy of Rs 10,000 crore is far less than the Rs 26,900 crore needed for ensuring 100% under-recovery compensation for the nine months of FY14.