Metrics of Indian Oil Corporation

Indian Oil Corporation (IndianOil) is the largest oil marketing company in India with a 47 per cent market share. It is India's largest commercial enterprise, with a sales turnover of Rs 4,38,710 crore (USD 65.391bn) and profits of Rs 19,106 crore (USD 2.85bn) for the year 2016-17. The improvement in operational and financial performance for FY 2016-17 reflected in the market capitalization of the Company, which grew two-fold, from Rs 95,564 crore as on 31st March 2016 to Rs 1,87,802 crore as on 31st March 2017.

It also has the largest refining capacity in the country at 80.7 million metric tonnes per annum (mmtpa). Paradip Refinery is the eleventh refinery that is set up by IndianOil. Envisioned as the Energy Gateway to Eastern India, the installed capacity of the refinery is 15MMTPA. It has commissioned its refinery at Paradip town in the state of Odisha, which is the most complex refinery undertaken by the public sector.

IndianOil is ranked 168th among the world's largest corporates and first amongst the Indian enterprises in the prestigious Fortune ‘Global 500’ listing for the year 2017. As India's flagship national oil company, with a 33,000-strong work-force currently, the enterprise has been meeting India’s energy demands for over half a century. It also has the largest network of retail outlets across the country having more than 25,000 outlets.

With a corporate vision to be 'The Energy of India' and to become 'A globally admired company,' IndianOil's business interests include the entire hydrocarbon value-chain – from refining, pipeline transportation and marketing of petroleum products to exploration & production of crude oil & gas, marketing of natural gas and petrochemicals, besides venture into alternative energy and globalisation of downstream operations.

Having set up subsidiaries in Sri Lanka, Mauritius and the UAE, the corporation is simultaneously exploring for new business opportunities in the energy markets of Asia and Africa. It has also formed about 20 joint ventures with reputed business partners from India and abroad to pursue diverse business interests. 

Tumbling profits owning to inventory losses

On account of severe inventory loss, IndianOil’s profits were dragged at USD3.4/bbland plummeted 45 per cent below the previous sequential quarter. The standalone reported net profit for the quarter ended in June 2017 was Rs 4548.5 crore as against Rs 8269 crore in the year earlier period. This decrease in profit could have been higher however it included provision of Rs 2810 crore write-back pertaining to settlement of state entry tax liability with Haryana.

The corporation witnessed strong core gross refining margins (GRMs) of USD7.7/bbl. The margins increased by 12 per cent on quarter to quarter. Excluding both the inventory losses and the one-off write-back provision of Rs 2810 crore, core EBITDA has been robust and increased by 32 per cent on year to year basis standing at Rs 8600 crore.

Paradip refinery to perk up profitability

Among the oil marketing companies, the companies’ refineries are better in terms of complexity and on average have generated higher refining margins. The Paradip refinery has been sprinting at full capacity utilisation, and will consistently generate gross refining margins (GRMs) at a premium to Singapore benchmarks given its high complexity adding to IndianOil’s refining margins.

The gross refining margins are likely to structurally enhance as the Paradip refinery has been fully commissioned. The core GRM raised 119 per cent on YoY, however, has surpassed estimate on higher utilisation of Paradip. The oil company had given guidance of 92 to 95 per cent utilisation in fiscal 2018. During the first quarter of 2018, Paradip refinery worked on full capacity of 88 per cent utilisation as against 82 per cent in last quarter of 2017. The strong structural earnings growth prospects of IndianOil and ongoing successful ramp up of the highly profitable Paradip refinery will enhance profitability.

The value-accretive mega capital expenditure (capex) of Rs 180 thousand crore over seven years; it is balanced across verticals will be funded via internal accruals. The company’s operating cash flow on per annum basis stands at Rs 30 thousand crore.

Refinery throughput, at 17.5MMT up 9 per cent YoY, came 1 per cent below estimate. The reported gross refining margins fell 52 per cent QoQ at USD2.1/bbl discount to Singapore benchmark, was largely attributed to adverse inventory losses; the impact was owing to the decrease in Brent oil, which was down by 7 per cent QoQ.

Better-than-expected pipeline and petchem performance

The stable earnings from pipelines division cushion the company from the volatility of the refining and marketing segments.

Pipeline EBITDA decreasing one per cent YoY came at Rs 1600 crore owing due to 7 per cent higher-than-expected throughout. Petchem EBITDA slumped 10 per cent on both year and quarter basis and stood at Rs 1800 crore.

Marketing growth of Indian Oil

IndianOil’s witnessed decent marketing growth with MS sales growing at 10 per cent on year and year and High Speed Diesel (HSD) sales rose at 3 per cent on year and year (YoY). Excluding the inventory losses, marketing EBITDA was, therefore, up 25 per cent YoY.

Advantages and Risks

The state-owned oil marketing company enjoys a first mover advantage and strong presence in the high entry barrier rural areas 26 per cent which will enable it to ride the robust rural demand growth.

Diesel prices deregulation from Oct 19, 2014 will lead to further decrease in the interest costs and an increase in retail margins as well. The benefits of recent deregulation are more permanent and will in fact progressively show through more significantly going forward.

IndianOil faces the risks of regulatory changes in the form of reduction in duty protection which will lower the refining margins and also roll-back of de-regulation owing to sharp rally in crude price is also a concern for the company.

neha.seth@outlookindia.com