Stock Review: Indian Oil Corporation’s (IOC)

Higher gross refining margins aid second quarter financials

Indian Oil Corporation's (IOC) performance improved during the September quarter as its gross refining margins (GRMs) increased to $6.6 a barrel from $3.6 a barrel in the first quarter. During the period, Singapore-Dubai GRMs were up $0.50 to $4.2 a barrel.

This was partly helped by inventory gains as IOC kept more crude oil in its inland refineries and produced more compared to Hindustan Petroleum and Bharat Petroleum, which saw refining margins of $2.7 and $2.8 a barrel, respectively.

While GRMs may remain subdued during the next six months globally, analysts at Anand Rathi have increased IOC's earnings forecast for FY11 and FY12 by six per cent and 11 per cent, respectively.

Besides refining, IOC has diversified its revenues from pipeline and chemicals businesses, and will add nuclear power. It will invest `900 crore to buy 26 per cent stake in Nuclear Power Corporation's 1,400 mw Kota atomic power plant. Among other projects, it will add a new LNG terminal at Ennore. It has already opened 450 new outlets this financial year, and will add 450 more pumps by March.

IOC has doubled its capacity in Panipat to 12 million tonnes a year, which will improve petrochemical revenues on account of higher naphtha throughput.

Its annual crude oil refining capacity will go up from 60 million tonnes to 80.7 million tonnes by 2012. The company is expected to come out with its follow-on offer, which will dilute its equity by 10 per cent, in January 2011.

The uncertainty over subsidy-sharing still continues and clarity from the government is awaited. The government made subsidy payments for the first half of FY11 in the last quarter and helped IOC post a net profit of `5,294 crore in the second quarter of FY11 compared to `284 crore a year ago, while net sales grew a good 27 per cent y-o-y.