• Net sales for Q4 FY14 rise 4.8% yoy mainly on account of higher realizations and rupee depreciation

• Upstream companies shared under recovery burden worth Rs96.3bn in Q4 FY14 v/s Rs76.4bn in Q4 FY13

• Throughput was lower on yoy basis at 13.6MMT but was higher by 4% qoq. GRM for the quarter was at US$2.2/bbl sequentially down by 52.4%

• Net profit of Rs94bn was reported for the quarter which was moderately ahead of our estimates

• With recent favorable policy action we upgrade our rating from Market Performer to BUY with a 9-month target price of Rs420

Net sales grow by 4.7% on back of growth and realizations

Net sales for IOC was at Rs1,349bn a growth of 4.8% yoy and 14.6% qoq. While petroleum products revenues were higher by 4.3% yoy, petrochemicals and others segment saw strong jump of 22.4% yoy and 33.3% respectively. Refinery throughput at IOCL’s refineries was at 13.6mn tons in Q4 FY14 compared to 13.7mn tons in Q4 FY13 and 13.1mn tons in Q3 FY14. Processing for the full year was lower at 53.1mn tons vis-à-vis 54.7mn tons in FY13. Sales volume in domestic markets during Q4 FY14 fell 1.2% yoy to 18mn tons as against 18.3mn tons in Q4 FY13 and 18.2mn tons in Q3 FY14. For FY14 volumes declined 1.9% yoy to 71.1mn tons owing to 4.7% yoy decline in diesel sales and steep fall in FO/LSHS sales to 2.7mn tons . 8% yoy increase in gasoline volumes and 5.5% yoy rise in LPG sales helped offset the impact. Realizations were higher on the back of diesel price hikes implemented over the past 12 months.

Subsidy sharing witnesses marked change

During Q4 FY14, IOC’s gross under recoveries were at Rs204bn a growth of 9.2% yoy. Upstream companies shared Rs96bn while government paid Rss185bn resulting in over recoveries of Rs77.4bn. For FY14 gross under recoveries were at Rs729bn of which upstream companies compensated Rs347bn and government shared Rs371bn leaving Rs10.8bn to be borne by IOC. In FY13, IOC had borne Rs5.5bn.

GRMs decline sequentially, against market trend

IOC reported a sequential decline in GRMs from US$4.6/bbl in Q3 FY14 to US$2.2/bbl in Q4 FY14. This was starkly against market trend wherein benchmark Singapore GRMs saw strong growth. This was mainly on account of adventitious loss reported of Rs9.7bn against a gain of Rs9.2bn in Q3 FY14.

Petrochemical segment performance disappoints

Petrochemical segment reported volumes of 0.575mn tons as compared to 0.464mn tons in Q3 FY14 and 0.512mn tons in Q4 FY13. Revenues were also higher commensurately. However, EBIT for the quarter was at Rs1.3bn substantially lower when compared to Rs3.4bn in Q4 FY13 and Rs3.3bn in Q3 FY14.

Net profit of Rs94bn moderately ahead of estimates

IOC reported a net profit of Rs94bn as compared to a profit of Rs145bn in Q4 FY13. The fall was owing to 1) lower over recoveries, 2) decline in GRMs and 3) poor profitability in the petrochemical segment. Lower than expected other income was offset by lower than anticipated interest expenses. Overall net profit was at Rs94bn which was moderately ahead of our estimates.

Good play on reforms, Upgrade to BUY

With continued diesel price hikes, appreciating rupee and soft crude oil prices, there is a high probability that diesel under recoveries might be wiped out before the end of the current fiscal. This would substantially improve predictability of earnings for the entire OMC pack. Better cash flow from government will add to interest cost savings. ROEs should improve considerably over the next few years. This calls for a re-rating in for OMCs and hence we upgrade our rating to BUY from Market Performer with a revised price target of Rs420.