IOC: Refining profits

Improved performance of its refinery division, subsidy sharing help the oil major tide over under-recoveries.

Indian Oil Corporation, unlike other oil marketing companies, was able to offset its under-recoveries on the sale of petroleum products in the September 2007 quarter via an improved performance of its refinery division.

In addition, the company has accounted for Rs 6362.3 crore in oil bonds in Q2 FY08 compared with Rs 7168 crore a year earlier.

IOC's operating profit grew 31.4 per cent y-o-y to Rs 5121.3 crore in Q2, while its total operational income (including oil bonds) fell 2.9 per cent to Rs 56,148.7 crore. Its operating profit margin also improved 235 basis points y-o-y to 9.1 per cent in Q2 FY08.

In case of HPCL, the operating profit margin declined 160 basis points y-o-y to 5.4 per cent in Q2 FY08. Meanwhile, IOC's refinery throughput was 11.04 million tonnes in Q2 FY08 compared with 10.51 million tonnes a year earlier.

The company also highlighted that its gross refining margin was $8.44 a barrel in the first half of FY08 compared with $3.13 a barrel a year earlier. The regional benchmark Singapore refining margin was $6.4 a barrel in the September 2007 quarter.

Also, upstream players such as ONGC and GAIL, as part of the subsidy sharing formula provided Rs 2526.07 crore to IOC in the September 2007 quarter, as compared with Rs 3427.5 crore a year earlier.

Improved performance of the refinery division, coupled with subsidy sharing by upstream players helped IOC offset the under-recoveries related to retail sales of petroleum products in the September 2007 quarter.

Going forward, refining margins for IOC are expected to remain strong on a y-o-y basis, given the shortage of global refining capacity.

However, with the government being reluctant to raise petroleum product prices, IOC will have to rely on the remaining oil bonds that it is entitled to receive in the second half of FY08 and subsidy sharing by upstream players.

Jet Airways: Domestic blues

It's been another disappointing result for India's leading private sector carrier Jet Airways. The airline has seen revenues grow at a sluggish 12.6 per cent y-o-y to Rs 1,819 crore in Q2 FY08, thanks to the domestic business faring poorly.

With start-up costs incurred on new routes to Newark, New York and Toronto sectors launched during the quarter, Jet posted an operating loss of Rs 101 crore.

However, it has managed a positive EBITDAR (earnings before interest, tax, depreciation and rentals) margin of 1.35 per cent though the margin was lower by about 70 basis points y-o-y.

A sale and lease back income of Rs 310 crore helped it turn in a net profit of Rs 28.4 crore. Revenues in the home market fell 4.2 per cent indicating that competition continues to be fierce and that demand is not growing fast enough to match the capacity that the industry is adding.

The capacity added by Indian carriers has slowed down to 38 per cent in Q2 FY08 from about 50 per cent last year, but the benefits of consolidation don't seem to be visible as yet even in a booming economy.

The international operations continue to do well "" revenues were up 108 per cent at Rs 560 crore in Q2FY08 "" and Jet has broken even on the southeast Asian routes with average passenger loads of 75 per cent.

The carrier plans to start services to the Gulf region from 2008 and with a hub in Brussels, it proposes to launch services to five other destinations in the US.

Jet's business will be increasingly driven by its overseas operations, which currently account for 32 per cent of revenues and should contribute half the airline's turnover over the next couple of years.

The stock has rallied from its lows and now trades at Rs 830 levels. However, the domestic environment remains competitive and it could be a while before conditions turn favourable for the industry.

Moreover, Jet is planning a rights issue of $400 million, to fund a portion of its aircraft purchase, which might create an overhang of equity in the counter.

With contributions from Amriteshwar Mathur and Shobhana Subramanian