IOC: Slick affair

Rising gross refining margins save the day for oil major.

Indian Oil Corporation (IOC), like other marketing companies, was able to report an improved performance on a y-o-y basis in the June 2007 quarter, thanks to surging gross refining margins (GRMs).

As a result, operating profit was Rs 1419 crore in Q1 FY08 compared with an operating loss of Rs 1288 crore a year earlier, while income from operations expanded 9 per cent y-o-y to Rs 52862 crore in the last quarter.

The company's refinery throughput was 12 million tonne in the last quarter compared with 10 million tonnes a year earlier. Of crucial importance, is that its GRMs were $10.7 a barrel in the June 2007 quarter compared with $6.7 a year ago.

Other oil marketing companies such as HPCL saw its GRM rising $9 a barrel at its Mumbai refinery in Q1 FY08 compared with $8 a year ago.

Meanwhile, upstream oil players provided IOC Rs 2,440 crore in the June quarter compared with Rs 3380.4 crore a year earlier, as part of the subsidy sharing formula relating to under-recoveries for retail sales of auto fuels, kerosone and domestic LPG.

IOC has highlighted that its net under-recoveries was Rs 4879.49 crore in the last quarter compared with Rs 5504.16 crore a year earlier.

Going forward, in sync with the global trend, IOC is expected to continue to enjoy strong GRMs. Also, IOC's financial health is expected to improve, like other OMCs, once it receives the oil bonds from the central government. At Rs 401, the stock trades at nearly 8 times estimated FY08 earnings.

Shopper's Stop: Expenses hitch

A 13 per cent y-o-y increase in same-store sales for Shopper's Stop in the June 2007 quarter may seem subdued when compared with the same-store growth in FY07 of 21 per cent, but four of its 22 stores are being renovated. Otherwise, net sales for the quarter were up a fairly sprightly 26 per cent at Rs 231.5 crore.

The bad news is that costs remained high; new stores meant higher expenses on account of leases and other items, so that the operating profit margin fell 50 basis points to 6 per cent though the operating profit was up 15.8 per cent at Rs 13.86 crore.

The EBITDA margin for the full year FY07 had expanded 50 basis points to 7.8 per cent. Moreover, the profit after tax in the June 2007 has dropped sharply to Rs 1.97 crore from Rs 5.4 crore in the June 2006 quarter, mainly owing to the depreciation and amortisation more than doubling to Rs 9.3 crore.

The company is seeing huge cost increases "" heads such as employees saw particularly high jumps (38 per cent) though the retailer was able to get a better deal from suppliers. Besides, selling expenses during the quarter remained more or less flat because the June 2006 quarter had seen high expenses on an advertising campaign.

At the current price of Rs 550, the stock trades at 38 times estimated FY08 earnings and most of the near term upsides appear to be priced in and the recently opened MotherCare, MAC and F&B brands, will take time to contribute to the bottom line.

Tata Power: Margin pressure

Tata Power sold increased units of power on a y-o-y basis in the June 2007 quarter, but a rising operational cost structure put pressure on operating profit margins.

As a result, operating profit (excluding other income) declined 2.2 per cent y-o-y to Rs 252.4 crore in the last quarter, while net revenues grew 10.5 per cent to Rs 1511.5 crore.

Its operating profit margin also fell 220 basis points y-o-y to 16.7 per cent in Q1 FY08. Reliance Energy also saw its operating margin declining 880 basis points y-o-y to 2.3 per cent in the last quarter.

Meanwhile, Tata Power sold 4.056 billion units in the last quarter, a growth of 6.5 per cent y-o-y. Its realisations were estimated at Rs 3.67 per unit in Q1 FY08, compared with Rs 3.52 per unit a year earlier.

No doubt the company got higher realisations on a y-o-y basis in the last quarter, but it was not adequate to offset an 8 per cent y-o-y rise in the cost of fuel and an 18 per cent rise in cost of power purchased.

The company is implementing several expansion projects currently, which will come up after a few years. However for the short term, Tata Power's ability to manage input costs will remain crucial. At Rs 670, the stock trades at 22 times estimated FY08 earnings, given its holdings in group companies in such as Tata Teleservices, VSNL and others.

With contributions from Amriteshwar Mathur and Shobhana Subramanian