lioc 27.06.2014

NDB Securities (Pvt) Ltd, 5th Floor, # 40, NDB Building, Nawam Mawatha, Colombo 02. Tel: +94 11 2314170 Fax: +9411 2314180

Research Team – Waruna Singappuli, Suvimal De Costa, Akila Devendra, Vaishalie Shakespeare

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Main Shareholders As At 31.03.14 No. of Shares %Indian Oil Corporation Limited, India 400,000,005 75.12Bank of Ceylon A/c Ceybank Unit Trust 17,524,839 3.29Employee Provident Fund 15,911,915 2.99National Savings Bank 12,980,951 2.44JB Cocoshell (pvt) Ltd 8,308,083 1.56

LKR Mn FY10/11(A) FY11/12(A) FY12/13(A) FY13/14(A) FY14/15(E) FY15/16(E)Turnover 51,743 60,436 75,111 81,793 83,053 90,757Net profits 877 907 2,909 4,813 2,996 3,042EPS (LKR) 1.65 1.70 5.46 9.04 5.63 5.71Forward P/E*(X) 10.69 11.39 3.73 4.26 7.20 7.09DPS (LKR) 0.00 0.00 1.00 2.00 2.00 2.00Dividend Yield (%) 0.00 0.00 4.90 5.19 4.94 4.94BV (LKR) 17.30 19.00 24.46 32.01 35.63 39.35PBV* (X) 1.02 1.02 0.83 1.20 1.14 1.03ROE (%) 9.99 9.39 25.14 32.01 16.64 15.24Total debt/Equity (X) 0.66 0.50 0.42 0.34 0.36 0.26*P/E and PBV from FY10/11-FY12/13 have been calculated using the year-end share price,whilst current share price has been used for FY13/14-FY15/16.

Market Price As at 26.06.201452 Week RangeShares in IssueAverage Daily Volume (52 Weeks)Estimated Free Float (%) 24.88

Share DataLKR 38.00

LKR 24.20 - 44.50532,529,905

310,612

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Volume Adjusted ASPI Price

Lanka IOC PLC (LIOC) Earnings update

Margins for auto fuel segment threatened – The latest estimated increase of 4.0% in Brent crude oil price for 2014 to USD 110.26 per bbl (Source: Bloomberg) will bring down profit margins for FY14/15. This anticipated increase is as a result of the current unrest in Iraq, which happens to be OPEC’s second largest oil producer. To account for these margin pressures, we revise our previous revenue estimation downwards to LKR 59,297 Mn from LKR 60,094 Mn from total fuel distribution for FY14/15.

Overall reduction in revenue from Bunkering – Sri Lanka saw a contraction in the bunkering industry due to lacklustre industry conditions and increasing regional competition. In addition, during the year the entry of new players to the local industry may have led to intense competition and loss of market share for LIOC. LIOC has experienced over 25% decline in revenue from bunkering in FY13/14. However, considering this significant fall for last year, we anticipate the volumes to remain stagnant for FY14/15.

Sturdy cash balance to retain - According to our estimates, LIOC has the ability to retain a robust cash balance of above LKR 6,500 Mn even after paying out dividends and incurring capital expenditure for the next 3 years from FY14/15 to FY16/17.

Change in recommendation - Since our previous recommendation to BUY in April, the share has edged down by 4.8% compared to a rise in ASPI of 5.2%. Considering the likely reduction in earnings for FY14/15H1 compared to FY13/14H1 we have reduced the forward PER from 8.0X to 7.0X and therefore, the intrinsic value has declined.

(Please refer annexure for a description of the company)

Price Performance

Target Price – LKR 42.10 Recommendation – HOLD Analysts – Akila Devendra Date – 27.06.2014

NDB Securities (Pvt) Ltd – Lanka IOC PLC –27th June 2014 2

Bitumen and Lubricants showing positivity

The bitumen and lubricant industries have been growing with the expansion in the motor sector and growth in the economy. GDP growth of Sri Lanka for 2014 is expected to be 7.2% according to World Bank projections. Lubricants for FY13/14 saw an increase of 34% which is the highest for LIOC since FY08/09. We have estimated the lubricants to continue to witness gains with a CAGR of 13% for FY14/15-FY16/17 while bitumen is estimated to witness gains of 7.0% for FY14/15.


Income StatementLKR Mn FY10/11(A) FY11/12(A) FY12/13(A) FY13/14(A) FY14/15(E) FY15/16(E)Revenue 51,743 60,436 75,111 81,793 83,053 90,757Cost of Sales (50,217) (56,080) (69,721) (73,481) (76,927) (84,134)Gross Profit 1,526 4,357 5,389 8,312 6,126 6,623Other Operating Income 109 36 38 31 34 38Selling and distribution costs (24) (1,425) (1,676) (1,748) (1,973) (2,209)Administrative expenses (840) (1,011) (889) (875) (844) (990)Operating profit 770 1,956 2,862 5,719 3,343 3,462Net finance (expense)/income 124 (1,026) 128 43 242 173Profit before tax 893 931 2,991 5,762 3,585 3,635Tax (17) (24) (82) (948) (589) (593)Net profit after tax 877 907 2,909 4,813 2,996 3,042

Balance SheetLKR Mn FY10/11(A) FY11/12(A) FY12/13(A) FY13/14(A) FY14/15(E) FY15/16(E)Non current assetsProperty,plant & equipment 3,313 3,276 3,265 3,341 5,708 5,865Long term investment 4,394 4,394 4,394 4,394 4,394 4,394Intangible assets 681 679 678 677 675 674

8,388 8,348 8,337 8,412 10,777 10,933Current assetsInventories 6,710 8,813 10,240 7,929 8,400 9,385Current tax receivable 186 282 365 0 0 0Trade & other receivables 3,012 2,980 2,570 1,886 1,933 2,217Cash & cash equivalents 693 1,698 3,187 8,758 7,031 7,736

10,601 13,774 16,363 18,573 17,364 19,338Total assets 18,989 22,122 24,700 26,985 28,141 30,271

EquityStated capital 7,577 7,577 7,577 7,577 7,577 7,577Retained earnings 1,635 2,541 5,452 9,466 11,398 13,374Total equity 9,211 10,117 13,028 17,043 18,974 20,951

Non current liabilitiesRetirement benefit obligations 41 39 41 47 52 57Deferred tax lability 0 0 5 30 30 30

41 39 47 77 82 87Current liabilitiesTrade & other payables 5,115 7,705 7,258 3,213 3,583 4,356Borrowings 4,622 4,260 4,367 6,123 4,974 4,348Total current liabilities and provisions 9,737 11,966 11,625 9,864 9,085 9,233Total liabilities 9,778 12,005 11,672 9,942 9,167 9,320Total equity & liabilities 18,989 22,122 24,700 26,985 28,141 30,271

Segmental breakdownFY10/11(A) FY11/12(A) FY12/13(A) FY13/14(A) FY14/15(E) FY15/16(E)

RevenueFuel distribution 41,112 38,642 47,969 59,548 59,297 66,413Bunkering 7,305 14,587 17,336 12,905 13,531 13,650Lubricants 1,434 1,601 1,742 2,253 2,646 2,964Bitumen 1,891 5,606 7,262 7,086 7,579 7,730Other 0 0 801 0 0 0

51,743 60,436 75,111 81,793 83,053 90,757

Financials


Cash Flow StatementLKR Mn FY13/14(A) FY14/15(E) FY15/16(E)Profit Before Tax 5,762 3,585 3,635Depreciation 221 233 343Amortization 2 1 1Interest Income (301) (395) (369)Interest Expense 258 153 196

Change in Recievables 684 (47) (285)Change in Inventories 2,312 (471) (985)Change in Payables (4,045) 370 773

Change in retirement benefit obligations 6 5 5Cash generated from operations 4,898 3,435 3,315

Interest paid (115) (120) (105)Interest received 301 395 369Economic service charge and income tax paid (558) (589) (593)Net cash generated from operating activities 4,526 3,120 2,986

CF from investing activitiesPurchase of property plant and equipment (304) (2,600) (500)

(313) (2,600) (500)

CF from financing activitiesNet proceeds from borrowings 1,612 (1,182) (717)Dividend paid (533) (1,065) (1,065)

1,079 (2,246) (1,782)

Net increase/(decrease) in cash and cash equivalents 5,292 (1,726) 704Movement in cash & cash equivalentsAt start of year 3,187 8,758 7,031(Decrease)/ increase 5,292 (1,726) 704At end of year 8,479 7,031 7,736

Key Ratios FY10/11(A) FY11/12(A) FY12/13(A) FY13/14(A) FY14/15(E) FY15/16(E)Growth RatiosTurnover Growth (%) 3.04 16.80 24.28 8.90 1.54 9.28Gross Profit Growth (%) 510.82 185.52 23.71 54.22 -26.30 8.11Net Profit Growth (%) 307.36 3.51 220.62 65.47 -37.75 1.52Profitability RatiosGross Profit Margin (%) 2.95 7.21 7.18 10.16 7.38 7.30Net Profit Margin (%) 1.69 1.50 3.87 5.88 3.61 3.35ROE (%) 9.99 9.39 25.14 32.01 16.64 15.24Share RatiosEPS (LKR) 1.65 1.70 5.46 9.04 5.63 5.71DPS (LKR) 0.00 0.00 1.00 2.00 2.00 2.00Dividend Yield (%) 0.00 0.00 4.90 5.19 4.94 4.94BV (LKR) 17.30 19.00 24.46 32.01 35.63 39.35GearingTotal Debt/Equity (%) 50.18 42.11 33.52 35.92 26.21 20.75


Appendix

Company Description

Lanka IOC (LIOC) is a subsidiary of Indian Oil Corporation, a fortune 500 Company, which was established in Sri Lanka in 2002. LIOC was listed in the Colombo Stock Exchange in 2004. LIOC is currently one of the largest players in import and distribution of petroleum products in Sri Lanka.

LIOC has interest in following segments

• Fuel distribution • Bunkering • Bitumen • Lubricants

LIOC also holds a 33% stake in Ceylon Petroleum Storage Terminals Ltd, which is the Common User Facility in Colombo for storage and distribution of petroleum products in Sri Lanka. Further the company has heavily invested in tank storage development, China Bay tank farm, in Trincomalee.

Fuel distribution

LIOC sources its fuel from Singapore and Dubai through competitive bidding and distributes following fuels through 157 fuel outlets (105 owned, 52 franchise).

• Petrol (Octane 92) • Petrol (Octane 95) • Diesel • Super Diesel • Xtra Mile • Xtra Premium

LIOC is the second largest importer and distributor of fuel in Sri Lanka with about 12% market share. The fuel distribution takes place from the Common User Facility in Colombo and the China Bay tank farm.

Fuel distribution contributed to roughly 40.4% of the turnover in FY13/14 making it the largest business segment for LIOC in terms of revenue while it accounted for approximately 59% of gross profits.


Bunker operations

Since the start of its operations in 2009, LIOC has become one of the largest bunkering companies at the Port of Colombo. The bunker operations cater to vessels calling on the harbour for trade activities (approximately 60% of the sales volumes) as well as shipping vessels passing through on the east west sea trade route, one of the world’s busiest shipping lanes.

Following types of fuel are available at Colombo Port.

• Fuel Oil 380 cst • Fuel Oil 180 cst • Marine Gas Oil (MGO)

Fuel Oils are generally used to power ship engines and the two variants combined constitute to about 75% of the sales at the port of Colombo. MGO is used to power ship generators, which is used to power other on board equipment. Therefore in normal practice, ships when bunkering, purchase both Fuel Oil and MGO.

The SLPA operates a common storage facility with a capacity of 40,000 MT which is shared by the all the bunkering players. The bunker fuel is brought to the harbour by bunkering operators in their own vessels or chartered vessels and pumped into the common storage facility. The SLPA charges for the usage of storage facilities depending on the quantity and number of days at storage.

The bunkering at Port of Colombo is dominated by three main players.

• LIOC • Lanka Marine Services • Lanka Maritime Services

Source : NDBS research

Lanka Marine Services

LIOC

Lanka Maritime Services

Other

Colombo port bunkering market share


Bunkering contributed to roughly 15.8% of the turnover in FY13/14 while it accounted for approximately 12% of gross profits.

Source : Shipping density data adapted from National Center for Ecological Analysis and Synthesis, United States

Bitumen operation

LIOC started import and distribution of Bitumen in FY09/10 with the increasing public investments in infrastructure development. Bitumen, also known commonly as asphalt, is used as a binder mixed with aggregate to create asphalt cement in road works and other construction projects.

CPC is the largest distributor of bitumen in Sri Lanka, with bitumen produced as a by-product of refining crude oil. LIOC has however gained significant market share accounting for approximately 43.0% of imported bitumen in FY12/13.

Bitumen contributed to roughly 8.66% of the turnover in FY13/14 while it accounted for approximately 13% of gross profits.

Lubricants operation

LIOC started marketing lubricant under the Servo brand and in 2007 started operating a blending plant in Trincomalee. It is currently the second largest distributor of lubricants in Sri Lanka with majority of the products marketed in Sri Lanka blended in Trincomalee.

Lubricants contributed to roughly 2.8% of the turnover in FY13/14 while it accounted for approximately 3% of gross profits.


Board of Directors

• Mr. Makrand Nene– Chairman • Mr. Subodh Dakwale – Managing Director • Mr. Lakshman Ravendra Watawala • Mr. Rajiv Khanna • Mr. B. Ashok • Mr. Amitha Gooneratne


Mrs. Prasansini Mendis Chief Executive Officer [email protected] 011 2131005

Sales Branches

Head Office CSE

Mr. Gihan R. Cooray [email protected] 011 2131010 Mr. Sujeewa Athukorala [email protected] 011 3135495

Mr. Jayantha Samarasinghe [email protected] 011 2131011 Mrs. Shiromi De Silva [email protected] 011 2335054

Mr. Channaka Munasinghe [email protected] 011 2131014 Kiribathgoda

Mr. Aroos Faleel [email protected] 011 2131012 Mr. Gayan Pathirana [email protected] 011 2907515

Mr. Auburn Senn [email protected] 011 2131013 Matara

Mr. Uditha Silva [email protected] 011 2131016 Mr. Kithsiri Nishantha [email protected] 041 2236757

Mr. Taamara De Silva [email protected] 011 2131018 Mr. Srimal Gunawardana [email protected] 041 2236757

Mr. Imran Reyal [email protected] 012 2131021 Galle

Mr. Ramesh Anthony [email protected] 011 2131023 Mr. T A A Aravinda [email protected] 091 2225447

Mr. Nimal Kumara [email protected] 011 2131022 Gampaha

Mr. Sanjaya Prabath [email protected] 011 2131024 Mr. Chamesh Hettiarachchi [email protected] 033 2231117

Mr. Akram Thadani [email protected] 011 2131025 Mr. Uddeepa Peiris [email protected] 033 2231117

Mr. Ishanka Fernando [email protected] 011 2131054 Mr. Priyashantha Senevirathne [email protected] 033 2231117

Mr. Harsha Sritharan [email protected] 011 2131017 Kaluthara

Mr. Sajed Sallay [email protected] 011 2131019 Ranganath Wijethunge [email protected] 034 2221589

Mr. Stefan De Alwis [email protected] 011 2131015 Mr. A A Jeewantha [email protected] 035 2221589

Operations Jaffna

Mr. C Padmanathan [email protected] 021 5671155

Contacts Us [email protected] 011 2131000 Ms. Sanjika Ranjithkumar [email protected] 021 5671155

Rathnapura

NDB Securities (Pvt) Ltd Mr. Indrajith Lokuhettige [email protected] 045 2230800

5th Floor, NDB Building, Ampara

40, Nawam Mawatha, Colombo 02 Mr. Ravi De Mel [email protected] 063 2224245

NDB Securities (Pvt) Ltd


Disclaimer

This document is based on information obtained from sources believed to be reliable, but NDB Securities (Pvt) Ltd., (NDBS) accepts no responsibility or makes no warranties or representations, express or implied, as to whether the information provided in this document is accurate, complete or up-to-date. Furthermore, no representation or warranty is made by NDBS as to the sufficiency, relevance, importance, appropriateness, completeness or comprehensiveness of the information contained herein for any specific purpose. Prices, opinions and estimates reflect our judgment on the date of original publication and are subject to change at any time without notice. NDBS reserves the right to change their opinion at any point in time as they deem necessary. There is no guarantee that the target price for the stock will be met or that predicted business results for the company will be met. NDBS accepts no liability whatsoever for any direct or consequential loss or damage arising from any use of these reports or their contents. References to tax are based on our understanding of current law and Inland Revenue practices, which may change from time to time.

Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressee only and is not to be taken as substitution for the exercise of judgment by addressee. The information contained in any research report does not constitute an offer to sell securities or the solicitation of an offer to buy, or recommendation for investment in, any securities within Sri Lanka or any other jurisdiction. The information in any research report is not intended as financial advice. Moreover, none of the research reports is intended as a prospectus within the meaning of the applicable laws of any jurisdiction and none of the research reports is directed to any person in any country in which the distribution of such research report is unlawful. Past results do not guarantee future performance. NDBS cautions that any forward-looking statements in any research report implied by such words as “anticipate”, “believe”, “estimate”, “expect”, and similar expressions as they relate to a company or its management are not guarantees of future performance. The investments in undertakings, securities or other financial instruments involve risks. Any discussion of the risks contained herein should not be considered to be a disclosure of all risks or complete discussion of the risks which are mentioned.

NDBS and its associates, their directors, and/or employees may have positions in, and may affect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other financial services for these companies.

lioc 27.06.2014

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