Maintain ADD on Indian Oil Corporation - Inventory losses dent profitability - HDFC Securities

Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities.

Indian Oil Corporation (Q4FY20): Inventory losses dent profitability. Maintain ADD
(TP Rs 94, CMP Rs 87, MCap Rs 820bn)

We maintain ADD on IOC with a TP of INR 94 owing to an expected recovery in demand for petroleum products and subsequently, refining margins.

View on the result: In 4Q, the EBITDA loss was higher than our estimates owing to higher than estimated inventory loss, USD (17.4)/bbl vs. est. (12.1).

EBITDA: 4QFY20 EBITDA loss came at INR 111bn (est. loss INR 57bn) vs. operating profit of INR 109/67bn in 4QFY19/3QFY20. Refining business' inventory losses were INR 161bn and marketing inventory losses were INR 23bn. Forex losses stood at INR 27bn. Adjusting for these, core EBITDA comes to INR 101bn (+101/37% YoY/QoQ). For FY20, inventory loss/forex loss came to INR 166/39bn and core EBITDA stood at INR 274bn (-12% YoY).

Refining: Crude throughput in 4Q stood at 17.1mmt (-1/-2% YoY/QoQ). Core GRM stood at USD 7.8/bbl vs USD 1.5/2.0 in 4QFY19/3QFY20. GRMs improved with higher naphtha, LPG cracks and fuel oil cracks. For FY20, crude throughput and core GRM stood at 69.4mmt (-3% YoY) and USD 4.1/bbl (vs. USD 4.6 in FY19).

Marketing: Domestic marketing sales volume was 22.2mmt (-2/-5% YoY/QoQ). India's petroleum product consumption contracted by 5/3% YoY/QoQ, thus demonstrating that IOCL gained market share on an annual basis and lost market share sequentially. Blended gross margin for 4Q stood at INR 4.7/lit (-16/+15% YoY/QoQ) and seems sustainable in the near term.

Adjustments in 4Q: Reported loss post tax of INR 52bn in 4Q has been adjusted for (1) Inventory loss of INR 113bn, and (2) Deferred tax of INR 37bn. Lower demand for crude oil and petroleum products impacted prices and in turn refining margins. Due to this, part of IOCL's inventory has been valued at net realizable value/replacement costs resulting in a loss of INR 113bn. The company moved to the lower tax regime of 25.2% in the quarter and availed benefit of deferred tax that has been adjusted to arrive at APAT.

Outlook for FY21/22E: Standalone crude/marketing throughput is expected to dip by 10/9% YoY to 62.5/76.3mmt in FY21 and recover subsequently by 14/6% in FY22 to 71.1/80.9mmt in FY22. Core GRM should decline to USD 3.4/bbl from USD 4.1/bbl in FY21, courtesy lower gasoil and gasoline cracks. Thereafter in FY22, GRMs should recover to USD 3.9/bbl (+14.4% YoY). Gross margin, however, should remain at current levels of INR 4.3 per litre in FY21/22 vs INR 4.2 in FY20.

Change in estimates: We raise our standalone FY21/22 EPS estimate to INR 4.4/10.3 vs. (0.4)/9.2 owing to the change in tax rate to 25.2%. We raise our Core GRM estimates by USD 1.4/0 per barrel to USD 3.4/3.9 for FY21/22.

Shares of INDIAN OIL CORPORATION LTD. was last trading in BSE at Rs.85.05 as compared to the previous close of Rs. 87. The total number of shares traded during the day was 1175603 in over 5154 trades.

The stock hit an intraday high of Rs. 88.15 and intraday low of 84.7. The net turnover during the day was Rs. 101075236.

Source : Equity Bulls

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