Maintain ADD on Indian Oil Corporation - High inventory losses drag earnings - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

We maintain ADD on IOC with a target price of INR 96, owing to an expected recovery in demand for petroleum products and, subsequently, refining margins in 2HFY21E. 1Q EBITDA and APAT were 13% and 18% below estimates, owing to higher-than-anticipated inventory losses. EBITDA came to INR 55bn (-29% YoY) vs the operating loss of INR 111bn in 4QFY20. Refining business' inventory losses were INR 6bn, and marketing inventory losses were INR 32bn. Forex gains stood at INR 1bn. Adjusting for these, the core EBITDA stood at INR 86bn (+35/-15% YoY/QoQ).

Refining: Crude throughput in 1Q stood at 12.9mmt (-25% YoY and QoQ). Lower utilisation across refineries, given the lower demand amid the lockdown, led to lower throughput. Core GRM stood at USD 4.3/bbl vs USD 3.6/7.8 in 1QFY20/4QFY20. Core GRMs declined sequentially with fall in naphtha, gas oil, gasoline and jet kero cracks.

Marketing: Domestic marketing sales volume was 16.5mmt (-24/-26% YoY/QoQ). India's petroleum product consumption contracted by 26/23% YoY/QoQ, thus demonstrating that IOCL gained market share on an annual basis and lost market share sequentially. Blended gross margin stood at INR 6.0/lit (+49/30% YoY/QoQ) in 1Q, but these do not seem sustainable in the near term. We expect the blended gross margin to correct INR ~4.3 in FY21/22E.

Px and PTA complex project at Odisha: The board approved the project at an investment of INR 138bn. The plant has a capacity of 800kTPA (Px) and 1.2mmt (PTA) and should be operational by 1HFY24.

Change in estimates: We raise our FY21E crude throughput estimate by 1% from 62.5mmt to 63.4mmt due to higher-than-anticipated throughput in 1Q. It leads to a 2% increase in our EPS estimate of INR 6.3/share in FY21.

Our SOTP target comes to INR 96/sh (5.0x Mar-22E EV/e for standalone refining, marketing and petchem businesses and 5.5x Mar-22E EV/e for pipeline business and INR 26/sh for other investments). The stock is currently trading at 7.4x on FY22E EPS.

Shares of INDIAN OIL CORPORATION LTD. was last trading in BSE at Rs.87 as compared to the previous close of Rs. 86.2. The total number of shares traded during the day was 2647226 in over 3983 trades.

The stock hit an intraday high of Rs. 87.4 and intraday low of 85.85. The net turnover during the day was Rs. 230231787.

Source : Equity Bulls

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