Indian Oil Corporation - 9M EPS surges; margin recovery key to outlook - ICICI Securities

Indian Oil Corporation's (IOC) Q3FY21 standalone and consolidated recurring EPS are up 175-145% YoY driven by rise in inventory gain, marketing margin, other income, petrochemical EBITDA and fall in interest cost. Excluding inventory gain/loss, Q3 standalone EPS is up 250% YoY. 9M standalone and consolidated recurring EPS are up 140-129% YoY. Factoring-in the 9M inventory gain has led to 2% upgrade in FY21E EPS, but target price remains unchanged at Rs105 (6x FY22E EBITDA). While GRMs continue to be weak, even net auto fuel marketing margin has turned weak. Net margin needs to recover (Rs1.05/l at latest prices) at least by Apr'21, so that FY22E margin is at Rs2.0-2.5/l. We remain optimistic of net margin recovery given the government's track record. Marketing margin recovery is key to IOC's share price not correcting, and GRM recovery to share price rising. IOC is trading at 0.85x FY21E P/BV and dividend yield of 9.6%. Reiterate ADD.

- Q3FY21 EPS surges on petrochemical, marketing margin & inventory gain rise: Standalone Q3FY21 EPS is up 175% YoY, driven by: 1) 76% YoY rise in marketing margin to Rs3.1/l; 2) 2.6x YoY jump in petrochemical EBITDA; 3) 46% YoY rise in crude and product inventory gain to Rs26.3bn; 4) 52% YoY fall in interest cost (debt is down 21% to Rs725bn in end-Dec'20 from Rs915bn in end-Sep'20); and 5) 123% YoY rise in other income to Rs12.7bn. The rise is despite 48% YoY fall in reported GRM to US$2.1/bbl (vs US$4.1/bbl in Q3FY20). Core GRM at US$1.2/bbl is down 42% YoY. Consolidated recurring Q3 EPS is up 145% YoY; rise in share of profit from JV/associates is up just 27% YoY. Refining subsidiary Chennai Petroleum's recurring profit stood at Rs1.4bn vs just Rs64mn in Q3FY20.

- Auto fuel marketing margin up from lows on price hikes; more hikes needed: Auto fuel net marketing margin is estimated at Rs3.73/l in FY21-TD, but is weak at Rs1.03/l in Q4-TD. Net margin slipped to a low of Rs0.24/l on 16-Jan'21, but price hikes of Rs1.6/l since then has boosted the net margin to Rs1.57/l on 29-Jan'21; it is estimated at Rs1.11/l on 1-Feb and Rs1.05/l on 16-Feb'21. Price hike or excise duty cut of Rs1.75/l, which is not passed on to consumers, is needed for net margin to be Rs2.5/l at latest international prices.

- Core GRM in the red, but in the black due to inventory gain in Q4-TD: We estimate IOC's Q4FY21-TD core GRM at minus US$0.24/bbl and that including inventory gain of US$0.85/bbl at US$0.60/bbl.

- Raise FY21E EPS: We have raised our inventory gain estimate to Rs31.8bn (actual in 9M) vs Rs28.6bn earlier. This has led to upgrade in FY21E EPS by 2%. Target price remains unchanged at Rs105 (13% upside). Recovery in auto fuel marketing margin and in GRM, as global demand recovers on vaccine rollout and refinery closures boost global utilisation, are key to improvement in IOC's stock performance. We are assuming IOC's net marketing margin at Rs2.5/l (Rs3.3/l in FY21E) and GRM at US$3.4/bbl (US$2.3/bbl in FY21E) in FY22E.

Shares of INDIAN OIL CORPORATION LTD. was last trading in BSE at Rs.93.3 as compared to the previous close of Rs. 92.65. The total number of shares traded during the day was 4495845 in over 15851 trades.

The stock hit an intraday high of Rs. 96.35 and intraday low of 92.75. The net turnover during the day was Rs. 423802070.

Source : Equity Bulls

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