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A decent show
Post an inline performance in Q3, we maintain BUY on IOC with a TP of Rs 181. IOC was able to maintain its market share and margins in the quarter while the performance of the refining business was commendable in the midst of the current scenario.
HIGHLIGHTS OF THE QUARTER
* Refining: Creditable show in the current gloomy scenario with the benchmark S’pore GRM at USD 1.6/bbl, -62.8/-75.4% YoY/QoQ. Refining throughput was 17.5mmt (-7.8/-0.2% YoY/QoQ). Planned shutdown in Mathura and Bongaigaon refineries for BS-VI up-gradation led to the lower throughput. Crude throughput is expected to be lower in 4Q as well due to shutdowns for BS-VI. In FY21, annual throughput will improve in the absence of planned shutdowns.
* Core GRM (excluding inventory losses of USD 2.0/bbl) was USD 2.0/bbl in 3Q vs USD 2.9/bbl in 2Q. (1) Lower refinery utilisation (100.3% vs 103.8% for FY19) and, (2) Higher fuel and losses (8.8% vs 8.6% for FY19) have resulted in lower core GRMs. Operating expenses were up USD 1.5/bbl to USD3.5/bbl owing to higher expenses due to shutdowns.
* Marketing: IOC’s volume was 23.4mmt, +2.7/9.3% YoY, while India’s petroleum product consumption grew 2.6/7.7% YoY/QoQ. This implies that IOC gained market share in Q3. Blended gross margin stood at Rs 3.9/lit (- 5.9/-7.1% YoY/QoQ). These margins seem sustainable.
* IMO has failed to boost middle distillate, particularly diesel, cracks. Diesel cracks are at a 10-quarter low of USD 12/bbl in Q4FY20 as demand from ships to comply with IMO’s sulphur regulation has disappointed. Hence, we cut our GRM estimates for FY20/21E to USD 4/4.5/bbl from USD 4.6/4.8/bbl to factor-in 9MFY20 trends and outlook. Thus, our EPS estimates fall by 12/4.6% to Rs 14.5/19.4.
* Near term outlook: Increase in middle distillate cracks owing to IMO implementation.
We remain structurally positive owing to IOC’s diversified business model and healthy FCF of Rs 690.7bn over FY21- 22E. Our SOTP based target price is Rs 181 (5x Dec 21E EV/e for standalone refining, pipeline, petchem and 5.5x Dec 21E EV/e marketing and Rs 28/sh from other investments).
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