Published on 14/02/2020 9:13:04 AM | Source: HDFC Securities Ltd

Buy Indian Oil Corporation Ltd For Target Rs.181 - HDFC Securities

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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.



* 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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