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* Core operations improve led by healthy marketing margins.
* Easing political uncertainty post Central elections and benign crude oil prices from rising US supplies are likely to support stable earnings growth for the OMCs.
We maintain our FY20/21E earnings. During Q4, core performance for IOCL improved led by better marketing performance. Benign crude price outlook given rising US supplies and weak global macros is likely to keep marketing margins buoyant. Oil prices likely to remain benign, as rising US supplies cushions the impact of supply disruptions of over 3mbpd. Weak global macros and US-China trade dispute will prevent crude prices flare-up. Also, completion of Central elections is likely to ease policy overhang. Maintain ACCUMULATE.
IOCL reported steady Q4FY19 results with EBITDA of Rs108.7bn (PLe Rs103bn; -1%YoY) and PAT of Rs60.9bn (PLe Rs52.6bn; +17%YoY). Operational results came in line with our estimates, however, higher other income led to better than expected PAT. For Q4, inventory gain was at Rs26.4bn. For FY19, EBIDTA was at Rs338.2bn (-15%YoY) due to lower inventory gains of Rs41.7bn (Rs67.6bn in FY18) and weak GRMs of US$5.4/bbl vs US$8.5/bbl in FY18. PAT for FY19 was at Rs169bn (-21%YoY).
Core refining marings remain muted:
IOCL’s refining margins for Q4FY19 came in at US$4.1/bbl (Q3FY19 at US$1.2/bbl) and included inventory gains of Rs23.9bn or US$2.7/bbl. Adjusted for inventory and time lag, management expects GRMs at US$3.04/bbl against US$5.1/bbl in Q3FY19. For FY19, normalized GRMs were at US$4.8/bbl vis-à-vis US$7.37/bbl in FY18 due to lower gasoline spreads. GRMs are likely to improve going ahead as the company increase its heavy crude diet to ~40% in FY20E vs 21% last year.
Global GRM’s are likely to remain under pressure, as new refining capacity addition of ~ 2mbpd is higher than demand expectation of 1.1mbpd. However, OMCs with ~40% diesel product slate remain well placed to benefit from IMO2020 regulation which will increase diesel demand by >1mbpd if they are implemented immediately. For Q4, refining throughput was at 17.4MTPA (18.9MTPA in Q3) due to maintenance shutdown at the Panipat and Koyali refinery.
Marketing volumes lagged industry trend:
IOCL’s marketing volumes lagged industry run rate for HSD (2.3% YoY vs 4% for industry and for MS (8.2%YoY against industry rate of 9%YoY). For FY19 the company added 650 new retail outlets and plans to add 1000 new outlets in FY20E.
However, marketing earnings improved:
IOCL’s Q4FY19 marketing EBIDTA was at Rs68.5bn against loss of Rs3.9bn in Q3FY19. However, adjusted for inventory gains, core-marketing earnings for Q4 were at Rs65.9bn (Rs22.7bn in Q3) from smart recovery in margins.
Stable petrochemicals performance:
For Q4FY19, petrochemicals EBIDTA improved to Rs10.0bn against Rs9.7bn in Q3. However, pipeline business was steady with EBIDTA of Rs15.9bn (Rs16.1bn in Q3).
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