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In‐line earnings; maintain BUY

Our view

The 2QFY22 operating profits at Rs 106bn (+13% YoY; ‐4% QoQ)  stood largely in‐line with our (YES: Rs 99.5bn) but ahead of street estimates (Rs 87.8bn). While refining and petrochemical margins stood stronger than estimated, they were offset by weaker than estimated marketing margins. Strong recovery in petroleum consumption from transportation sector as Covid‐2nd wave abated coupled with switch for heating/power from LNG to petroleum, aided refining margins environment. The refining and marketing margins continue to be healthy, as we write.   We maintain our BUY rating on IOCL with a TP of 175/sh. Our recommendation is premised upon sustained recovery in domestic petroleum consumption, as the GDP growth in India gains traction. As per IEA estimates the petroluem consumption in the country is expected to increase by 50% to 306mmtoe by 2030. IOCL being the largest petroleum marketker stands to gain from the trend.  

Result Highlights

* 2QFY22 Profitability:  Reported EBITDA and PAT stood at Rs 106.3bn (+13% YoY; ‐4% QoQ) and Rs 63bn (+2% YoY; +7% QoQ). 22% QoQ lower interest costs at Rs9.8 bn, helped offset sequentially weaker EBITDA. On a YoY basis, the growth in operating profits stemmed from improvement across segments, other than refining which stood weaker YoY. On a sequential basis however, profitability stood weaker across the segments, offset by stronger earnings in ‘others’ segment.

* Refinery Utilization: The refinery throughput and utilization stood sequentially lower at 15.3mmt and 87% (1QFY22: 16.7mmt & 96.2%).

* Gross Refinery Margin: The GRM for the quarter stood at USD 6.55/bbl (1QFY22: USD 6.58/bbl; 2QFY21: USD 8.6/bbl), in‐sync with sequential improvement in Singapore Benchmark margins to USD 3.8/bbl (2QFY22: USD 2.05/bbl). A separate disclosure of inventory gain is discontinued by IOCL.

* Marketing sales: The total domestic sales for the quarter stood at 17.2mmt, largely flat on sequential basis. While MS sales improved by 15% QoQ, HSD sales declined by 7% on sequential basis. In the same period, overall sales of petrol in the country, however improved by 18% QoQ whereas HSD declined by 6% QoQ, implying loss of market share for IOCL.

* Marketing margins: The gross marketing margin during the quarter stood at Rs 5770 per ton, an improvement over previous quarter as MS margins improved, while HSD remained firm. As we write MS and HSD margins continue to be close to normalized levels.

* Petrochemicals: Petrochemical sales improved by 17% sequentially to 0.769mmt. The petchem Ebitda nevertheless stood weaker by 9% QoQ, at Rs 18bn.

Valuation

Given company’s market share and infrastructure in place, we find the stock extremely undervalued, trading at just 6.7x FY24e (just ~3.4x FY24e adjusted for investment). We value IOCL on SOTP basis, with standalone (SA) business valued at Rs 144/sh and investment in listed (valued at 30% hold‐co discount to market price) and unlisted entities  at ~ Rs 32/sh.

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