Buy Indian Oil Corporation Ltd : Reported numbers beat estimates on higher GRMs; petchem outperforms - Emkay Global
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Reported numbers beat estimates on higher GRMs; petchem outperforms
* Q4FY21 standalone EBITDA came in at Rs147.0bn, up ~4x yoy/53% qoq with a 40% beat, driven by higher GRMs and petchem margins. PAT of Rs87.8bn (up 79% qoq) was a 40% beat, with lower ETR of 20% offsetting higher interest, lower other income and impairment.
* Reported GRM in Q4 was USD10.6/bbl (est.: USD6.0) while price lag adj. GRM was USD2.51. Total marketing sales volume rose 1.7% yoy to 22.6mmt, with domestic up 2.4% yoy to 21.2mmt. Reported marketing EBITDA halved qoq to Rs34.4bn due to impairment.
* Petchem EBITDA rose 15% qoq to Rs22.5bn, driven by a 22% uptick in margin though volumes declined 5%. Pipeline EBITDA fell 5% to Rs16.1bn due to a 6% decline in margins, while volumes stayed flat. Gross debt rose 41% qoq to Rs1.03trn (down 4% yoy).
* We cut FY22E/23E EPS by 10% each as we factor in lower marketing margins due to volatile oil prices. We raise TP by 18% to Rs130, after lowering our net debt estimate based on reported FY21 numbers. Maintain Buy rating on IOCL with an EW stance in sector EAP.
Highlights: IOCL’s Other Expenditure rose 12% qoq/9% yoy to Rs94.4bn. Employee cost was higher by 9%/48% qoq/yoy to Rs31.4bn with a bonus provision of Rs18bn. Interest cost jumped 71% qoq to Rs10.7bn. Other Income was a 23% miss. Refinery utilization stayed flat qoq at 102%, while segment EBITDA stood at Rs63.8bn. Petrol/diesel sales grew 8.2%/2.2% yoy vs. industry’s 9.7%/4.1%. There was a marketing segment impairment of Rs12.0bn on PMUY loans. For FY21, IOCL’s EBITDA/APAT rose 73%/134% to Rs392.7bn/228.0bn, driven by a jump in GRMs, marketing margins and petchem earnings. Volumes were down 10%. Interest costs declined 48%, while forex gain was Rs11.5bn. IOCL incurred Rs270bn capex (incl. JVs/subs). Final dividend of Rs1.5/sh was recommended with Rs12.0 in total. Q4- end debt included Rs79.1bn of lease liability, while subsidy receivables fell to Rs6.8bn.
Guidance: Management expects GRMs to improve due to vaccine rollout and better demand. GRMs in Q4 were driven by inventory gains but the company will no longer disclose it. As of May, debt is down to Rs870bn. Petrol/diesel sales volume in May is down 33%/35% vs. CY19 for three OMCs. IOCL would purchase Iran crude when sanctions are lifted. Barauni/Gujarat/Panipat refinery expansions will be completed by Apr’23/Aug’24/Sep’24. Demand should continue to grow. IOCL’s project IRR hurdle rate is 11%. LMO supply has not affected overall petchem operations, and naphtha cracker/LAB units are operating at 110%+ in May. FY22 capex guidance is Rs285bn, with Rs50bn/66bn/50bn/26bn on refining/marketing/pipelines/petchem. Annual outlet addition run-rate of 2,000-3,000 should continue. Hydrogen plant monetization is aimed at inducting a partner to improve efficiency.
Valuation: We value IOCL on a SoTP basis with 6x blended target FY23E EV/EBITDA for the standalone business. Key risks: Adverse petroleum prices/margins/currency/govt actions
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