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Buy Indian Oil Corporation Ltd For Target Rs.175

Result Highlights: Earnings beat street estimates

* 1QFY22 Profitability:  Reported EBITDA and PAT stood at Rs 111.3bn (+102% YoY;  ‐24% QoQ) and Rs 59.4bn (+211% YoY;  ‐32% QoQ). The YoY growth stemmed from weaker base quarter as strict lockdown during Covid‐1st wave (Apr‐ Jun’20) severely impacted sales; the sequential decline however, was an aftermath of Covid ‐2nd wave.

* Refinery Utilization: The refinery throughput and utilization stood sequentially lower at 16.7mmt and 96% (4QFY21: 17.6mmt & 102%) on account of planned maintenance shutdown

* Gross Refinery Margin: The GRM for the quarter stood at USD 6.6/bbl (4QFY21: USD 10.6/bbl; 1QFY21: USD (2)/bbl), in‐sync with sequential improvement in Singapore Benchmark margins to USD 2.05/bbl (4QFY22: USD 1.8/bbl). The GRM, stipped of timing and inventory impact stood at USD 2.24/bbl.  

* Marketing sales: The total domestic sales for the quarter stood at 17.2mmt, 11% QoQ lower as sales momentum in 4QFY21 was derailed by Covid‐2nd wave. MS and HSD sales declined by 12% & 11% QoQ, respectively.  The industry sales on the other hand declined by 10.4% QoQ as MS and HSD declined by 13% & 10.5%, respectively. As we write, while MS sales have revived and stands 3.5% higher than Jul’19(pre‐covid), but HSD and ATF sales continue to lag.

* Marketing margins: The gross marketing margin during the quarter stood at Rs 5160 per ton, an improvement over previous quarter as HSD margins improved, but MS margins stood QoQ weaker. As we write MS margins have improved to ~ Rs 2/liter and HSD margins continue to be strong at ~Rs 5/liter.

* Petrochemicals: Petrochemical sales also declined 13% sequentially to 0.656mmt, as polypropylene capacity at Panipat continue to run at low utilization of ~ 60%. The polymer and polyester intermediate spreads came also came off from the highs seen in 4QFY21. The petchem EBITDA as result stood 12% QoQ lower at 19.9bn.

View & Valuation

The 1QFY22 earnings stood below our estimates but well above street estimates. The miss on our estimates stemmed primarily from a) lower than estimated HSD sales and b) lower than estimated inventory gains, even as c) forex losses at Rs (5.9)bn stood above our estimates.

We maintain our BUY rating on IOCL with a revised TP of 175 (from Rs 170/sh) as we roll estimates to FY24e.  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.  

Given company’s market share and infrastructure in place, we find the stock extremely undervalued, trading at just 6.0x FY23e (just ~3.5x FY23e adjusted for investment).

We value IOCL on SOTP basis, with standalone (SA) business valued at Rs 140/sh and investment in listed (valued at 20% hold‐co discount to market price) and unlisted entities  at ~ Rs 35/sh.  

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