IGI Logo

LPG subsidy restricts Q2 losses, GRMs better, valuations reasonable

* IOCL reported Q2FY23 S/A adj. (ex-subsidy) EBITDA loss of Rs57.1bn vs. our loss est. of Rs86.8bn on better-than-expected GRMs. Adj. net loss stood at Rs82bn (vs. Rs107.9bn loss est). One-time LPG subsidy of Rs108bn led to reported net loss narrowing to Rs2.4bn.

* Reported/core GRM was USD18.5/bbl each (vs. USD7.6/14.0 est.), implying surprisingly nil inventory loss. While marketing inventory loss is undisclosed, implied blended margin could be negative Rs5/kg+ (vs. –Rs2.3 est.) with a sizeable miss in non-auto LPG margins.

* The marketing margin miss, nil refining inventory loss, and treatment of windfall taxes are unclear; and with continuing auto fuel RSP freeze and limited subsidy, FY23 earnings look clouded. Pricing should, however normalize post-Gujarat elections and inflation easing.

* We have cut FY23E EPS by 33%, building higher marketing losses, lower petchem earnings, and forex losses (FY24/25E slightly changed). We have cut our Sept-23E TP by 5% to Rs85 but retain Buy on a reasonable valuation of 0.7x PB. We expect a better H2.

Highlights: Employee costs were 20% below our estimate at Rs21.9bn, while other expenditure rose 20% yoy/6% qoq to Rs111.3bn (3% above est.). Other income rose 73% yoy to Rs22bn, while forex loss was high at Rs30.5bn in Q2. Interest cost fell 16% qoq to Rs14.4bn, though gross debt was up 29% qoq at Rs1.40trn on higher working capital needs. Petchem EBIT loss was Rs1.3bn (vs. +Rs2.9bn est.), with volume down 17% qoq. Refinery utilization stood at 91% in Q2 due to turnaround. High sulfur crude share fell from 58-60% to 55% in Q2. IOCL’s domestic sales volume was up 14% yoy vs. 10% for the industry with petrol/diesel up 15%/24% vs. 9%/11%. Exports were down during the quarter. Q2FY23 capex stood at Rs79bn as per PPAC. Core EPS remained negative in Q2.

Guidance: There was not much RTP benefit from windfall taxes as IOCL only procures some volumes from CPCL in the domestic market. Results were impacted by slump in marketing margins. Capex target remains unchanged.

Outlook: FY23 earnings outlook remains cloudy and we have lowered our estimates but directionally building some profits for the year. Marketing under-recovery on diesel persists at Rs10-12/ltr; hence, RSP hikes are required. We believe pricing should normalize post-Gujarat elections. With a counter-cyclical international propane-butane pricing this time, LPG margins have turned positive. We have raised our GRM assumptions for FY23 while lowering marketing and petchem earnings. We stay constructive on OMCs on reasonable valuations at 0.7x S/A PB and potential recovery in marketing margins and expecting significantly better overall earnings in H2FY23

Valuation: We value IOCL on SOTP basis, with core business at 5.5x Sep-24E EV/EBITDA (unchanged) and investments at 30% holdco discount. We retain our Buy rating on the stock. Key risks: Adverse commodity prices and margins/currency/polices and project issues

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer