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Earnings beat estimates on strong GRMs   

Our View:

IOCL’s 1QFY23 operating profit at Rs 17.6bn (?84% YoY; ?85% QoQ), stood ahead of our estimates primarily on stronger than estimated refining margins. IOCL’s GRM at USD 31.8/bbl, including an inventory gain of USD 6.5/bbl, stood ahead of our estimate of ~USD 24.5/bbl. However, the YoY & QoQ weakness in operating profitability was directionally in line with expectation, as deep losses in retailing of MS and HSD along with plausible inventory losses, were bound to weigh on earnings. MS and HSD crack spreads touched historical highs during the quarter, fueling refining profits at one hand, but impacting marketing margins on the other as retail price revisions remained stagnant. As we write, refining cracks have corrected significantly, which would normalize GRMs but would also reduce marketing losses in MS and HSD, reducing the need for price revisions. We find IOCL’s cashflows therefore fairly hedged, in addition presence of petrochemicals segment aids diversification. BUY

Result Highlights

* Profitability:  While reported EBITDA for the 1QFY23 stood at Rs 17.6bn (?84% YoY; ?85% QoQ); on after?tax basis IOCL reported a loss of Rs 19.9bn, as against a profit of Rs 61.5bn in 4QFY22 and Rs 59.4bn in 1QFY21. While the profitability during the quarter was aided by a) strong GRM of USD 31.8/bbl and b) 22% YoY & 6% QoQ growth in petroleum sales, the same was significantly weighed down by losses in retail sales of MS (~Rs 13/ltr) and HSD (~Rs 17/ltr), leading to an after tax loss.

* Refinery Utilization: The refining throughput at 18.9mmt stood 13.2% YoY and 5% QoQ higher, implying 108% utilization, as IOCL raised run rate to benefit from strong refining environment.

* Gross Refinery Margin: The GRM stood at USD 31,8/bbl, ahead of our   expectations, as compared to USD 18.5/bbl in previous quarter and USD 6.6/bbl in same quarter last year. The strength in GRMs is likely driven by increase  in MS, HSD & ATF crack in aftermath of Russia?Ukraine conflict in addition to an inventory gain of USD 6.5/bbl.

* Marketing sales: The total domestic sales for the quarter stood at 21.3mmt, higher by 23% YoY and 6% on QoQ basis, marginally ahead of our estimates. MS sales for IOCL stood at 3.66mmt (+34% YoY; +16% QoQ), and HSD at 10.4mmt (+31YoY; +17% QoQ). In the same period, while overall sales of petrol in the country, stood at 8.8mmt (+29.4% YoY & 10.7% QoQ), the sales of HSD stood at 22.16mmt ( +20.4% YoY & +7.7 QoQ), respectively. We estimate a market share gain for IOCL for both products during the quarter.

* Marketing margins: As per our estimates, the gross marketing margin during the quarter stood at a loss of Rs 8258 per ton, adjusted for plausible inventory loss, on account of weaker retail margins in Petrol and Diesel.

* Petrochemicals: Petrochemical sales at 0.64mmt, stood weaker by 2% YoY and 17% QoQ. The Petchem Ebit stood at Rs 2.7bn (?85% YoY; ?53% QoQ), weaker as margins were impacted by higher raw material cost (naphtha).

Valuation

Given company’s market share and infrastructure in place, we find the stock extremely undervalued, trading at P/E of just 4.0x FY24e and 0.6x FY24 BV. We value IOCL on SOTP basis, with standalone (SA) business valued at Rs 86/sh and investment in listed (valued at 30% hold?co discount to market price) and unlisted entities  at ~ Rs 28/sh.

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