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GRMs strong; marketing recovery key

Indian Oil Corporation (IOCL) reported a 21% YoY decline in standalone EBITDA to Rs116.3bn and a 38% YoY dip in net earnings to Rs60.2bn vs I-Sec estimates of Rs125bn EBITDA and Rs76bn PAT in Q4FY22. Earnings decline was driven by a sharp decline in retail fuel margins for petrol and diesel with estimated net loss of Rs1.4/ltr for petrol and Rs1.6/ltr for diesel for the quarter. The dip in marketing earnings has, however, been offset somewhat by continued strength in GRMs, which averaged US$18.7/bbl for Q4FY22, up US$8.1/bbl YoY, US$6.6/bbl QoQ, well above I-Sec estimates of US$15.5/bbl. FY22 EBITDA/PAT of Rs432.4/241.7bn has improved 10.7/6.1% YoY, respectively. Sustained improvement in GRMs, attractive valuations, bonus issue (1:2 declared with Q4 result) and robust dividend yield (@>10% for FY22) coupled with our assumptions of some normalcy returning to marketing margins over the next 12 months, make IOCL an attractive play at current prices. Re-initiating coverage on IOCL with BUY rating, TP of Rs165/sh, ~~40% upside from CMP

Q4FY22 result impacted by marketing woes: YoY performance was flat due to high retail fuel losses for petrol/diesel but despite the losses, PAT has still risen by 3% QoQ, driven by a US$6.6/bbl QoQ jump in GRMs

Consolidated EPS jumps on CPCL outperformance. FY22 consolidated EPS growth was 8% YoY primarily due to stellar numbers from subsidiary CPCL (CPCL’s Q4FY22 PAT has jumped 4x YoY; FY22 PAT has jumped 5x YoY)

GRMs to stay elevated, normalisation of marketing margins key: The combination of volatile geopolitical worries, steady demand and refinery supply woes should keep GRMs elevated albeit we do expect some normalisation from current levels of ~US$21/bbl (average for Q1’23TD till 13-05-22). We estimate average GRMs of US$15/bbl for IOCL in FY23E. The more critical monitorable for IOCL remains abysmal marketing margins, with the freeze on retail fuel prices implying loss on petrol/diesel at Rs1.4/1.6 per ltr for the quarter. We believe H2FY23E should see some normalisation of the pricing policy and factor minimal retail fuel margin of Rs0.5/ltr for FY23E.

Re-initiate coverage with BUY: We believe consolidated EBITDA and PAT will decline by an average of ~4.9% over FY22-24E. PAT will decline by 5% with a sharp jump in earnings over FY23E to moderate over FY24E, driven by our assumptions of normalisation in GRMs and marketing margins over the period. Valuations of 5.2x FY24E PER, 4.6x EV/EBITDA and 0.7x P/BV are attractive and we believe dividend yield of ~10%, announced and improved prospects of subsidiary CPCL, make riskreward favourable for IOCL. Our FY24E EV/EBITDA based valuation of Rs165/sh implies 40% upside. Re-initiate coverage on the stock with BUY rating.

Key Risks: continued suspension of fuel price hikes, sudden downturn in GRMs, slowdown in fuel consumption.

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