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Strong GRM steals the show in 1QFY23

* IOCL reported an EBITDA of INR13.6b (-88% YoY) ahead of our estimates of negative INR8.4b. The beat was mainly driven by robust reported GRM at USD31.8/bbl (v/s our estimate of USD25.8/bbl) with core GRM being at USD25.3/bbl.

* In the refining segment, throughput came in at 18.9mmt (+13% YoY) that was broadly in line with our estimate (of 18mmt) with an all-time high GRM of USD31.8/bbl. High GRM is primarily led by high Singapore GRM, which was at an all-time high of ~USD21/bbl in 1QFY23 (long-term avg of USD2-4/ bbl).

* In the marketing segment, both domestic sales volumes and export volumes remained strong, which were up 23% and 6% YoY to 21.3mmt and 1.7mmt, respectively. However, OMCs are estimated to have generated losses of INR8.8/INR12.4 per liter on petrol/diesel, respectively, in 1QFY23.

* While petchem margins remained modest in 1QFY23 (up 9%/4%/1% QoQ for PE/PP/PVC, respectively) they were muted in Jul’22 compared with 1QFY23 average cracks due to lower product prices. Petchem sales volumes also declined 2% YoY/17% QoQ to 0.64mmt in 1QFY23.

* Factoring in the aforementioned reasons, we lower our FY23E EBITDA by 24% due to downward revision in our GRM assumption for 2QFY23 to USD7.8/bbl v/s USD19.6/ bbl earlier (keeping FY24E broadly unchanged).

* IOCL is likely to benefit the most among its peers from an uptick in refining margin, further supported by robust near-term petchem margin. We value the stock at 2.5x FY24E P/BV to arrive at our TP of INR100. We maintain our BUY rating on the stock with a 37% upside potential.

GRM remains robust; refining throughput in line

* IOCL’s standalone EBITDA came in at INR13.6b (down 88% YoY) and it posted a loss of INR19.9b (v/s profit of INR60b in 4QFY22 and INR59b in 1QFY22).

* Utilization of high sulphur crude oil was 57.9% in 1QFY23 (v/s 61.2% in 4QFY22), with refinery capacity utilization rate at 108.4%.

* IOCL reported GRM of USD31.8/bbl (v/s our estimate of USD25.8/ bbl) with core GRM at USD25.3/bbl. Refinery throughput was largely in line at 18.9mmt.

* Gross marketing margin (including inventory) was negative INR7.6/liter in 1QFY23 (v/s INR2.3/liter in 4QFY22) with domestic sales of products at 21.3mmt.

* Petchem EBITDA/mt stood at USD199 (+19% QoQ, -51% YoY); Petchem sales volumes declined 2% YoY/17% QoQ to 0.64mmt.

Valuation and View

* IOCL is set to commission various projects over the next three years driving growth further. Refinery projects currently underway are expected to be completed as follows as per earlier guidance: Panipat refinery (to 25mmtpa) by Sep’24, Gujarat refinery (to 18mmtpa) by Aug’23 and Baruni refinery (to 9mmtpa) by Apr’23.

* Given the aggressive guidance of upcoming projects, we have assumed a capex of INR250b for FY23/24E with ROCE profile of 6-7%.

* We expect dividend payout to be around similar levels of 51% for FY23-24 as well. The stock trades at 5.6x consol. FY24E EPS and 1.8x FY24E PBV. IOCL is likely to benefit the most among its peers from an uptick in refining margin, further supported by robust petchem margin in the near term. We value the stock at 2.5x FY24E P/BV to arrive at our target price of INR100. We maintain our BUY rating on the stock with 37% upside potential.

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