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A strong beginning to FY24E

Indian Oil Corporation’s (IOCL) Q1FY24 EBITDA and PAT of INR 221.6bn and INR 137.5bn beat our estimates of INR 175bn and INR 103bn, respectively. The numbers were also well ahead of Q1FY23 EBITDA of INR 13.6bn and net loss of INR 19.9bn. Reported GRM of USD 8.3/bbl in Q1FY24 was down by USD 6.9/bbl QoQ and USD 23.5/bbl YoY (in-line), while refining throughput was at 18.8mt (down 1% YoY, in-line). Marketing strength drove the outperformance, with sharply higher retail margins (blended margins at INR 8.8/ltr for Q1FY24) the key driver, even as marketing volumes of 24.4mt were down 1% YoY. We increase FY24E / FY25E EPS by 4.4% / 7.0% to factor-in the stronger margins. Our EV/EBITDA based target price thus stands increased to INR 120/sh. Maintain BUY.

Sharp sequential improvement in marketing margins

While overall marketing sales volumes of 24.4mt were down 1% YoY (flat QoQ) due to weaker diesel sales, margins showed sharp improvement in Q1. With sharply higher retail fuel margins and overall blended margin of INR 10,500/t (up 3x QoQ, 27% higher than our estimate), gross marketing earnings of INR 248.6bn were a sharp improvement both YoY (Q1FY23 loss of INR 185.9bn) and QoQ (up 3x). With an expected recovery in volumes and FY24 annualised retail margins likely to average at least INR 4-4.5/ltr for both petrol and diesel, we would expect marketing earnings to show strong growth in FY24E, even as Q1 is likely to remain the peak quarter for the year.

GRMs reflect the QoQ slowdown

The combination of volatile geopolitical worries, steady demand and refinery supply woes kept GRMs elevated in FY23, with benchmark Singapore GRMs at USD 10.8/bbl in FY23, up USD 2.2/bbl YoY. This was also reflected in IOCL’s GRMs for FY23, reaching a record USD 19.25/bbl for the year. However, global recession worries and lack of demand momentum in China in Q1FY24 have led to a sharp pull-back in GRMs, with SG GRMs declining by USD 4.1/bbl QoQ for the quarter and IOCL in turn seeing a sharp decline YoY and QoQ in its reported GRMs. We continue to believe however that the market will likely tighten in H2FY24E (please see here), hence we still factor-in GRMs of USD 10.5 for FY24E and USD 12/bbl for FY25E.

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