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Better marketing, petchem margins drive beat

* Better marketing and petchem margins, along with lower refining opex of USD2.5/bbl (v/s USD3.3–3.5 in 3QFY20–2QFY21), resulted in a beat on EBITDA.

* Adjusted. (for inventory gains) EBITDA stood at INR70b (v/s our est. of INR60b). Notably, inventory gains were ~INR6.6b higher than estimates.

* IOCL declared an interim dividend of ~INR7.5/share (resulting in dividend yield of ~8% on CMP).

* Among the OMCs, we reiterate IOCL as our top pick, on the back of a diversified EBITDA mix (Marketing: 43%, Refining: 23%, others: 34% in FY19) – with the best free cash flow generation profile going forward.

* The stock is trading at 6.5x FY23 EV/EBITDA and 0.8x FY23 PBV. Valuing it on 1.2x Sep’22, we recommend Buy, with Target Price of INR142.

Beat on EBITDA led by inventory gains…

* EBITDA at INR96.2b reported a beat (+21% est.; +41% YoY). Forex gains came in higher than est. at INR3.7b (our est.: -INR0.3b). Interest cost was lower at INR6.3b, weighed by adjustment for forex gains (~INR2b in 3Q). Thus, PBT stood ~54% higher than est. at INR78b. Tax rate was 36.9% as the company made additional provisions of INR15.9b under the ‘Vivad se Vishwas’ scheme. Reported PAT stood at INR49.2b (+110% YoY).

* For 9MFY21, reported EBITDA stood at INR246b (v/s INR143b in 9MFY20), with PBT gains of INR188b (v/s loss of INR91b in 9MFY20).

…and good operating metrics

* Refining: Reported GRM came in below est. at USD2.2/bbl (v/s our est. of USD4). Refining inventory gains of INR9.2b translate to USD1; thus, core GRM came in at USD1.3/bbl (v/s our est. of USD2.0).

* Refining throughput was in line with our est. at 17.9mmt (+2% YoY, +28% QoQ), with utilization rate at 101.7%.

* Refining EBITDA reported loss of INR3.3b (v/s gains of INR5.5b in 3QFY20).

* Marketing: Sales volumes were in line with our est. at 19.7mmt (-4% YoY). On the other hand, marketing margins were higher than est. at INR6.5/lit (v/s est. of INR5.3; +36% YoY, +11% QoQ). Marketing EBITDA came in at INR71.3b (+82% YoY). Marketing inventory gains stood at INR17.1b.

* Petchem: EBITDA came in at INR19.5b (+163% YoY), with sales at 0.77mmt (+22% YoY, +7% QoQ) and implied EBITDA/mt at USD344 (v/s our est. of USD280; +109% YoY). Naphtha cracks declined QoQ, while PE-PP Delta improved QoQ on account of improved product prices, led by strong demand from downstream manufacturers.

* Pipeline: EBITDA was up 10% YoY to INR17b, with total pipeline capacity utilization at 103.1%; demand normalization was seen post COVID.

Valuation and view – preferred pick among OMCs

* Currently, retail auto fuel prices in India have reached all-time highs, although gross marketing margins are at INR3.3–4.3/lit (v/s INR4.5–5/lit in 3QFY21). Also, gross marketing margins in FY21’TD average INR6.5–7/lit (well above the longterm average of ~INR3/lit).

* Also, petroleum product demand in India clocked growth, exceeding pre-COVID levels in Dec’20. We reiterate our belief in the sustainability of marketing margins around the long-term average (if not higher) – while aiding poor refining margins in the short term.

* IOCL is likely to benefit from the petchem spread, currently at multi-year highs; although, we expect the spreads to normalize as capacity additions from China continue to create a glut in the global market.

* Now that the company is out of its capex cycle, it is expected to report positive FCF yield of 15–18% over FY22–23 (despite heavy capex of INR260b in FY21). IOCL’s debt stands at INR724.5b (unchanged QoQ).

* Return ratios are set to improve and the discount gap to peers should shrink as refining margins move up the trough.

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