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Better-than-expected margins drive beat

* IOCL reported a beat on our estimates, led by higher-than-estimated reported GRM (USD6.6/bbl), marketing margins (INR6.2/lit), and marketing sales volumes (-6% QoQ – despite the second COVID wave led lockdowns). Thus, EBITDA stood at INR111b (+65% est., +102% YoY, -18% QoQ), with PAT at INR59b (+211% YoY, -32% QoQ).

* SG GRM is averaging higher MoM at USD2.9/bbl in July (v/s USD2/bbl in 1QFY22), the highest ever since the COVID outbreak in Feb'20. Recovery is entirely driven by higher demand for gasoline (margins at USD10.1; +USD3 MoM); while ATF and gasoil margins remain the same MoM at USD4.3/4.7.

* With the total phasing out of the COVID lockdowns and closure of refinery complexes (est ~3mnbopd over the next 2–3 years), the refining margin would return to its long-term average (of USD5–6/bbl).

* Consol. debt declined further to INR857b in 1QFY22 (down 16% v/s endFY21). We maintain Buy, with combined FCF yield and dividend of ~21-25% over FY22–24E. It trades at 6.1x consol. FY23E EPS and 0.7x FY23E PBV.

Marketing margin outshines; petchem margin remains robust

* Refining: EBITDA stood at INR24.9b (-61% QoQ).

* Refining throughput was in-line at 16.7mmt (+29% YoY; -5% QoQ), translating to a utilization rate of 96% in 1QFY22.

* Reported GRM came in at USD6.6/bbl (our est. of USD5/bbl) v/s –USD2/bbl in 1QFY21 and USD10.6/bbl in 4QFY21.

* The utilization of high sulfur crude oil stood at 56.0% in 1QFY22 (v/s 54.8% in 4QFY21 and 54.5% in FY21).

* Marketing: EBITDA stood at INR54.3b (+58% QoQ).

* Marketing sales volumes came in at 17.2mmt (+21% YoY; -6% QoQ).

* Marketing margin (incl. inv.) were at INR6.2/lit (v/s our est. INR4.1).

* Petchem: EBITDA stood at INR19.9b (+173% YoY; -12% QoQ).

* EBITDA/mt continued to be robust at USD412 (flat QoQ v/s our estimate of USD356), while petchem sales were down 11% QoQ to 0.66mmt.

* Petchem margins for IOCL were robust (flat QoQ) despite PE/PP delta softening from multi-year highs (since the start of 1QFY22) and averaging 5%/9% lower QoQ.

* Pipeline: EBITDA stood at INR15.7b (+37% YoY; -2% QoQ).

* Throughput was up 32% YoY and down 9% QoQ to 19.9mmt, with the total pipeline capacity utilization at 83% – impacted by lower petroleum product demand amid the lockdowns.

Valuation and view – maintain Buy

* The capex guidance for FY22 stands at INR285b. The company is set to commission various projects over the next three years, which would drive further growth. The refinery projects currently underway are expected to be completed as follows: the Panipat refinery (to 25mmtpa) by Sep’24, Gujarat refinery (to 18mmtpa) by Aug’23, and Baruni refinery (to 9mmtpa) by Apr’23. Three products’ pipelines are 85–94% complete and expected to be commissioned in 4QFY22.

* IOCL has traded at a huge discount in the recent past decade owing to its capex cycle and CPSE-led liquidity. We value it at 1.1x Sep’23 PBV, to arrive at TP of INR157. Maintain Buy.

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