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Excise duty cut impacts marketing margins; reported GRM jumps

* IOCL posted Q3FY22 standalone EBITDA/PAT of Rs94.1bn/Rs58.6bn, down 15%/8% qoq. EBITDA missed our estimate by 43% due to low marketing income, which was affected by a one-time inventory loss resulting from a cut in auto-fuel excise duty in Nov’21.

* Reported GRM of USD12.0/bbl was better than our USD9.5 estimate, while normalized GRM was also healthy at ~USD9/bbl. Refinery utilization stood at 99% in Q3. Total marketing volumes beat by 5%, with domestic sales down 2% yoy vs. 4% for the industry.

* Based on BPCL’s run-rate, assuming Rs33bn of marketing inventory losses, IOCL’s blended margin is estimated to decline by 23% qoq to Rs5.3/kg. Gross debt (ex-lease liabilities) rose by 5% qoq to Rs883.2bn. We estimate a core EPS of Rs6.4/sh in Q3.

* We raise FY22/FY23/FY24 EPS estimates by 17%/3%/3%, building in higher GRMs and other income in FY22, and roll over valuations from Dec’23E to Mar’24E. We raise our Mar’23E SOTP-based TP by 7% to Rs160. Retain Buy with an EW stance.

Highlights: Other expenditure rose by 22% yoy/17% qoq to Rs107.2bn. IOCL has reported a provision write-back of Rs4.71bn separately. Hence, the other expenditure run-rate could be lower, similar to HPCL/BPCL. Employee costs were down 7% yoy/flat qoq at Rs26.9bn. Other income increased 9% qoq to Rs13.8bn. Interest costs, however, were flat qoq at Rs9.79bn, while the forex loss was marginal Rs150mn. The tax rate was lower at 21.6%. Though normalized GRM was USD9/bbl, we expect core GRM to be at USD9/bbl+. Refining volumes rose 14% qoq to 17.4mmt (down 3% yoy). Petrol/diesel sales volumes were up 1%/down 4% yoy. Sequentially, IOCL’s marketing margin decline seems to be more than peers, affected by non-transport fuels (we believe LPG). Q3/9MFY22 capex was Rs77.4bn/185.6bn. The board has declared a second interim dividend of Rs4/sh.

Guidance: Q3FY22 earnings were driven by better GRMs, while 9MFY22 numbers were supported by inventory gains. FY22/23 capex guidance as per Union Budget is Rs285bn each, with petchem capex at Rs52-53bn. Petchem EBITDA fell by 50% yoy/46% qoq to Rs9.82bn, with margins down 45%/42% and volumes also lower by 10%/7%. Pipeline EBITDA improved by 14% qoq to Rs16.5bn though being down 3% yoy. Pipeline volumes rose 11% qoq/flat yoy at 21.8mmt. Reported refining EBITDA in Q3 was Rs75.9bn, which implies a range-bound opex, while marketing was Rs4bn loss (opex down qoq). Other segment EBITDA was Rs14.1bn. Refinery distillate yield, fuel & loss and high sulfur crude diet were largely in the range at 80%, 9% and 59%, respectively.

Valuation: We value IOCL on a SOTP basis at 5.9x blended Mar’24E EV/EBITDA and investments with a 30% holdco discount. We roll over valuations to Mar’24. We have raised FY22E EPS by 17% due to significantly higher GRMs in Q3 and due to adjustments in belowthe-operating line items based on 9M numbers. We retain Buy on IOCL on the back of attractive valuations and a dividend yield of 7-8%. Key risks are adverse petroleum prices/margins/currency, project delays, and adverse policies and political scenario.

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