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Marketing margin & GRM rise key to outlook

Indian Oil Corporation’s (IOC) Q4FY21 recurring EPS is up 4x YoY driven by inventory gain vs loss, petrochemical EBITDA jump and fall in interest cost. FY21 recurring EPS is also up 4x YoY driven by same factors as in Q4 besides 37% YoY rise in auto fuel net marketing margin. We have raised FY22E EPS by 4% and target price by 5% to Rs110 (3% upside) mainly on upgrade in petrochemical EBITDA to reflect the recent margin strength and outlook. Net marketing margin is weak in FY22-TD at Rs0.43/l. Rs2.05-2.5/l price hike is required to boost it to Rs2.5/l, which is our FY22 estimate. We are optimistic about future hikes given the government’s track record. IOC’s GRM is weak in FY22-TD and recovery in diesel cracks is key to GRM rising to our FY22 estimate of US$3/bbl. We downgrade IOC to HOLD from ADD as we await GRM and marketing margin recovery.

Q4 EPS surge driven by inventory gain and petrochemical EBITDA jump:

Standalone Q4FY21 recurring EPS is up 4.3x YoY driven by 1) estimated crude and product inventory gain of Rs84bn vs loss of Rs185bn in Q4FY20; 2) 4.7x YoY jump in petrochemical EBITDA to Rs22.5bn and 3) 42% YoY fall in interest cost (debt is down 12% YoY but up 41% QoQ to Rs1,023bn in end-Mar’21). Reported GRM was US$12.5/bbl vs minus US$9.6/bbl in Q4FY20 while core GRM at US$4.5/bbl is down 44% YoY vs US$8.2/bbl in Q4FY20. Net marketing margin was down 61% YoY at Rs1.2/l. Excluding inventory gain/loss, Q4 standalone EPS is down 84% YoY. Consolidated recurring Q4 profit stood at Rs90.3bn vs loss of Rs5.5bn in Q4FY20; share of profit from JV/associates is up 6% YoY driven by subsidiary Chennai Petroleum’s recurring profit of Rs2.3bn vs loss of Rs16.4bn in Q4FY20.

Auto fuel marketing margin weak in FY22-TD, need hikes to boost it:

Auto fuel net marketing margin was up 37% YoY at Rs3.05/l in FY21. It is weak at Rs0.66/l on 19-May’21 and Rs0.43/l in FY22-TD despite petrol and diesel price hikes of Rs2.5- 2.8/l in the last two weeks. Net margin is estimated at Rs0.39/l on 1-Jun’21 and Rs0.79/l on 16-Jun’21. Price hike or excise duty cut (not passed on) of Rs2.05-2.5/l is needed for net margin to rise to Rs2.5/l, which is also our FY22 estimate.

Core GRM up QoQ in Q1FY22-TD:

We estimate IOC’s Q1FY22-TD GRM at US$0.79/bbl. For GRM to rise to our FY22 estimate US$3/bbl, diesel cracks, which are at US$5.1/bbl in FY22-TD need to rise to over ~US$10/bbl. Gradual recovery in global demand as vaccines are rolled out may help diesel cracks and GRM recover

Raise FY22E EPS and target price:

We have cut IOC’s FY22E GRM to US3/bbl from US$3.4/bbl earlier but raised petrochemical EBITDA estimate by 45% to Rs70bn to reflect the strength in petrochemical margins due to snowstorm in the US gulf coast in Feb’21; IOC’s petrochemical EBITDA was at Rs19.5-22.5bn in Q3-Q4FY21 and we estimate it at Rs23bn in Q1FY22E. The net impact is an upgrade in FY22E EPS by 4% and target price by 5% to Rs110 (3% upside). Recovery in auto fuel marketing margin and GRM is key to improvement in IOC’s stock performance

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