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Inventory gains drive profits; demand recovery key...

Indian Oil Corporation (IOC) reported Q4FY21 profits better than our estimates, mainly driven by inventory gains. Revenues increased 11.6% QoQ to | 163605.7 crore (our estimate: | 170485 crore). The quarter saw strong inventory gains of US$8.1/bbl leading to reported GRMs at US$10.6/bbl (our estimate: US$4.5/bbl). EBITDA was at | 13501.8 crore (up 40.3% QoQ), above our estimate of | 7738.4 crore, mainly due to higher profitability in both refining and petchem segments. Subsequently, reported PAT was at | 8781.3 crore, up 78.6% QoQ (our estimate: | 3908.9 crore).

Marketing profitability weaker

Crude oil prices sharply increased during the quarter on expectations of global demand recovery. Average crude oil prices increased by US$16.1/bbl to US$60.7/bbl while Brent crude oil prices on a closing basis jumped US$11.2/bbl QoQ to US$62.4/bbl. The company declined to disclose marketing inventory details. Marketing margins were lower QoQ as higher crude oil costs were not fully passed on to customers. Subsequently, marketing segment’s profitability was relatively weaker. IOC’s marketing sales grew 2.4% YoY to 21.2 MMT marginally lower than estimate. Going ahead, we expect marketing sales at 85.8 MMT and 93.4 MMT for FY22E and FY23E, respectively. Crude throughput in Q4FY21 was up 2.9% YoY at 17.6 MMT, largely in line with estimate. Going ahead, we estimate throughput at 67.2 MMT and 70 MMT for FY22E and FY23E, respectively.

Core GRMs trend important, going ahead

Reported GRMs during the quarter were at US$10.6/bbl, above our estimate of US$4.5/bbl. Core GRMs were at US$2.5/bbl while inventory gain was US$8.1/bbl. Benchmark Singapore GRMs, while recovering from Q3 levels of US$1.2/bbl, still remained low at US$1.8/bbl in Q4FY21. Improvement in product cracks (mainly diesel) will be important for further recovery in GRMs. Going ahead, we expect GRMs at US$3.4/bbl for FY22E and US$4.3/bbl for FY23E.

Valuation & Outlook

Marketing sales increased YoY (on a lower base) during Q4FY21. However, in the current quarter (Q1FY22-TD), second wave of Covid-19 and subsequent restrictions on movement led to reduction in demand. Petrol, diesel sales fell ~33% in May 2021 vs. May 2019. Recovery in demand and steady marketing margins will be important for marketing segment, going ahead. While inventory gains supported overall refining margins, core GRMs are still weak and affecting the operational performance. Global demand recovery and improvement in product cracks will be key monitorable. We are neutral on IOC at the current juncture given the volatility in refining margins. We maintain HOLD on the stock with a revised target price of | 115/share (earlier | 105/share). We value the stock based on average of P/BV multiple: | 116/share, P/E multiple: | 115/share.

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