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GRM recovery sustaining key to outlook

Indian Oil Corporation’s (IOC) Q2FY22 consolidated EPS is up 3% YoY despite fall in reported GRM, driven by jump in petrochemical EBITDA and marketing margin. Auto fuel net marketing margin in FY22-TD is at Rs2.5/l, same as our FY22E estimate. Singapore GRM surged to US$7.5/bbl in Oct’21 on fall in Chinese throughput, Asian and US auto fuel inventories and very high gas prices boosting oil demand. GRM recovery sustaining is key to IOC’s outlook; a cold winter may ensure GRM strength sustains in FY23E, but there are headwinds too. We have raised our: 1) FY22E EPS by 52% on factoring H1 inventory gains and upgrading GRM, 2) FY22E EBITDA based target price by 28% to Rs137, and 3) FY23E EPS by 6% on upgrade in marketing margin to Rs2.5/l. Maintain HOLD.

* Q2 EPS up 3% YoY driven by petrochemical EBITDA and marketing margin jump: Standalone Q2FY22 EPS is up 2% YoY driven by: 1) 50% YoY rise in petrochemical EBITDA to Rs18.1bn, 2) 34% YoY rise in marketing margin to Rs3.5/l, and 3) estimated 5.9x YoY rise in product inventory gain to Rs4.5bn. Reported GRM was down 24% YoY to US$6.55/bbl while core GRM at US$4.81/bbl was higher compared to minus US$0.97/bbl in Q2FY21. Excluding inventory gain/loss, Q2 standalone EPS is up 6.9x YoY. Q2 consolidated EPS YoY growth was modest at 3% YoY despite surge in share of profit of JV/associates by 3.2x YoY due to 76% YoY fall in profit of subsidiary Chennai Petroleum (CPCL).

* Marketing margins YTD and FY22E at Rs2.5/l: Net auto fuel marketing margin is at Rs2.48/l in FY22-TD vs our FY22E estimate of Rs2.5/l. To keep margins at this level, more price hikes are required, which we are confident would be made.

* Recent Singapore GRM surge bodes well for FY22E outlook; cold winter may keep GRM strong in FY23E, but there are headwinds too: Reuters Singapore GRM is at a 25-month high of US$7.5/bbl in Oct’21 driven by transportation fuel cracks at 21-69 month high. IOC’s GRM lags Singapore GRM partly due to temporary factors. We expect GRM strength to sustain in rest of FY22E. Capacity additions of 1.3m b/d, new covid waves and rebound in Chinese and US refinery utilisation are risks to the strength sustaining, but a severe winter that keeps gas prices high and demand recovery can keep GRM strong even in FY23E.

* Raise FY22E-FY23E EPS and target price: We have raised our core FY22E GRM estimate to US$4/bbl from US$3/bbl and factored-in H1 crude and product inventory gain of ~Rs92bn including that of subsidiary CPCL. However, we have cut our throughput and sales volume to factor-in the impact of covid in H1. The net impact is upgrade in FY22E EPS by 52%. Target price based on 6x FY22E EV/EBITDA excluding inventory gains is up by 28% to Rs137 (4% upside). We have raised our FY23E EPS by 6% mainly on increase in auto fuel net marketing margin to Rs2.5/l from Rs2.25/l earlier. GRM estimate remains unchanged at US$4.5/bbl.

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