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Mixed Q1 performance; Outlook intact

Indian Oil Corporation Limited manufactures petroleum & petroleum products in addition to exploration & refining of crude oil. Its products include lubricating oils, liquid petroleum gas, aviation turbine fuels etc.

* Q1FY22 revenue rose 74.3% YoY due to higher demand compared to last year. However, revenue declined 5.2% QoQ on sequential slowness in demand with increase in COVID cases.

* Refinery throughput fell 5.0% QoQ to 16.7mmt due to lower demand because of plant shutdown amidst COVID second wave.

* EBITDA margin contracted 190bps QoQ to 7.1% (+70bps YoY) due to increase in cost of materials.

* The recent movement in oil prices with Delta variant of COVID and OPEC+ output should boost the performance of the company in the medium-term. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 126 based on SOTP valuation.

Topline impacted sequentially with slowness in demand

In Q1FY22, IOCL’s revenue increased 74.3% YoY to Rs. 155,056cr due to increase in demand for petroleum products and petrochemicals. However, on sequential basis, revenue declined 5.2% on slowness in demand for these products amidst rising COVID cases. Petroleum products sales increased 75.1% YoY to Rs. 149,193cr (-5.0% QoQ) and Petrochemicals grew 105.8% YoY to Rs. 5,829cr (-8.7% QoQ). Domestic sales volume rose 22.9% YoY to 18.7mmt (-11.6% QoQ) and export sales increased by 25.8% YoY to 1.6mmt (+13.9% QoQ). Average GRM stood at US$6.6/bbl vs. US$(2.0)/bbl in Q1FY21. However, normalized GRMs stood at US$2.2/bbl vs. Singapore GRM of US$2.1/bbl in Q1FY22 after adjusting for inventory impact.

Higher material cost dents profitability on QoQ basis

EBITDA fell 25.3% QoQ to Rs. 10,986cr (+94.5% YoY) with increase in cost of materials (+13.2% QoQ), partially offset by purchase of stock in trade (-21.3% QoQ). Hence, Reported PAT also decreased 32.3% QoQ to Rs. 5,941cr (+210.9% YoY), further impacted by higher interest costs (+17.2% QoQ) and lower other income (-48.8% QoQ), partially offset by decline in taxes (-14.4% QoQ).

Key concall highlights

• The company has +30k automated retail outlets to ensure correct pricing and quantity. Also, it commissioned 83 mobile dispensers in Q1FY22.

• Refinery throughput fell 5.0% QoQ to 16.7mmt (+29.3% YoY) with capacity utilization of 96.2% vs. 102.4% in Q4FY21. This decline in throughput was primarily due to plant shutdown amid COVID second wave.

• Average crude price increased ~12% QoQ to US$67.5/bbl (+121% YoY). MS cracks improved to US$7.6/bbl vs. US$5.4/bbl in Q4FY21.

Valuation

In 1QFY22, the company saw limited impact from the increase in COVID cases compared to prior year period. The oil prices declined in global market due to Delta variant and increase in OPEC+ output, which should aid operating margins in the medium-term.

Also, the company plans to produce more clean energy products with its news collaborations with Phinergy. New products and low oil prices should boost company’s performance. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 126 based on SOTP valuation.

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