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Improving macros to aid IOCL the most among its peers

* IOCL reported a beat on our estimates owing to better than expected reported GRM (USD6.6/bbl) and marketing margin (INR7/liter), although refining throughput and marketing sales volumes were lower than our estimate. Petchem margin for IOCL fell by 23% QoQ, in line with the softening of PE/PP cracks in 2QFY22 (averaging 15-19% lower QoQ).

* Singapore GRM improved to an average of USD7.5/bbl in Oct’21 as demand continued to outweigh supply. Although gross marketing margin was slightly under pressure (to INR1.8/INR3.7 per liter for petrol/diesel in Oct’21; down INR1.3 and INR2.3 QoQ) due to a spurt in Brent prices, we expect the same to normalize to its long term average over the next couple of months.

* Petchem margin improved by 12%/7%/40% QoQ in Oct’21 till date for PE/PP/PVC on the back of a spike in product prices owing to power rationing measures in China. This would enable IOCL to improve margin in 3QFY22.

* Factoring in the above and the huge beat in 2Q, we revise our FY22E EPS by 8% (keeping our FY23-24E EPS unchanged).

* Standalone/consolidated debt declined to INR838b/INR993b at the end of 1HFY22 from INR927b/INR1,065b at the end of FY21. IOCL declared an interim dividend of INR5/share, which translates into a dividend yield of ~4% at its current market price.

* IOCL is likely to benefit the most from an uptick in refining margin, further aided by robust petchem margin in the near term (as mentioned above). We maintain our Buy rating on the stock.

Beat on our estimates led by better refining and marketing margin

* Standalone EBITDA stood at INR106b (up 13% YoY, but down 4% QoQ), with PAT at INR63.6b, translating into an EPS of INR6.9 (est. INR4.2).

* Refining: EBITDA stood at INR20.3b (-19% QoQ).

* Reported GRM came in higher than our estimate at USD6.6/bbl (est. USD3 and USD6.6 in 1QFY22), with refining throughput 5% below our estimate at 15.3mmt (-9% QoQ) owing to plant maintenance related shutdowns.

* Utilizations of high sulfur crude oil stood at 58% in 2QFY22 (v/s 54.5% in FY21), with the refinery capacity utilization rate at 87%.

* Marketing: EBITDA stood at INR53.8b (flat QoQ).

* Marketing margin (including inventory) came in higher at INR7/liter (est. INR5.5/liter; up 18% YoY and 12% QoQ), with sales volume marginally below our estimate at 17.2mmt (3% lower than our estimate, flat QoQ).

* Petchem: EBITDA stood at INR18.1b (+50% YoY, -9% QoQ).

* EBITDA/mt declined by 23% QoQ to USD318 (+41% YoY), although petchem sales were up 7% YoY and 17% QoQ to 0.77mmt.

* Pipeline: EBITDA stood at INR14.5b (+12% YoY, -8% QoQ).

* Throughput rose 13% YoY, but fell 2% QoQ to 19.5mmt, with total capacity utilization of the pipeline at 81%, impacted by lower petroleum product sales in 2QFY22.

Valuation and view – maintain Buy

* EBITDA rose 46% YoY to INR218b in 1HFY22, with adjusted PAT at INR123b (+51%). Refinery throughput increased by 19% YoY to 32mmt, and marketing volumes rose 14% to 34mmt. Reported GRM stood at USD6.6/bbl (v/s USD3.3/bbl in 1HFY21). Marketing margin stood at INR6.6/liter (v/s INR7.2/liter in 1HFY21).

* The management guided at a capex of INR285b for FY22. IOCL is set to commission various projects over the next three years further driving growth. Refinery projects currently underway are expected to be completed as follows: Panipat refinery (to 25mmtpa) by Sep’24, Gujarat refinery (to 18mmtpa) by Aug’23, and Baruni refinery (to 9mmtpa) by Apr’23. Three product pipelines are expected to be commissioned in 4QFY22.

* We expect the dividend payout to be around similar levels of 50% over FY22- 23E. We maintain our Buy rating, with a combined dividend and FCF yield of 14% over FY22-24E. IOCL trades at 7.8x consolidated FY23E EPS and 0.9x FY23E P/BV. We value the stock at 1.1x Dec’23E P/BV to arrive at our TP of INR160. We reiterate our Buy rating.

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