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IOCL reported a sizable earnings beat in Q3FY24, driven by the inventory gains surprise (refining at USD3.5/bbl vs est. USD2.5 loss). SA adj. EBITDA came in at Rs158.9bn. Core GRM was in line, at USD10/bbl. Marketing segment could also have logged inventory gains. Blended marketing margin was better, albeit largely offset by higher opex, with core EBITDA being inline. Domestic sales grew 1% YoY, while diesel was down 6% (below industry). Petchem EBIT turned negative at Rs2bn, due to lower deltas & volumes. Gross debt grew 7% QoQ to Rs1.06trn. OMCs remain well-poised in a strong marketing environment, as auto-fuel price-cuts remain elusive, and with nearing general elections and macros being stable. We raise FY24E EPS 25% and FY25/26E EPS 7-8% each on better refining outlook; retain ADD with revised Dec-24E TP of Rs160/sh.

Result Highlights

IOCL’s Q3FY24 SA R-PAT was down 38% QoQ to Rs80.6bn, but the over 3x beat to our estimate was primarily led by the EBITDA beat. Refining volumes were in-line at 18.5mmt (up 4% QoQ) with ~105% utilization. Petchem was hit by lower blended deltas, with volume down 16% QoQ. Assuming marketing inventory gain (not disclosed by IOCL) of ~Rs10bn in Q3 (vs Rs8.5bn loss built-in by us originally), blended marketing margin was at a 17% beat. Marketing volume rose 1% YoY domestically vs 2% for Industry, while total volume was at a marginal 1% beat to our estimate. Petrol/diesel sales grew/fell 3%/6% vs 5%/1% growth for the industry. Opex was 7% higher than expected, while D/A rose 32% QoQ to Rs43.4bn due to Rs6.4bn additional charge led by change in useful life & residual value. Interest cost fell 1% QQ. Other Income fell 15% YoY to Rs14.5bn, while forex loss was Rs1.0bn. Capex for 9MFY24, as per PPAC, was Rs270bn.

Other Highlights

Capex target for FY24 is Rs304bn, as per PPAC. Channel checks indicate that product inventories in the refining division led to sizable inventory gains, while crude inventory saw a loss. The marketing segment also saw inventory gains.

Valuation and Outlook

We value IOCL on SOTP-EV/EBITDA based methodology, with investments at a 30% holdco discount. We raise FY24E earnings by 25%, based on the prevailing run-rate. We rollover to Dec-25E and retain our blended target EV/EBITDA of 6.2x. Key risks: Adverse crude oil prices and downstream margins; currency movement; government policies; and project issues.

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