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Diversified portfolio augurs well

Indian Oil’s refining and marketing divisions contribute over 70% to its EBITDA. We expect the FY26 contribution of marketing a 45%, refining at 28%, petchem 11%, and pipeline 16%. Currently IOCL is the most diversified and least susceptible to issues of any division, among all OMCs.

Improved Marketing Outlook: Over the past few months, retail fuel margins have recovered from weaker numbers with a fall in crude and product prices which were not passed on as the RSP remains unchanged, this clearly weighs on the outlook for the marketing division. We expect gross marketing margins to be at par with past averages in a base case scenario, at the pre-deregulated of Rs2.7/ltr for both diesel and petrol.

GRM environment - super normal, to support earnings Lower global gasoil stocks and robust demand for petroleum products are expected to sustain, keeping key product cracks higher. The company is sourcing over 30% of its crude requirements from Russia, which is at a discount boosting GRMs, least amongst the Indian refiners. The benchmark Singapore GRM and the company’s GRM are trending higher than their last 10-year averages, supported by stronger demand, reduced supply, and lower stocks. We assume FY25 and FY26 GRMs of respectively $8.0 and $7.0/bbl vs the last 7-year average reported GRM of $7.7 and the Singapore GRM of $5.4.

Dividend bonanza: We believe that IOCL will report highest ever profitability in a year in FY24. This was supported by higher GRMs and an improved marketing performance on a fall in crude prices, though petchem was weaker and supported less. As per our expectations, IOCL in FY24 could declare a dividend of Rs15/share (a higher yield of ~11.5% at CMP), the company has already declared an interim dividend of Rs 5/share (yield of 3.8% at CMP).

Petchem segment: Given the slowing demand, especially in the US and Europe, the current global supply-demand balance will largely stay unchanged But, given likely higher demand from China (which has the strongest influence on demand), demandsupply balance could tilt toward the latter, and FY24 prices would remain weak. Having said that, considering predictions of a fall in oil prices, demand would fluctuate in line with China’s policy changes. Given this backdrop, the extent of improvement next year seems limited for the industry. We expect petchem spreads to improve end-FY25 only. IOCL’s FY23 production was at 4.27mmtpa, which is expected to rise to 9.68mmtpa by the end of the decade.

CGD: IOC has formed two JVs and has presence in 49 GAs in 21 states covering 112 districts, making it one of the largest CGD players in the country. On a standalone basis, it has 26 GAs, in 11 states comprising 75 districts. As penetration improves, we could see strong growth in this space.

Outlook: IOCL has a Rs34.2bn/Rs44.2bn sensitivity to a change of Rs0.5/ltr/$1/bbl, respectively. An expectation of higher dividend in FY24 (11.5% yield), 6.2%/5.4% FY25e/26e would be key for the shareholders, compensating of lower dividend of FY23. The BV/share for FY25e/26e is at Rs 121/129 and debt: equity at 0.7/0.6/0.5x for FY24e/25e/26e. At CMP, stock trades at 5.8x/6.3x FY25e/26e EV/EBITDA and 1.1x/1.0x P/BV (excl. investments, it trades at 5.2x/5.7x FY25e/26e EV/EBITDA and 0.9x/0.8x P/BV). We initiate coverage on it, with a BUY rating and a target price of Rs155 valuing it on a sum-of-parts basis (core business at 6.4x EV/EBITDA and investments at Rs21).

Risks: Lower GRM environment, change in crude prices and inventory losses, adverse government policy of subsidy-sharing, weak marketing margins environment, weaker petchem spreads.

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