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Strong earnings momentum to continue

Q3FY24 PAT at INR 81bn     

Indian Oil Corporation (IOCL IN) reported Q3FY24 PAT of INR 81bn (Elara: INR 55bn), down 38% QoQ versus INR 4.5bn in Q3FY23. The YoY growth was driven by margin recovery in Diesel led by lower crude prices. GRM at USD 13.5/bbl beat estimates of USD 7.6/bbl.           

Diesel margin down QoQ; gasoline margin strong

As per our calculations, retail diesel margin in Q3FY24 was INR 0.5/liter from INR 2.3/liter in Q2FY24 and INR 3.9/liter loss in Q3FY23. Gasoline gross margin was INR 7.8/liter versus INR 6.5/liter in Q2FY24 and INR 12.6/liter in Q3FY23. Marketing sales volume grew 1% YoY in Q3. We expect crude prices in CY24E to remain benevolent at ~USD 80/bbl, due to significant 40mn tonnes capacity addition in LNG exports globally, which may impact oil demand, as observed in CY16.  

Margin beat; GRMs to sustain above mid-cycle level

Reported Q3 GRMs were at USD 13.5/bbl (Elara: USD 7.6/bbl) versus USD 12.9/bbl in Q3FY23 and USD 18.1/bbl in Q2FY24. Core GRM was USD 10.0/bbl and inventory gain was USD 3.5/bbl. Product cracks saw mixed trend as gasoline cracks jumped 49% YoY. However, diesel cracks, while lower YoY/QoQ, were still trending at higher level than historical averages. We anticipate IOCL’s GRM to be above mid-cycle level due to tighter refining product supply in CY24.

Valuations: Upgrade to Buy; TP raised to INR 178

We raise FY26E EPS by 49% on better GRMs at USD 10.0/bbl (from USD 7.5/bbl) and higher diesel/gasoline margin at INR 3.5/liter (from INR 1.0/liter) on tighter refining supply outlook and benevolent crude prices at ~USD 80/bbl.

Consequently, we upgrade IOCL to Buy from Accumulate, and raise our FY26E earnings-based TP to INR 178 (from INR 105), on refining EV at 5.0x (unchanged) and marketing EV at 5.0x (from 4.0x) FY26E EBITDA.

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