Buy Indian Oil Corporation Ltd Ltd For Target Rs.145 by Motilal Oswal Financial Services Ltd
Inventory/forex losses overshadow 3Q performance.
* IOCL’s reported 3QFY25 financial performance was below our expectations, mainly led by a weak reported refining margin. Inventory losses stood at USD3.7/bbl (INR52b) in 3Q. However, the marketing segment reported an in-line performance during the quarter. PAT was dragged by forex losses amounting to INR20.5b in 3Q. On a sequential basis, LPG prices have remained stable, and under-recoveries should start tapering off from 1QFY26 onwards. Further, SG GRM has remained weak in 4Q’td, and marketing margins at ~INR9/INR5 per lit for MS/HSD remain robust and above our assumption (of INR3.3/lit).
* IOCL’s major refinery expansions are slated for commissioning in 2HFY26. IOCL is currently trading at 0.9x FY26E P/B, at par with its one-year forward LTA of 1x P/B.
Low Russian crude proportion to weigh on GRM; LPG losses to be flat QoQ
* IOCL’s Russian crude utilization has remained at 25% during 9mFY25. While contracts for Jan and Feb’25 are in place, the company's supply for Mar’25 remains uncertain. If the Russian crude utilization becomes nil, the company could encounter a USD0.5 per bbl GRM impact, as the USD1.5-USD2 per bbl discount will not be available elsewhere.
* In 3QFY25, LPG under-recoveries came in ~47% higher QoQ. With propane prices averaging USD635/ton in Jan’25 (similar to 3QFY25 prices), LPG under-recovery is expected to be in the similar range of ~INR10b per month. We continue to believe that the government will provide compensation to OMCs against LPG under-recovery (media article).
Project execution delays; soft refining outlook may drag mid-term results
* Capacity expansions at Barauni, Panipat, and Gujarat have been delayed by 4-6 months, with full-year utilization now expected in FY28. Any further delays could have an incremental adverse impact on the company’s performance.
* Overall, refining GRMs are expected to remain soft in FY26/YF27 as global oil demand remains below the historical average and global refining capacity expansion remains robust. IOCL has the highest refining exposure among OMCs, resulting in the highest adverse impact. Additionally, if crude prices decline in 4Q, IOCL could incur the highest refining inventory losses among OMCs.
* Though MS/HSD marketing margins were down 16%/23% QoQ in 4QFY25’td, OMCs continue to generate healthy MS/HSD marketing margins of INR9.6/INR4.7 per lit (Jan’25’td average margins). However, IOCL has the smallest advantage to marketing among OMCs and, hence, the lowest relative benefit. Further, marketing inventory losses are expected in 4Q if refining GRMs remain low.
* IOCL’s major refinery expansions are slated for commissioning in 2HFY26. IOCL is currently trading at 0.9x FY26E P/B, slightly below its one-year forward LTA of 1x P/B. Considering the sequentially weak refining performance and expected medium-term weakness in the segment, we reduce our target multiple from 1.3x P/B to 1x P/B and arrive at a TP of INR145 (based on Dec’26E book value). Reiterate BUY
Other key takeaways from the conference call
* In 9mFY25, the company incurred capex of INR280b. A total of INR350b/INR330b is expected to be spent in FY25/FY26.
* The company intends to have a RE portfolio of 31GW by FY30 through organic and inorganic acquisitions.
* Inventory losses amounted to INR52b in 3Q. (INR55b in 9mFY25).
* The company plans to invest INR720b to increase its SA refinery capacity by 25% to 88mmtpa.
High inventory losses drag 3Q performance
* Reported GRM came in sharply below our est., even as core GRM was largely in line (USD6.6/bbl), implying an inventory loss of USD3.7/bbl during the quarter.
* Both marketing and refining throughput and marketing margin came in line with our estimate.
* However, the petchem segment’s EBIT loss stood at INR1.5b (vs. EBIT loss of INR916m in 2QFY25).
* EBITDA was 11% below our est. at INR71.2b (down 54% YoY).
* Additionally, INR54.6b LPG under-recovery was booked in 3Q (INR37.1b in 2Q).
* Reported PAT came in at INR28.7b (our est. of INR42.7b, down 64% YoY). The higher-than-estimated finance cost was partially offset by higher-thanestimated other income.
* PAT was dragged by forex losses amounting to INR20.5b in 3Q.
* Following the favorable ruling from the Hon'ble Supreme Court on 2nd Aug’24, regarding VAT input tax credit under the Gujarat VAT Act of 2005, a previously established provision of INR6.8b has been reversed and reported as an exceptional item in the current quarter.
* Hence, after adjusting the above provision reversal, IOCL reported an APAT of INR21.9b in 3Q.
* In 9MFY25, net sales were similar YoY at INR5.6t, while EBITDA/APAT declined 67%/89% YoY to INR195b/INR39b. In 4QFY25, we expect net sales/EBITDA/PAT to decline 2%/43%/81% YoY.
* As of Dec’24, IOCL had a cumulative negative net buffer of INR143.3b due to under-recovery on LPG cylinders (INR88.7b as of Sep’24).
Valuation and View
* IOCL is set to commission multiple projects over the next two years, driving further growth. The refinery projects currently underway, expected to be completed in 2HFY26-FY27, include the Panipat refinery (25mmtpa), Gujarat refinery, and Barauni refinery (9mmtpa).
* The stock trades at 11.9x consolidated FY26E EPS of INR10.4 and 0.9x FY26E P/B. We reiterate our BUY rating on the stock with a TP of INR145, valuing at 1x Dec’26E P/B.
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