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Strong margins; petchem turnaround drives earnings

* IOCL’s 1QFY25 EBITDA at INR86.3b (down 61% YoY) came in 16% higher than our estimate of INR74.7b led by marketing margin (1QFY25: INR4.8/lit), which was stronger than our estimate (1QFY25: INR3.9/lit). The EBITDA was also driven by a turnaround in the petrochemical division (1Q EBIT of INR119m vs. a loss previously).

* Core GRM in 1QFY25 was USD2.8/bbl. Singapore GRM (SG GRM) has been marginally up so far in 2QFY25 at ~USD5/bbl vs. USD3.5/bbl in 1QFY25. For FY25/26, we are building in GRMs of USD6.9/9.0 per bbl. As such, we believe the refining segment performance will be healthy given the robust oil demand.

* The petchem segment reported an EBIT after two consecutive loss-making quarters. As such, we remain constructive on the petchem cycle turning around in 2HFY25.

* OMCs are currently estimated to be generating a marketing margin of INR6.9/4.9 per lit on petrol/diesel vs. our assumption of INR3.3/lit for both these products in FY25-26.

* Our earnings assumptions for the refining and marketing segments remain unchanged. The stock trades at 13.7x consol. FY26E EPS and 1.3x FY26E P/B. Reiterate BUY with a TP of INR215, valuing the stock at 1.5x FY26 P/B.

Beat on EBITDA/PAT led by strong margins; turnaround in petchem

* Reported GRM came in line with our est. at USD6.4/bbl (vs. our est. of USD6.5/bbl and USD8.4/bbl in 4QFY24

* Core GRM stood at USD2.8/bbl (v/s USD9.1/bbl in 1QFY24 and USD10.6/bbl in 4QFY24), implying an inventory gain of USD3.6/bbl during the quarter.

* Refining throughput came in line with our estimate at 18.2mmt (down 3% YoY).

* In the marketing segment, domestic sales volume was also in line with our estimate at 24.1mmt (up 3% YoY).

* Marketing margin (including inv.) was above our est. at INR4.8/lit (est. INR3.9/lit and INR5.2/lit in 4QFY24).

* Petchem sales volume stood in-line YoY at 0.73mmt (vs. 0.8mmt in 4QFY24).

* However, petchem segment’s EBIT stood at INR119m (vs. -INR4b in 4QFY24), driven by a sequential margin expansion.

* EBITDA was above our est. at INR86.3b (our est. of INR74.7b, down 61% YoY). Additionally, INR41.2b LPG under-recovery was booked in 1QFY25.

* Resultant PAT came at INR26.4b (our est. of INR23.7b, up 81% YoY), due to lower-than-estimated other income.

* In 1QFY25, Principal Controller of Defence Accounts (PCDA) has unilaterally deducted INR6.2b from payment for ongoing supplies, pertaining to a claim of similar amount raised, via MoPNG, for Jan’22 to Mar’23 supplies against IOCL.

* As of 30 Jun’24, IOCL had a cumulative negative net buffer of INR51.6b due to under-recovery on LPG cylinders (INR10.2b as on 31 Mar’24)

Valuation and View

* IOCL is set to commission multiple projects over the next two years, driving further growth. Refinery projects, currently underway, are expected to be completed as follows: Panipat refinery (25mmtpa) by Dec’25, Gujarat refinery (18mmtpa) by Oct’24, and Baruni refinery (9mmtpa) by Dec’24.

* The stock trades at 13.7x consolidated FY26E EPS of INR13.3 and 1.3x FY26E P/B. We reiterate our BUY rating on the stock, valuing it at 1.5x FY26E P/B to arrive at our target price of INR215.

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