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Weak refining and marketing performance; LPG subsidy burden continues to impact the earnings

Indian Oil Corp Q2FY25 performance showcased a poor core performance aggravated by inventory and adventitious losses. The integrated core margins in USD/bbl were lower than our estimates at 2.6 versus 4.1. With EBITDA at Rs37.7bn and Adj. PAT loss of Rs9.8bn, the core GRMs has been quite weaker with inventory losses, while the marketing performance stood weaker than our expectations with higher-thanexpected adventitious losses. Reported EBITDA and PAT is lower than our and consensus expectations. The reported GRM of USD1.6/bbl and Rs6.6/ltr of blended gross marketing margins, while the core integrated margins stood at USD2.6/bbl. We maintain NEUTRAL rating with a revised target price of Rs163 (earlier 188).

Result Highlights

* EBITDA at Rs37.7bn and Adj. PAT loss of Rs9.8bn; on weaker core GRMs and inventory losses and adventitious losses, while the marketing performance was impacted by an LPG subsidy burden of Rs 37.1bn Reported EBITDA and PAT are significantly lower than our and consensus expectations. The exceptional item of Rs11.57bn this quarter stems from IOCL's reversal of a previously created provision, following a favorable Supreme Court ruling on VAT Input Tax Credit.

* The reported GRM was ~USD1.6/bbl (USD6.39 the previous quarter, USD18.16 a year ago). The core GRM at USD3.11/bbl, (USD2.84 the prior quarter, USD16.35 a year ago). The refining inventory loss at USD1.51/bbl (a gain of USD3.55 the previous quarter, and a gain of USD1.81 a year back). Refinery throughput was 16.74mmt at 94.5% utilisation (103.7% the previous quarter, 100% a year ago).

* The integrated core EBITDA margins was USD2.6/bbl (USD1.9 the prior quarter, USD7 a year ago) lower our estimated USD4.1/bbl.

* The core marketing EBITDA (back-calculated) was Rs1.6/ltr (Rs1.1 the prior quarter, Rs0.3 a year back). The domestic marketing throughput was 22.96mmt, down by 1.2% YoY and 9.1% QoQ (vs. the industry’s growth of 2.3% YoY and - 6.4% QoQ). MS sales were 3.86mmt, up 5.2% YoY and down 2.6% QoQ, while diesel at 8.0mmt, down 4.3% YoY and 17.9% QoQ. Industry motor spirit and diesel sales were up 7.4%/0.1% YoY but down 2%/17.3% QoQ. The company has a negative buffer amounting to Rs 37.1bn as of Q2FY25 (Rs 88.7bn for H1FY25) pertaining to LPG subsidy. Product market share: The sales market shares of highspeed diesel and motor spirits both were marginally down at 39.9% and 39.4%.

* Petchem EBIT loss at Rs 916mn vs positive EBIT of Rs119mn loss the prior quarter, Rs 1.63bn a year back. This decline was due to weaker spreads and higher costs.

* Capex as per PPAC was Rs100.2bn (Rs 184.8bn for H1FY25) and FY25 target of Rs 310bn. The Rs 4.2bn forex loss impacted the quarterly profitability. Debt of Rs1,427.3bn was up Rs433.2bn YoY and Rs Rs268.8bn QoQ as there is a higher capex, dividend payment and weaker cashflows.

* H1FY25 performance: EBITDA at Rs 124.0bn (vs Rs 434.8bn in H1FY24) while Adj. PAT at Rs 16.7bn (vs Rs 267.2bn) and the reported GRM at USD4.08/bbl (vs USD13.12). The core GRM stood at USD2.97/bbl (vs USD12.6). The core integrated margins were at USD2.2/bbl vs USD8.2/bbl while the marketing EBITDA/ltr (Rs) was at 1.5 vs 2.9 in H1FY24.

Valuation

IOCL has a Rs25.3bn/Rs38.5bn sensitivity to a change of Rs0.5/ltr/USD1/bbl, respectively. At CMP, stock trades at 8.6x/7.2x/7.7x FY25e/26e/27e EV/EBITDA and 1.1x/1.1x/1.0x P/BV (excl. investments, it trades at 7.6x/6.4x/6.9x FY25e/26e EV/EBITDA and 0.9x/0.9x /0.8x P/BV). We maintain NEUTRAL rating with a revised target price of Rs163 (earlier 188).

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