Neutral Indian Oil Corporation Ltd for the Target Rs. 150 by Motilal Oswal Financial Services Ltd
Earnings volatility and low ROE cap upside
* IOCL’s EBITDA/PAT came in 16%/20% below our estimates in 1QFY26, impacted by higher-than-anticipated refining inventory loss (USD4.8/bbl). However, blended marketing margin stood 24% above estimate at INR7.8/litre. Refining throughput and marketing volumes came in line with estimates.
* The Union Cabinet has approved INR300b in LPG compensation to OMCs, which will be paid in 12 tranches. While the disbursement timeline remains undisclosed, we estimate IOCL to receive ~INR72b in both FY26/FY27 (48% of total compensation). This will result in a ~4% increase in IOCL’s FY27E BVPS.
* Petchem drag, weak refining, and low ROE drive downgrade: In our previous note, we highlighted that OMCs are entering the last phase of a rally. Since then, IOCL has corrected 2% (peak return of +8%). We now downgrade IOCL to Neutral as earnings remain highly volatile due to large refining inventory swings and limiting visibility. The petrochemical segment continues to post losses, and spreads are likely to remain muted given the significant upcoming capacity additions in China. Further, we maintain a bearish view on refining, expecting spreads to stay rangebound amid substantial global net capacity additions (IEA est. of ~2.6mb/d) and weak demand growth for refined products over CY24-30. With a modest ROE of ~7%-8.5% over FY26/27, returns remain unattractive compared to peers. Accordingly, we cut our P/B valuation multiple to 1x, as we see limited upside at the current levels.
* We continue to prefer HPCL over IOCL because of the following factors: 1) HPCL’s leverage toward marketing segment, 2) higher dividend yield, as HPCL’s capex cycle is tapering off, while IOCL’s capex intensity remains high, and 3) start-up of HPCL’s multiple mega-projects in the next 12 months providing a push to earnings.
* IOCL currently trades at 1x 1yr. fwd. P/B, at par with its 10-year average. We now value IOCL at 1x FY27E consol. P/B and arrive at a TP of INR150/sh.
Other key takeaways from the conference call
Total inventory losses stood at INR65b in 1Q (marketing + refining).
* IOCL plans to add 4,000+ retail outlets in FY26 (40k+ outlets operating currently; 48000+ outlets by FY27’end).
* Russian crude %: 24% (discounts of USD1-1.5/bbl vs. Dubai crude).
* 1Q capex stood at INR64.7b. FY26 planned capex is ~INR335b.
* Ennore terminal capacity utilization: 25% in FY25 and 31% expected in FY26
Higher-than-expected inventory losses drag down 1Q performance
* EBITDA came in 16% below our estimate at INR126.1b (up 46% YoY).
* Reported GRM came in significantly below our estimate at USD2.2/bbl; refining inventory loss stood at USD4.8/bbl during the quarter.
* Marketing margin stood at INR7.8/lit, 24% above estimates.
* LPG under-recovery of INR37.1b was booked in 1Q (INR55b in 4Q)
* Marketing and refining throughput came in line with our estimate.
* Petchem segment posted EBIT loss of INR10m (vs. INR2.1b loss in 4QFY25).
* Reported PAT came in 20% below our estimate at INR56.9b.
* Other income came in above our estimates.
* As of Jun’25, IOCL had a cumulative negative net buffer of INR236.4b due to the under-recovery on LPG cylinders (INR199.3b as of Mar’25).
* As per the PIB release dated 8th Aug’25, the Union Cabinet approved INR300b in compensation for PSU OMCs. However, the company has not recognized this, as the exact split among OMCs is yet to be announced by MoPNG.
Valuation and view
* IOCL is set to commission multiple projects over the next two years, driving growth acceleration. Refinery projects that are currently underway, including the Panipat refinery (25mmtpa), Gujarat refinery (18mmtpa), and Barauni refinery (9mmtpa), are expected to be completed in 4QFY26-FY27.
* The stock trades at 13x consolidated FY27E EPS of INR10.7 and 0.9x FY27E P/B. We downgrade the stock to Neutral with a TP of INR150, valuing at 1x FY27E P/B.
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