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Strong 2Q performance

* IOCL’s EBITDA came in at INR303b (vs our estimate of INR143b, consensus est.: INR115b) and reported PAT came in at INR216b (vs. our estimate of INR68b, consensus est.: INR63b). LPG under-recovery of INR64b was booked in 2Q (vs. INR102b in 1Q). The GRM (including SAED) came in line with our estimate at USD36.7/bbl (vs. est.: USD37/bbl). Better-than-estimated marketing performance drove the strong earnings beat, with gross marketing margin at INR(0.7)/lit (vs. our est. of INR(7.7)/lit).

* Marketing margins to remain under pressure on three counts: 1) Brent has averaged ~USD105/bbl in Oct’26 MTD, sharply increasing under-recoveries on regulated auto fuels and LPG. MS/HSD gross marketing losses stood at ~INR18/INR31 per lit in Oct’26 MTD; 2) diesel GRMs are likely to remain elevated (3x long-term avg. in Oct’26), with the IEA expecting high diesel cracks until 1HCY27, further weighing on HSD marketing margins; and 3) there is limited room for a steep auto-fuel price hike before the UP elections. The UP Assembly’s term ends on 22nd May’27, with polls widely expected in Feb-Mar’27 and potentially brought forward to avoid clash with the Census exercise. Punjab, Goa, Uttarakhand, and Manipur are also scheduled to hold elections in CY27, with their respective assembly terms ending in Mar’27. The ECI has yet to announce the dates. Given this, we see little room for a steep pump-price increase over the next 4-5 months.

* Refining gains partly offset by freight: Realized refining margins are likely to be lower than the headline GRMs suggest, as elevated shipping freight costs would offset part of the margin gains.

* Earnings cut primarily driven by marketing segment weakness: Despite a strong 2QFY27 performance, we cut our full-year FY27 standalone estimates. We now expect an EBITDA of INR412b for FY27 (earlier EBITDA estimate: INR576b). This reflects: 1) higher 2HFY27E gross marketing margin (GMM) losses of INR7.5/ltr on MS and INR3/ltr on HSD (positive GMM of INR4.5/lit earlier); and 2) LPG under-recovery of INR150/cylinder in 2HFY27 (nil earlier). The cut is partly offset by our higher 2HFY27E GRM assumption of USD17/bbl (vs. USD9/bbl earlier). * Risk from our crude assumption: We note that our FY28/FY29 crude assumption of USD75/bbl remains conservative. Any upward revision would lead to further earnings cuts for IOCL.

* Valuation and view: Reiterate Neutral - IOCL currently trades at 0.7x consol. FY28 P/B, below its 10-year average. We value the stock at 4.5x Dec’27 EBITDA and add value of investments (INR39/sh) to arrive at a TP of INR135/sh.

* 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 (15mmtpa to 25mmtpa), Gujarat refinery (13.7mmtpa to 18mmtpa), and Barauni refinery (6mmtpa to 9mmtpa), are expected to be completed in Dec’26.

* The stock trades at ~6x consolidated FY28E EPS of INR21.9 and 0.7x FY28E P/B. We value the stock at 4.5x Dec’27 EBITDA and add value of investments (INR39/sh) to arrive at a TP of INR135/sh. Reiterate Neutral.

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