Reduce Indian Oil Corporation Ltd For Target Rs. 145 By JM Financial Services
Strong GRM drives earnings beat; marketing earnings slightly lower
IOCL’s standalone 2QFY26 EBITDA at INR 146bn was significantly higher than JMFe/consensus of INR 106bn/ INR 134bn due to higher reported GRM at USD 10.7/bbl (vs. JMFe of USD 6.5/bbl) aided by both higher core GRM of USD 8.9/bbl (vs. JMFe of USD 6.5/bbl) and higher crude inventory gain of USD 1.7/bbl (vs. JMFe of NIL gain); hence, refining EBITDA was higher at INR 73bn vs JMFe of INR 27bn. However, marketing EBITDA was slightly lower at INR 51bn vs. JMFe of INR 55.5bn. Hence, PAT was also significantly higher at INR 76bn vs. JMFe/consensus of INR 41bn/ INR 57bn, aided by higher other income. Thus, implied integrated reported EBITDA margin was higher at USD 8.9/bbl in 2QFY26 vs. JMFe of USD 6.5/bbl (vs. USD 8.9/bbl in 1QFY26). Separately, MoPNG has conveyed compensation of INR 144.9bn to IOCL (out of INR 300bn compensation announced for OMCs) towards LPG under-recoveries for FY25 and FY26; and this would be disbursed in 12 equal monthly instalments starting Nov’25. IOCL has not recognised any compensation in 2QFY26 but will start recognising it from 3QFY26 onwards on receipt basis. IOCL’s LPG net under-recovery was INR 21.2bn in 2QFY26; hence, net negative LPG buffer was INR 257.7bn at end-2QFY26. Standalone gross debt rose by INR 67bn QoQ to INR 1,282bn at end-2QFY26 while consolidated gross debt also increased by INR 109bn QoQ to INR 1,369bn at end-2QFY26 - but this rise in debt in 2Q (Jul-Sep quarter) is a seasonal phenomenon due to higher tax outgo. We reiterate REDUCE on IOCL (with an unchanged TP of INR 145) on valuation grounds as it is trading at 0.97x FY27 PB (vs. last 3-year average of ~0.9x); however, it’s likely to see strong earnings growth over FY27-28 due to refining capacity expansion by 18mmtpa or 25% in the next 12 months.
* Refining EBITDA higher at INR 73bn vs. JMFe of INR 27bn as reported GRM higher at USD 10.7/bbl aided by both higher core GRM and higher inventory gain: Implied EBITDA for the refining segment was higher at INR 73bn vs. JMFe of INR 27bn as reported GRM was higher at USD 10.7/bbl vs. JMFe of USD 6.5/bbl aided by both higher core GRM of USD 8.9/bbl (vs. JMFe of USD 6.5/bbl) and higher crude inventory gain of USD 1.7/bbl (vs. JMFe of NIL gain). In 2QFY26, RIL and MRPL's implied GRM was ~USD 9.5/bbl and ~USD 7.8/bbl respectively, while CPCL’s reported GRM was strong at USD 9.1/bbl. However, IOCL’s crude throughput was a tad lower than JMFe at 17.6mmt (vs. 18.7mmt in 1QFY26). Overall distillate yield was slightly lower QoQ at 79.3% in 2QFY26 (80.1% in 1QFY26); high sulphur crude utilisation increased slightly to 54% (vs. 53.2% in 1QFY26); and fuel and loss stood at 8.7% (vs. 8.5% in 1QFY26).
* Implied marketing EBITDA was slightly lower at INR 51bn vs. JMFe of INR 55.5bn: Our calculations suggest implied marketing EBITDA was slightly lower at INR 51bn vs. JMFe of INR 55.5bn. Implied normalised marketing EBITDA was slightly lower at INR 2,351/tn (vs. JMFe of INR 2,580/tn). But marketing sales volume was a tad higher than JMFe at 21.6mmt (vs 23.7mmt in 1QFY26); however, IOCL’s implied market share in 2QFY26 declined slightly to 38.7% in MS (vs. 38.9% in 1QFY26) and down slightly at 40% in HSD (vs. 40.5% in 1QFY26). Hence, implied integrated reported EBITDA margin was higher at USD 8.9/bbl in 2QFY26 vs. JMFe of USD 6.5/bbl (vs. USD 8.9/bbl in 1QFY26). Separately, MoPNG has conveyed compensation of INR 144.9bn to IOCL (out of INR 300bn compensation announced for OMCs) towards LPG underrecoveries (upto FY25 and likely to be incurred upto FY26) and this would be disbursed in 12 equal monthly instalments, starting Nov’25. IOCL has not recognised any compensation in 2QFY26 but will start recognising it from 3QFY26 onwards on receipt basis. IOCL’s LPG net under-recovery was INR 21.2bn in 2QFY26; hence, net negative LPG buffer was INR 257.7bn at end-2QFY26.
* Petchem EBIT continues to be weak though it has recovered slightly QoQ, while pipeline volume was lower: Based on segmental results, Petchem EBIT continues to be weak, though it has recovered slightly QoQ to +INR 1.7bn (vs. negative INR 0.01bn); petchem volume was slightly lower at 0.8mmt (vs. 0.8mmt in 1QFY26). Separately, pipeline throughput was lower at 24.1mmt (vs. 26.3mmt in 1QFY26).
* Reiterate REDUCE on valuation grounds: We reiterate REDUCE on IOCL (unchanged TP of INR 145) on valuation grounds as it is trading at 0.97x FY27 PB (vs. last 3-year average of ~0.9x); however, it’s likely to see strong earnings growth over FY27-28 due to refining capacity expansion by 18mmtpa or 25% in the next 12 months. We believe OMCs’ integrated refining cum marketing margin will normalise around historical levels as the government may retain the benefit of any sustained fall in crude price via excise duty hike and/or fuel price cut to pass on the benefit of lower crude price to end-consumers. At CMP, IOCL is trading at 0.97x FY27E P/B (vs. 3-year avg P/B of 0.9x).
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