Indian Oil Corporation - Inventory gains drive surge in Q2 earnings - ICICI Securities

Indian Oil Corporation's (IOC) Q2FY21 standalone and consolidated EPS are up 11-13x YoY on a very low base driven by large inventory gains and jump in petrochemical EBITDA. H1 standalone and consolidated recurring EPS are up 118-117% YoY. Excluding inventory gain/loss, Q2 standalone EPS is down 49% YoY, but H1 is up 36% YoY as surge in marketing EBITDA, driven by margin jump, more than made up for 51% YoY fall in core GRM and 23% YoY fall in sales volume. Factoring in H1 inventory and forex gain have boosted FY21E EPS by 14%, but target price is unchanged at Rs87 (6x FY21E EBITDA excluding inventory & forex gain). IOC is trading at 0.7x FY21E P/BV and dividend yield of 7.6%. Reiterate ADD.

- Q2FY21 EPS up 13x YoY driven by inventory gains: Standalone Q2FY21 EPS is up 11.1x YoY in Q2FY21, driven by crude and product inventory gain of Rs74bn vs loss of Rs11.8bn in Q2FY20 and 56% YoY rise in petrochemical EBITDA. Core GRM at minus US$1.0/bbl (US$3/bbl in Q2FY20) is below our estimate of US$2.4/bbl, but reported GRM at US$8.6/bbl including inventory gain of US$9.6/bbl is higher than our estimate of US$6.4/bbl. Opening crude inventory cost was US$32.6/bbl vs spot price of US$42.7/bbl leading to inventory gain. Consolidated Q2 EPS is up 12.9x YoY, despite 54% (Rs1.5bn) YoY fall in share of profit of associates/JVs, given subsidiary Chennai Petroleum's recurring profit of Rs2.7bn vs loss of Rs2.1bn in Q2FY20.

- Auto fuel marketing margins remain robust with further upside not ruled out: Auto fuel net marketing margin is estimated at Rs4.29/l in FY21-TD. Further upside to our FY21 estimate of Rs3.3/l appears likely; net margin would be higher than our estimate if it is higher than Rs2.56/l in H2FY21E while it is at Rs3.25/l in Q3FY21-TD, Rs3.21/l on 30-Oct'20, Rs3.68/l on 1-Nov'20E and Rs4.37/l at latest prices.

- GRM remains weak but underlying data improving: Reuters' Singapore GRM is in the red at minus US$0.15/bbl in FY21-TD, but has recovered to 8-month high of US$1.6/bbl in Oct'20 driven by rise in all product cracks except diesel. Diesel cracks are weak at US$2.5/bbl but up from low of US$1.8/bbl in Sep'20. Underlying data is improving with US inventory down 13% from 37-year high in end-Jul'20, diesel consumption up 8.8% YoY in 1-15 Oct'20 (6-56% YoY fall in Apr-Sep) in India and down 5.6% YoY in US in Oct-TD (down 7.2-14.9% YoY in Apr-Sep). US distillate inventory is 9% above 5-year average but at recent rate of fall may be down to 5-year average levels in 3-6 weeks. Fall in US gasoline inventory by 14% from mid-Apr'20 highs to 4.6% below 5-year average, boosted cracks from US$0.1/bbl to US$5.3/bbl.

- Raise FY21E EPS but target price unchanged: We have raised inventory and forex gain estimates, which stood at Rs28.7bn in H1FY21 vs Rs5bn included in our estimates. To factor trends in H1, we have cut IOC's FY21E core GRM estimate to US$2.2/bbl from US$2.5/bbl but raised that of CPCL to US$1.53/bbl from US$1.05/bbl. Net impact of changes is upgrade in FY21E EPS by 14% but no change in target price, which remains at Rs87 (10% upside). Reiterate ADD on IOC.

Shares of INDIAN OIL CORPORATION LTD. was last trading in BSE at Rs.79.55 as compared to the previous close of Rs. 78.45. The total number of shares traded during the day was 2673770 in over 10953 trades.

The stock hit an intraday high of Rs. 81.9 and intraday low of 78.95. The net turnover during the day was Rs. 214839278.

Source : Equity Bulls

Keywords