Maintain ADD on Indian Oil Corporation - High inventory gains spike earnings! - HDFC Securities

Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities

We maintain ADD on IOC with a target price of INR 83, owing to an expected recovery in demand for petroleum products and subsequently, refining margins in 2HFY21. Reported EBITDA/APAT were 97/366% above estimates owing to better-than-anticipated inventory gains, and lower-than-anticipated finance cost, offset by a lower GRM of USD -0.8/bbl (HSIE: USD 2/bbl). Refining and marketing business' inventory gains were INR 73bn and INR 0.8bn. Adjusting for inventory gains and forex gain, core EBITDA comes to INR 14bn (-77/-84% YoY/QoQ).

Refining: Crude throughput in 2Q stood at 14mmt (-20/+9% YoY and QoQ). Lower utilisation across refineries given the lower demand amid the lockdown led to lower throughput. Core GRM stood at USD -0.8/bbl vs USD 2.9/4.3 in 2QFY20/1QFY21. Core GRMs declined sequentially with fall in naphtha, gas oil, gasoline and jet kero cracks.

Marketing: Domestic marketing sales volume was 17.2mmt (-20% YoY). India's petroleum product consumption contracted by 11% YoY, thus demonstrating that IOCL lost market share on an annual basis. Blended gross margin stood at INR 5/lit (+10/-21% YoY/QoQ) in 2Q, but these do not seem sustainable in the near term. We expect a blended gross margin to correct to INR ~3.8 in FY21/22E.

Call takeaways: (1) Utilisation in October for refinery/petchem stood at 95/85%. Polypropylene plant at Paradip is operating at 65% capacity. (2) Capex planned by IOCL for FY21 is of INR 210bn along with INR 45bn for its subsidiaries and JVs. In 1HFY21, the company has spent INR 75bn. Capex earmarked for refinery / marketing / pipeline / petchem business is of INR 40/55/14/20bn. There is increased thrust from the GoI to increase Capex. (3) In 1HFY21, IOCL commissioned 994 retail outlets, and the target is set at 2,400 new retail outlets for FY21. (4) IOCL maintains refinery crude inventory of 8-9mmt and product inventory of 6-7mmt.

Our SOTP target comes to INR 83/sh (5.0x Sept-22E EV/e for standalone refining, marketing and petchem businesses and 5.5x Sept-22E EV/e for pipeline business and INR 25/sh for other investments). The stock is currently trading at 7x on FY22E EPS.

Shares of INDIAN OIL CORPORATION LTD. was last trading in BSE at Rs.78.1 as compared to the previous close of Rs. 79.55. The total number of shares traded during the day was 1269945 in over 4792 trades.

The stock hit an intraday high of Rs. 80.7 and intraday low of 77.65. The net turnover during the day was Rs. 99627520.

Source : Equity Bulls

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