Indian Oil Corporation Rating: Like peers, strong quarter for company

Similar to its peers BPCL and HPCL that reported last week, IOC also reported a strong result. Reported Ebitda of Rs 126 bn (+14% q-o-q, +57% y-o-y) was sharply 66% ahead of our estimates and 20% ahead of Bloomberg consensus forecasts. Large inventory gain of Rs 78.7 bn (`59.2 bn or $6.8/bbl in refining) was a key reason for the beat. We expected core marketing margins to be weak, as OMCs had not taken enough timely increases in petrol/diesel prices. However, similar to HPCL/BPCL, IOC also surprised us. Refining segment Reported GRM of $10.2/bbl was significantly ahead (our estimate $ 6.4/bbl), driven by a large inventory gain of $6.8/bbl.

According to management, to inventory-adjusted GRM ($3.4/bbl), impact of price lag impact for product prices (15 days for petrol/diesel, 1 month for kerosene/LPG, varies for other products) should be added to get normalised GRM that will be comparable to SG complex margins. As per IOC, the product price lag impact in Q1 was $1.8/bbl; thus normalised GRM was $5.2/bbl. Overall GRMs were impacted by the 22-day shut-down at Paradip in April. Marketing segment Marketing segment Ebitda of `43.7 bn was up a sharp 46% q-o-q. Similar to refining segment, the marketing segment also benefited from inventory gains.

Also, marketing earnings were boosted by relatively lower product exports of 1.25mmt (29-30% lower q-o-q and y-o-y), as IOC was able to place more products in domestic market and thus earn higher margins. Valuation methodology We value IOC’s refining/marketing/ petchem business at 6x/7x/6x FY20F EV/Ebitda multiples. We assign an 8x FY20F EV/Ebitda multiple to the pipeline business. We value listed investments at a 20% discount to market price. Our target price remains `220, which implies 37% upside. The stock currently trades at 7.5xFY20F P/E (FY20F EPS of 21.4). The benchmark index for this stock is the Nifty-50. Risks: Lower-than-expected GRMs and higher inventory/forex losses could be negative. A very sharp increase in oil prices and inability of OMCs to raise fuel prices in line with price increase would be a negative.

Indian Oil Corporation