Indian Oil rating – Hold: Inventory gain gave earnings a boost

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We have cut IOC’s FY22E GRM to $3/bbl from $3.4/bbl earlier but raised petrochem Ebitda estimate by 45% to Rs 70 bn. The net impact is an upgrade in FY22E EPS by 4%

Indian Oil Corporation’s (IOC’s) Q4FY21 recurring EPS is up 4x y-o-y driven by inventory gain vs loss, petrochemical Ebitda jump and fall in interest cost. FY21 recurring EPS is also up 4x y-o-y driven by same factors as in Q4 besides 37% y-o-y rise in auto fuel net marketing margin. We have raised FY22E EPS by 4% and TP by 5% to Rs 110 (3% upside) mainly on upgrade in petrochemical Ebitda to reflect the recent margin strength and outlook.

Net marketing margin is weak in FY22-TD at Rs 0.43/l. Rs 2.05-2.5/l price hike is required to boost it to Rs 2.5/l, which is our FY22 estimate. We are optimistic about future hikes given the government’s track record. IOC’s GRM is weak in FY22-TD and recovery in diesel cracks is key to GRM rising to our FY22 estimate of $3/bbl. We downgrade IOC to Hold from ADD as we await GRM and marketing margin recovery.

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Q4 EPS surge driven by inventory gain and petrochemical Ebitda jump: Standalone Q4FY21 recurring EPS is up 4.3x y-o-y driven by (i) estimated crude and product inventory gain of Rs 84 bn vs loss of Rs 185 bn in Q4FY20; (ii) 4.7x y-o-y jump in petrochemical Ebitda to Rs 22.5 bn; and (iii) 42% y-o-y fall in interest cost (debt is down 12% y-o-y but up 41% q-o-q to Rs 1,023 bn in end-Mar’21). Reported GRM was $12.5/bbl vs minus $9.6/bbl in Q4FY20 while core GRM at $4.5/bbl is down 44% y-o-y vs $8.2/bbl in Q4FY20.

Net marketing margin was down 61% y-o-y at Rs 1.2/l. Excluding inventory gain/loss, Q4 standalone EPS is down 84% y-o-y. Consolidated recurring Q4 profit stood at Rs 90.3 bn vs loss of Rs 5.5 bn in Q4FY20; share of profit from JV/associates is up 6% y-o-y driven by subsidiary Chennai Petroleum’s recurring profit of Rs 2.3 bn vs loss of Rs 16.4 bn in Q4FY20.

Auto fuel marketing margin weak in FY22-TD: Auto fuel net marketing margin was up 37% y-o-y at Rs 3.05/l in FY21. It is weak at Rs 0.66/l on 19-May’21 and Rs 0.43/l in FY22-TD despite petrol and diesel price hikes of Rs 2.5-2.8/l in the last two weeks. Net margin is estimated at Rs 0.39/l on 1-Jun’21 and Rs 0.79/l on 16-Jun’21.

Core GRM up q-o-q in Q1FY22-TD: We estimate IOC’s Q1FY22-TD GRM at $0.79/bbl. Gradual recovery in global demand as vaccines are rolled out may help diesel cracks and GRM recover.

Raise FY22E EPS and target price: We have cut IOC’s FY22e GRM to 3/bbl from $3.4/bbl earlier but raised petrochemical Ebitda estimate by 45% to Rs 70 bn to reflect the strength in petrochemical margins due to snowstorm in the US gulf coast in Feb’21; we estimate IOC’s petrochemical Ebitda at Rs 23 bn in Q1FY22E. The net impact is an upgrade in FY22E EPS by 4% and TP by 5% to Rs 110. Recovery in auto fuel marketing margin and GRM is key to improvement in IOC’s stock performance.

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