PL Stock Report: Indian Oil Corporation (IOCL IN) - Q2FY24 Result Update – Elevated GRMs improve earnings - HOLD

Indian Oil Corporation (IOCL IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: HOLD | CMP: Rs92 | TP: Rs94

Q2FY24 Result Update – Elevated GRMs improve earnings

Quick Pointers:

♦ Singapore GRMs have softened to US$4.6/bbl amidst decline in product cracks due to demand concerns.

♦ Gross marketing margin stood at Rs 5.4/ltr against estimate of Rs4.4/ltr.

Indian Oil Corporation (IOCL) Q2 EBITDA stood at Rs 213.1 bn (down 4% QoQ, PLe: Rs 171.8 bn) and PAT at Rs 129.7 bn (down 6% QoQ, PLe: Rs96.4 bn). The beat on estimates was driven by higher than expected refining margins. Refining capacity utilization stood at 100.9%. Going ahead, we anticipate GRMs at US$6/bbl for FY25/26E and gross marketing margin at Rs 4.2/ltr for FY25/26E. The stock is currently trading at a PBV of 0.8x and EV/EBITDA of 4x, factoring in the softening Singapore GRMs and inability to pass on rise in fuel cost. We maintain ‘Hold’ rating with a TP of Rs 94 (Previous TP Rs 97) based on 0.7x FY26E P/BV.

♦ Refining throughput and marketing sales below expectation: Refining throughput at 17.8 mmt fell by 5% QoQ (PLe: 18.3 mmt). The fall was due to maintenance shutdown undertaken by the company. Capacity utilization for the quarter was 100.9%. On a YoY basis, throughput grew by 10%. Marketing sales came in at 19.7 mmt, down 8% QoQ (PLe: 21.3 mmt). Sales were down 1% YoY. Exports for the quarter were 1.3 mmt.

♦ Strong GRMs beat estimates: IOC reported a GRM of US$18.1/bbl, higher than our estimate of US$12.4/bbl. GRMs rose by US$9.8/bbl QoQ. Strong GRMs were on account of rise in Singapore GRM and inventory gains. On a YoY basis, GRMs were down by US$1.1/bbl. Singapore GRMs in the current quarter have softened amid demand concerns and hence we build in a GRM of US$10/6/6/bbl in FY24/25/26E. On the marketing front, implied gross marketing margin came in at Rs 5.4/ltr above our estimate of Rs 4.4/ltr. Marketing margins declined 38% QoQ due to rise in benchmark petrol and diesel prices and capped retail fuel prices. On YoY basis, gross marketing margins grew remarkably against a gross marketing loss of Rs 0.8/ltr. We build in gross marketing margins at Rs 5/4/4/ltr for FY24/25/26E.

♦ Significant growth on a YoY basis: EBITDA grew 325% YoY mainly on account of higher gross marketing margins. Net profit for the quarter was Rs 129.7 bn against a net loss of Rs 2.7 bn in Q2FY23. For H1FY24, EBITDA came in at Rs 3,772.7 bn, up 12.6% YoY. PAT during the period came in at Rs 267.2 bn against a net loss of Rs 23bn YoY.

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