Analyst Corner – Indian Oil: Maintain ‘hold’, raise TP to Rs 137

By: |
November 04, 2021 3:45 AM

Excluding inventory gain/loss, Q2 standalone EPS is up 6.9x YoY. Q2 consolidated EPS YoY growth was modest at 3% YoY despite surge in share of profit of JV/associates by 3.2x YoY due to 76% YoY fall in profit of subsidiary Chennai Petroleum (CPCL).

We have raised our core FY22E GRM estimate to $4/bbl from $3/bbl and factored-in H1 crude and product inventory gain of ~Rs92billion, including that of subsidiary CPCL.We have raised our core FY22E GRM estimate to $4/bbl from $3/bbl and factored-in H1 crude and product inventory gain of ~Rs92billion, including that of subsidiary CPCL.

Indian Oil Corporation’s (IOC’s) Q2FY22 consolidated EPS is up 3% YoY despite fall in reported GRM, driven by jump in petrochemical ebitda and marketing margin. Auto fuel net marketing margin in FY22-TD is at Rs2.5/l, same as our FY22E estimate. Singapore GRM surged to $7.5/bbl in Oct’21 on fall in Chinese throughput, Asian and US auto fuel inventories and very high gas prices boosting oil demand. GRM recovery sustaining is key to IOC’s outlook; a cold winter may ensure that GRM strength sustains in FY23E, but there are headwinds too. We have raised our: 1) FY22E EPS by 52% on factoring H1 inventory gains and upgrading GRM, 2) FY22E ebitda-based target price by 28% to Rs137, and 3) FY23E EPS by 6% on upgrade in marketing margin to Rs2.5/l. Maintain ‘hold’.

Q2 EPS up 3% YoY driven by petrochemical ebitda and marketing margin jump: Standalone Q2FY22 EPS is up 2% YoY driven by: 1) 50% YoY rise in petrochemical ebitda to Rs18.1billion, 2) 34% YoY rise in marketing margin to Rs3.5/l, and 3) estimated 5.9x YoY rise in product inventory gain to Rs4.5billion. Reported GRM was down 24% YoY to $6.55/bbl while core GRM at $4.81/bbl was higher compared to minus $0.97/bbl in Q2FY21. Excluding inventory gain/loss, Q2 standalone EPS is up 6.9x YoY. Q2 consolidated EPS YoY growth was modest at 3% YoY despite surge in share of profit of JV/associates by 3.2x YoY due to 76% YoY fall in profit of subsidiary Chennai Petroleum (CPCL).

Marketing margins YTD and FY22E at Rs2.5/l: Net auto fuel marketing margin is at Rs2.48/l in FY22-TD vs our FY22E estimate of Rs2.5/l. To keep margins at this level, more price hikes are required, which we are confident would be made.

Recent Singapore GRM surge bodes well for FY22E outlook; cold winter may keep GRM strong in FY23E, but there are headwinds too: Reuters Singapore $7.5/bbl in Oct’21 driven by transportation fuel cracks at 21-69 month high. IOC’s GRM lags Singapore GRM partly due to temporary factors. We expect GRM strength to sustain in rest of FY22E. Capacity additions of 1.3m b/d, new Covid waves and rebound in Chinese and US refinery utilisation are risks to the strength sustaining, but a severe winter that keeps gas prices high and demand recovery can keep GRM strong even in FY23E.

Raise FY22E-FY23E EPS and target price: We have raised our core FY22E GRM estimate to $4/bbl from $3/bbl and factored-in H1 crude and product inventory gain of ~Rs92billion, including that of subsidiary CPCL. However, we have cut our throughput and sales volume to factor-in the impact of Covid in H1. The net impact is upgrade in FY22E EPS by 52%. Target price based on 6x FY22E EV/ebitda excluding inventory gains is up by 28% to Rs137 (4% upside). We have raised our FY23E EPS by 6% mainly on increase in auto fuel net marketing margin to Rs2.5/l from Rs2.25/l earlier. GRM estimate remains unchanged at $4.5/bbl.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Sensex ends deep in red for second day straight, Nifty trend weak, expect more weakness ahead
252-week high, 52-week low: ZEEL, Vodafone among 195 stocks to hit fresh highs on BSE; 29 scrips at fresh lows
3Sensex, Nifty may give double-digit returns after recent correction; check top stock picks by ICICI Securities