Indian Oil Corporation’s (IOC) 9MFY19 standalone and consolidated EPS are down 33%-34% year-on-year hit by y-o-y lower GRM, decline in other income and rise in interest cost. Outlook for Q4FY19 is better due to super-normal auto fuel marketing margins, which would more than make up for weakness in GRM. We estimate IOC’s FY19 and FY20 EPS to be down 23% y-o-y and 16% y-o-y, respectively. We are estimating IOC’s FY20E GRM at $5.1/bbl (flat y-o-y) and auto fuel net marketing margin at Rs 1/litre (down 46% y-o-y).

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Outlook for FY20 would depend on 1) strength of government that assumes power after May 2019 elections which would determine auto fuel marketing margin outlook; 2) whether IMO mandated cut in sulphur content in marine fuel from January 2020 would significantly boost GRM. We resume coverage on IOC by downgrading it to ‘hold’ from ‘buy’ until we have clarity on the above issues. Our target price is Rs 160 (3.5% upside) based on 6x FY20E EV/Ebitda.

IOC’s 9MFY19 standalone EPS was down 33% y-o-y hit mainly by 30% y-o-y decline in reported and 20% y-o-y decline in core GRM. A 37% y-o-y rise in interest cost and 35% y-o-y fall in other income also hit 9M earnings. IOC’s standalone debt has gone up from Rs 319 billion in December 2017 and Rs 580 billion in March 2018 to Rs 646 billion in Dec 2018. Debt rise is due to higher oil price, subsidy and large subsidy amount not yet reimbursed by GoI due to decision to rollover Rs 180 billion to FY20.

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We estimate IOC’s Q4FY19 auto fuel marketing Ebitda to be up Rs 52 billion quarter-on-quarter due to net auto fuel marketing margin of Rs 4.64/l in Q4FY19E v/s Rs 1.3/l in Q3FY19. We estimate Q4FY19 GRM at $2.83/bbl to be up q-o-q v/s $1.15/bbl (hit by inventory loss of $8/bbl) in Q3FY19. Despite a strong Q4FY19, we estimate FY19E EPS to be down 23% y-o-y. We estimate IOC’s FY20 EPS to be down 16% y-o-y hit mainly by 46% y-o-y decline in net auto fuel marketing margin to normal level of Rs 1/l v/s super-normal margin of Rs 1.84/l in FY9E. We are assuming FY20 GRM to be flat y-o-y at $5.1/bbl.
IOC’s FY20 earnings outlook would depend on strength of government that assumes power in May 2019 after the Lok Sabha elections.