We assume coverage of IOCL with a Buy, expecting its EPS rebound to continue helped by higher earnings across segments as margins and volumes expand. With the stock also 10-40% cheaper than peers despite a more diversified and stable EPS mix and its 10x P/E inexpensive in the context of market multiples, risk/reward is favourable. Our Rs 500 PT implies 16% potential upside.
Enduring: IOCL had lagged in the initial phase of the rally in the stock prices of India’s SOE refiners/marketers but it has caught up in recent times. Like its peers, this was helped by its EPS rebound in FY15-17 as refining margins rose. Unlike for peers, we expect this to endure.
In refining, lower energy costs at existing refineries and stabilisation of the $5.5 bn Paradip project, which was commissioned in early 2016, may allow realised refining margins to rise even as benchmarks ease. Refining Ebitda may rise 42% in FY17-21e.
Pipelines: We also expect pipeline earnings to grow as volumes rise. Indeed, this segment, now a fifth of total Ebitda, also differentiates IOCL by lending stability to cash flow.
Petchem: Investors now recognise this, but likely under-appreciate how smartly petchem (also a fifth of Ebitda) has turned around. ROCE was at 36% in FY17, e.g., and while margins may soften, volumes will rise helped by low cost new capacity helping Ebitda rise.
Marketing: Ironically, marketing has proven the hardest to predict, but we expect a gradual rise in auto fuel margins as we do for its peers with less risk from a steep fall in non-auto fuel margins too, unlike say for HPCL. With IOCL’s market share losses also likely to ebb, segment Ebitda may rise at 15% CAGR, helped along by India’s 4-5% oil demand growth.
Modest: Overall, we expect EPS to rise at a 10% CAGR in FY18-21e helped by higher earnings across segments. Consensus est. (and ratings) have risen (much more than peers in recent times) to factor this but still appear 7-13% too low, leaving scope for positive surprise.
Buy: Even with a more enduring earnings outlook, a stronger balance sheet and steady return ratios that are similar to peers, IOCL is 10-40% cheaper and under-owned. We rate it as Buy, therefore, highlighting that it is in the bottom decile in valuations in market indices.
Our Rs 500 SOTP PT (6.1x EV/Ebitda) suggests 16% pot’l upside. Lower marketing and refining margins (esp. if Paradip disappoints), any move to regulate its pipeline segment or a cut in NE excise duty benefits are downside risks.
We assume coverage on IOCL with an unchanged Buy rating, expecting its earnings rebound to continue helped by higher Ebitda across businesses. Refining margins should rise as the $5.5 bn Paradip project stabilises, volume growth and a gradual rise in auto fuel margins should aid marketing while volume growth and resilient margins are tailwinds for petchem and pipelines. Capex may rise too but its 9% FY17-21e EPS CAGR should allow FCF
to rise keeping gearing modest and RoE above 20%. With the stock also 10-40% cheaper than peers despite a more diversified (and stable) earnings mix and its 9.8x FY18e P/E inexpensive in the context of broader market multiples that are twice as much, we see risk/reward as favourable.
IOCL’s share price is up smartly in the past three years but has lagged peers: As the subsidy woes of India’s SOE refiners and marketers appeared to be ebbing in 2014, aided by government action but more due to falling oil prices, risk reward for IOCL appeared favourable with improved outlooks for its refining and marketing segments. Investors had disagreed, though, preferring the more marketing levered (and liquid) HPCL and BPCL. Their share prices rose much more as a result but IOCL’s performance has also gained some lost ground in recent quarters.