Refining outlook remains weak; FY21e EPS up 56% on inventory gain, petchem prospects; upgraded to Buy with TP going up to Rs 130
Vaidya said the IOC will pay annual operation and maintenance charges to the new owner.
In 2020, marketing was a weak spot for state-owned oil marketing companies (OMCs). With a sharp increase in taxation, retail fuel prices were close to the peak at an oil price of just $45-50/bbl. While OMCs did take price hikes, these were infrequent and lower than required. But, recently OMCs and the Government of India (GoI) have surprised us with price hikes.
For petrol/diesel, despite peak prices, OMCs raised prices for 12 consecutive days. So far in 2021, petrol/diesel prices are up ~Rs 7.2-7.5/L (9-10%, ~$16/bbl). Since
1 Jan 2020, while oil prices have stayed nearly flat, petrol/diesel prices are up Rs 13-16/L (20-21%, ~$29-34/bbl), and retail subsidised LPG prices are up ~44%. Notably, retail petrol/diesel prices now factor in product prices of ~$64-65/bbl, on our estimates. We see downside risk to oil prices (we assume $55/bbl for FY22F), and product margins remain weak.
Upcoming state elections are a risk. But we note there is scope for fuel tax cuts (FY22F excise estimates are conservative, and a few states are already taking tax cuts). In our view, the risk/reward is a lot more favourable now. Refining: Worst cycle continues
For the past five quarters, SG complex margins were below $2/bbl, ex-inventory gains, and refining has been loss-making (typical opex is $2.2-2.8/bbl). Margin recovery has been delayed due to the second wave of the pandemic, and the near-term outlook is weak.
Valuations: More positive on marketing; upgrade to Buy from Neutral
We raise our FY21F earnings by 56%, driven by high inventory gains, stronger petchem, and low base. We leave FY22F earnings largely unchanged, and cut FY23F by 7% on a lower refining margin assumption. Although we forecast reported earnings to decline in FY22F (vs FY21F), we note that FY21F earnings are bolstered by a likely Rs129-bn inventory gain (~38% of standalone FY21F Ebitda).
We continue to assign 5x/5x/7x (unchanged) EV/Ebitda multiples for refining/petchem/pipeline. But for marketing, we believe the worst is over, and now assign 6x EV/Ebitda multiple (earlier 5x). Also, with the roll-forward to Sep-22F (earlier Mar-22F), our SOTP-based TP increases to Rs 130 (earlier Rs 85), implying 29% upside. We upgrade IOC to Buy (from Neutral). The stock trades at 5.3x FY22F P/E and 0.8x FY22F P/B.