Indian Oil ratings | Hold — Ebitda was in line, net profit below par

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Published: May 27, 2019 2:43:34 AM

Little respite likely in FY20 from flat earnings of last 3 years; ‘Hold’ retained due to undemanding valuations.

With refining margins still weak and auto-fuel marketing margins now below normal, there may be little respite in FY20 despite IMO.

IOCL’s Q4FY19 net rose 8.5x q-o-q to Rs 61 bn but came 18% below JEFe on lower inv. gains. Core Ebitda, down 41% q-o-q, was in line but core earnings have now been flat for three years at `15/sh with little respite likely in FY20e too. With subsidy dues also likely to stay high and IOCL materially raising capex, debt — already at lifetime highs — may continue to rise too, driving down return ratios. We keep our Hold preferring ONGC, Gail & PLNG instead in India O&G.

Q4FY19 performance

IOCL’s Q4FY19 rose 8.5x q-o-q (+17% y-o-y) to `60.99 bn — 18% below JEFe on lower than est. inventory gains (`26.4 bn) even as fx gains (`8.7 bn) were higher. Higher dep. and lower other income were headwinds too while lower opex and tax rates helped.

Core: Core Ebitda was in line, though, falling 41% q-o-q helped also by lower corp. opex. Petchem was softer than we expected with Ebit at a five-year low despite robust aromatics margins (and Paradip PP start-up) with pipeline subdued on lower crude volumes.

Refining: Refining thruput fell 9% q-o-q on turnarounds at Panipat & Koyali with current price margins (~$3-4) also below JEFe. Lower than est. RTP lags boosted “core” margins ($1.4) a tad ahead of JEFe ($1.3), helping Ebitda although opex rose to $2.3/bbl too.
Marketing: Marketing was the key driver in the quarter, though, making up ~85% of core Ebitda driven by all-time high auto fuel margins. Volumes were muted, though, with IOCL losing ~30-40bps of share q-o-q in auto fuels and ~65bps overall with ATF the only bright spot.

FY19 performance

Indeed, on balance, FY19 was another difficult year with core standalone earnings now flattish at `15/sh for three years with consolidated EPS just 3% higher; CPCL is struggling and overseas E&P M&A is not as profitable. With refining margins still weak and auto-fuel marketing margins now below normal, there may be little respite in FY20 despite IMO.

Capital expenditure

Despite these uncertainties, though, IOCL continues to dial up investments with capital spend rising to `250 bn in FY19 with `300 bn likely in each of FY20-21e as it completes approved projects and embarks on more brownfield refining expansions.

Valuations

Still, with valuations also undemanding, we keep our Hold even as we prefer ONGC & Oil India (BUYs) instead among India’s policy dependent SOEs where valuations are now at 6-7x P/E with the govt. exempting them from subsidies in FY19. We also like Gail & PLNG.

 

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