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