Elevated marketing margins to offset refining weakness; FY21-22e EPS cut by 2%; ‘Buy’ retained with TP of Rs 110.
IOCL’s normalised results were well ahead of our estimates in Q1FY21 reflecting higher-than-expected margins for refining, marketing and petchem segments; reported results were impacted by surprising inventory loss, which is expected to reverse in the near term. We reiterate Buy expecting elevated marketing margins on auto fuels to offset the ongoing refining weakness. We reduce our FY2021-22 EPS estimates by 2% and Fair Value to Rs110 from Rs 115 earlier.
Higher normalised Ebitda led by robust underlying margins across segments: IOCL’s normalised Ebitda, adjusted for inventory/forex movement, was well above our estimate at Rs 86.3 bn in Q1FY21; volumes were expectedly weaker across segments. Inventory-adjusted refining margins remained healthy at $4.4/bbl; inventory-adjusted marketing margins jumped 84% q-o-q to Rs 3,823/ton.
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Reported Ebitda at Rs 55.1 bn, included cumulative inventory loss of Rs 32 bn and modest forex gain of Rs 0.8 bn. The company accounted inventory loss of Rs 46 bn in the refining segment marking down crude inventories to cost price of around $30/bbl, which was lower than the net realisable value at end-period. IOCL reported net income of Rs 19.1 bn (EPS of Rs 2.1) in Q1FY21 versus loss of Rs 51.9 bn in Q4FY20.
Lower end-demand and higher inventories to impact refining operating rate: In the Q1FY21 conference call, the management indicated—(i) demand for diesel has reduced to 77% of normal volumes in July from 82% in June, while gasoline has increased to 89% of normal volumes in July from 85% in June; (ii) IOCL’s current crude and product inventories are higher than normal levels of 45 and 15 days, respectively; (iii) utilisation for IOCL’s refineries moderated to 90% in July and are anticipated to be lower y-o-y in FY2021; (iv) gross debt as of end-June 2020 was Rs 986.1 bn; and (v) capex guidance remains at around Rs 260 bn for FY2021.
Fine-tune EPS estimates: We reduce our FY2021-22 EPS estimates by modest 2% factoring in (i) lower underlying refining margin; (ii) higher auto fuel marketing margins; and (iii) other minor changes. Our Fair Value of Rs 110 is based on 6X FY2022e Ebitda plus the value of investments. We retain our Buy rating noting attractive valuations at 7X FY2022e EPS and healthy dividend yield of 5%.