Indian oil reported Ebitda of Rs 20 bn (-82% y-o-y/+41% q-o-q) beating our estimates by 70% and consensus estimates of Rs 52 bn – largely led by highly subdued marketing, partially offset by strong refining.
Gross refining margin (GRM) in second quarter surged 3x y-o-y (-42% q-o-q), but will likely stay subdued in the near-term as Singapore GRMs are down to ~$6/bbl (Jun-22: $31) amid recession fears. Domestic retail sales grew 16% y-o-y (-6% q-o-q) on strong demand recovery, although offset by negative retail margins(-Rs 10/l for diesel) on high crude prices. However, OMCs tend to perform better with falling crude prices. We estimate healthy LT retail margins of Rs 4-5/litre as crude prices normalise at $70/bbl in the long-run. Revise TP lower by 6% to $93; retain ‘BUY.
Refining remained strong in Q2 as GRMs surged 3x y-o-y to $18.5/bbl (-42% q-o-q) on higher distillate cracks. HSD cracks surged ~3x/6x y-o-y to $34/bbl in Q2FY23. While throughput increased 5% y-o-y to 16MMT, it dipped 15% q-o-q on maintenance shutdown of Paradip refinery during Q2. GRMs shall remain weak in the near-term on anticipated recessionary fears coupled with the doubling of Chinese exports. High speed diesel (HSD) cracks plunged 30% to $47 from its peak in Jun-22 and MS cracks turned negative to $-2/bbl, from $42 in Jun-22.
Weak marketing on subdued margins; volumes recovery offsets
Marketing remained weak on subdued margins. Diesel retail margins plunged to Rs 10/ltr (`7 y-o-y/`-15 q-o-q) amid rising crude prices. Domestic volumes grew 16% y-o-y (-6% q-o-q) with improvement in demand. OMCs remain countercyclical to crude prices and perform better in times of falling crude prices. Crude prices normalising to $70 in the long run shall enable healthy long-term retail margins of Rs 4-5/ltr. Chemical segment remained weak on 30% y-o-y/17% q-o-q volume dip. IOCL will start its PX-PTA Paradip plant by FY24 and Nagapattinam plant by FY26. Pipeline throughput rose 22% y-o-y (-4% q-o-q) on high utilisation of 89% (81% y-o-y/95% q-o-q).
Outlook and valuation
Operational cash flow dipped 55% y-o-y to Rs 107 bn in H1. While GRMs shall remain weak in the near-term, we reiterate ‘Golden era of refining’ thesis anticipating >$10 GRM beyond CY24. IOCL is trading at 4x FY24e EV/Ebitda despite 15% RoE. We cut TP by 6% to Rs 93.