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Indian Oil Corporation rating – Buy: Final quarter results missed estimates

IOC’s Q4FY22 standalone Ebitda at Rs 116 bn (+18% q-o-q, -14% y-o-y) was 27/3% below our/Bloomberg consensus estimate. Overall marketing sales volume was 2% above our estimates, while blended Ebitda margin at $5/bbl (vs $4.4 in Q3) was below our estimate of $7/bbl, likely on lower inventory gain/marketing margins. But, reduced disclosures on inventory changes for both refining and marketing (since Q4FY21) and segment Ebitda (stopped from Q4FY22) makes segmental analysis difficult, given the likely high impact of inventory changes (Brent up $37/bbl q-o-q over the past 42 days). Q4 standalone PAT at `60 bn (+3% q-o-q, -31% y-o-y) was 12/38% below consensus/our estimate on lower Ebitda, lower other income and higher interest expense (+64% q-o-q).

For FY22, IOC’s standalone Ebitda at Rs 432 bn was up 14% y-o-y as higher refining margin and inventory gains offset weaker marketing margins, while standalone adjusted PAT at Rs 242 bn was up 3% y-o-y, driven by a sharp 56% y-o-y increase in interest expenses.

Refining: Overall weaker on lower reported GRM; core higher

Refining throughput of 18.3mmt (+5% q-o-q) was 2% above our estimate. IOC reported Q4 GRM of $18.5/bbl (vs Q3: $12.0/bbl) on strength in transportation fuel cracks and likely high inventory gains. It reported constant price or core GRM (stripped off inventory change impact) of $13.6/bbl (vs $8.9/bbl in Q3). This implies an inventory gain of $5/bbl, which in our view is significantly under-stated.

Marketing: Sales volume higher; but marketing likely in loss

Total marketing volume at 23.3mmt (+3% y-o-y) was 2% above our estimate, while petroleum product sales (including exports) was up 4% y-o-y at 21.7mmt and was 2% above our estimate. With key state elections in Mar’22, OMCs had kept retail fuel price unchanged for almost entire Q4, despite the surge in Brent prices and product cracks, leading to significant losses on retail petrol/diesel sales. On our estimates, gross marketing margin likely declined sharply from $7.1/bbl in Q3 to ~$4.4/bbl in Q4FY22. Adjusted for the inventory gain, core marketing margin was likely even weaker at $1.6/bbl in Q4. 

Marketing losses to widen in Q1FY23FOMCs have raised auto fuel prices by Rs 10/l since end-Mar, but prices remain unchanged for over a month, despite the sharp increase in international prices, leading to OMCs’ losses on retail fuel sales rising to ~Rs 11/12 in recent weeks, on our estimates. We expect OMCs’ marketing losses to widen in Q1FY23F.

With the strength in transportation fuel cracks, SG complex margins have surged to ~$20/bbl on average in Q1 so far (vs $7.8/bbl in Q4) and could provide some offset for OMCs’ marketing losses. 

Valuation: We value various segments on average FY23-24F EV/Ebitda. We retain Buy with an unchanged TP of Rs 160. The stock trades at 0.87x FY23F P/B and 6.2x FY23F EV/Ebitda.



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