Buy Indian Oil Corporation; target of Rs 115: Sharekhan

Sharekhan's research report on Indian Oil Corporation

Q3FY21 adjusted PAT at Rs. 6,505 crore (up 178% y-o-y) was above consensus estimates led by robust petchem EBITDA (up 2.6x y-o-y) and higher inventory gain of Rs. 2,630 crore (versus 1,804 crore in Q3FY20). Volume recovery was strong with refinery utilization reverting to 103% versus 80% in Q2FY21 and petrol/diesel sales volume up 13%/36% q-o-q. Robust petchem EBITDA/tonne of $335/tonne (up 2x y-o-y) but core GRM remained weak at $1.26/bbl. Potential monetisation of pipeline assets and BPCL privatisation would be key re-ratings catalyst. Strong earnings momentum to sustain in Q4FY21 on likely inventory gain despite recent weakness in auto fuel marketing margin (likely to normalise with gradual price hikes).

Outlook

IOCL’s steep valuation discount of 57% to that of BPCL likely to narrow down amid strong earnings visibility, RoE of 15.4%, and high dividend yield of ~9-10%. Hence, we maintain a Buy with an unchanged PT of Rs. 115.