Buy Indian Oil Corporation; target of Rs 224: HDFC Securities

HDFC Securities' research report on Indian Oil Corporation

IOC’s 4QFY18 EBITDA came in at Rs 110.21bn, down 16.9% QoQ. This has been attributed to 26% QoQ fall in GRM to USD 9.1/bbl. The blended gross marketing margin was up 29.3% to USD 9.9/bbl (or Rs 4.02/lit). APAT stood at Rs 52.18bn, down 33.8% QoQ owing to lower other income at Rs 2.48bn (-81.7% QoQ) and higher interest cost at Rs 13bn (+98.9% QoQ).  We  are  structurally  positive  on  IOC, owing to its diversified business model,  ramp-up  of  the Paradeep refinery and healthy operating cash flows (Rs  430bn) over FY19-20E. However, in the year full of elections including the  general  election  which is due in May-19, the government is likely to resort  to  some mechanism to control/reduce the current surge in prices of Petrol  and  Diesel.  One of the solutions could be that government may ask OMCs  to  ‘manage’  marketing margins. If in case, the OMCs are ask to curb the  marketing  margin  by Rs 1/ltr (on both Petrol and Diesel) then HPCL’s FY19E  PAT will be impacted the most (42%), followed by BPCL (26%) and IOCL (17%).

Outlook

Our SOTP target reduce to Rs 224 (5.0x Mar-20E EV/e for standalone refining, pipeline, marketing and petchem, and Rs 47/sh from investments). Maintain BUY.