Buy Indian Oil Corporation; target of Rs 498: HDFC Securities

HDFC Securities' research report on Indian Oil Corporation

IOC’s  2QFY18  EBITDA came in at Rs 73.73bn, up 27.7% YoY and 42% QoQ. This has  been attributed to 44.6% jump in core GRM to USD7/bbl, 6% YoY increase in  marketing  volumes  at  20.9  mnT, and 6% YoY increase in the marketing margin at USD8.3/bbl. APAT was Rs 36.96bn, up 18.4% YoY and 38.6% QoQ. Refining  throughput  is expected to increase from 65.2 mnT in FY17 to 73.5 mnT  in  FY20,  owing  to  an improvement in the utilisation of the Paradip refinery  (55%  in  FY17  to 110% in FY20E). The refinery has not processed heavy  crude.  However,  the share of heavy crude will increase to 40% over the  coming year. This would increase GRMs by ~USD1.5/bbl to USD2/bbl, from USD7.85/bbl  in  2QFY18.  The  increase in utilisation will reduce fuel and losses,  which  would  aid  in a further improvement in GRM. We see IOCL as relatively   well-placed  to  gain  from  the  benefits  of  a  ramp-up  in production,  and  better  configuration  of  Paradip refinery. China is the world’s  largest  importer of plastic waste (~7.3mnT in CY16). However, the Chinese  govt  plans  to  enforce  a  complete  ban on the import of wastes (plastic,  paper, slag and textiles) from other countries by end-2017. This will  lead  to a rise in demand for petchem from China. This, in turn, will support  petchem  margins.  There  is no large capex in the pipeline, which will  lead to generation of FCF greater than ~Rs 432bn over FY18E-FY20E.

Outlook

We are  structurally positive on IOC, owing to its diversified business model, ramp-up  of the Paradip refinery and healthy cash flows. Our SOTP target is Rs  498  (5.0x  Sep 19E EV/e for standalone refining and the pipeline, 7.0x EV/e  for  marketing  and petchem, and Rs 97/sh from investments). Maintain BUY.