Buy Indian Oil; target of Rs 85: Emkay Global Financial

Emkay Global Financial's research report on Indian Oil

IOCL reported Q2FY23 S/A adj. (ex-subsidy) EBITDA loss of Rs57.1bn vs. our loss est. of Rs86.8bn on better-than-expected GRMs. Adj. net loss stood at Rs82bn (vs. Rs107.9bn loss est). One-time LPG subsidy of Rs108bn led to reported net loss narrowing to Rs2.4bn. Reported/core GRM was USD18.5/bbl each (vs. USD7.6/14.0 est.), implying surprisingly nil inventory loss. While marketing inventory loss is undisclosed, implied blended margin could be negative Rs5/kg+ (vs. –Rs2.3 est.) with a sizeable miss in non-auto LPG margins. The marketing margin miss, nil refining inventory loss, and treatment of windfall taxes are unclear; and with continuing auto fuel RSP freeze and limited subsidy, FY23 earnings look clouded. Pricing should, however normalize post-Gujarat elections and inflation easing.

Outlook

We have cut FY23E EPS by 33%, building higher marketing losses, lower petchem earnings, and forex losses (FY24/25E slightly changed). We have cut our Sept-23E TP by 5% to Rs85 but retain Buy on a reasonable valuation of 0.7x PB. We expect a better H2.