Buy IOCL; target of Rs 110 : Motilal Oswal

Motilal Oswal's research report on IOCL

IOCL reported an EBITDA of INR221.6b (up 54% QoQ), below our estimate of INR301.4b, due to weaker-than-expected GRM at USD8.3/bbl (vs. our est. of USD11/bbl) and lower marketing GM at INR8.7/lit. (vs. our est. of INR10/lit). Refining throughput came in line with our estimate at 18.8mmt (down 1% YoY). In the marketing segment, domestic sales volumes were also in line at 23.3mmt (up 1% YoY) in 1QFY24. Singapore GRM has improved to USD6.1/bbl in 2QFY24’TD from USD4.0/bbl in 1QFY24, which may lead to an improvement in refining performance in the coming quarter. IOCL has the highest leverage to refining segment and is expected to benefit the most due to improvement in GRMs. However, a reduction in Russian crude oil discounts may impact it adversely. OMCs are estimated to be generating healthy marketing margins of INR11.9/INR13.0 on petrol/diesel in 2QFY24’TD. However, margins may be hit by retail fuel price cuts due to the upcoming elections and/or a rise in crude oil prices due to quota management by OPEC+ nations. The next OPEC+ meeting is scheduled to be held on 3rd Aug’23. Petchem volumes increased 14% YoY to 0.73mmt (vs. 0.68mmt in 4QFY23); however, Petchem EBIT fell 67% YoY to INR884m (vs. INR2,951m in 4QFY23). Petchem margins contracted 11%/15%/13% for PE/PP/PVC in 2QFY24’TD.

Outlook

Owing to its underperformance in 1QFY24, we cut our FY24E EBITDA/PAT by 6/8%, while keeping FY25E broadly unchanged. The stock trades at 4.2x consolidated FY24E EPS and 0.8x FY24E P/BV. We reiterate our BUY rating, valuing IOCL at 0.9x FY25E P/BV to arrive at our TP of INR110.