Buy IOCL; target of Rs 145: Motilal Oswal

Motilal Oswal 's research report on IOCL

IOCL reported higher-than-expected core GRMs, primarily due to discounts received on crude during the quarter, in line with the GRMs of other Indian refiners. After the plunge witnessed in crude prices for the quarter, prices recovered to ~USD40/bbl. We believe this would offer the company some relief in terms of inventory gains going forward; however, the entire loss booked in 4QFY20 may not be recovered. IOCL revalued inventory at ~USD36/bbl, which currently stands ~USD43/bbl. For IOCL, the share of marketing in the total EBITDA increased to 32–40% over FY19–20, from ~20% in FY17, offering a more diversified earnings mix. While refining margins are dependent entirely on global macros, marketing margins are more under the control of OMCs. We continue to prefer IOCL despite the company having annual capex of ~INR260b (the highest among OMCs); it is expected to report ~16% cumulative FCF yield in FY21/FY22. Additionally, dividend yield appears attractive at 8–10%. IOCL trades at 5.6x consol. FY21E EPS of INR15.1 (~42% discount to FY15–18) and 0.8x FY21E PBV (~11% discount to FY15–18). Reiterate Buy.

Outlook

The discount gap to peers should shrink, and we value it at 1.2x FY22 PBV (at par with FY15–18 post the reform period) to arrive at target price of INR145. Reiterate Buy.

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