In 2020, advertising and marketing was a weak spot for state-owned oil advertising and marketing corporations (OMCs). With a sharp boost in taxation, retail fuel rates had been close to the peak at an oil price tag of just $45-50/bbl. While OMCs did take price tag hikes, these had been infrequent and reduced than needed. But, not too long ago OMCs and the Government of India (GoI) have shocked us with price tag hikes.
For petrol/diesel, in spite of peak rates, OMCs raised rates for 12 consecutive days. So far in 2021, petrol/diesel rates are up ~Rs 7.2-7.5/L (9-10%, ~$16/bbl). Since
1 Jan 2020, when oil rates have stayed practically flat, petrol/diesel rates are up Rs 13-16/L (20-21%, ~$29-34/bbl), and retail subsidised LPG rates are up ~44%. Notably, retail petrol/diesel rates now element in solution rates of ~$64-65/bbl, on our estimates. We see downside threat to oil rates (we assume $55/bbl for FY22F), and solution margins stay weak.
Upcoming state elections are a threat. But we note there is scope for fuel tax cuts (FY22F excise estimates are conservative, and a handful of states are currently taking tax cuts). In our view, the threat/reward is a lot more favourable now.
Refining: Worst cycle continues
For the previous 5 quarters, SG complicated margins had been beneath $2/bbl, ex-inventory gains, and refining has been loss-creating (common opex is $2.2-2.8/bbl). Margin recovery has been delayed due to the second wave of the pandemic, and the close to-term outlook is weak.
Valuations: More positive on advertising and marketing upgrade to Buy from Neutral
We raise our FY21F earnings by 56%, driven by higher inventory gains, stronger petchem, and low base. We leave FY22F earnings largely unchanged, and reduce FY23F by 7% on a reduced refining margin assumption. Although we forecast reported earnings to decline in FY22F (vs FY21F), we note that FY21F earnings are bolstered by a probably Rs129-bn inventory achieve (~38% of standalone FY21F Ebitda).
We continue to assign 5x/5x/7x (unchanged) EV/Ebitda multiples for refining/petchem/pipeline. But for advertising and marketing, we think the worst is more than, and now assign 6x EV/Ebitda various (earlier 5x). Also, with the roll-forward to Sep-22F (earlier Mar-22F), our SOTP-based TP increases to Rs 130 (earlier Rs 85), implying 29% upside. We upgrade IOC to Buy (from Neutral). The stock trades at 5.3x FY22F P/E and .8x FY22F P/B.