Indian Oil Corporation’s (IOC’s) Q4FY21 recurring EPS is up 4x y-o-y driven by inventory achieve vs loss, petrochemical Ebitda jump and fall in interest expense. FY21 recurring EPS is also up 4x y-o-y driven by identical variables as in Q4 apart from 37% y-o-y rise in auto fuel net promoting margin. We have raised FY22E EPS by 4% and TP by 5% to Rs 110 (3% upside) primarily on upgrade in petrochemical Ebitda to reflect the current margin strength and outlook.
Net promoting margin is weak in FY22-TD at Rs .43/l. Rs 2.05-2.5/l cost hike is essential to increase it to Rs 2.5/l, which is our FY22 estimate. We are optimistic about future hikes offered the government’s track record. IOC’s GRM is weak in FY22-TD and recovery in diesel cracks is important to GRM increasing to our FY22 estimate of $3/bbl. We downgrade IOC to Hold from ADD as we await GRM and promoting margin recovery.
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Q4 EPS surge driven by inventory achieve and petrochemical Ebitda jump: Standalone Q4FY21 recurring EPS is up 4.3x y-o-y driven by (i) estimated crude and item inventory achieve of Rs 84 bn vs loss of Rs 185 bn in Q4FY20 (ii) 4.7x y-o-y jump in petrochemical Ebitda to Rs 22.5 bn and (iii) 42% y-o-y fall in interest expense (debt is down 12% y-o-y but up 41% q-o-q to Rs 1,023 bn in finish-Mar’21). Reported GRM was $12.5/bbl vs minus $9.6/bbl in Q4FY20 whilst core GRM at $4.5/bbl is down 44% y-o-y vs $8.2/bbl in Q4FY20.
Net promoting margin was down 61% y-o-y at Rs 1.2/l. Excluding inventory achieve/loss, Q4 standalone EPS is down 84% y-o-y. Consolidated recurring Q4 profit stood at Rs 90.3 bn vs loss of Rs 5.5 bn in Q4FY20 share of profit from JV/associates is up 6% y-o-y driven by subsidiary Chennai Petroleum’s recurring profit of Rs 2.3 bn vs loss of Rs 16.4 bn in Q4FY20.
Auto fuel promoting margin weak in FY22-TD: Auto fuel net promoting margin was up 37% y-o-y at Rs 3.05/l in FY21. It is weak at Rs .66/l on 19-May’21 and Rs .43/l in FY22-TD regardless of petrol and diesel cost hikes of Rs 2.5-2.8/l in the last two weeks. Net margin is estimated at Rs .39/l on 1-Jun’21 and Rs .79/l on 16-Jun’21.
Core GRM up q-o-q in Q1FY22-TD: We estimate IOC’s Q1FY22-TD GRM at $.79/bbl. Gradual recovery in international demand as vaccines are rolled out could enable diesel cracks and GRM recover.
Raise FY22E EPS and target cost: We have reduce IOC’s FY22e GRM to 3/bbl from $3.4/bbl earlier but raised petrochemical Ebitda estimate by 45% to Rs 70 bn to reflect the strength in petrochemical margins due to snowstorm in the US gulf coast in Feb’21 we estimate IOC’s petrochemical Ebitda at Rs 23 bn in Q1FY22E. The net effect is an upgrade in FY22E EPS by 4% and TP by 5% to Rs 110. Recovery in auto fuel promoting margin and GRM is important to improvement in IOC’s stock overall performance.