BUY Indian Oil Corporation (IOCL)

Q3FY21 Result Review

TP Rs113 Key Stock Data Indian Oil Corporation (IOCL) BUY CMP Rs96 Bloomberg / Reuters IOCL IN / IOC.BO Potential upside / downside +18% Sector Oil & Gas Robust show from marketing and petrochemicals Previous Rating ACCUMULATE Shares o/s (mn) 9,414 Summary V/s Consensus Market cap. (Rs mn) 9,02,347 IOC’s Q3FY21 result was a beat to our estimates owing to robust performance from EPS (Rs) FY21E FY22E FY23E Market cap. (US$ mn) 12,356 marketing and petrochemicals business. The company also reported inventory gains of IDBI Capital 18.8 17.4 17.2 3-m daily avg Trd value (Rs mn) 1,551.8 Rs26.3 bn (Rs9.2 bn for refinery and Rs17.1 bn for marketing). While core GRM came Consensus 14.5 16.5 19.3 52-week high / low Rs118 / 71 slightly below expectation at US$1/bbl (IDBIest US$1.5/bbl), marketing EBITDA/mt % difference 30.1 5.7 (11.0) increased 33% and petrochem EBITDA/mt doubled YoY to US$335. Volume across segment Sensex / Nifty 48,601 / 14,281 rebounded to pre-covid levels where ATF is yet to catch up while Petrochem volume grew Shareholding Pattern (%) Relative to Sensex (%) 25% YoY. Factoring higher marketing margin and up cycle in petrochem, we raise FY22E/FY23E EBITDA estimates by 11%/9%. We raise our TP to Rs113 from Rs87 earlier and Promoters 51.5 130.0 upgrade the stock to BUY from ACCUMULATE. FII 5.8 115.0 Key Highlights and Investment Rationale 100.0 DII 13.5  Robust performance across segments barring refining 85.0 Public 29.1 Adjusting to inventory and forex gains, refining segment reported an EBITDA loss of Rs16 70.0

bn vs Rs39 bn loss in Q2FY21 and Rs12 bn loss in Q3FY20. Owing to strong marketing 55.0 Price Performance (%) margin from auto fuels, marketing EBITDA (adj to inventory gains) grew a robust 31% 40.0

YoY/70% QoQ. Further, strong demand growth for polymers led to a whopping 163% -1m -3m -12m

Jul-20

Jan-20 Jan-21

Jun-20

Oct-20

Apr-20

Feb-20 Sep-20

Dec-19 Dec-19 Dec-20

Aug-20

Nov-19 Nov-20 Mar-20 growth in petrochemical EBITDA to Rs19.5 bn. Pipeline EBITDA also crossed pre-covid Absolute 4.8 20.5 (12.0) May-20 levels and grew 10% YoY to Rs17 bn. Rel to Sensex 3.2 (2.2) (34.3) Indian Oil Corporation Sensex  Plans to set up 9mmt of new refinery; pipeline monetization is on the cards Company has given the capex guidance of Rs263bn for FY21 (64% invested in 9MFY21) Financial snapshot (Rs mn) and Rs250-300 bn for FY22. IOC plans to setup a 9mmt refining unit in Tamil Nadu by Year FY19 FY20 FY21E FY22E FY23E forming a JV with CPCL at an estimated cost of Rs294 bn. Further, MEG plant at Paradip is Revenue 52,26,911 48,26,022 36,84,614 48,91,581 63,85,996 expected to commence from Oct’21 which has a total capacity of 357KTA. As announced EBITDA 3,54,417 2,27,297 3,15,666 3,16,116 3,23,387 in budget 2021-22, IOC plans to monetize its few pipeline (Total 14864km) through InvIT EBITDA (%) 6.8 4.7 8.6 6.5 5.1 but refrain to lose control on it. Adj. PAT 1,69,713 (27,055) 1,73,043 1,59,904 1,58,305  Raise TP to Rs113; Upgrade to BUY EPS (Rs) 18.5 (2.9) 18.8 17.4 17.2 We expect strong show from marketing would remain there in FY22 after a small hic-up EPS Growth (%) (13.0) (115.9) (739.6) (7.6) (1.0) in Q4 on the back of bearish view on crude oil price. Also, buoyant petrochem margin and PE (x) 5.0 (31.7) 5.0 5.4 5.4 revival in refining margin from second half along with modest growth in auto fuel Dividend Yield (%) 10.2 4.6 10.1 8.4 7.4 demand are few triggers for the growth in FY22/FY23. Further, lower interest cost owing EV/EBITDA (x) 4.6 8.3 6.2 6.6 6.7 to declining debt level would further support PAT. We upgrade the stock to BUY with a RoE (%) 15.5 (2.7) 17.8 15.3 14.1 revised SOTP based TP of Rs113 (Rs100 based on EV/EBITDA and Rs13 for its RoCE (%) 14.0 6.4 9.6 9.0 8.4 investments). Source: Company; IDBI Capital Research February 2, 2021 Indian Oil Corporation | Q3FY21 Result Review

Q3FY21 Concall Highlights  Utilization: Refineries ran at 102% capacity during the quarter.  Demand: On the back of personal mobility, MS demand improved to 108% during the quarter compared to same period last year vs 103% in Q2 compared to same period last year. HSD demand witnessed moderation and was at 91% and 95% in November and December vs same period last year and was 103% in Q2 compared to same period last year. In Q3, demand for ATF was at 61% of last year’s volume.  New Launches: IOCL launched HG100 i.e. High Octane Gasoline and all the refineries are now producing HG100.  Pipeline network: During the quarter, company added 296kms of new pipeline (102kms of patna-motihari-baitalpur pipeline and 194 kms of Paradip-Haldia-Durgapur pipeline) Total pipeline stands at 14,864kms.  Cracks: Spreads during the quarter remained weak: MS cracks were at US$3/bbl and HSD cracks were at US$4.5/bbl.  Petrochemicals: In Q3, Polymers margins were at US$651/tonnes was 20% higher than the previous quarter and 54% higher on a YoY basis. In case of PTA margins were, US$146/bbl was 25% higher than the previous quarter and was 21% lower on a YoY basis.  Borrowings: As of Q3 was at 725bn vs Rs 915bn as of Q2 and Rs 1,165bn as of Q4FY20. This includes Rs 78bn lease obligations.  Govt outstanding: Govt outstanding has come down in Q3 to Rs 43bn from Rs 91bn in Q2.  Inventories: Crude inventories for the quarter was 7mmt whereas for product it was 8mmt. This has led to lower working capital.  Capex: Capex for FY21 is at Rs 262bn including in JV’s and associates of which 64% is used and for FY22 company plans to spend around Rs 250-300bn  Cost of crude inventory in Q3FY21 was US$47.4/bbl  MEG (Petrochemicals) with a capacity of 357kt will be added in Paradip plant in Oct ’21.  Ethenol blending is a price through i.e. price differential is passed through to customers. No implication on capex.

Indian Oil Corporation | Q3FY21 Result Review

Exhibit 1: Quarterly Snapshot (Rs mn) (Rs mn) Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 % Chg YoY % Chg QoQ Net sales 1,246,152 1,184,391 623,966 856,105 1,063,365 -15% 24% Expenditure 1,177,821 1,155,069 569,653 761,833 967,145 -18% 27% EBITDA 68,331 29,322 54,313 94,272 96,219 41% 2% EBITDA margin (%) 5.5 2.5 8.7 11.0 9.0 65% -18% Depreciation 21,862 23,895 23,545 24,036 24,667 13% 3% EBIT 46,469 5,427 30,767 70,235 71,552 54% 2% Interest 13,117 18,504 11,713 2,211 6,286 -52% 184% Other income 5,697 17,223 6,422 8,653 8,997 58% 4% Fx gains/(losses) (1,819) (27,200) 810 6,721 3,698 - - PBT (before exceptional items) 37,230 (23,055) 26,286 83,398 77,962 109% -7% Exceptional items (9) (113,046) ------PBT (before exceptional items) 37,222 (136,102) 26,286 83,398 77,962 109% -7% Tax 13,832 (84,248) 7,177 21,125 28,796 108% 36% Reported PAT 23,390 (51,853) 19,108 62,273 49,166 110% -21% Adjustments 6 31,711 ------Adjusted PAT 23,396 (20,142) 19,108 62,273 49,166 110% -21% Adjusted EPS (Rs) 2.5 (2.2) 2.1 6.8 5.4 110% -21% Crude throughput (mmt) 17.5 17.1 12.9 14.0 17.9 2% 28% Product sales (mmt) 23.4 22.2 16.5 18.9 23.0 -2% 22% Petrochem sales (mmt) 0.63 0.65 0.48 0.72 0.79 25% 10% Pipeline throughput (mmt) 21.0 20.8 15.0 17.3 21.8 4% 26% Reported GRM (US$/bbl) 4.1 (9.6) (2.0) 8.6 2.2 -46% -75% Source: Company; IDBI Capital Research

Indian Oil Corporation | Q3FY21 Result Review

Exhibit 2: Actual vs estimates (Rs mn) Actual Estimated % Variance Net sales 1,063,365 940,294 13.1 EBITDA 96,219 72,285 33.1 EBITDA margin (%) 9.0 7.7 241bps Adjusted PAT 49,166 36,756 33.8 FDEPS (Rs) 5.4 4.00 33.8 Source: Company, IDBI Capital Research

Exhibit 3: Change in estimates Key parameters FY21E FY22E FY23E (Rs mn) Old New % Chg Old New % Chg Old New % Chg Revenue 31,87,814 36,84,614 15.6 42,31,243 48,91,581 15.6 51,37,558 63,85,996 24.3 EBITDA 2,43,452 3,15,666 29.7 2,84,072 3,16,116 11.3 2,95,828 3,23,387 9.3 EBITDA margin (%) 7.6 8.6 93 6.7 6.5 -25 5.8 5.1 -69 Net profit 1,38,699 1,73,043 24.8 1,17,804 1,59,904 35.7 1,16,026 1,58,305 36.4 FDEPS (Rs) 15.1 18.8 24.8 12.8 17.4 35.7 12.6 17.2 36.4 Source: Company, IDBI Capital Research

Indian Oil Corporation | Q3FY21 Result Review

Exhibit 4: Refinery: Throughput & EBITDA/tonnes Exhibit 5: Marketing: Sales & EBITDA/tonnes

6,000 17.4 17.3 17.5 17.5 17.9 20.0 23.4 23.0 17.1 4,000 22.8 22.6 22.7 22.2 25.0 21.6 21.4 4,000 3,500

14.0

12.9 18.9

2,000 15.0 3,000 20.0

907 907

214 214

416 416 16.5

- 2,500

10.0 2,000 15.0 390 390

-2,000 509

2,437

1,500

5,690

-4,000 5.0

1,000 10.0

2,787 -

-6,000 500

1,311 1,311 2,446 1,664 1,476 1,306 3,434 1,410 1,962

823 823 800

-8,000 0.0 - 5.0

Q2FY20 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21

Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Refining EBITDA/ tonnes Refining Throughput (MMT) - RHS Marketing EBITDA/ tonnes Marketing sales

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 6: Reported GRM & Singapore GRM Exhibit 7: Petrochemicals: Sales & EBITDA/tonnes

12.0 10 0.90 500

0.79 9.2

8.3 0.72 6.5

0.80

8.0 0.67 0.67

0.63 0.65

400

4.8

4.2 0.70

3.6

3.5

3.2

3.0

4.0 2.0 5 0.53

1.6

1.4

1.2 1.2 1.2 0.60 0.47 0.48 0.0 300

0.0 0.50

0.40

200 0.9

-4.0 1.0 0 - - 0.30

0.20

-8.0 100

0.10

201 213 187 237 165 101 213 226 335

-12.0 -5 - 0

Q2FY20 Q3FY19 Q4FY19 Q1FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21

Q3FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Core GRM (US$/bbl) LHS Singapore GRM (US$/bbl) LHS Q4FY19 EBITDA/ tonnes RHS Sales (MMT) LHS

Premium (US$/bbl) RHS

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Indian Oil Corporation | Q3FY21 Result Review

Exhibit 8: Refinery Throughput (mmt) Exhibit 9: Marketing sales volume (mmt)

75 100 10.9 12.5 73 10.0 70 68 80 5.6 6.8 7.5 3.5 65 5.0 63 60 60 1.0 0.2 2.5 2.7 58 0.0 55 53 40 -2.5 50 -5.0 48

20 -9.8 -7.5

43 -10.0

87.5 74.0 78.1 80.9 86.4 87.3 87.4 78.9 89.9

40 0 -12.5

56.7 65.2 69.0 71.8 69.4 62.8 70.0 72.0 38 53.6 35 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 Marketing Sales Volumes (mmt) YoY %

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Exhibit 10: Pipeline volume (mmt) Exhibit 11: Reported GRM & Singapore GRM - (US$/bbl)

100 16 10 95 14.4 14 8.5 12 90 7.9 85 10 8 7.5 7.8 8 80 5.5 3.3 3.9 3.3 6 75 7.3 4 6 70 6.4 5.4 2 5.1 5.8 4.3 4.3 65 0 -3.6 4.9 60 -2 4 3.2 2.9 55 -4 -6 50

-8

2 45 -10

0.55

76.2

79.8 82.5 85.7 88.5 85.3 87.2 94.0 40 75.7 -10.7 -12 0.3 0.1 35 -14 0 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 Pipeline volume (mmt) YoY % Reported GRM (USD/bbl) Singapore GRM (USD/bbl)

Source: Company; IDBI Capital Research Source: Company; IDBI Capital Research

Indian Oil Corporation | Q3FY21 Result Review

Exhibit 12: Return Ratios (%)

23 20.3 20.3 20 17.8 18 19.6 15.4 15.3 15 14.4 16.1 14.1 13 12.3 14.0 10 7.9 6.4 9.6 9.0 8 8.4 5 3 3.9 1.3 0 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 ROE % ROCE %

Source: Company; IDBI Capital Research

Indian Oil Corporation | Q3FY21 Result Review

Financial Summary

Profit & Loss Account (Rs mn) Cash Flow Statement (Rs mn)

Year-end: March FY20 FY21E FY22E FY23E Year-end: March FY20 FY21E FY22E FY23E

Net sales 48,26,022 36,84,614 48,91,581 63,85,996 Pre-tax profit (36,941) 2,31,341 2,13,775 2,11,638

Growth (%) (7.7) (23.7) 32.8 30.6 Depreciation 87,661 97,679 1,01,209 1,11,757

Operating expenses (46,35,268) (33,68,948) (45,75,465) (60,62,609) Tax paid (18,067) (1,07,197) (1,03,259) (1,03,214)

EBITDA 2,27,297 3,15,666 3,16,116 3,23,387 Chg in working capital 35,303 19,076 926 (177) (35.9) 38.9 0.1 2.3 Growth (%) Other operating activities 18,438 (1,353) 1,132 (8) Depreciation (87,661) (97,679) (1,01,209) (1,11,757) Cash flow from operations (a) 86,394 2,39,546 2,13,783 2,19,996 EBIT 1,39,636 2,17,988 2,14,908 2,11,630 Capital expenditure (2,96,970) (2,08,105) (2,30,014) (2,30,045) Interest paid (59,795) (32,672) (35,332) (37,992) Chg in investments (8,256) - - - Other income (3,736) 46,025 34,200 38,000 Other investing activities 223 - - - Pre-tax profit (36,941) 2,31,341 2,13,775 2,11,638 Cash flow from investing (b) (2,68,774) (1,74,080) (1,95,814) (1,92,045) Tax 50,073 (58,298) (53,871) (53,333) Equity raised/(repaid) - - - - Effective tax rate (%) 135.5 25.2 25.2 25.2 Debt raised/(repaid) 2,98,393 80,000 1,10,000 80,000 Minority Interest - - - - Dividend (incl. tax) (58,023) (1,03,826) (86,348) (75,986) Net profit 13,132 1,73,043 1,59,904 1,58,305 Chg in minorities - - - - Exceptional items 40,187 - - -

Adjusted net profit (27,055) 1,73,043 1,59,904 1,58,305 Other financing activities (53,012) (32,672) (35,332) (37,992)

Growth (%) (115.9) (739.6) (7.6) (1.0) Cash flow from financing (c) 1,87,358 (56,498) (11,680) (33,979)

Shares o/s (mn nos) 9,181 9,181 9,181 9,181 Net chg in cash (a+b+c) 4,978 8,968 6,289 (6,028)

Indian Oil Corporation | Q3FY21 Result Review

Balance Sheet (Rs mn) Financial Ratios

Year-end: March FY20 FY21E FY22E FY23E Year-end: March FY20 FY21E FY22E FY23E

Net fixed assets 16,34,196 17,41,517 18,67,186 19,82,306 Adj. EPS (Rs) (2.9) 18.8 17.4 17.2

Investments 3,10,522 3,13,627 3,16,763 3,19,931 Adj EPS growth (%) (115.9) (739.6) (7.6) (1.0)

Other non-curr assets 1,05,768 1,06,826 1,07,894 1,08,973 EBITDA margin (%) 4.7 8.6 6.5 5.1

Current assets 10,60,420 8,33,519 10,81,487 13,74,697 Pre-tax margin (%) (0.8) 6.3 4.4 3.3

Inventories 6,36,776 4,82,518 6,40,576 8,36,277 ROE (%) (2.7) 17.8 15.3 14.1 ROCE (%) 6.4 9.6 9.0 8.4 Sundry Debtors 1,28,441 97,326 1,29,207 1,68,681 Turnover & Leverage ratios (x) Cash and Bank 5,891 14,860 21,148 15,121 Asset turnover (x) 1.5 1.2 1.5 1.8 Marketable Securities 80,864 80,864 80,864 80,864 Leverage factor (x) 3.1 3.1 3.1 3.2 Loans and advances 1,66,994 1,26,540 1,67,991 2,19,313 Net margin (%) (0.6) 4.7 3.3 2.5 Total assets 31,10,906 29,95,489 33,73,330 37,85,906 Net Debt/Equity (x) 1.1 1.1 1.1 1.1

Working Capital & Liquidity ratio Shareholders' funds 9,37,689 10,06,906 10,80,462 11,62,780 Inventory days 48 48 48 48 Share capital 91,810 91,810 91,810 91,810 Receivable days 10 10 10 10 Reserves & surplus 8,45,878 9,15,095 9,88,651 10,70,970 Payable days 20 23 23 23 Total Debt 11,27,367 12,07,367 13,17,367 13,97,367

Secured loans 4,92,506 6,35,992 8,03,130 9,34,554

Unsecured loans 6,34,861 5,71,375 5,14,237 4,62,814 Valuation

Other liabilities 1,51,643 1,03,770 55,442 6,657 Year-end: March FY20 FY21E FY22E FY23E

Curr Liab & prov 8,94,207 6,77,446 9,20,059 12,19,102 PER (x) -31.7 5.0 5.4 5.4

Current liabilities 7,98,533 6,07,909 8,25,619 10,93,966 Price / Book value (x) 0.9 0.9 0.8 0.7

Provisions 95,675 69,537 94,440 1,25,136 PCE (x) 14.1 3.2 3.3 3.2

Total liabilities 21,73,217 19,88,583 22,92,869 26,23,126 EV / Net sales (x) 0.4 0.5 0.4 0.3

Total equity & liabilities 31,10,906 29,95,489 33,73,330 37,85,906 EV / EBITDA (x) 8.3 6.2 6.6 6.7

Book Value (Rs) 102 110 118 127 Dividend Yield (%) 4.6 10.1 8.4 7.4

Source: Company; IDBI Capital Research

Indian Oil Corporation | Q3FY21 Result Review

Notes

Dealing (91-22) 6836 1111 [email protected]

Key to Ratings Stocks: BUY: Absolute return of 15% and above; ACCUMULATE: 5% to 15%; HOLD: Upto ±5%; REDUCE: -5% to -15%; SELL: -15% and below.

IDBI Capital Markets & Securities Ltd. Equity Research Desk 6th Floor, IDBI Tower, WTC Complex, Cuffe Parade, Colaba, Mumbai – 400 005. Phones: (91-22) 2217 1700; Fax: (91-22) 2215 1787; Email: [email protected] SEBI Registration: BSE & NSE (Cash & FO) – INZ000007237, NSDL – IN-DP-NSDL-12-96, Research – INH000002459, CIN – U65990MH1993GOI075578 Compliance Officer: Christina D’souza; Email: [email protected]; Telephone: (91-22) 2217 1907

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Indian Oil Corporation | Q3FY21 Result Review

Analyst Disclosures

We, Sudeep Anand and Viral Shah, hereby certify that the views expressed in this report accurately reflect our personal views about the subject companies and / or securities. We also certify that no part of our compensation were, are or would be directly or indirectly related to the specific recommendations or views expressed in this report. Principally, We will be responsible for the preparation of this research report and have taken reasonable care to achieve and maintain independence and objectivity in making any recommendations herein

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IDBI Capital hereby declares that our activities were neither suspended nor we have materially defaulted with any Stock Exchange authority with whom we are registered in last five years. However SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued advice letters or levied minor penalty on IDBI Capital for certain operational deviations. We have not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has our certificate of registration been cancelled by SEBI at any point of time. IDBI Capital, its directors or employees or associates, may from time to time, have positions in, or options on, and buy and sell securities referred to herein. IDBI Capital or its associates, during the normal course of business, from time to time, may solicit from or perform investment banking or other services for any company mentioned in this document or their connected persons or be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or their affiliate companies or act as advisor or lender / borrower to such company(ies)/associates companies or have other potential conflict of interest. This report may provide hyperlinks to other websites. Except to the extent to which the report refers to the website of IDBI Capital, IDBI Capital states that it has not reviewed the linked site and takes no responsibility for the content contained in such other websites. Accessing such websites shall be at recipient's own risk. IDBI Capital encourages the practice of giving independent opinion in research report preparation by the analyst and thus strives to minimize the conflict in preparation of research report. Accordingly, neither IDBI Capital nor Research Analysts have any material conflict of interest at the time of publication of this report. We offer our research services to primarily institutional investors and their employees, directors, fund managers, advisors who are registered with us. The Research Analyst has not served as an officer, director or employee of Subject Company. We or our associates may have received compensation from the subject company in the past 12 months. We or our associates may have managed or co-managed public offering of securities for the subject company in the past 12 months. We or our associates may have received compensation for investment banking or merchant banking or brokerage services from the subject company in the past 12 months. We or our associates may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. We or our associates may have received any compensation or other benefits from the Subject Company or third party in connection with the research report. Research Analyst or his/her relative’s may have financial interest in the subject company. IDBI Capital or its associates may have financial interest in the subject company. Research Analyst or his/her relatives does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. IDBI Capital or its associates may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. The Subject Company may have been a client during twelve months preceding the date of distribution of the research report. Price history of the daily closing price of the securities covered in this note is available at www.bseindia.com; www.nseindia.com and www.economictimes.indiatimes.com/markets/stocks/stock-quotes.