Indian Oil Corporation Ltd. Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh euismod tincidunt ut laoreet dolore magna aliquam erat volutpat. Ut wisi enim ad minim veniam, quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea commodo consequat. Duis autem vel eum iriure dolor in hendrerit in vulputate Initiating Coverage velit esse molestie consequat, vel illum dolore eu feugiat nulla Indian Oil Corporation Ltd. Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh euismod tincidunt ut laoreet dolore magna aliquam erat volutpat. Ut wisi enim ad minim veniam, . quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea 20-October-2020 commodo consequat. Duis autem vel eum iriure dolor in hendrerit in vulputate velit esse molestie consequat, . vel illum dolore eu feugiat nulla facilisis at vero eros et accumsan et iusto odio dignissim qui blandit praesent luptatum zzril delenit augue duis dolore te feugait nulla facilisi. et iusto odio dignissim qui blandit praesent luptatum zzril delenit 1 Indian Oil Corporation Ltd. Industry LTP Recommendation Base Case Fair Value Bull Case Fair Value Time Horizon Refineries/ Petro-Products Rs. 76.8 Buy at LTP & add further on dips to Rs 69 Rs. 87 Rs. 92 2 quarters HDFC Scrip Code INDOIL Our Take: BSE Code 530965 IOCL’s marketing sales have improved from April 2020 lows but are still lower YoY. Fuel demand in July fell MoM due to localised lockdowns NSE Code IOC and monsoon. From September, fuel demand has improved MoM and in the first half of October, fuel demand has risen to pre Covid levels. Bloomberg IOCL IN Post excise duty hike in May 2020, IOC increased retail prices by Rs 9-12/litre, which has led to steady marketing margins. Rising prices CMP Oct 19, 2020 76.8 and/or reducing subsidies on LPG cylinder augurs well for the IOCL. Deregulating LPG would boost the working capital of IOCL. However, the Equity Capital (Rscr) 9414.2 government’s resolve would be tested if oil prices spike. Face Value (Re) 10.0 Equity Share O/S (cr) 941.4 Global demand recovery is likely to remain capped in the near term with concerns over high inventory and further delayed recovery in Jet Market Cap (Rscrs) 72299.5 fuel demand. We expect crude throughput of 63.4/71.1mmt and GRM of USD 3.4/3.9 per bbl in FY21/22E as the economy recovers. OMCs Book Value (Rs) 103.90 are currently making marketing margin of ~Rs 3.5-4.5/liter on petrol-diesel, which is slightly higher than the long-term average. Avg. 52 Wk Volumes 953758 52 Week High 149.0 IOC expects to add 1000 outlets and also invest on upgrading existing outlets in fuel retailing. IOC is already setting up EV charging centers. 52 Week Low 71.15 Most of the new outlets will be added in class ‘B’ towns at a lower cost per outlet ~ typically Rs 0.50- Rs1 crore. The annual capex will go towards this expansion and support infrastructure like tankages, pipelines and surveillance as well as technology. Share holding Pattern % (June, 2020) Valuations & Recommendation: Promoters 51.5 IOCL is well-placed to take advantage of the improved demand outlook as the economy opens up and can deliver overall throughput much Institutions 20.2 Non Institutions 28.3 higher than the industry average. As petroleum products are essential services, IOCL’s refining and marketing operations continued despite the lockdown and has got back to almost normalcy. Also we expect, further improvement in demand to normal levels, upon full lifting up of Total 100.0 the lockdown and stabilisation of economic activity. However, the net sales may remain subdued in Q2FY21. IOCL’s refining margins are likely to bottom-out in its cyclical downturn, going forward. We expect recovery in both margins as well as volumes. Its strong operational Fundamental Research Analyst profile driven by dominant market position supported by established marketing and distribution network and sizable refining capacity makes Abdul Karim us positive on the stock. [email protected] IOCL’s value of investments and non-core assets (Chennai Petroleum Corporation Ltd, Petronet LNG, Lanka IOC, ONGC, GAIL, OIL India other subsidiaries and JVs) account for nearly its entire value, indicating that the market is ascribing no or negligible value to its core refining and fuel marketing businesses. 2 Indian Oil Corporation Ltd. Oil Marketing Companies are trading at close to five year lows in terms of Price to Book & at valuations similar to regulated regime (2009 - 2014) which had structural issues like no pricing freedom and subsidy concerns. In the current period, the low GRM due to depressed global demand is compensated by high marketing margins. Moreover, BPCL’s privatisation (as and when it happens) has the potential to significantly re-rate refining and marketing business of HPCL and IOCL. Investors could buy the stock at the LTP and add on dips to Rs 69 (valuing refining, marketing and pipeline and Petchem businesses at 4.0, 4.0, 4.5 and 4.0 times EBITDA multiple +value of other listed and unlisted investments). Based on SOTP valuation, Base case fair value of the stock is Rs 87 (valuing refining, marketing and pipeline and Petchem businesses at 5.0, 4.5, 5.0 and 5.0 time EBITDA multiple +value of other listed and unlisted investments) and the bull case fair value of the stock is Rs 92 (valuing refining, marketing and pipeline and Petchem businesses at 5, 5, 5 and 5 time EBITDA multiple +value of other listed and unlisted investments) over the next 2 quarters. Financial Summary Standalone Consolidated Particulars (Rs Cr) Q1FY21 Q1FY20 YoY-% Q4FY20 QoQ-% FY19 FY20 FY21E FY22E Total Operating Income 62396.6 130885.6 -52.3 118439.1 -47.3 5,28,148.9 4,84,362.3 3,30,505.1 3,75,614.7 EBITDA 5513.4 7723.9 -28.6 -11089.2 -149.7 35,226.9 5,525.6 18,312.0 25,278.4 Depreciation 2355.7 2093.6 12.5 2392.8 -1.6 8,506.5 10,274.5 9,452.7 9,749.5 Other Income 642.2 631.4 1.7 1722.3 -62.7 2,714.3 2,784.6 4,069.1 4,199.0 Interest Cost 1171.3 1509.1 -22.4 1850.4 -36.7 4,888.0 6,578.7 7,144.3 6,761.7 Tax 717.7 1783.3 -59.8 -8424.8 -108.5 8,653.1 -5,300.7 1,511.2 3,267.5 RPAT 1910.8 3596.1 -46.9 -8853.0 -121.6 15,893.7 -3,242.4 4,272.9 9,698.6 Diluted EPS (Rs) 2.1 3.9 -46.9 -5.6 -136.9 18.9 -5.0 6.3 12.0 RoE-% 15.4 -4.4 5.7 10.7 P/E (x) 4.1 -15.5 12.2 6.4 EV/EBITDA 4.4 33.6 9.2 6.6 (Source: Company, HDFC sec) 3 Indian Oil Corporation Ltd. Q1FY21 Result Review IOCL numbers were inline in Q1FY21. Company reported 46.9 per cent (YoY) de growth in standalone net profit to Rs 1,910.8 crore due to an inventory loss of Rs 3,196 crore, while it reported improved bottomline performance on sequential basis, Company had reported net loss of Rs 8,853 crore in Q4FY20. Consolidated net revenue was down by 52.3 per cent (YoY) and 47.3 per cent (QoQ) to Rs 62396.6 crore due to COVID-19 pandemic disruption in the quarter. Within business segments, revenue from Petroleum Products (contributes 95.0 per cent) declined 41.6 per cent, Petrochemicals (contributes 3.7 per cent) was down by and revenue from other business activities like Gas, Oil & Gas Exploration Activities, Explosives & Cryogenic Business and Wind Mill & Solar Power Generation declined 41 per cent in Q1FY21 on YoY basis. IOCL’s Average Gross Refining Margin (GRM) in Q1FY21 stood at US$ (1.98 per bbl) vs. US$ 4.69 per bbl in Q1FY20. The core GRM or the current price GRM after offsetting inventory loss/ gain stood to $ 4.27 per bbl in Q1FY21 up 23% YoY. Company accounted for NIL Budgetary Support in Q1FY21 vs. Rs 655.92 crore accounted in Q1FY20 as revenue grants on sale of SKO (PDS). Refineries were running at an utlisation of 40% in April which improved to 78% by end-May and have peaked to 97% in June. Capacity utilization for Q1 stood at 74.4%. Refining throughput remained muted at 12.9MMT (down 25% YoY). Management expects 90-95% capacity utilization for Q2FY21. On the other hand, marketing margin stood at Rs6.8/ltr v/s Rs 3.4/ltr in Q4FY20 while sales volume for the quarter declined by 28.3% YoY to 15.4MMT. IOCL expects the IOCL Group's capacity utilisation to be maintained at 70-75 per cent for FY21. IOCL Board approved setting up of Rs 13,800 crore Purified Terephthalic Acid (PTA) plant in Paradip. Recent Triggers IOCL plans to invest Rs 2 lakh crore in the next 5-7 years to expand its refining, marketing, petrochemicals and natural gas business. Company is expanding almost all its refineries from Panipat to Paradip and also clubbing petrochemicals in all the refineries. Company is making necessary investments in pipeline and marketing infrastructure so that there will be no shortage in meeting the growing energy demands of the country. IOCL accounts for about one-third of India’s refining capacity of 250 million metric tonnes per annum (mmtpa) with 11 refineries.