Indian Oil Corporation's Q2FY19 results (Neutral) - Marketing margins, inventory offset refining weakness, forex loss

Q2FY19 highlights

• IOCL adjusted EBITDA/PAT of Rs80.3bn/Rs40bn respectively declined 36/40% qoq and was below est of Rs96.9/47.5bn, driven by lower refining margins of $6.7/bbl (IDFCe $6.9/bbl) and higher forex loss of Rs26bn (est Rs13bn)
• Reported EBITDA/PAT of Rs67.6/32.5bn was impacted by a one-time provision of Rs12.7bn towards superannuation provision for previous periods.
• Refining thruput of 17.8mt (IDFCe 17.6mt) and Reported GRMs of US$6.8/bbl (Core $3.3/bbl, inventory gain $3.5/bbl vs est of US$6.9/bbl (Core $5.3, inventory of $1.6)
• Marketing volumes of 21.6mt (+3.3% yoy, IDFCe 21.8mt), with blended margins of Rs4834/t (IDFCe Rs4315/t) driven by other product margins. Marketing inventory gain of Rs13.9bn (+5x yoy, IDFCe Rs6.2bn).
• Gross debt increases by 56% yoy to Rs594bn; Capex of Rs128bn in H1, FY19 guidance of Rs230bn.

Key positives:  Strong marketing margins

Key negatives: Weak refining metrics, debt ramp up

Impact on financials: Revise FY19/20E EPS up by 25/3% to factor inventory and sharply higher marketing margins, offsetting lower refining assumptions. TP revised to 180/sh

Valuations & View

IOCL remains the most resilient among the 3 OMCs in an uncertain marketing environment due to lowest profit contribution from the segment among peers. Additionally, strength in other product margins is a positive. Despite these positives and the optimism from the recent decline in Brent crude prices however, we remain cautious. The Refining environment has turned unusually weak in recent weeks, with retail fuel margins yet to recover to pre Oct price cut levels, even though the scenario might change with crude @US$73/bbl levels. Valuations of 8x FY20E EPS (Standalone) and 5.3x EV/E adequately capture the risk-reward. Reiterate Neutral.