IOCL's Q4FY18 results (Outperformer) - Strong FY18, clouded by margin concerns for FY19
Q4FY18 highlights
- IOCL Q4FY18 recurring PAT of Rs52.2bn (-36% yoy, IDFCe Rs57bn). FY18 PAT of Rs195bn down 22%.
- EBITDA of Rs110bn (IDFCe Rs98.3bn) helped by inventory gains of Rs25bn in refining (US$3/bbl) and Rs9.9bn in marketing.
- Reported GRMs of $9.1/bbl, $1/bbl flat yoy (IDFCe $7.9/bbl). Inventory gains of $3/bbl vs $2.05/bbl in Q4FY17 and IDFCe $2/bbl. FY18 saw refining inventory gain of only $1.7/bbl vs $2.8/bbl in FY17. Despite this, stronger core GRMs have meant that reported GRMs of $8.5 are $0.7/bbl higher yoy.
- Marketing volumes of 22.6mt grew 6.7%, ahead of estimates of 22.4mt. Strong growth in Gasoline (+10% yoy), Diesel (+5%) LPG (+7%) has driven this increase. FY18 volumes of 88.8mt have grown 6.4%, 300bps higher than 3% growth seen in FY17. Marketing margins have jumped sharply to an 11 qtr high of Rs4800/t, driven by a sharp recovery in petrol/diesel margins and higher other product margins.
Key positives: Strong Core GRMs/ marketing performance in FY18.
Key negatives: Paradip utilisation still shy of 100%, PPU unit yet to be commissioned, diesel volume growth lower than industry.
Impact on financials: EPS for FY19/20 lower by 11/7% to factor softer marketing margins. TP reduced to Rs225/sh
Valuations & View
Notwithstanding the stellar FY18 performance (EBITDA net of inventory has grown 27%), IOCL stock has underperformed Sensex by 25% (6M) due to concerns on retail fuel margins and government policy direction in the context of sharply higher crude prices in recent months. While we submit the threat of lower margins on petrol/diesel is material (every Rs0.5/ltr drop in petrol/diesel margin drags EPS down 10%) we believe over the year margins will gradually return to normalized levels of Rs2.5-2.6/ltr and that the pressure on margins will ease in H2FY19. Additionally, the rising profitability from refining due to Paradip and the cushion of pipeline/petchem segments hedges IOCL from the marketing segment uncertainty to some extent. With valuations at trough levels of 7.6x FY20E EPS/ 4.9x EV/E, we believe downsides are limited from here. Our EV/E based SOTP delivers a target price of Rs225/sh, offering 46% upside from an 18month perspective. Outperformer.
Indian Oil is engaged in the sale of imported crude oil; and exploration of petrochemicals, and oil and gas. Co.'s products include liquefied petroleum gas, natural gas, petrol/gasoline, diesel/gas oil, aviation turbine fuel/jet fuel, lubricants and greases, marine fuels and lubricants, kerosene, bulk/industrial fuels, bitumen, petrochemicals, and crude oil. Co. also provides other products, which comprise benzene, carbon black feed stock, food grade hexane, jute batching oil, micro crystalline wax, mineral turpentine oil, paraffin wax, propylene, raw petroleum coke, sulphur, and toluene.
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