IOC's Q1FY19 results (Outperformer) - Inventory gains drive beat
Q1FY19 highlights
- IOCL Q4FY18 reported PAT of Rs68.3bn (+2.6x yoy, IDFCe Rs51.4bn), on the back of substantially higher inventory gains and better marketing margins for products other than petrol/diesel.
- EBITDA of Rs125.7bn, up 2.4x yoy well above estimates of Rs107bn, primarily due to higher inventory gains of Rs59.2bn (refining) and Rs19.5bn (marketing). We note that opex includes Rs18bn of forex loss vs Rs6bn forex gain in Q1FY18.
- GRM* of $10.2/bbl sharply ahead of $4.3/bbl in Q1FY18 and estimates of $8.8/bbl – This is driven by Inventory gains of $6.8/bbl vs inventory loss of $3.4/bbl in Q1FY18 and estimates of $3.6/bbl gain.
- Marketing volumes of 22.9mt, up 1.8% yoy and lower than estimates of 23.3mt –growth of key fuels Gasoline/Diesel/LPG of 5/1/9% vs estimates of 4/2/3% respectively. Marketing margins of Rs4340/t up 21% yoy and well ahead of estimates of Rs3550/t – primarily driven by growth in other product margins as petrol/diesel margins declined by Rs1/ltr yoy/qoq.
Key positives: Strong marketing margins despite lower petrol/diesel.
Key negatives: muted core GRMs, weak marketing volume growth.
Impact on financials: EPS for FY19/20 higher by 5.5/4.9% to factor better marketing margins. TP raised to Rs230/sh
Valuations & View
IOCL stock has underperformed Sensex by 23% (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 8x FY20E EPS/ 5.3x EV/E, we believe downsides are limited from here. Our EV/E based SOTP delivers a target price of Rs230/sh, offering 43% upside from a 12month 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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