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MOSL: IOCL (Buy)-Mixed quarter-marketing margins remain high

IOCL: Mixed quarter; marketing margins remain high

(IOCL IN, Mkt Cap USD18.7b, CMP INR137, TP INR195, 42% Upside, Buy)

 

Reported 1QFY20 EBITDA of INR82.6b (-43% YoY, -18% QoQ) was 5% below our estimate. Adjusting for settlement of old dispute for sales tax/VAT in the state of Maharashtra and other one-offs, EBITDA stood at INR64.0b (-2% YoY, -13% QoQ) v/s our estimate of INR80.7b. The miss was mainly due to higher-than-expected costs and the poorer-than-expected petrochem performance. PAT fell 47% YoY (-41% QoQ) to INR36b due to higher interest cost (+46% YoY to INR15.1b).

• Forex gain was at INR0.9b (v/s loss of INR18.1b in 1QFY19 and gain of INR8.4b in 4QFY19). Total inventory gain stood at INR12.3b (refining at INR9.8b and marketing at INR2.6b).
• Refining: Refining throughput was at 17.3mmt (flat YoY/QoQ) in 1QFY20, 2% below our estimate, due to shutdown at the Koyali refinery for BS-VI quality upgradation. Reported GRM of USD4.7/bbl (-54% YoY, +21% QoQ) was higher than our estimate. Core refining margin stood at USD3.6/bbl v/s our estimate of USD3.9 (USD3.4 in 1QFY19 and USD1.4 in 4QFY19).
• Marketing: Domestic sales stood at 20.5mmt (flat YoY/QoQ), in line with our estimate. Implied marketing margin stood at INR5.1/lit v/s our estimate of INR4.5 (v/s INR5.2 in 1QFY19 and INR6.7 in 4QFY19).
• Petrochem: Sales declined 18% YoY to 0.53mmt due to shutdown at PTA plant at Paradeep after some restriction by NGT (now normalized though). EBITDA/mt declined to USD187, lower than USD381 in 1QFY19 and USD218 in 4QFY19, due to continued pressure on petchem spreads.

Operational highlights:

• Total capex for the quarter was at INR42.5b, with expected capex of ~INR250b in FY20 (Refining: INR73b, Marketing: INR64b, Pipeline: INR56b, E&P: INR10b, Petrochem: INR15b).
• Borrowings decreased by INR140b, supported by receipt of INR94b of under recoveries from government during the quarter. Receivables from the government now stand at INR97b (v/s INR190b at end-Mar'19).
• Gross debt stands at ~INR722b, which also includes ~INR40b impact of lease due to Ind-AS 116.

Valuation view: In a stable crude oil and exchange rate environment, we expect to see structural changes in pricing of LPG and kerosene, which may bid farewell to all under-recoveries in the petroleum sector.

• IOCL is at the end of its capex cycle. Our estimate suggests that free cash flow generation over FY20/21 would be INR5.5/12.2/share, ~5-9% of the current market cap. Additionally, dividend yield appears attractive at ~5-6%.
• We cut our FY20/21 EPS by 20%/11% in light of weak petchem spreads due to global supply glut. We have revised our petchem margin (EBITDA USD/mt) estimate by 20% for FY20/21. Also, we expect the ramp-up at Paradip PP plant to be spread over more than a year.
• IOCL is trading at 9.7x consol. FY20E EPS of INR14.1 and 1.1x FY20E PBV. We value IOCL at 1.4x FY21 PBV. Maintain Buy with a target price of INR195.