Indian Oil Corporation (IOC) consolidated EPS in the first quarter of fiscal 22 is up 2.7 times year-on-year, despite lower net sales margin and core GRM, due to the jump in Petrochemicals EBITDA and inventory gain versus loss in Q1 FY21. The sharp rise in domestic prices and the fall in international prices from peak meant that the fuel net trade margin automobile is on track to meet our estimate for FY 22 of Rs 2.5 / l. IOC GRM is low during FY22-TD and diesel crack recovery is essential for GRM to meet our FY22 estimate of $ 3 / bbl. The net impact of taking into account the market value of investments (increase of Rs 3 / share), the reduction in the volume of diesel sales (-8% in FY22e vs. -20.6% in Q1) and of the pipeline’s Ebitda (Rs 63 billion in FY22e vs Rs 15.7 billion in the first quarter, the EPS for FY22e is reduced by 3% and the target price by 3% to Rs 107 (4% up) We maintain Hold on IOC.
Q1 EPS up 2.7x yoy: FY22 first quarter autonomous recurring EPS is up 3.1x yoy thanks to: GRM of minus $ 2.0 / bbl in Q1 of fiscal year 21, and (iii) an estimated increase of 99% year-on-year in the gain in stock of products to Rs 27.7 billion. Core GRM at $ 2.24 / bbl is down 49% year-on-year. The first quarter EPS was up year-on-year despite a 77% year-on-year drop in net trading margin to Rs 1.4 / l. Excluding inventory gains / losses, first quarter stand-alone EPS was down 80% year-on-year. The 2.7x YoY Consolidated EPS growth is more modest than that of a stand-alone company because the increase in JV / Associate profit share is more modest than that of IOC at 57 % year-on-year and subsidiary Chennai Petroleum’s profit was down 80% year-on-year.
Marketing margins appear to be on track to reach around Rs 2.5 / l in FY22: an adequate increase (Rs 9-11.28 / l) in domestic diesel and gasoline prices over the course of FY22. of the EX22-TD and a modest drop in international prices from the peak of July 6, 21 a This means that the net commercial margin of motor fuel is Rs 2.56 / l as of July 30, 21 and Rs 2.75 / l at T2FY22-TD against Rs 1.43 / l at Q1FY22 and Rs 1.76 / l at FY22-TD. The net margin is estimated at Rs 3.39 / l for August 1 based on international prices from July 16 to 29 21 and at Rs 2.69 / l at the latest international prices. If national and international prices remain at current levels, the 22nd financial year net margin would amount to Rs 2.41 / l.
Base GRM Q1 25% lower than GRM FY22e: IOC’s Q1FY22 base GRM at $ 2.24 / bbl is 25% lower than our FY22 estimate of $ 3 / b. Reuters Singapore GRM is 8 quarter high due to gasoline cracks at 7 quarter high at T2FY22-TD. However, diesel cracks continue to be weak at $ 5 / bbl and their rebound to the pre-Covid level of $ 11 / bbl is key to the GRM’s recovery.
Reduction in EPS and target price for FY 22: We reduced IOC’s diesel sales volume for FY 22 to assume an 8% decline from FY 20 levels versus a decline of 3% assumed earlier and we reduced pipeline EBITDA to the same level as in FY20 (3.5% increase assumed earlier). The net impact of these changes and taking into account the market value of the investments is reduced in the 22nd year EPS and the target price by 3% to Rs 107. The rebound of diesel cracks is the key to the takeover of GRM, which we consider crucial to improve the performance of IOC shares.