We have raised Indian Oil Corp’s (IOC) target price (TP) by 18.8% to Rs147 based on revised FY20E-FY21E and new FY22E and upgrade the rating from Sell to Accumulate as we believe that the poor 2QFY20 results are priced in, considering that it is down nearly 10% in the last six months. The stock is likely to find support at CMP as it is trading at close to its book value and offers dividend yield of 5%. We also see prospects of 21% EPS CAGR over FY21-22E on the beaten down base in FY20E after our sharp 29% cut in FY20E following the steep 83%/58% decline in 2QFY20/1HFY20 PAT.IOC’s2QFY20 result was a big missvs. street and NBIE estimates as GRMs crashed to US$1.28/bbl vs. our estimate of US$6.69/bbl. This was due to inventory loss of Rs11.78bn and fx loss of Rs11.35bn – which we did not consider in our 2QFY20E (as these are difficult to estimate). Normal GRMs have come in at US$3.99/bbl, which is comparable with our GRM estimate. Standalone PAT came in at Rs5.63bn vs. street estimate of Rs37bn and NBIE estimate of Rs55.8bn. Going forward, management is banking on normalized GRMs based on likely improvement in spreads and higher petrochemical earnings from one of the twin-train new polypropylene (PP) units that started operations last quarter. Management is also hopeful of capping gross debt at current levels of Rs800bn barring any setbacks or increase in LPG/SKO subsidy dues from the government.
We lower our FY20E earnings estimates to factor in lower than expected H1 performance. During Q2, core performance for IOCL was weak; however, we expect operational performance to improve going forward. Benign crude price outlook given rising US supplies and weak global macros is likely to keep marketing margins buoyant. Also, implementation of IMO2020 will support diesel margins, which is positive for the OMCs. Maintain BUY with a revised PT of Rs209 (Rs181 earlier) on roll over to FY21E.
We are neutral on IOC at the current juncture given the volatility in global GRMs and uncertainty on the company’s ability to pass on costs to customers during high oil prices. IOC’s marketing margins and trend in refining margins will determine its near term performance. We have a HOLD recommendation on the stock with a target price of | 160 (based on average of P/BV multiple: Rs 152/share and P/E multiple: Rs 168/share).
Reported net profit for 1QFY20 at Rs35.96bn is higher than our estimate of Rs31.74bn. If we adjust for the write-back of Rs6.3bn in revenue (related to old sales tax/VAT disputes in Maharashtra),adjusted net profit for 1QFY20 at Rs31.86bn is broadly in line with our estimate of Rs31.74bn. Adjusted EBITDA came in at Rs77.3bn vs. our estimate of Rs72bn (+7.4%). On a YoY basis, the standalone adjusted EBITDA is down 39% at Rs77.2bn and PAT is down 53% YoY at Rs31.9bn (net of the above tax write-back). We maintain Sell with TP of Rs112 (based on 7.2x FY21E PE assuming 10% discount to 5 year median).
We cut our FY20/21E earnings by 10/11% respectively to update cost post annual report updation, appreciating exchange rate (INR/USD of 70/72.1 vs 72.6/74.8 for FY20/21) and other changes. During Q1, core performance for IOCL was muted, however, with marketing and refining margins higher than Q1 levels, we expect operational performance to improve going forward. Benign crude price outlook given rising US supplies and weak global macros is likely to keep marketing margins buoyant. Also, implementation of IMO2020 will support diesel margins which is positive for OMCs. Meanwhile, government’s move to redefine holdings eligible for stake sale is a dampener. Maintain BUY.
We are neutral on IOC at the current juncture given the volatility in global GRMs and uncertainty on the company’s ability to pass on costs to customers during high oil prices. IOC’s marketing margins and trend in refining margins will determine it’s near term performance. We have a HOLD recommendation on the stock with a target price of Rs 150.
With GRMs doubling QoQ to over USD7/bbl, we expect GRMs to have bottomed in Q1. Refining/petchem will be the key earnings driver in the future. With IOCL trading at an inexpensive 4.8x FY21E EV/EBITDA, we maintain ‘BUY’ with a TP of INR174/share.
We are structurally positive on IOC, owing to its diversified business model, and healthy free cash flows (Rs 285bn) over FY20-21E. Our SOTP based target price of Rs 190 (5x Mar 21E EV/e for standalone refining, pipeline, petchem and 5.5x Mar 21E EV/e marketing and Rs 31/sh from other investments).
With respect to refining, we maintain a modest outlook and believe rising US production along with potential production increase by OPEC could keep crude price levels below $78-80/bbl hence supporting operational performance to some extent. We expect revenues to grow at a CAGR of 8.6% over FY19-21E and EBITDA to grow at a CAGR of 9.0% over FY19-21E. At a CMP of INR 157, IOC is trading at 6.1x FY20E EV/EBITDA and 5.7x FY21E EV/EBITDA. We maintain our EV/EBITDA-based multiple target price of INR 185 (potential upside – 17.8% ). We maintain BUY rating on the stock.
We have Sell rating on IOCL with a target price of Rs112: Given our concerns on the increase in capex over the next five years, rise in interest costs and also concerns over product pricing freedom, we expect the upside in earnings to be capped. We believe that with likely low earnings growth and a decline in RoE and RoCE, the stock will get de-rated. We have retained Sell rating on IOCL with a target price of Rs112 based on FY21E SOTP valuation. We will be revising our estimates shortly.
We are neutral on IOC at the current juncture given the volatility in oil prices and intention of the new government to pass on costs to consumers when oil prices are high. IOC’s ability to maintain normal marketing margins and trend in refining margins will determine its near term performance. We have a HOLD recommendation on the stock with a target price of Rs 170 (based on average of P/BV multiple: Rs 164/share and P/E multiple: Rs 176/share).
IOCL is commissioning polypropylene plant at Paradip; it has already commissioned 5mmtpa Ennore LNG terminal. With reduced future capex, our estimate suggests that free cash flow generation over FY20/FY21 would be at INR10.2 per share/INR11.5 per Standalone - Quarterly Earning Model share, with dividend yield appearing attractive at ~5%. IOCL is trading at 8.4x consol. FY20E EPS of INR18.7 and 1.2x FY20E PBV. We value IOCL at 1.4x FY21 PBV. We reiterate Buy with a target price of INR198.
We maintain our FY20/21E earnings. During Q4, core performance for IOCL improved led by better marketing performance. Benign crude price outlook given rising US supplies and weak global macros is likely to keep marketing margins buoyant. Oil prices likely to remain benign, as rising US supplies cushions the impact of supply disruptions of over 3mbpd. Weak global macros and US-China trade dispute will prevent crude prices flare-up. Also, completion of Central elections is likely to ease policy overhang. Maintain ACCUMULATE.
We upgrade oil marketing companies (OMC’s) to BUY as we look beyond May 2019, wherein two important factors that determine the fortunes of OMCs gets settled-1) Central elections and uncertainties of policy overhang 2) clarity on Iran sanctions, which will determine trends in international crude oil prices. We believe that the risk-reward for the OMCs are favorable as US-China trade discord and weakening global economy will prevent any sharp rise in crude prices. Post Central elections, risk of government intervention on marketing margins is also likely to come down significantly. As a result, we increase our marketing margin assumptions (from Rs1.75 to Rs2.8/litre for FY20E) and target multiples to 10x PER FY20E against 8x earlier. BPCL/HPCL are top picks.