Q1FY24 Review: IOCL: Strong quarter but inventory losses hurt

31 Jul 2023 , 10:21 AM

IOCL reported Q1 standalone PAT of Rs137bn (loss YoY), which missed IIFL Capital Services estimates slightly due to inventory valuation losses in its Marketing segment (quantum not disclosed). On the other hand, Refining segment showed robust performance. Pricing policy on autofuels remains uncertain for which analysts of IIFL Capital Services 63% upgrade to FY24 earnings may see further upsides, if prices stay unchanged. However, even in a normalised environment (FY25), dividend yield works out at 7%; thereby offering fundamental support to the stock price. Sustainable pricing freedom continues to be a key for the re-rating in the stock. Maintain ADD. 

Inventory losses lead to miss: 

Due to inventory losses, IOCL’s Q1FY24 standalone PAT of Rs137bn fell slightly short of analysts of IIFL Capital Services expectations. While IOCL quantified the inventory loss for refining segment (US$0.7/bbl, of reported US$8.3/bbl vs SG benchmark GRM of US$4/bbl), it did not enumerate the same for the Marketing segment; complicating result analysis. In Q1, Crude throughput and market sales volumes were flat YoY; while petrochemical production was up sharply by 14% YoY. Impacted by CPCL’s 77% YoY profit decrease, IOCL’s consolidated performance lagged standalone. 

Uncertain autofuel pricing: 

Despite the current healthy autofuel margins, volatility in crude prices may delay any cut in autofuel prices. On the bright side, Refining stays strong, driven by Russian crude (approx. ~30% share) and the recent surge in product cracks. This is supported by a healthy outlook on product consumption, for which the operating environment bodes well for IOCL in the near term. If the trend continues, Refining will offset the recent weakness in the Marketing segment. 

Upgrade in earnings: 

Owing to the uncertainties around timing and extent of autofuel price cuts, estimating FY24 earnings poses challenges. If oil prices soar uncontrollably, inventory gains and GRMs may soar but could also erode autofuel margins, for which the 63% upgrade in FY24 earnings holds less significance. However, even in a normalised environment (FY25), the 7% dividend yield provides fundamental support to the stock. Sustainable pricing freedom remains key for the re-rating. Maintain ADD.