Q2FY24 Review: IOCL: Beating Forecasts with Strong Refining

2 Nov 2023 , 01:19 PM

IOCL reported Q2FY24 standalone PAT of Rs129.7bn (loss YoY) that came in ahead of the forecasts. The strong performance was on the back of GRM beat (Russian oil + Inventory gains); while marketing margins moderated QoQ. The 44% upgrade to FY24 earnings may see further upside provided oil collapses. The stock remains cheap even in a normalised operating environment, as seen in FY25 forecasts and offers ~8% yield. 

Refinery drives the earnings beat: 

IOCL reported PAT of Rs129.7bn vs Rs2.7bn of loss YoY, beating forecasts, driven by better than expected GRMs at US$18.1/bbl (Inventory gains of US$1.8/bbl) vs SG benchmark of US$9.6/bbl and US$18.5/bbl YoY. The refinery utilisation averaged at 101% in Q2FY24 vs 91% YoY, while IOCL’s overall product sales grew by 4% YoY. Pipeline throughput was flat YoY at 23.9mmt; while petrochemicals throughput saw a sharp recovery YoY and was at 0.8mmt (53% up YoY).The consolidated performance was also strong with reported PAT at Rs131bn (vs Rs9.9bn loss YoY)- CPCL (52% stake) reported PAT of Rs11.9bn vs Rs0.3bn YoY firm GRMs (US$12.1/bbl). 

Integrated value chain: 

Analysts of IIFL Capital Services see IOCL with its integrated value chain is relatively well placed to handle the volatility in oil prices and product cracks. It should also benefit from the processing of inexpensive Russian oil and maximisation of high margin middle distillates. Its balance sheet is strong to fund ~Rs300bn capex pa, to scale up its refining capacity by ~17mmtpa (Gujarat, Barauni and Panipat), grow its marketing infra, including pipelines etc. It also plans to scale up the RE portfolio, including green H2, which should lower its overall carbon footprint. 

Upgrade EPS: 

Analysts of IIFL Capital Services upgrade IOCL’s FY24 EPS by 44%, to reflect the strong H1FY24 performance. The earnings are sensitive to the GRM; US$1/bbl change in GRM can swing consolidated EPS by 9%. IOCL has declared Rs5/share of interim dividend and analysts of IIFL Capital Services believe FY24/FY25 payout should be healthy (50% in the base case). The stock trades cheap, and offers attractive yield of 7-8% even in normalised earnings environment, which offers a fundamental support to the price.