Q3FY24 Review: IOCL: Strong quarter, as refining surprises

25 Jan 2024 , 12:16 PM

IOCL’s Q3FY24 (standalone) PAT of Rs80.6bn was significantly ahead of the consensus estimates, driven by the strong refining segment (opportunistic crude sourcing + undisclosed inventory gains); supported by positive marketing margins (loss YoY). Analysts of IIFL Capital Services 16-22% upgrade to FY24-FY26 earnings may see further upside if IOCL continues to gain on oil sourcing. The stock remains cheap even in a normalised operating environment as seen in FY25-FY26 forecasts and offers 6% div yield. 

Strong performance:

IOCL’s Q3 standalone PAT of Rs 80.6bn surpassed consensus forecasts, driven by strong reported GRMs (undisclosed inventory gains + opportunistic crude sourcing) at US$13.53/bbl vs US$12.9/bbl YoY, outperforming the SG benchmark of US$5.6/bbl; while the marketing segment also turned profitable vs a loss YoY. Refinery utilisation averaged 105% in Q3FY24, up from 104% YoY, while overall product sales grew by 1% YoY. The PAT growth could have been higher, but changes in the assumptions of the useful life for certain assets resulted in Rs6.36bn of additional depreciation in Q3. IOCL’s consolidated performance was also strong, with a reported PAT at Rs 903bn (vs Rs 7.77bn YoY), as CPCL (52% stake) reported a PAT of Rs 3.6bn vs Rs 1.4bn. 

Favourable macro continues: 

The macro environment remains conducive for IOCL, evident in the benign brent, firm GRMs and freeze on the autofuel prices. It should also benefit from the opportunistic crude sourcing and maximisation of high margin middle distillates. As a result, the outlook for each of its core businesses remains robust over the next few quarters, driven by strong GRMs and normalised marketing margins; petrochemical profitability however is uncertain and remains a concern. 

Upgrade earnings:

Analysts of IIFL Capital Services upgrade IOCL’s FY24-26 EPS by 16%-22%, to reflect the sustained firm GRMs and continuation of normalised marketing margins. The earnings have an upside if IOCL continues to surprise positively in the refining segment with continued opportunistic crude sourcing. As such, its earnings are sensitive to the GRMs; US$1/bbl change in GRM can swing consolidated EPS by 15%. The stock trades cheap, and offers attractive yield of 6% and can re-rate significantly provided the favourable macro sustains.