The brokerage company HDFC Securities has issued a buy call on Indian Oil Corporation Ltd (IOCL) shares with a target price of Rs 150 (time frame- 2 QTRs). The Maharatna CPSE is a diversified energy giant having a footprint in oil, gas, petrochemicals, and alternative energy sources.
Q3FY22 Result of IOCL
HDFC Securities has said "IOCL revenue was above expectations in Q3FY22, while profitability was below expectations. Standalone net revenue grew by 57% YoY and 23.2% QoQ to Rs 166,788 crore. Capacity utilisation plunged 270bp YoY to 99% on planned shutdown of the Haldia refinery in Q3. Since all maintenance-related work is behind, utilisation could normalise Q4 onwards. EBITDA was up by 2.5% YoY, stood at Rs 9,866 crore in Q3FY22, and declined 7.2% QoQ. EBITDA margin stood at 5.9% in Q3FY22 vs. 9.1% in Q3FY21 and 7.8% in Q2FY22. The company's Net Profit was up by 19.2% to Rs 5,861 crore in Q3FY22 supported by lower tax expenses in the quarter. Tax rate in the quarter was at 21.6% vs. 36.9% in Q3FY21. Marketing business incurred an EBITDA loss, mainly due to inventory loss resulting from a sharp excise duty cut during Q3FY22."
According to the brokerage "On Operating metrics, IOCL refinery throughput reported at 17.404 MMT in Q3FY22 vs. 15.277 MMT in Q2FY22 and 17.866 MMT in Q3FY21. Its pipeline throughput stood at 21.779 MMT in Q3FY22 vs. 19.533 MMT in Q2FY22 and 21.806 MMT in Q3FY21. Domestic product sales was at 21.021 MMT in Q3FY22 vs. 18.938 MMT in Q2FY22 and 21.425 MMT in Q3FY21. Export product sales was at 1.57 MMT in Q3FY22 vs. 1.243 MMT in Q2FY22 and 1.608 MMT in Q3FY21."
Investment rationale for IOCL
As per the brokerage "IOCL expects to add 1000 outlets and also invest on upgrading existing outlets in fuel retailing. IOC is already setting up EV charging centers and forming partnership for green hydrocarbon. Most of the new outlets will be added in class 'B' towns at a lower cost per outlet ~ typically Rs 0.50- Rs1 crore. The annual capex will go towards this expansion and support infrastructure like tankages, pipelines and surveillance as well as technology."
The brokerage has also claimed that "IOCL is planning to expand its CGD business and investing Rs 7,282 crore over for development of City Gas Distribution (CGD) network in 9 Geographical areas (GAs) awarded to the Company by PNGRB in the 11" Round of CGD bidding. The company will now have its presence in 26 number of GAs on its own and 23 number of GAs through its Joint Venture companies. Besides, IOCL acquired a 4.93% equity share in Indian Gas Exchange Ltd (IGX) - the country's first automated national level gas exchange. The acquisition of an equity stake in IGX is a strategic opportunity to become part of India's natural gas market."
HDFC Securities has also highlighted that "IOCL is expanding almost all its refineries and also clubbing petrochemicals in all the refineries. The company is making necessary investments in pipeline and marketing infrastructure so that there will be no shortage in meeting the growing energy demand. The company intends to enhance crude refining capacity from 70.05 MMT to 87.55 MMT by 2024-25, to meet the growing demand for petroleum products."
"IOCL added 337 km of additional pipeline length in FY21, as part of its plans to continuously expand the network in line with growth in business. Projects currently under implementation could further increase the length of the pipelines network to about 21,000 km, and throughput capacity to 102 mmtpa. IOCL has taken crucial mega-investment decisions - 9 MMTPA greenfield refinery at Nagapattinam in Tamil Nadu through a Joint Venture with CPCL, Panipat Refinery expansion from 15 to 25 MMTPA and Gujarat Refinery expansion from 13.7 to 18 MMTPA. All refinery expansion and petrochemical integration projects viz. PX-PTA at Paradip and Ethylene Glycol at Paradip (Odisha) and Oxo Alcohol project at Dumad (Gujarat) are on track. The newly approved projects translate into an investment commitment of close to Rupees One Lakh crore over the next 4 to 5 years," the brokerage has said.
"Recently, IOCL, the EPC major Larsen & Toubro (L&T) and ReNew Power, a renewable energy firm signed binding term sheet for the formation of a Joint Venture (JV) to develop the nascent green hydrogen sector in India. On March 16, 2022, IOCL approved implementation of Poly-Butadiene Rubber (PBR) Project at company's Naphtha Cracker Complex at Panipat, Haryana at an estimated investment of Rs 1459 crore, which is expected to be operational by 2025," HDFC Securities has noted.
Buy for a target price of Rs 150
"Oil Marketing Companies are trading at close to eight year lows in terms of P/BV, P/E & at valuations similar to regulated regime before 2010 which had structural issues like no pricing freedom and subsidy concerns. In the current period, higher oil and gas prices with delayed revision in product prices have impacted the marketing margins, but higher inventory gains and refining margin could moderate the pressure on marketing margin in near to medium term. Moreover, BPCL's privatisation (as and when it happens) has the potential to significantly rerate refining and marketing business of HPCL and IOCL," the brokerage has said.
As per HDFC Securities, "IOCL's value of investments and non-core assets (Chennai Petroleum Corporation Ltd, Petronet LNG, Lanka IOC, ONGC, GAIL, OIL India other subsidiaries and JVs) accounts for nearly its entire value. We expect IOCL's strong earnings momentum to sustain in the coming quarters, supported by multiple drivers like volume recovery, auto fuel price hikes, cyclical recovery in refining margins, recovery in petchem margins, and expected inventory gain as spot crude oil price are in the $95-100/bbl range."
The brokerage has also claimed that "We expect IOCL to benefit from the ongoing recovery in the global refining cycle and expect marketing margins to return to normative levels following the completion of the state elections (with latest price hikes helping in this regard). Investors could buy the stock in the Rs 125-129 band and add more on dips to Rs. 114-118 band (Rs 80/share for standalone equity value+ Rs 36/share for investment value), based on SOTP valuation. Base case fair value of the stock is Rs 140 (Rs 104/share for standalone equity value+ Rs 36/share for investment value) and the bull case fair value of the stock is Rs 150 (Rs 114/share for standalone equity value+ Rs 36/share for investment value) over the next 2 quarters. At the CMP of Rs 127 the stock trades at (6.8x FY 24E EV/EBITDA, 8.8x FY24E EPS, on consolidated basis)."
The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.