Buy This Mahratna PSU Stock For Potential Gains Up To 25%, Target Price Rs 85: ICICI Securities

ICICI Securities has placed a buy tag on Indian Oil Corporation Limited (IOCL) for a target price of Rs 85 apiece. The brokerage with the given target price claims a potential upside in the share price of Rs 25% from its current level. IOCL is a large-cap Mahratna company under the ownership of the Ministry of Petroleum & Natural, Government of India. IOCL is India's highest rank Energy PSU in Fortune-500 list (Rank 142), IndianOil recorded Revenue from Operations of Rs 7,28,460 crores and a net profit of Rs 24,184 crores for the financial year 2021-22.

Indian Oil Corporation (IOCL) reported a recurring standalone EBITDA loss of Rs88.4bn and net loss of Rs123bn for Q2FY23. Earnings missed our estimates of EBITDA/PAT loss of Rs24.7bn/Rs63.2bn by a wide margin, with both refining & marketing segment performing below par during the quarter. Reported EBITDA of Rs19.6bn and net loss of only Rs2.7bn was helped by the one-time grant of Rs108bn towards accrued LPG subsidies.

Stock outlook & Returns on Investments

The current market price of the IOCL stock is Rs 68.30 apiece, closed after falling 0.22% compared to its previous close. This Large cap Maharatna stock has a market capitalisation of Rs 96,377.45 crore.

Over the week, the stock gained minor, giving positive gains of 0.29%. Whereas, in the past 1 month, it gained 1.94%. In the past 1 year, the share price has fallen 19.99%. In 3 years, it gave 30.26% negative returns. Whereas, in the 5 years, it gave 50.72% negative returns on investments.

Its 52-week low is Rs 65.20 recorded on 29 September 2022 and its 52-week high is Rs 94.33 recorded on 09 November 2021, respectively.

Q2FY23 performance impacted by marketing woes

IOCL's YoY performance was hit by retail marketing loss of Rs1/ltr for petrol and Rs13/ltr for diesel in Q2FY23, coupled with the estimated Rs30bn inventory loss during the quarter. The relatively lower product prices have helped moderate the losses for Q3FY23-TD and we do believe there would be some normalisation of losses in the second-half of the current fiscal. We factor-in a loss of Rs1/ltr for petrol and Rs7/ltr for diesel in our FY23E estimates.

GRMs continue to come off their highs

The combination of volatile geopolitical worries, steady demand and refinery supply woes kept GRMs elevated in Q1FY23, with benchmark Singapore GRMs at US$21/bbl. However, global recession worries in Q2 have led to a sharp pullback in GRMs except for select products like diesel and ATF. GRMs have continued to weaken, averaging US$2.4/bbl in Q3FY23-TD, but elevated cracks for diesel and ATF should continue to support Indian players' GRMs (for domestic, the weightage of diesel + ATF is ~53% vs 35% in benchmark product slates). Hence we continue to factor-in US$16-17/bbl GRMs for FY23E in our revised estimates.

Maintain BUY

"We cut our estimates of 'other products' marketing margin for FY23E to Rs7,000/mt from Rs8,000/mt earlier. This reduces FY23E and FY24E recurring EPS to Rs13.2 and Rs13.3 respectively. Valuations of 5.1x FY24E P/E, 3.5x EV/EBITDA and 0.6x P/BV, are attractive. We believe dividend yield of ~11.7% and the support from CPCL earnings make risk-reward favourable for IOCL. Our FY24E EV/EBITDA-based valuation of Rs85/sh implies 24% upside. Maintain BUY," said the brokerage.

According to the brokerage the key risks would be Continued suspension of fuel price hikes, more sustained downturn in GRMs, slowdown in fuel consumption.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.