Buy Indian Oil, target price Rs 145: Motilal Oswal

Motilal Oswal has given a buy rating to Indian Oil Corporation Ltd with a target price of Rs 145. The share price moved down by -2.35 per cent from its previous close of Rs 87.10. The stock’s last traded price is Rs 85.05.

IOCL reported higher-than-expected core GRMs, primarily due to discounts received on crude during the quarter, in line with the GRMs of other Indian refiners. After the plunge witnessed in crude prices for the quarter, prices recovered to $40/bbl. The brokerage believes this would offer the company some relief in terms of inventory gains going forward; however, the entire loss booked in the fourth quarter of FY20 may not be recovered. IOCL revalued inventory at $36/bbl, which currently stands $43/bbl.

Investment Rationale

The brokerage points out that the company declared force majeure on various Middle Eastern crude suppliers. Indian Oil also cancelled/diverted various crude parcels on mutual agreement with suppliers. IOCL parked almost 7 million bbls of oil in Strategic Petroleum Reserve of India, for which the company has received payment. The Panipat naphtha cracker and Paradip polypropylene plant are now operating at 100 per cent. Petchem EBITDA was lower for the year due to shrinkage in petchem spreads, along with a shutdown at Paradip in the first quarter of FY20, followed by the National Green Tribunal's order. The company expects PX/PTA production to improve in FY21, thus aiding the petchem business.

For IOC, the share of marketing in the total EBITDA increased to 32–40 per cent over FY19–20, from 20 per cent in FY17, giving a more diversified earnings mix. IOC has traded at a huge discount in the past decade owing to its capex cycle. Although, the company is now at the end of its capex cycle and the brokerage believes ROE is set to double to 17.5 per cent in FY22 from ~9.1 per cent in FY20. The discount gap to peers should shrink. The brokerage values it at 1.2 time FY22 PBV (at par with FY15–18 post the reform period) to arrive at a target price of Rs 145.
Source: Motilal Oswal

The brokerage continues to prefer Indian Oil despite the company having an annual capex of Rs 260 billion, the highest among OMCs. It is expected to report 16 per cent cumulative free cash flow yield in FY21/FY22. Additionally, dividend yield appears attractive at 8–10 per cent. IOCL trades at 5.6 times consolidated FY21E EPS of Rs 15.1 ( about 42 per cent discount to FY15–18) and 0.8 times FY21E PBV.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 118007.32 crore, down -4.78 per cent from last quarter sales of Rs 123929.51 crore and down -6.39 per cent from last year same quarter sales of Rs 126068.23 crore. The company reported net profit after tax of Rs -9101.32 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 51.49 per cent stake in the company as of March 31, 2020, while FIIs held 7.19 per cent, DIIs 13.52 per cent and public and others 27.80 per cent.