Top Gainer on Nifty, IOC share price soars 5%, CLSA says BUY, price target Rs 110

CLSA says that Indian Oil’s (IOCL) 4QFY21 net profit was 28% ahead of our estimate driven by higher inventory gains and a lower tax rate. Its core refining margin missed a bit. IOCL did not disclose inventory gains for the marketing segment. Management mentioned regional lockdowns have hurt demand and led to a scale-down of refinery run-rates to 84% in May vs 96% in April. This comes amidst a slump in its marketing margin and cuts FY22 EPS by 15%. Depressed Asian GRMs mean any significant upside from refining is also unlikely. CLSA leave their FY23 EPS estimate unchanged but lift our target price from Rs 100 to Rs 110 and maintain Outperform rating on the stock.

CLSA says that IOCs marketing volume was largely in line, up 1.5% YoY vs a 2.5% YoY uptick for the industry. Market share trends were weak as it lost 139/40/30bps share QoQ in ATF/gasoline/LPG. Its diesel market share rose 24bps QoQ. Management said regional lockdowns due to the resurgence of Covid-19 cases have hurt demand with diesel/gasoline demand down 35%/33% YoY & 11%/5% vs Apr 2019. This pulled down the refinery run-rate to 84% in May vs 96% in Apr. Its FY22 capex plan is at Rs 285 bn.

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CLSA says Marketing earnings may come under pressure as the margins on gasoline and diesel are trending below long-term averages and the volume pick-up may be slow in 1HFY22 due to state lockdowns. Building-in this pulls down our FY22 EPS estimate 15%. Asian GRMs have seen some uptick but remain depressed at US$2.6/bbl in 1QFY22 YTD on concern over the pace of the global demand recovery meaning major gains from refining are unlikely. CLSA maintains an outperform rating even as we raise our target to Rs 110 from Rs 100.

Edelweiss Management call highlights:

1)      April-May gasoline/diesel crack modest at USD3-4/bbl following subdued core GRM of USD2.5/bbl in Q4FY21. Current strong polymer/PTA spreads likely to be maintained in H2CY21
2)      Refinery utilisation fell to 96% in April and 84% in May given Covid-led setback
3)      Marketing margin plunged by Rs 3-4/ltr in April on rising oil prices

ICICI Securities says that Recovery in demand and steady marketing margins will be important for the marketing segment, going ahead for IOC. While inventory gains supported overall refining margins, core GRMs are still weak and affecting the operational performance. Global demand recovery and improvement in product cracks will be key. ICICI Securities are neutral on IOC at the current juncture given the volatility in refining margins.