Indian Oil Corporation's Q2FY20 consolidated and standalone recurring EPS is down 83-93% YoY, despite supernormal auto fuel marketing margin, hit by inventory loss vs gain last year and fall in GRM. H1FY20 standalone and consolidated recurring EPS is down 63% YoY. Q2FY20 and H1FY20 EPS would have been up sharply YoY if inventory loss/gain would have been excluded. We have cut IOC's FY20 GRM estimate but raised auto fuel net marketing margin estimate to factor YTD trends. The net impact of this is cut in FY20E EPS by 4%. The new target price of Rs 149 implies 1% upside. How IOC's GRM pans out driven by IMO would be key to its H2FY20 and FY21 earnings outlook. We downgrade IOC to 'Hold' from 'Add'.
Q2FY20 standalone and consolidated EPS is down 83-93% YoY hit by inventory loss of Rs 11.8 bn compared to a gain of Rs 44.1 bn last year, 50% YoY fall in petrochemical Ebitda and 81% YoY fall in GRM to $1.28/bbl. Q2 GRM excluding impact of inventory at US$3/bbl is also down 15% YoY, which is disappointing unless it was hit by Euro VI compliance-related shutdowns.
Marketing Ebitda is up 198% YoY driven by 119% YoY rise in auto fuel net marketing margin to Rs 1.82/l. Q2FY20 EPS excluding inventory impact (loss of Rs 11.8 bn vs Rs 44.1 bn gain in Q2FY19) is up 413% YoY. H1FY20 standalone and consolidated EPS is down 63% YoY hit by factors similar to that in Q2FY20. H1FY20 EPS, also net of inventory impact (gain of Rs 550 m vs Rs 125.2 bn gain in Q2FY19), is up 112% YoY.
Auto fuel net marketing margin is supernormal at Rs 1.64/l in FY20-TD but is weaker at Rs 0.79/l in Q3FY20-TD. IMO-mandated change in sulphur in marine fuel is estimated to boost diesel demand, diesel cracks and GRM of refiners like IOC with high diesel and low fuel oil yield.
Diesel cracks are at 23-quarter quarter high of $16.2/bbl while fuel oil cracks are at 22-quarter low of minus $14.1/bbl in Q3FY20-TD. Diesel cracks strength due to IMO in H2FY20 and FY21 would be the key to IOC's GRM outlook.
We have raised IOC's FY20 auto fuel net marketing margin estimate to Rs 1.5/l but cut its GRM estimate to $4.9/bbl ($6/bbl assumed in H2) to factor in H1FY20 result and YTD trends. The net impact is a cut in its FY20E EPS by 4% and in its fair value based on 6x FY20E EV/Ebitda by 5% to Rs 149/share (1% upside). It is also our target price against Rs 148, which assumed 50% probability that IOC would buy government's stake in BPCL (likely to be privatised). We downgrade IOC to ‘HOLD’ from ‘ADD’.