Indian Oil’s Q3 performance beats estimates led by strong petchem recovery

Indian oil

Indian Oil Corporation Ltd’s strong performance for the quarter ended December will improve sentiment for the stock. The scrip has gained more than 8% post its results on Friday.

Coming out of the lockdown, the oil marketing company (OMC) continues to see the benefits of improvement in auto fuel demand. The marketing margins on the sale of fuel have been impressive too. The weak link remains the refining margins environment, the outlook for which is though brightening with recovery in the world economy.

The December quarter saw a sequential rise in the company’s petrol and diesel sales volume by 13% and 36%, respectively . The refinery utilization reverted to 103% versus 80% in Q2FY21, as per analyst data.

Higher crude oil prices though not favourable for OMCs, it meant inventory gains (carrying forward of lower-priced crude inventory) for the company. This accrued benefits for both refining and marketing segments.

The benchmark refining inventory gain was at ?920 crore, implying core gross refining margin of $1.2 per barrel, against an estimated $1 per barrel, said analysts at Emkay Global Financial Services Ltd. Blended marketing margin came in at ?5.8 per kg, while inventory gains were high at ?1,710 crore against Emkay’s estimates of ?1,000 crore. Marketing EBITDA (including inventory gain) stood at ?7,130 crore, up 82.2% y-o-y and 97.7% sequentially.

Improved petchem EBITDA per tonne of $335, which had almost doubled compared to year-ago levels, meant that the company’s overall performance got a further boost. This was the key reason for the company’s performance beating estimates, said analysts.

IOCL reported standalone EBITDA stood at ?9,622 crore, up 44.7% y-o-y and 2.1% q-o-q. This was higher than consensus estimate of ?8,876 crore. The reported net profit of ?6,505 crore was 178% higher year-on-year.

Moving forward, strong earnings momentum may sustain in Q4FY21 on likely inventory gains. The recent weakness in auto fuel marketing margin is likely to normalise with gradual price hikes, said Abhijeet Bora at Sharekhan.

As improving refining and petchem outlook accrues benefits, potential monetisation of pipeline assets and privatisation of Bharat Petroleum Corporation Ltd (BPCL) would be key catalyst in re-ratings, said analysts.

The only factor that can limit improvement in free cash flow generation is the company’s capex cycle. The capex cycle is still high at ?25000-30000 crore annually, and that leaves low scope for free cash flow generation, said analysts at Credit Suisse.

News Source:- Livemint

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