Indian Oil Corporation (IOCL)s 2QFY2016 revenue came in 2.4% ahead of our
estimate at Rs85,385cr, led by a 5.8% yoy increase in product sales volumes to
19.07MMT as against 18.03MMT in 2QFY2015. Refining throughput increased
2.1% to 13.68MMT as against 13.41MMT in 2QFY2015, while total throughput
increased 5% yoy to 19.98MMT as against 19.04MMT in 2QFY2015. Revenue
however declined 24% yoy on account of lower price realisations. The EBITDA at
Rs695cr was much lower than our expectation of Rs3,714cr, owing to lower than
expected refining margins and high inventory losses. Refining margin at $0.9/bbl
was much lower than our expectation and compared to $10.8/bbl as in
1QFY2016. This was largely on account of reduced spreads and adventitious loss
of Rs1,197cr. We expect the impact from inventory losses to reduce going forward
and profit to stabilise as crude prices stabilise at current levels.
The commissioning of its state-of-the-art 15MMTPA coastal refinery at Paradip is
expected to be fully operational in an integrated manner by Dec 2015. With its
commissioning, IOCL’s refining capacity is set to increase by ~23% to
80.7MMTPA from the current capacity of 65.7MMTPA.
Outlook and valuation
IOC is currently trading at an EV/EBITDA multiple of 5.4x its FY2017E EBITDA
and 8.4x FY2017E EPS of Rs48.7. Lower oil prices resulting in significant reduction
in under recoveries, expected improvements in refining margins and IOCL’s reach
make it a structural play on the refining sector. We apply a 6x multiple on its
FY2017E EBITDA to arrive at our price target of Rs455 and retain our Accumulate
rating on the stock.

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