IOC shares at Rs 87 or Rs 125? What analysts say on OMC stock

Indian Oil Corporation reported a strong set of numbers for the quarter ended on March 31, 2023, which boosted the morale of a number of brokerage firms, who remain positive on the stock and see an upside of up 44 per cent in the stock. The stock hit its 52-week high on Wednesday.

The stock has gained more than 12 per cent in the year 2023 so far, but is still below about 45 per cent from its record highs around Rs 140 mark in August 2017. The state-run oil marketing company (OMC) has remained under pressure ever since the government officially took a step back from interfering in regularizing the oil prices.

Indian Oil has been suffering under recoveries from sale of domestic LPG since FY22. To compensate for this, the Union government approved a one-time grant of Rs 10,801 crore and Indian Oil has recorded this under revenue from operations in financial year 2022-23.

However, the overall performance was well ahead of analysts estimates who mostly have suggested to 'buy' or 'accumulate' the stock. On the contrary, others, who are critical on the counter believe that the company has a long way to go and current momentum is unlikely to continue.

Prabhudas Lilladher has changed its FY24 and 25 earnings estimates by 20 per cent and 26 per cent, respectively to factor in actual FY23 numbers. IOCL reported better than expected Q4 results with standalone EBITDA of Rs 15,340 crore and PAT of Rs 10,060 crore, due to higher than expected GRMs. Earnings surprise came despite Q4 refining inventory loss of Rs 4,380 crore, it said.

"We believe OMCs are well placed to benefit from improving marketing margins and healthy refining profitability. We maintain a 'buy' rating with a target price of Rs 125 based on EV/EBITDA of 5.5x FY24E as the earnings environment stabilizes," it said. Prabhudas' target suggests an upside of 44 per cent its previous close at Rs 87.

IOC is set to commission various projects over the next two years, driving further growth. Refinery projects, currently underway, are expected to be completed including Panipat refinery (25mmtpa) by September 2024 and Gujarat refinery (18mmtpa) by August 2023, according to the earlier guidance, said Motilal Oswal Financial Services.

"IOCL is likely to be impacted the most among its peers from a decline in refining margin. It trades at 7.1 times consolidated FY24E EPS and 0.8 times FY24E PBV. We value the stock at 0.9 times FY25E P/BV to arrive at our target price of Rs 105," it added reiterating its 'buy' rating on the stock.

The company's board of directors have recommended a final dividend of Rs 3 per equity share for FY23, subject to approval by the members of the company.

However, not all analysts are positive on the stock. Kotak Institutional Equities has a 'reduce' rating on the stock with a fair value estimate at Rs 85 apiece citing the risk of rising retail prices being moderated. While refining margins have recently corrected, OMCs are making up for higher over-recoveries on retail fuels, it said.

"IOC’s 4QFY23 EBITDA was 25 per cent ahead of our estimates. Similar to HPCL, the beat was driven by refining with reported GRMs. Marketing was in line, and the petchem segment returned to profits. For FY2023, despite record GRM of $20/bbl, IOC’s net profit declined 66 per cent YoY," Kotak said.

Amid the weakness in the markets, shares of Indian Oil Corporation managed to hit its new 52-week highs at Rs 88.61, commanding a market capitalization of little more than Rs 1.25 lakh crore. However, the stock gave its gains and was able to trade higher than its previous close at Rs 87 on Tuesday.

"Our ADD rating on Indian Oil Corporation (IOCL), with a target price of INR 95, is premised on robust refining and marketing margins, offset by elevated debt owing to a rise in working capital requirement and capex," said HDFC Securities, which finds EBITDA and APAT well above its estimate. The beat was largely on account of better-than-expected performance, it said.


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