IOCL Navigates Turbulent Waters: Motilal Oswal Maintains Neutral Stance Amidst Q3 Surprises

Indian Oil Corporation (IOCL) recently unveiled its third-quarter FY23 results, which presented a stark contrast to analyst expectations. The oil giant reported an unexpected standalone loss of Rs 1,817 crore, a significant deviation from the anticipated profit of Rs 3,500 crore. This surprising downturn has prompted leading brokerage Motilal Oswal to reaffirm its 'Neutral' rating on IOCL, setting a target price of Rs 150 per share.

The primary culprits behind IOCL's Q3 underperformance were lower-than-expected Gross Refining Margins (GRMs) and substantial inventory losses.

The refining segment, a traditional stronghold, saw its Profit Before Tax (PBT) tumble to Rs 2,000 crore, a sharp decline from the Rs 7,700 crore reported in the same period last year. This marked a challenging quarter for IOCL's refining operations, adding to a streak of losses experienced in the preceding quarters of FY23.

However, it wasn't all grim news for the state-owned refiner.

The marketing segment emerged as a surprising beacon of strength, registering a robust PBT of Rs 6,800 crore. This impressive turnaround comes after a loss of Rs 3,000 crore in the prior year, driven by a welcome easing of international crude oil prices coupled with stable domestic retail fuel prices.

This recovery in marketing margins provided a much-needed offset to the refining woes, cushioning the overall financial impact.

Looking ahead, Motilal Oswal has revised its FY23 standalone loss estimate for IOCL to Rs 5,500 crore, a notable shift from its earlier projection of an Rs 1,800 crore profit.

Despite this immediate setback, the brokerage remains optimistic about the company's medium-term prospects. They anticipate a strong rebound in FY24 and FY25, projecting standalone profits of Rs 25,000 crore and Rs 27,000 crore respectively. This positive outlook is underpinned by expectations of robust refining margins and a sustained recovery in the marketing segment.

Motilal Oswal's 'Neutral' stance factors in IOCL's current valuation, which sees it trading at 0.7x FY25E P/B and 5.0x FY25E EV/EBITDA.

While acknowledging the challenges posed by fluctuating product cracks and crude oil prices, the firm believes that the improving marketing outlook and resilient refining capabilities will stabilize the company's performance. Furthermore, IOCL's ambitious capital expenditure plans, with Rs 30,000 crore earmarked for FY23 (Rs 20,000 crore already spent) and a further Rs 28,000 crore planned for FY24, are expected to strengthen its long-term operational footprint, despite a projected peak in net debt-to-equity ratio at 0.9x in FY23.