The Q2FY22 operating profit at ₹10,600 crore (+13 per cent y-o-y; 4 per cent q-o-q) stood largely in line with our estimates (YES: ₹9,950 crore) but was ahead of street estimates (₹8,780 crore).
While refining and petrochemical margins stood stronger than estimated, they were offset by weaker than estimated marketing margins. Strong recovery in petroleum consumption from the transportation sector as Covid 2nd wave abated coupled with switch for heating/power from LNG to petroleum aided refining margins environment.
The refining and marketing margins continue to be healthy.
Our recommendation is premised upon sustained recovery in domestic petroleum consumption as the GDP growth in India gains traction. As per IEA estimates, the petroleum consumption in the country is expected to increase by 50 per cent by 2030. IOCL being the largest petroleum marketer stands to gain from the trend.
Given the company’s market share and infrastructure in place, we find the stock extremely undervalued, trading at just 6.7x FY24e (just about 3.4x FY24 adjusted for investment). We value IOCL on SOTP basis, with standalone business valued at ₹144/share and investment in listed (valued at 30 per cent holdco discount to market price) and unlisted entities at about ₹32/share.