After lacklustre Q4 results, headwinds persist for Indian Oil stock

State-run Indian Oil Corporation (IOCL) reported a weak performance in the fourth quarter of FY24 (January-March 2024), and the turmoil in the energy market indicates it could endure another lacklustre quarter.

The oil marketing company (OMC) reported an Ebitda of Rs 10,400 crore, down 27 per cent year-on-year (Y-o-Y) due to weak reported gross refining margin (GRM) of $8.4 per barrel in Q4FY24, which was almost half the consensus expectation of $15 per barrel.

The petrochemical division also had a poor result with earnings before interest and tax (EBIT) loss of Rs 400 crore.

The core GRM per barrel in Q4FY24 was actually around $10.6 and the core GRM for FY25-26 could bottom out at $9.

However, the petchem division had an operating loss for the second successive quarter with weak spreads in key products like Polyethylene and Polypropylene.

The petchem cycle may not turn around until H2FY25.

The April marketing margins for OMCs are estimated to be around Rs 2 per litre on petrol and Rs 0.5 per litre on diesel, which is well below the earlier assumptions of above Rs 3 per litre for both products.

The difference between the reported GRM of $8.4 and core GRM of $10.6 can be attributed to the inventory loss of $2.2 per barrel during Q4FY24.

The refining throughput was around consensus at 18.3 million metric tonnes (MMT), down 4 per cent Y-o-Y.

The domestic sales volume was also in line with consensus at 23.7 MMT (up 3 per cent Y-o-Y).

The petchem sales volume rose 18 per cent Y-o-Y to 0.80 MMT (versus 0.68 MMT in Q4FY23).

But along with an EBIT loss, petchem margins remained flat quarter-on-quarter (Q-o-Q) during Q4FY24.

The Q4FY24 marketing margin (including inventory) was somewhat above estimates at Rs 5.2 per litre (vs Rs 4.5 per litre in Q3FY24).

While the Ebitda was down 27 per cent Y-o-Y, the reported profit after tax (PAT) stood at Rs 4,840 crore down 52 per cent Y-o-Y.

In FY24, Ebitda was up 2.4x Y-o-Y to Rs 69,400 crore, with a PAT of Rs 39,600 crore (versus PAT of Rs 8,200 crore in FY23).

Refining throughput for the financial year was up 1 per cent Y-o-Y to 73.3 MMT, with a reported GRM of $12.1 per barrel.

The blended marketing margin stood at Rs 6 per litre (versus the loss of Rs 1.1 per litre in FY23).

IOCL had a cumulative negative net buffer of Rs 1,020 crore as of March 2024 due to the under-recovery on LPG cylinders (where the retail selling price was less than the market-determined price).

The total cumulative uncompensated loss stood at Rs 4,800 crore.

There are several ongoing projects, which will be completed as follows: Gujarat refinery (18 MMT per annum) by October 2024, Barauni refinery (9 MMT per annum) by December 2024, and Panipat refinery (25 MMT per annum) by December 2025.

In Q1FY25, the benchmark Singapore GRM (per barrel) has declined to $4.1 (versus $7.3 during Q4FY24).

IOCL could see a downturn in GRM. Q1FY25 is likely to be difficult for OMCs, given the sharp correction in refining margins and auto fuel under-recoveries following the recent price cuts despite higher crude prices.

Moreover, there s no pricing power due to the long drawn-out election schedule.

So, the OMCs may have to absorb losses. For IOCL, the weak petchem cycle is also a cause for concern.

Analysts mostly have Reduce or Sell recommendations with the few Buy/ Hold recommendations being accompanied by downgrades in earnings and valuation estimates.