HDFC Securities rating on Indian Oil Corporation (IOC) with a price target of Rs 114 is premised on  recovery in domestic demand for petroleum products in FY22, improvement in refining margins in FY22/23, and sustainability of auto fuel gross margins over Rs 3.0/lit. 

Reported EBITDA was 13% below our estimate and APAT was 21% below, owing to lower-than-expected gross margins in marketing and petchem segments, forex loss and higher interest cost, offset by higher GRM of USD 6.6/bbl. Refining calculated inventory gain was INR 40bn. Adjusting for inventory gains and forex gain, core EBITDA comes to Rs 77bn.

Refining: Crude throughput in Q1 stood at 16.7mmt (+29.6% YoY and -5.0% QoQ). Core GRM stood at USD 2.2/bbl vs USD 2.5/bbl in Q4FY21 and USD 4.3/bbl in Q1FY21. We estimate core GRM at USD 3.1/3.3/bbl in FY22/23E.

Marketing: Domestic marketing sales volume was 17.2mmt (+21.1 YoY and -11.3% QoQ). Blended gross margin stood at INR 4.8/lit (-22.7% YoY and +2.8% QoQ) in Q1, but these do not seem sustainable in the near term. We expect blended gross margins to correct to INR 4.3/4.5/lit in FY22/23E.

Earnings call takeaways: (1) Capex planned for FY22/23E is INR 285bn and INR300bn. (2) Borrowings as at Jun'21-end stood at INR 857bn. (3) Core GRM for Q1FY22 stood at USD 2.24/bbl. (4) Singapore GRM was reported at USD 2.05/bbl in Q1.