Q2 Results: Indian Oil’s Performance Disappointed Analysts, But…

Analysts were disappointed with Indian Oil Corporation Ltd. after the operating profit of India’s largest oil marketer fell the most in 12 quarters.

Indian Oil’s operating profit fell 57.22 percent sequentially to Rs 3,572 crore in the quarter ended September, according to its exchange filing. Its operating margin narrowed to 3.20 percent from 6.35 percent in the previous quarter. Net profit fell 84.3 percent quarter-on-quarter to Rs 563 crore.

That’s because of an unplanned refinery shutdown at Panipat, weak sales volume, and higher inventory and foreign exchange losses. Sales volume dropped more than 6 percent, impacting the marketing segment’s performance. Also, Brent crude averaged lower in the second quarter at $62.12 a barrel as production rose and global demand fell. That led to an inventory loss of Rs 1,178 crore.

The company also incurred a foreign exchange loss of Rs 1,135 crore during the quarter, further impacting its operating profit and bottom line.

Yet, analysts maintained their bullish investment recommendation for Indian Oil as they expect the implementation of new shipping fuel norms from next year to boost earnings.

Here’s what analysts have to say about Indian Oil’s second-quarter results…

JPMorgan

• Maintains ‘Overweight’ with a target price of Rs 205 apiece.
• Second quarter miss driven by large inventory loss, forex hit and weak refining.
• Reported gross refining margin lower than estimates; gross debt higher.
• Expects negative reaction to the results.

SBICAP

• Maintains ‘Buy’ with a target price of Rs 184 apiece.
• Earnings significantly lower due to weak core margin in both refining and marketing segments.
• Surprise inventory gain boosted marketing segment Ebitda; core margin was weak.
• Valuation attractive but government stake sale a key overhang.

Nomura

• Maintains ‘Buy’ with a target price of Rs 170 apiece.
• Second quarter was significantly weaker than estimates.
• Key reason for miss was much lower refining and large forex loss.
• Gross refining margins have been weaker so far in third quarter.

UBS

• Maintains ‘Buy’ with a target price of Rs 200 apiece.
• Refining disappoints again; debt level continues to remain elevated.
• Investors are expected to focus on potential upcycle in earnings with impending International Maritime Organization (new shipping fuel) 2020 implementation.

Jefferies

• Maintains ‘Buy’ but cuts target price to Rs 200 from Rs 215 a share.
• A weak quarter with soft refining and rising debt.
• Cash flow hurt by a spike in capex and higher working capital.
• IMO tailwinds and benign auto fuel marketing margins likely to repair earnings.