Analyst Corner: Auto fuel marketing margins to slip below Rs 1/L; Add on IOC

In November 2020, petroleum product consumption was down 3.7% YoY. Diesel consumption too fell 6.9% YoY during the same month and 5% YoY in 1-15 December ’20, but petrol was up 5.1% YoY in November and 9.5% YoY in 1-15 December. Refinery utilisation surged to 101% in Nov’20 vs 87% in Oct’20 with MoM output rise being 2.5mmt while consumption was flat MoM. This meant rise in product inventory. Diesel inventory was up by 0.2mmt MoM as production surplus exceeded exports.

The oil price surge from end-Oct’20 lows has hit both GRMs and auto fuel net marketing margins (may fall to below Rs 1/l in Jan’21). However, it would lead to large inventory gains, which would mean strong earnings growth for IOC even in Q3FY21E. We reiterate ‘add’ on IOC given its cheap valuation and high dividend.