Indian Oil Corporation’s (IOC) 9MFY19 standalone and consolidated EPS are down 33%-34% year-on-year hit by y-o-y lower GRM, decline in other income and rise in interest cost. Outlook for Q4FY19 is better due to super-normal auto fuel marketing margins, which would more than make up for weakness in GRM. We estimate IOC’s FY19 and FY20 EPS to be down 23% y-o-y and 16% y-o-y, respectively. We are estimating IOC’s FY20E GRM at $5.1/bbl (flat y-o-y) and auto fuel net marketing margin at Rs 1/litre (down 46% y-o-y).
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Outlook for FY20 would depend on 1) strength of government that assumes power after May 2019 elections which would determine auto fuel marketing margin outlook; 2) whether IMO mandated cut in sulphur content in marine fuel from January 2020 would significantly boost GRM. We resume coverage on IOC by downgrading it to ‘hold’ from ‘buy’ until we have clarity on the above issues. Our target price is Rs 160 (3.5% upside) based on 6x FY20E EV/Ebitda.
