Indian Oil Corp faces a slippery slope after weak Q4 results

Investors were disappointed that IOC’s standalone Ebitda fell as much as 32% year-on-year in the quarter, even as its revenue was down just 2.5%. Ebitda is earnings before interest, tax, depreciation and amortisation.

While the drop in profitability seems large, it is primarily because of inventory accounting — not an unusual feature for state-run Indian oil marketing companies (OMCs). However, the Street was broadly expecting IOC to see an inventory gain last quarter thanks to the steep sequential rise in oil prices.

“IOCL surprisingly reported a significant impact from crude inventory loss of ₹2,390 crore/$2.2 per barrel in Q4, despite the sharp rise in end-of-period crude prices by $9.4 per barrel," said Hemang Khanna, analyst at Nomura Financial Advisory and Securities (India) in a report on 1 May. For perspective, the brokerage had factored crude inventory gains of ₹1,400 crore/$1.3 per barrel. Accordingly, IOC’s reported gross refining margin (GRM) in Q4 came in at $8.4 per barrel, missing analysts’ estimates.

Also read: OMCs recovered losses from 2-year freeze on fuel rates with combined profit of ₹69,000 crore in FY24

Moreover, IOC’s marketing segment failed to compensate for the weak showing by the refining business, leading to muted Q4 results. Even so, IOC’s FY24 performance is nothing to sneeze at, with standalone Ebitda rising by 212% year-on-year to ₹69,400 crore despite core GRM dropping to $11.4 a barrel during the year from $20 in FY23.

What gives? To start with, on the profitability front, the company had a favourable base. Secondly, the marketing segment delivered a strong performance. According to Nomura, FY24 Ebitda benefited from the recovery in auto fuel marketing margins to supernormal levels of ₹4.9 a litre versus a negative ₹5.4 a litre in FY23.

Investors have taken note. In the past year IOC’s shares have gained about 108%. But sharp upsides could well be capped as IOC faces near-term pressures in both its key segments. As analysts from Kotak Institutional Equities pointed out, Q1FY25 is set to be dismal for OMCs, given the sharp correction in refining margins over past few weeks and the return of auto fuel under-recoveries since the recent price cut amid higher crude prices.

Meanwhile, the Ebit (earnings before interest and tax) loss of IOC’s petrochemicals business widened in Q4FY24, hurt by lower margins. But the business is currently too small to move the needle for the company, accounting for about 3% of FY24 consolidated gross segment revenue.

Also read: Oil retailers hike ATF rates, slash commercial LPG cylinder prices

IOC plans to double its petrochemicals capacity by FY27. It has also increased its focus on other related businesses such as renewables. This would not only derisk it from the fluctuation in oil prices but also help its green push. Revenues from these have doubled between FY22 and FY24 although their share in the total is still less than 5%.

Overall, IOC has enough cash and managed to lower its net debt in FY24, which should help with its diversification push. For now, investors should keep tabs on the resumption of daily revisions of petrol and diesel prices after the general elections. This should bring comfort on marketing margins.

Also read: India's oil import bill could rise to $101-104 billion in FY25, says ICRA report