Indian Oil’s (IOCL) Q1FY13 loss of Rs224bn was worse than Edelweiss' estimate of loss of Rs79bn. GRMs at USD(4.8)/bbl was lower than their USD1.0/bbl estimate due to crude inventory losses of USD(7.5)/bbl as crude fell ~USD25/bbl QoQ. Marketing EBITDA was also lower than estimates as there was no under‐recovery compensation by the Govt in the quarter. Upstream companies shared 31.5% in Q1FY13, leading to IOCL posting a net under‐recovery of Rs175bn. Edelweiss estimates OMCs to bear 4% of gross under‐recovery in FY13/14. Edelweiss maintain their fair value of Rs333. Current market price implies zero value to marketing. Maintain ‘BUY’.

GRMs hit by inventory losses; diesel grows 8% YoY

Refining throughput at 13.6 mmt (101% utilization) was lower than the estimated 14.2 mmt due to maintenance shutdown. GRMs of USD(4.8)/bbl was much lower than Edelweiss' estimate of USD1.0/bbl as there was a crude inventory loss of Rs40.6bn, i.e. USD(7.5)/bbl. Thus, refining EBITDA loss at Rs32.3bn was lower than our Rs(1.0)bn estimate. Led by fuel pricing distortion, diesel sales continue to grow 8% YoY while the impact of petrol hikes clearly reflects in nil volume growth. Also, while LPG grew 6% YoY, SKO fell 12%. Forex loss of Rs31.8bn on crude and payables also impacted the refining EBITDA.

No Govt compensation in Q1; debt rises Rs155bn QoQ

IOCL’s Rs255bn gross under‐recovery (60% from diesel) was partly compensated by upstream to the extent of Rs80bn (31.5%). With no Govt sanctions in the quarter, IOC’s net under‐recovery was Rs175bn (68.5%). In addition, ~Rs91bn of pending Govt payments for FY12 led to a sharp increase in debt from Rs754bn to Rs909bn QoQ. Thus, interest expense was up 78% YoY. Marketing EBITDA loss was Rs180bn.

Outlook and valuations: Maintain SOTP of Rs333; ‘BUY’

Edelweiss retains their refining margin estimate of USD5.0/bbl for FY13 and FY14. They estimate FY13E EPS at Rs23.9 and FY14E EPS at Rs29.8 broadly in line with earlier estimates. Edelweiss also assumes IOCL to bear ~4% of gross under‐recoveries for FY13/14. Ergo, they maintain their fair value of Rs333. Current price implies zero value to the marketing business. Key trigger for the stock remains a hike in diesel prices. Maintain ‘BUY’.