Indian Oil’s strong 2Q earnings beat faces marketing margin pressure and refinery expansion

Investment View and Valuation

Motilal Oswal’s November 1, 2026, 2QFY27 results update on Indian Oil Corporation Limited (IOCL) retains a Neutral rating and a target price of Rs 135 per share.

The broker considers IOCL inexpensive at around 6x FY28E consolidated EPS of Rs 21.9 and 0.7x FY28E price to book, both below the company’s 10-year averages. However, limited expected upside and a weaker marketing-margin outlook temper the valuation case. Motilal Oswal values IOCL at 4.5x December 2027 EBITDA and adds Rs 39 per share for investments.

Strong 2QFY27 Earnings Performance

IOCL reported a strong 2QFY27 earnings beat, driven by better-than-expected marketing performance.

Petroleum-product EBIT improved to Rs 229.3 billion from an EBIT loss of Rs 29 billion in 1QFY27. Petchem EBIT also rose to Rs 5.3 billion from Rs 2.2 billion.

Operating Performance and Management Commentary

• 2Q refinery throughput was 18.1 million metric tonnes, representing 102.3 per cent utilisation.
• Marketing sales volume was 25.2 million metric tonnes.
• GRM excluding SAED was USD 18.52 per barrel.
• Combined refining and marketing inventory gains were about Rs 69.5 billion.
• Refining operating cost, excluding depreciation and exchange fluctuation, was USD 2.73 per barrel in 1HFY27.
• Domestic petrol and diesel demand rose 8.5 per cent and 7.5 per cent YoY, respectively, during 2Q.
• Spot crude sourcing increased to about 87 per cent in 1HFY27, with Russian crude accounting for around 55 per cent of sourcing.

Marketing Margin and LPG Risks

Motilal Oswal expects marketing margins to remain under pressure. Brent averaged about USD 105 per barrel in October 2026 month to date, raising under-recoveries on regulated fuels and LPG. October month-to-date gross marketing losses were about Rs 18 per litre for petrol and Rs 31 per litre for diesel.

The broker expects elevated diesel cracks to weigh on diesel marketing margins and believes there is limited scope for a steep auto-fuel price increase over the next four to five months. Higher shipping freight could also partly offset headline refining-margin gains.

IOCL’s cumulative negative LPG buffer was Rs 325 billion as of September 30, 2026. The Ministry of Petroleum and Natural Gas approved Rs 144.9 billion of LPG under-recovery compensation, of which Rs 72.4 billion was recognised in 1HFY27.

Earnings Estimate Revisions

Despite the quarterly beat, Motilal Oswal reduced its FY27 standalone EBITDA estimate to Rs 412 billion from Rs 576 billion.

• The broker now assumes 2HFY27E marketing-margin losses of Rs 7.5 per litre on petrol and Rs 3 per litre on diesel, compared with an earlier positive margin assumption of Rs 4.5 per litre.
• LPG under-recovery is assumed at Rs 150 per cylinder.
• A higher 2HFY27E GRM assumption of USD 17 per barrel, compared with USD 9 previously, partly offsets the reduction.

The broker identifies upside risk to its crude assumptions. Its USD 75 per barrel forecast for FY28 and FY29 is considered conservative, and higher crude prices could result in further earnings cuts.

Capacity Expansion and Renewable-Energy Plans

Growth drivers include refinery expansions at Panipat, Gujarat and Barauni, which are targeted for completion in December 2026.

Management also highlighted renewable-energy plans through TerraClean, targeting around 31 GW over five years. However, projects are expected to begin coming onstream only from FY29-FY30.