IOC reported strong results in 1QFY17 led by the inventory gains of ~Rs 70bn. EBITDA was Rs 136.8bn and RPAT was Rs 82.7bn. Results are not comparable owing to inventory and forex impacts. FY16 has been outstanding for OMCs led by (1) Strong GRM, (2) Higher profits in the marketing owing to higher volumes at lower product prices and healthy marketing margins, and (3) Reduced interest burden owing to lower subsidy receivables.Growth in FY17 may be challenging for OMCs considering the higher base and muted GRM trend in 2Q. The benefits of lower crude prices (balance sheet healing and lower interest cost) are mostly priced in. Expansion in marketing margins is the only trigger left for OMCs. However, IOC has an additional trigger of Paradeep refinery (15-mtpa capacity, Nelson index 13, likely to reach 95%+ utilisation by Dec-16).

They are structurally positive on IOC owing to its diversified business model, ramp-up of Paradeep refinery and possible upside in marketing segment. However, the stock has moved up by ~43% over the past 3-months and we see a correction in the near term (better entry point) led by the weakness in GRM and low chances of inventory gains. SOTP target is Rs 650 (3.5x FY18E EV/e for standalone refining, 6x EV/e for marketing, 7x EV/e for pipeline and Rs 137/sh from investments). Maintain BUY.