The Hindu Business Line : IBP: Avoid

INVESTORS can give this offer the go by. IBP is certainly a fundamentally strong company with good prospects going ahead but the stock appears fully priced even at the floor price of Rs 620 per share, leaving limited scope for appreciation. There could be the possibility of a near-term downside in the stock once the offer for sale goes through. Investors can wait for that and pick up the stock from the market.

IBP is a subsidiary of Indian Oil Corporation, which holds a 53.6 per cent stake in the company. Unlike Indian Oil, Bharat Petroleum and Hindustan Petroleum, IBP is a pure marketing company with no refinery of its own. It sources its products from parent Indian Oil, which supplies 88 per cent of all products sold by IBP. The company is financially strong with a small equity base, large reserves and no long-term loans.

The last couple of years, since the acquisition by Indian Oil, seem to have been a period of reorganisation and growth at IBP. The company went on an aggressive binge adding more retail outlets under its banner. There has been a 60 per cent growth in its retail outlets in the last two years, which now totals 2,524. Importantly, almost all of the new additions have been in the company-owned-company-operated category, which is the best bet in a free market. The land and equipment in these outlets are typically owned by or leased to IBP, which means that they are secure from poaching, by competitors.

This is an important parameter to value marketing companies in a free market situation and IBP is well positioned in this respect with almost 60 per cent of its outlets either owned by it or leased to it by its dealers.

The lack of its own refinery was seen as a handicap in the past but with the benefit of Indian Oil's parentage it is no more so. In fact, the two have synergised their operations perfectly in the last couple of years. Indeed, one of the major reasons for Indian Oil's aggressive bidding for IBP when the government put it up for strategic sale was that the latter offered much-needed marketing outlets for Indian Oil's products.

The biggest risk to IBP, as indeed to all companies in the oil sector, emanates from the government and its policies for the sector. Regulatory changes are hard to foresee and going by past experience, can cause enough harm to profitability of the oil companies. A good example is the LPG/kerosene subsidy burden that these companies are forced to bear on the government's behalf. IBP had to take a charge of Rs 62.5 crore in the last quarter due to this and this sum might have been larger if not for IBP's minor presence in the LPG business.

There is some concern over how IBP will cope with price-driven competition in the retail market, if and when it happens in the future. The absence of its own refinery may put it to some disadvantage especially if Indian Oil is busy fighting its own price battle in the market.

IBP's margins could be strained in a possible scenario where it is forced to source its products from other refiners and engage in a price battle in the retail market. By present indications, such a possibility appears remote given that Indian Oil's production covers its own as well as IBP's retail needs comfortably. Besides, it is inconceivable that Indian Oil would allow any dent on the finances of its subsidiary company.

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