Investors with a two-to-three year horizon and a moderate risk appetite can consider accumulating the stock of India’s largest oil marketing company, Indian Oil Corporation. With a refining capacity of about 70 million tonnes and network of over 58,000 retail outlets, IOCL is the country’s largest retailer of petrol and diesel. The company’s business segments include refining and marketing of petroleum products, manufacturing and marketing of petrochemicals and construction and operation of crude oil and gas pipelines.

The stock is available at a cheap valuation of 5.5 times trailing twelve-month earnings, primarily due to government control on retail fuel prices. While higher crude prices are traditionally good for refiners as it helps them earn higher margins on refining business, the marketing business’ fortunes depend on the ability of the company to pass on higher prices to retail customers.

For instance, in April-June 2022 when crude prices topped $100 levels, the company reported record refining margins. However, the entire profit was eroded due to record marketing losses, as the government chose to keep prices unchanged, due to inflation risk. That said, we believe that the company’s prospects over the next three-five years will improve with government initiatives such as Ethanol blending programme, which can reduce the risk due to crude price volatility. Also, planned expansion in the renewable energy space will help de-risk the business, reducing dependence on crude. We believe the company to be a good long-term investment bet for four reasons.

4 factors in favour

First, IOCL, is the country’s largest retailer of petrol and diesel with sales of 95.6 million tonnes in FY23, of which 90 million tonnes was in the home market while the balance was exported. The company is among one of the most efficient oil refiners in the country, with healthy refining margins and operates eight refineries with a capacity of over 70 million tonnes of crude oil. The company also owns and operates a network of crude oil and gas pipeline with a throughput of 94.56 million tonnes of crude and 21.69 million metric standard cubic metres of gas.

In FY23, the company’s petroleum products segment. which includes refining, marketing of petroleum products, accounted for over 94 per cent of the company’s total revenue of ₹950,924 crore, while the petrochemicals segment accounted for 2.3 per cent of the revenue. The balance 4 per cent included revenue from sales of gas, exploration of oil and gas, cryogenic and solar and wind power.

Second, IOCL has managed to sustain refining margins reasonably well during up and down crude cycles. For instance in the October-December 2022 quarter, when crude fell from $100-plus levels to about $88 levels, the company still reported health GRM of $21 per bbl, as compared to $15.92 per bbl for BPCL.

Similarly in Q1FY23, when crude prices hit an all-time high, the company recorded an impressive refining margin of $30 per bbl, much higher than $27.5 per bbl for BPCL. Further, its operating performance has been superior to peers, even during exceptional years such as FY20, when the company managed to deliver 3 per cent margin, while BPCL reported 2 per cent operating profit margin. In FY23, which was a very volatile year with crude swinging between $70-120 per barrel, indeed a very challenging year for marketing companies due to inability to pass on cost increases to customers, the company managed to clock 4 per cent operating profit margin, as compared to 2 per cent for BPCL, its closest peer.

Third, though the company has debt of ₹1.48-lakh crore, equal to its shareholders’ funds, only 40 per cent of it is long-term debt, while the balance is working capital loans. This is lower than 1.3 times for BPCL. Further, the company’s investment book, which is valued at ₹52,190 crore, as of FY23, is almost 37 per cent of the company’s market cap of ₹1.4-lakh crore. This includes 51.89 per cent stake in Chennai Petroleum Corporation.

Four, IOCL is investing in renewables business to increase its capacity to 3GW by 2025 from the current 239 MW, through a collaboration with NTPC. By 2030, the company aspires to have a renewable energy capacity of 35 GW and biofuels capacity of 0.6 million tonnes, which will be expanded to 4 million tonnes by 2030. All of these will likely be funded through ₹22,000-crore rights issue, which was recently approved by the board, subject to regulatory approvals. In addition to these, the company plans to set up 10,000 charging stations for electric vehicles. With these, it aims to achieve net-zero carbon by 2046. All these will help minimise the risk of crude price volatility.

Recent performance

In Q1FY24, the company reported 11 per cent decline in revenue, due to drop in crude prices and realisation on downstream products, year on year. In Q1FY24, the company posted operating profit of ₹15,785 crore versus loss of ₹5,824 crore, thanks to the improved marketing margins, which was negative in Q1FY23 and completely eroded the profits due to record refining margins, last year.

While the long-term prospects of the company remain intact, performance in the short term will be contingent on the company’s ability to pass on fuel price increases to end-customers.

Why
Largest oil marketing player
Efficient refining business
Long-term growth prospects intact
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