IOC: Good medium-term prospects

Raghuvir Srinivasan

Recommendation: High refining capacity, a large share of the market and a strong balance sheet make the Indian Oil Corporation Ltd (IOC) stock a good one for the medium-term investor's portfolio. The stock, at the current market price of Rs. 138.50, is sharply off its yearly highs and looks attractive for acquisition with a medium-term perspective.

The downside appears minimal from current levels and investors could consider acquiring the stock on declines. The company is expected to show a good report card for 1999-00. The drop in international oil prices in the last one month is expected to improve its margins in the current fiscal. The prospect of a partial divestment of Government stake and, probably even a GDR/ADR offer, is likely to keep the stock active in the near term.

Prospects: Oil prices have fallen from a high of $32 per barrel to less than $25 per barrel now. This will have a favourable impact on the operating economics of IOC's refineries. Second, the Government has increased the administered prices of LPG and kerosene. Though this will not directly improve IOC's margins, it would ensure that its cash flows do not suffer due to payments not coming in from the Oil Co-ordination Committee.

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The Government is also considering merging Chennai Petroleum Corporation Ltd (CPCL), formerly Madras Refineries Ltd, and Bongaigaon Refinery and Petrochemicals Ltd (BRPL) with IOC following the recommendations of the Nitish Sengupta Committee. This would give IOC a refining presence in the South, which it now lacks. This would be a significant advantage when the industry is eventually deregulated, as product movement would become easier.

IOC's arrangement with Reliance Petroleum for marketing its products has given it access to a significant volume of products, which has increased its market share. Coupled with its network of pipelines and marketing terminals across the country, IOC would be in a strong position when the market is fully opened up.

Financials: IOC was the only refining company to come out with a good performance in the first nine months of 1999-00. Net earnings rose by 24 per cent to Rs. 2,140 crores while turnover increased by 28 per cent to Rs. 66,429 crores. This contrasts with a drop in earnings for Bharat Petroleum and flat growth in the earnings of Hindustan Petroleum. Though refining margins were affected, IOC was able to ride on the strength of its marketing margins, which is the core of a refining and marketing company.

Background: IOC, with a refining capacity of 31.5 million tonnes and about 7,000 retail outlets, is the premier oil refining and marketing company in the country. Currently, IOC's production accounts for about 55 per cent of the total petroleum products consumed in the country. It is in the process of firming up plans for two new refineries at Paradip, Orissa, and Nagapattinam, Tamil Nadu. IOC is also planning to expand capacities at its troubled Panipat refinery to 9 million tonnes and at Baroda to 18 million tonnes from 12 million tonnes currently. The company is also entering power generation. It is setting up power plants at Panipat and Savli, Gujarat, based on refinery residue.