IOC shares are a good stock option

IOC shares are a good stock option

By Rajiv Kapoor | 20 February, 2016

India’s largest oil marketing company, Indian Oil Company (IOC) has set up a Rs 35,000 crore refinery in Paradip, Orissa, to be integrated along with a petrochemical complex. While the polypropylene unit has already started, the work on methyl, ethyl, glycol, coke gasification plant and a PTA project with an additional investment of over Rs 30,000 crore is proposed to start soon. The trial run of the new refinery has been completed and the plant should start operating at a 60% capacity, while the management expects it to run at full capacity in the next 18 months. Since its refineries are located in Panipat, Mathura and Barauni and are technically called inland refineries, the Paradip refinery has an added advantage of being a coastal refinery due to its location.

Currently, the average refining margin is in the region of $10-12 a barrel and the new project will add a further $6-7 a barrel thereby, giving a boost to the bottom line. Demand for these products is very high and petrol, diesel, kerosene and LPG will be marketed in the eastern and southern states of the country. The third quarter of the current financial year has been very good for the IOC due to lower than expected inventory losses and strong refining margins. With continuous robust gross refining margins expected for FY 16-17, every one dollar increase will add around 10% more to the IOC’s earning per share. Even the International Energy Agency in its report expects refining capacity to be lower for the next two years while the gross refining margins to remain robust. The burgeoning energy demand of the country is enormous and the IOC is working towards that goal in a professional method. This modern refinery will also accelerate the economic and infrastructural development around Paradip, Orissa. Analysts are expecting the IOC stock to remain subdued ahead of the budget because of the imposition of custom duty on crude oil. The IOC share is trading 6-8 times next year’s projected earnings per share and with a fantastic dividend yield of nearly 4%, any near term risk seems priced into the stock. Looking at the future, the IOC stock currently trading at Rs 370 is a good buy for a 25% price appreciation target over a one year time horizon. Markets were very choppy throughout the Friday session as traders and investors opted to square their transactions after two sessions of rally. With rating agency Moody’s stating that the Indian economy will grow at 7.5% in 2016 and 2017 helped the stock market to end the week above the crucial 23,700 (Sensex) and 7,200 (Nifty) levels. Amid global volatility, the quarterly results have been a huge disappointment and sadly, the economic revival has not translated into better corporate earnings. The huge NPA mess of PSU banks has been probably the biggest contributor for the stock market fall. The government has decided to tackle the problem and is working on a couple of solutions. One could be to select the bad assets and spin it off to an Asset Reconstruction Company, external institutions or the NIIF. The other option could be for a “Bad Bank” to buy all the stressed assets from the books of these ailing PSU banks. Similar to the SUUTI fund used to bail out UTI in 2003. Most analysts are now waiting for the budget for further direction to the stock market.

Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.

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