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Business News/ Opinion / How attractive is the Indian Oil issue?
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How attractive is the Indian Oil issue?

The inexpensive valuations make a good case to attract retail investors

The floor price has been set at `387 apiece, about a 2% discount to Friday’s closing price. Photo: Priyanka Parashar/MintPremium
The floor price has been set at `387 apiece, about a 2% discount to Friday’s closing price. Photo: Priyanka Parashar/Mint

Does the government’s offer for sale of Indian Oil Corp. Ltd (IOCL) provide a good opportunity for retail investors? The floor price has been set at 387 apiece, about a 2% discount to Friday’s closing price.

Retail investors will be issued shares at a 5% discount to the cutoff price. Assuming that the cutoff price is close to the floor price, retail investors will be allotted shares at 368. Based on Bloomberg estimates, that works out to a price-to-earnings ratio of 8.6 times estimated earnings for this financial year, which is rather undemanding. At Friday’s closing price, the same measure amounts to 9.2 times.

The inexpensive valuations make a good case to attract retail investors. Also, it is worth noting that shares of IOCL have underperformed those of Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL). In the last one year, the HPCL stock moved up 83.7%, BPCL 29.7%, while IOC went up 7%. Of course, one reason for the underperformance is the lingering disinvestment plan of the government.

However, investors would do well to not expect quick returns. True, the three state-run oil marketing companies—BPCL, HPCL and IOCL—reported a spectacular June quarter. These companies “recorded the highest quarterly gross refining margin (GRM) since March 2009 quarter", pointed out a Jefferies Equity Research note on 14 August. In fact, IOCL’s profit increased 155% year-on-year to 6,436 crore.

Unfortunately, the celebrations were cut short thanks to a sharp decline in refining margin. Benchmark Singapore refining margins are at $5.7/barrel so far this quarter compared with $8/barrel last quarter. “Diesel crack has declined the most—most Indian refiners produce relatively more of diesel and less of gasoline compared to Singapore GRM and are likely to be hurt more," said Jefferies in the same report. Further, if crude prices remain lower than in the June quarter, oil marketing companies could well suffer inventory losses this quarter against inventory gains last quarter. These factors may well weigh on sentiments in the short run.

The company is setting up a 15 million tonne per annum greenfield refinery in Paradip, commissioning of which is in progress, according to analysts. IOCL plans to reach 80% capacity utilization of the refinery before the end of 2016-17 after its commissioning in October 2015, said a Mint report. Needless to say, investors must keep a tab on the progress on this front from a medium-term perspective along with the refining environment.

The writer does not own shares in the above-mentioned companies.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 23 Aug 2015, 08:46 PM IST
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