IOC is the largest refining and marketing company in India. It operates 8 refineries, with a capacity of 49.7mmtpa and has a 52% stake in Kochi Refineries. The company has a strong pipeline network of approx. 10,300km and 18,278 petrol/diesel outlets along with interests in petrochemicals and upstream oil and gas. IOC, besides its large size, has various other strengths in terms of its management, business track record and growth opportunities.
Despite the uncertain phase that the global economy went through, IOC managed to notch up a growth of 4.6 per cent, registering a sales volume of 63.7 million tonnes in FY2010. The Corporation's refineries surpassed 100 per cent capacity utilization for the third consecutive year and clocked a throughput of 50.7 million tonnes. IOC’s pipelines network registered the highest ever operational throughput of 65 million tonnes of crude oil and petroleum products.
ICRA has upgraded the long term rating on outstanding long term debt programme of IOC from 'LAA+' to 'LAAA' (highest grade) on 28th June '10.
IOC is currently implementing projects with an approved cost of over Rs. 47,000 crore.
IOC is planning to raise funds through a follow-on-public offer (FPO) by the end of this year. It has earmarked Rs 13,000 crore as capital expenditure for the current fiscal and plans to invest Rs. 13,000-14,000 crore annually over the next few years.
However IOC scrip is trading at a deep discount to its intrinsic value. Consider this that, Reliance Industries, another major player in the same sector, has a market cap of Rs.319567.21 crore compared with IOC’s market cap of Rs. 98174.26 crore. However IOC leaves Reliance Industries way behind in terms of sales turnover. IOC has reported a sales turnover of Rs. 269136 crore as against Reliance Industries turnover of Rs. 192461 crore for FY2010. This very obvious discount to its fair value is because of the subsidy regime which has been forced on all Oil Marketing Companies for the last several years. This subsidy burden has not only prevented IOC from generating profits but also affected its expansion plans. However the government has initiated the process of gradually lifting this subsidy burden. This augurs very well for the future of the IOC scrip. Already the share price has smartly moved up ever since the start of the Administered Price Dismantling a couple of months back. We expect the stock to continue doing well and eventually capture the fundamental strength which the company has.
IOC is trading at the price of Rs.404.35 (7.9xFY11EPS), where as Reliance Industries is currently trading at a price of Rs. 976.9 (14.7xFY11EPS). We expect IOC to touch the price of Rs.436 in the short run. Also the dividend of Rs 13(which gives a yield of more than 3% at the Current Price) due on September 8th, is another attraction for buying this stock. Moreover given the gradual movement towards dismantling of the Administered Price Mechanism (APM) we expect the gap in the valuation between RIL and IOC to narrow down over the years. Given RIL’s superior track record on execution and management of projects and diversified businesses it will still command a premium to IOC but this should drastically reduce from the current astronomical levels. Hence IOC; with its colossal presence in India’s oil and gas space and much fundamental strength deserves a significant allocation in any discerning investor’s portfolio, especially given the various opportunities being released by the liberalization of this sector.
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