Decline in key parameters makes IOC a laggard among peers

ET Intelligence Group: The performance of the state-owned oil marketing companies (OMCs) on bourses has typically followed a similar trajectory since the deregulation of petrol and diesel prices some four years ago.However, the trend seems to have changed recently. Over the past three months, the stocks of Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) have increased by 51 per cent and 25 per cent, respectively. On the other hand, Indian Oil Corporation (IOC) has gained just over 5 per cent reflecting the weakness in its operating parameters such as gross refining margin (GRM) and rising refining capacity in the region. The stock is also under pressure due to the divestment talks of other oil majors such as BPCL and GAIL. Investors envisage a possibility that IOC may end up biding for the government’s stakes in BPCL or GAIL, similar to the past deal between ONGC and HPCL.IOC’s GRM, which represents the company earnings from turning every barrel of crude oil into fuels, was below the regional benchmark GRM at Singapore in the September 2019 quarter. Singapore’s GRM sequentially improved by $3.1 per barrel while that of IOC fell by $0.5 a barrel after adjusting for the inventory loss. The difference shows that the company paid higher for the crude oil following rising premium for the Middle East oil supplies. The share of the company’s operating profit before depreciation (EBITDA) from the refining segment dropped to 15 per cent in the September quarter compared with the average of 37 per cent in the previous 10 quarters.The regional GRM, which was boosted due to a higher realisation on gasoline in the previous quarter, is gradually moderating in the current quarter. In October, it fell to $4.1 per barrel compared with $6.5 in the previous quarter. This means pressure on IOC’s GRM is likely to continue in the current quarter. In addition, the global refining capacity is expected to increase by 3.5 million barrels in the next 12-15 months, which may further impact the GRMs. As a results, analysts have reduced the IOC’s estimated earnings per share (EPS) by 3.5 per cent for the next 12 months.IOC’s domestic fuel volume fell by 1 per cent year-on-year to 20.2 million tonnes and the growth in diesel and petrol volumes was slower than industry, an indication of market share loss. Besides, the company has guided for the capital expenditure of Rs 25,000 crore for the current fiscal in an investor conference after September quarter results. This is likely to keep the debt elevated. The gross debt of the company rose to Rs 80,380 crore at the end of September 2019 compared with Rs 72,230 crore in the previous quarter, according to Kotak Institutional Equities.Investors are also concerned about the possibility that IOC may bid for the government’s stake in BPCL or Gas Authority of India (GAIL) as a part of the strategic divestment exercise, a deal similar to one where ONGC purchased the government’s stake in HPCL in January 2018.Such a development would be perceived negatively by Dalal Street as it could further aggravate IOC’s debt burden and lower synergy benefit. At the Monday’s closing price of . Rs 138.7, the IOCs stock was traded at 1.2 times the book value compared with 1.6 for HPCL and 2.5 for BPCL.

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