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Indian Oil Corporation (IOC): Business model analysis - Views on News from Equitymaster
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  • Jul 3, 2006

    Indian Oil Corporation (IOC): Business model analysis

    After covering a host of standalone refineries, we now shift our focus towards the refining and marketing (R&M) aspect of the energy value-chain. We start with this segment by analyzing the biggest player on the block, IOC.

    About the company
    IOC, the largest oil refining and marketing company, is India's largest company in India in terms of sales (over US $ 36 bn in FY06). IOC, along with its subsidiaries, Chennai Petroleum Corporation Limited (CPCL) and Bongaigaon Refinery and Petrochemicals Limited (BRPL), owns 10 out of the 18 refineries in the country (43% of the refining capacity in the India). IOC and its subsidiaries account for 45% of the petroleum products market share among public sector oil companies, and 69% of the downstream pipeline throughput capacity.

    Segmental analysis

    Refining division
    The refining capacity of IOC has registered a CAGR of 1.6% over the period under consideration (FY01 to FY06). The reason for the lower growth for the period under consideration is the expansion in refining capacity from FY99 to FY01. However, the growth in the refining capacity over the period FY98 to FY06, is 6.1% CAGR for IOC as compared to nearly 10% for the industry. The company has lined up ambitious expansion plans to increase its refining capacity and to foray into the export of refined products. The capacity utilisation has increased from 87% in FY01 to 93% in FY06, backed by increased demand for petroleum products during the period. IOC has ensured de-bottlenecking and low-cost expansion of its existing refineries, in addition to new grass root refining capacity build-up. Also, the crude assay (the ability to process different types of crude) for the refineries is broadened over the years.

    Refining capacity utilisation
    (in MMTPA) FY01 FY02 FY03 FY04 FY05 FY06
    Refinery throughput 33.22 33.76 35.29 37.66 36.63 38.52
    Refinery capacity 38.15 38.15 39.95 41.35 41.35 41.35
    Capacity utilisation 87.1% 88.5% 88.3% 91.1% 88.6% 93.2%

    Marketing division
    The sales volumes from FY01 to FY06 have registered a meager growth of 0.3% CAGR, as compared to the overall growth in consumption of petroleum products by 2.2% CAGR in the corresponding period. The reason for the slower growth rate of IOC vis-à-vis consumption growth is deregulation of the sector, which brought in faster growth of other public and private sector companies in the country.

    Sales Volume analysis…
    (in MMTPA) FY01 FY02 FY03 FY04 FY05 FY06
    Domestic 47.80 47.17 46.46 46.80 48.86 47.52
    Export 1.02 0.90 1.10 1.81 1.96 2.09
    Total 48.82 48.07 47.56 48.61 50.82 49.61

    The sales-to-refining throughput for IOC has decreased over the period, due to faster growth in refining capacity compared to growth in sales volumes over the period. This has improved the business mix of the company over the period, as the external dependence is reduced from 48% (FY01) in terms of the volumes to 29% (FY06). However, increased competition on the part of PSU marketing companies in addition to the increasing presence of private marketing companies in form of Reliance and Essar, has posed a challenge for IOC.

    Reducing external dependence over the years…
    (in MMTPA) FY01 FY02 FY03 FY04 FY05 FY06
    Sales 48.82 48.07 47.56 48.61 50.82 49.61
    Refinery Thruput 33.22 33.76 35.29 37.66 36.63 38.52
    Sales/Refinery Thruput 147.0% 142.4% 134.8% 129.1% 138.7% 128.8%

    Pipeline network
    IOC has a widespread network of pipelines for transportation of crude and petroleum products. The pipeline throughput for IOC has increased from 39.4 million metric tonnes per annum (MMTPA) in FY01 to 45.4 MMTPA in FY06, thus registering a CAGR of 3% over the period. The major benefits perpetuating from the 9,000 kms of its widespread pipeline network have been in the form of lower transportation costs for the company.

    The vision…
    IOC has set its sights to reach US$ 60 bn in revenues by the year FY11 from the current level of US$ 36 bn earned in FY06. The road map to attain this milestone has been laid through vertical integration - forward integration into petrochemicals and backward integration into exploration and production (E&P), besides diversifying into natural gas and globalisation of its marketing division.

    In this write-up, we have explained the business segments of the company and their performance over the past few years. IOC is the biggest refining company in the country and has an equal presence in the refining and marketing segment. The fine blended presence of the company in both segments leads to lower segmental business risk and lower fluctuations in its earnings. IOC is the only refining company having a presence in North India (one of the major consumption centres). Refining capacity in the country is skewed, with western India contributing 47% of the total installed capacity, whereas the demand for petroleum products spread evenly across the country. Thus, transportation of petroleum products from the surplus refining regions to the deficit regions involves a cost, which to an extent, is not the case with IOC, as its has a well-spread refining capacity over the country, with the north contributing to the extent of 33% of the total refining capacity of the company.

    IOC has recently tied up with a US firm for improving its product quality for its Koyali refinery in Gujarat, which we believe is a step taken to increase exports. The company is also building an export-oriented refinery at Paradeep (capacity 15 MMTPA) to foray into the export markets of South East Asian countries.

    Further, as we mentioned above, in order to secure its crude oil requirements and diversify across the value chain, the company is moving into backward and forward integration. During FY06, the company bagged two oil blocks in Libya in addition to 11 blocks domestically. IOC is also diversifying into the petrochemicals business. It has earmarked a sum of Rs 300 bn for investment by FY12 for this purpose.

    However, a key risk to IOC's plans is the fact that venturing into businesses like petrochemicals and oil and gas E&P involves a significant level of risk. Such businesses require high levels of technical expertise, involve significant capex outlays and are generally highly regulated sectors globally. Therefore, IOC will not only have to spend large amounts of money on capex, it will also need to build skills to effectively compete in these businesses. To that extent, there is a risk to the company's future plans, although they may be in the right direction in terms of becoming an integrated transnational energy major, like its global peers such as Exxon Mobil, Shell and BP.



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