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IOC: Integration to benefit

Jul 14, 2003

Indian Oil Corporation (IOC) is the leading player in the oil refining and marketing segment. In FY03, the company reported a significant growth in bottomline (112%). This was primarily on account of deregulation in the sector, which allowed oil PSUs to align prices in line with international crude prices. A sharp increase in petroleum product prices further supplemented oil PSUs to improve the bottomline. Let's take a look at the businesses of IOC. Consider refineries first. It has seven refineries with a total installed capacity of about 40 million tonnes per annum (MTPA), excluding subsidiaries. With the demand expected to increase at a CAGR of 3.5% up to FY07, the company is currently undergoing expansion activity in its existing plant to the tune of 9 MTPA. This is in addition to the plan of setting up a new 9 MTPA refinery at Paradip. If one were to include capacities of its two subsidiaries i.e. Chennai petroleum (7 MTPA) and Bongaigaon refinery (2.4 MTPA), total refinery capacity increases to 49.3 MTPA (43% of industry capacity of 114.7 MTPA).

The logical extension for any refining company is marketing and distribution and IOC has a sizable presence here as well. From the chart below, we can figure out that it has a dominant marketing infrastructure (50% market share). In FY03 alone, it added about 229 retail outlets taking its total number to 8,035.

It also has a major presence in lube oil markets, LPG and kerosene distributorship. IOC has a vast pipeline network of about 7,170 Km, which is used to transport crude oil and petroleum products. IOC also has presence in SriLanka and has about 20% market share in the country. Due to an over supply situation of petroleum products in the country, various companies are planning to increase their thrust towards exports.

Channel IOC IBP Others Total (%)
LPG bottling capacity (TMT) 3,321 - 3,040 6,361 52%
Lube Blending Capacity (TMT) 583 50 390 1,023 62%
Depots/Terminals (Nos.) 176 15 220 411 46%
LPG Bottling Plants(Nos.) 79 - 80 159 50%
Aviation fuel stations (Nos.) 93 - 29 122 76%
Retail outlets 8,034 2,079 9,717 19,830 51%
LPG distributors 4,120 64 3,726 8,000 52%
Kerosene/LDO dealers 3,500 375 2,617 6,492 60%

In order to lower the dependence on ONGC for crude supply, the company has also ventured into upstream business. IOC has garnered 12 blocks in consortium and also 2 blocks of Coal Bed Methane. Apart from this, it has been awarded one Farsi exploration block in Iran in consortium with ONGC Videsh and Oil India Limited. Thus, apart from being a leader in oil refining and marketing, the company has integrated itself to enter in the exploration front also.

In order to gain the synergies of integration, the company plans to enter into the petrochemicals business. It has plans to invest Rs 150 bn to enter into this segment. Currently, plants under construction are for Linear Alkyl Benzene (LAB), polyxylene (PX) and purified terephthalic acid (PTA). The company has recently announced that it would invest about Rs 80 bn to set up a naphtha cracker to utilize the naphtha (a refinery product). This apart it is considering setting up a polypropylene unit and a polymer complex to gain integration benefits.

At Rs 408, IOC is trading at a P/E multiple of 5.2x its FY03 earnings. The company has plans to integrate upstream and diversify into related fields of gas, power and petrochemicals to become an integrated energy company going forward. Though the long term prospects looks good for the company, the FY04 performance will be mired by pressure on refining margins and under recoveries in case of kerosene and LPG. While the company's ambitious plans are heartening, exploration has an inherent risk and as a result, profitability may be affected.

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