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Indian Oil - Warrants a look?

Sep 28, 2000

Indian Oil Corporation (IOC) is the leading refining company in the country. It controls 31% of the total refining capacity, 75% of the downstream pipeline network and 55% of the refined product market share. However, the market seems to ignore its dominance. The company operates 7 refineries with a total refining capacity of 35.5 m metric tonnes (MMT). Its distribution network comprises of 7,252 retail outlets, 3,430 kerosene dealers, 92 aviation fuel stations and 3,251 LPG distributors.

IOC operated near 100% capacity utilization with a crude throughput of 32.4 MMT and sales of 48.8 MMT in FY00. The company has plans to invest Rs 250 bn over the IXth five-year period of which Rs 120 bn has already been invested.

The investments are planned to mould the organisation into an integrated energy company. Currently, it operates only in the downstream refining and marketing (R&M) sector. It plans to augment its refining capacity by setting up a 9 MMT grass root refinery in Pradip, Orissa and expand capacity at Panipat and Barauni to 12 MMT and 6 MMT respectively.

The company has bid for 6 exploration & production (E&P) blocks under the New Exploration Licensing Policy (NELP). It has bid for 5 blocks with ONGC and 1 with Petronas Carigali. The IOC-ONGC combine has been awarded two blocks, in Mumbai High and the Ganges Valley.

The company is keenly eyeing the petrochemical sector. It plans to set up a paraxylene (PX) and purified terephthalic acid (PTA) plant at Panipat in a possible collaboration with Petronas, Malaysia. It is also considering a linear alkyl benzene (LAB) unit at the Gujarat refinery. The company has entered into a joint venture with The Chatterjee Group to bid for the Government's stake in IPCL.

As for its LNG initiative the company has taken promoter stake in Petronet LNG Ltd. It will be allocated 2 MTPA of LNG from the Dahej and Kochi terminal. To exist along the entire LNG value chain the company has entered into an understanding with GE shipping to make a joint bid for the Petronet shipping contract.

The Government does not plan to undertake strategic divestment in IOC. In FY00, it undertook an equity swap arrangement by divesting 10% in favour of ONGC. The markets did not react favourably to this move, as the intention was to reduce the fiscal deficit.

IOC continues to remain the Governments vehicle for undertaking projects in the petroleum sector, which may not satisfy investment parameters. Further, there are concerns regarding dismantling of the APM and the ability to cope in a free market environment.

Crude prices are expected to remain firm till the start of the fourth quarter, consequently, refining margins will continue to remain under pressure. This could be the main reason for the depressed share price.

(Rs m) FY98 FY99 FY00
Gross Sales 598,314 636,621 958,224
Gross Profit 27,638 39,441 54,513
GPM 4.6% 6.2% 5.7%
Profit After Tax 17,104 22,182 24,502
NPM 2.9% 3.5% 2.6%
No. of shares 389 389 779
Diluted Earnings per share* 22 28 31
Current market price     131
* 1:1 bonus issue in FY00


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