IBP – IOC: Who got a better deal? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

IBP – IOC: Who got a better deal?

Dec 22, 2004

The press release from Indian Oil Corporation (IOC) reads as “Indian Oil Corporation Ltd has informed BSE that the Board of Directors of Company in their meeting held on December 22, 2004 have approved the Scheme of Amalgamation for merger of IBP Company Ltd (IBP) with the Company. The Board of Directors have also recommended a swap ratio of 125:100 i.e. 125 equity shares of Rs 10/- each of the Company ('the Transferee Company') as fully paid up for every 100 equity shares of Rs 10/- each of IBP Company Ltd ('the Transferor Company')” Before going any further, it is pertinent for investors to consider the business model of both the majors.

IBP: IBP is a standalone marketing major with a strong presence in the northern markets. Being a standalone major. It has over 2,925 retail outlets and utilizes parent IOC’s infrastructure for refined products and storage. The company also has other minor business operations, which are industrial explosives and cryogenics. IOC holds 53.58% in IBP.

IOC: IOC is the country’s largest downstream oil refining and marketing company accounting for over half the number of retail outlets along with its subsidiary IBP. Indian Oil is also the country’s largest refiner, with ownership of 10 out of the 18 refineries in the country. It imports over 33% of the crude oil imported by the country and has nearly 55% market share in the petroleum products segment. The company has 22,000 retail outlets (9.5 times of IBP). The Government of India holds 82.03% in IOC.

Who got a better deal – IOC shareholder or an IBP shareholder?
As is evident from the profile, though the administered pricing mechanism (APM) was dismantled in 2000, the fact remains is that prices at the consumer end are not market determined. At the same time, prices are completely de-regulated at the refinery gate level. Owing to the government interference, despite the sharp rise in crude prices over the last one and half years, retailing prices was not increased. This meant that IBP was buying petroleum products to be sold through its retail distribution network at international rates and selling the same products at the ‘regulated’ price. This is evident from the fact that IBP’s operating margin in 1HFY05 was a negative (1.2%) and as compared to a net profit of Rs 819 m in 1HFY04, the company incurred a loss of Rs 695 m in 1HFY05. It was very clear that unless the petroleum product pricing is de-regulated, IBP stands to lose and therefore, the merger with IOC was important from a long-term standpoint.

Investors have to consider two key aspects here:

  1. That IOC has nothing to lose without IBP, except for the fact that it holds a stake in the company. Even this stake, if one goes back in time, IOC actually placed the bid at Rs 1,551 in February 2002, which was far higher than the nearest bidder (Royal Dutch Shell, reportedly). In fact, the offer price was 80.8% premium to the then market price. So, it was the government that benefited from this ‘disinvestment‘ of IBP to IOC.

  2. Based on the current price of IBP at Rs 626 per share, IOC’s investment value in IBP is already lower by 60%!

  3. The bargaining power of IOC, considering its strong refining and marketing presence, is far larger than that of IBP.

Given this backdrop, it is clear that IBP shareholders have got a better deal i.e. they will be buying IOC at a discount, based on the current price. IOC, despite having a better bargaining power, has to pay hugely just because the government owns it.

Having said that, IBP’s strong presence in the northern markets will complement IOC’s marketing strengths and therefore, on a consolidated basis, the combined entity will benefit (but in FY05, the merger is likely to affect IOC’s profitability marginally). Investors should note that IOC also has a 74.5% stake in Bongaigaon Refineries and 52.2% stake in Chennai Petroleum (both standalone refineries). Both are likely candidates for a merger next!

Equitymaster requests your view! Post a comment on "IBP – IOC: Who got a better deal?". Click here!


More Views on News

IOC 2020-21 Annual Report Analysis (Annual Result Update)

Oct 20, 2021 | Updated on Oct 20, 2021

Here's an analysis of the annual report of IOC for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of IOC. Also includes updates on the valuation of IOC.

IOC Announces Quarterly Results (1QFY22); Net Profit Up 172.1% (Quarterly Result Update)

Aug 3, 2021 | Updated on Aug 3, 2021

For the quarter ended June 2021, IOC has posted a net profit of Rs 58 bn (up 172.1% YoY). Sales on the other hand came in at Rs 1,565 bn (up 73.7% YoY). Read on for a complete analysis of IOC's quarterly results.

IOC Reports Highest Ever Annual Profit (Views On News)

May 20, 2021

Boosted by inventory gains, the state-owned refiner posted a record-breaking bottomline.

5 Green Energy Stocks to Watch as India Readies for a Revolution (Views On News)

Oct 13, 2021

The excitement around green energy stocks has opened up a huge contrarian opportunity in the traditional energy space.

Top Performing PSU Stocks over the Past One Year (Views On News)

Oct 1, 2021

After a decade of underperformance, PSU stocks have woken up. Here are the best performing PSUs of past twelve months.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Dec 1, 2021 (Close)