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Stock pick of the week: Why analysts are betting on Indian Oil Corp

Crude oil prices settling at lower levels has done away with the govt-imposed burden of Re 1 cut in the margin.

, ET Bureau|
Feb 11, 2019, 06.30 AM IST
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A significant reduction in valuation due to the recent fall in share price is another factor that is attracting analysts to the IOC counter.
Public sector oil marketing companies (OMCs) such as Indian Oil Corporation (IOC) have undepreformed over the past one year. The government’s October 2018 directive asking them to take a Rs 1 cut in their marketing margin was instrumental in pulling down the performance of OMCs. But with the international crude oil prices correcting from higher levels, these companies are slowly recouping their marketing margins and analysts estimate that their refining margins are now back to the levels prior to the government Re 1 cut directive. Due to fear of a global slowdown, chances of another spike in global crude oil prices are minimal now and, therefore, the government may not tinker with OMCs’ marketing margins again. However, concerns about whether the OMCs will be able to pass on the cost, if crude oil prices spike once again, are likely to last till the general elections are over.

Analysts’ views

Sell: 4
Hold: 9
Buy: 20

A significant fall in its net profit in the third quarter of 2018-19 is another factor that has kept IOC counter under pressure. However, analysts are getting bullish on IOC, despite the cut in its net profit because the cut was due to heavy inventory losses—both in refining and marketing segments—triggered by the fall in international oil prices. More importantly, IOC continues to report good operational performance. For instance, the company has reported improvement in its core gross refining margin (GRM) during the third quarter of 2018-19. Refining volume improved 4% year-on-year and 7% quarter-on-quarter. At 19 million metric tonne of refining throughput (maximum production capacity), IOC can boast of 109% capacity utilisation. A 10-fold increase in IOC’s operating profit from other businesses—higher contribution from LNG sales—is another positive for the company. Its capacity addition plans are also going on smoothly. For instance, its upcoming polypropylene plant at Paradip is expected to be completed by the fourth quarter of 2018-19. Commissioning of the Ennore LNG terminal, which has a capacity of five million metric tonne per annum, is also underway and is expected to be operational in the fourth quarter. The IndMax unit at Bongaigaon refinery is expected to be completed by the third quarter of 2019-20.

A significant reduction in valuation due to the recent fall in share price is another factor that is attracting analysts to the IOC counter. The company is now quoting at a PE of just 7.91. Since this counter is expected to remain under pressure till elections, long-term investors have the option of buying the stock in a staggered manner.

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Selection Methodology: We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.
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