IOC's expansion in city gas distribution a positive; strong refining, marketing outlook add to prospects – Mint
- The outlook on IOCL’s refining and marketing business is improving. Refining margins which significantly corrected post the first wave of pandemic have continued to do well. While the Omicron spread may trigger some challenges in the current quarter, overall volume outlook remains strong
Indian Oil Corp. Ltd. (IOCL) plans to expand its city gas distribution (CGD) business, looking to invest ₹7,000 crore over and above the ₹20,000 crore already planned for the vertical. In the recent round auctions by the Petroleum and Natural Gas Board, the company bagged 9 of the 15 high potential GAs (Geographical Areas).
Analysts say that these investments can create value and will be earnings accretive, but the gains will accrue only over time. The pipeline infrastructure and expansions will take some time to complete while the bidding has been aggressive. There may be more upfront investments in terms of capex. All these are key factors to look out for, as per analysts. Also, since the geographical areas are relatively large, the company’s earnings can see upside of 4-5% but only over a period of time, said analysts.
Since benefits will accrue over time, the stock reaction has been relatively muted following the announcement on investments. IOCL’s shares had risen by up to 1.46% in morning deals, but gave up most gains to trade 0.3% higher by noon.
The stock, nevertheless, has been on an uptrend of late. From closing lows of ₹108.75 seen on the 20 December, it has risen more than 13%. The outlook on the company’s refining and marketing business is improving. Refining margins which significantly corrected post the first wave of pandemic have continued to do well.
The benchmark Singapore Gross Refining Margins (GRM’s) averaged at $6.0/barrel during the December quarter, up $2.2 a barrel sequentially, primarily led by improvement in diesel and ATF cracks. The near-term outlook for petrochemicals realisations is also firm. The closure of facilities and thus lower supplies from the US in the harsh winter season is likely to support petchem realisations.
Meanwhile, demand for auto fuels has continued to rise. While the Omicron spread may trigger some challenges in the current quarter, overall volume outlook remains strong. Crude oil prices, too, have come off peak while companies have been continuously passing on higher crude costs to consumers, keeping intact their margins.
With state elections in sight, though, investors have become cautious on the ability of state-run oil marketing companies (OMCs) to pass on higher crude prices to consumers. Analysts at HSBC Securities and Capital Markets (India) Pvt. Ltd. in their note said, “we believe OMCs will surprise on its ability to retain higher marketing margins despite election interventions”.
Also, analysts at Antique Stock Broking said that “historically OMCs have subsequently recovered any margin squeeze during elections and in the current case, cushion already exists as marketing margins have had a strong run since November’21 averaging closer to ₹8/liter and ₹5.1/litre, much higher than the ₹3.6/litre and ₹4.1/litre over the last two years.”
Analysts at Motilal Oswal Financial Services expect the company to report gross refining margins at $8/barrel for the December quarter, with gross marketing margin at ₹5.4 per litre. Recent spurt in refining margins is likely to aid IOCL the most and valuation also are the most attractive, they added.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!
Log in to our website to save your bookmarks. It’ll just take a moment.
Oops! Looks like you have exceeded the limit to bookmark the image. Remove some to bookmark this image.
Your session has expired, please login again.
You are now subscribed to our newsletters. In case you can’t find any email from our side, please check the spam folder.
This is a subscriber only feature Subscribe Now to get daily updates on WhatsApp
