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STRONG ON CONSUMPTION<br />
Expansion to meet growing demand<br />
IOCL will invest Rs 40,000 crore to expand its refining<br />
capacity to over 100 million tonnes by 2022 as the<br />
nation’s largest oil firm takes the lead to add capacity to<br />
meet India’s rising energy needs. Recently International<br />
Energy Agency’s World Energy Outlook has projected 4<br />
per cent CAGR growth in India’s fuel demand to 348 MT<br />
by 2030, from 184 MT in 2015-16. BP projects demand<br />
to be 335 MT while EIA has pegged it at 294 MT, which<br />
translates into a CAGR of 3 per cent. All the projections<br />
clearly show that the demand will grow and IOCL is in the<br />
right path to expand its refining capacity to 104.55 mt by<br />
2022 from the current 80.7 mt per annum with an<br />
investment of about Rs 40,000 crore.<br />
Decline in subsidy burden, Improvement in cash flows<br />
IOCL’s concern over the cash flows, due to subsidy<br />
burden, has started to reduce. The decline in under<br />
recoveries has been on the back of fall in crude oil<br />
prices, diesel deregulation and direct benefit transfer<br />
scheme implementation for LPG. The company is<br />
confident that irrespective of the crude oil prices, the IPPlinked<br />
prices for MS and HSD will be adhered to by the<br />
government. Currently only kerosene and LPG prices are<br />
under the regulatory regime and the government decision<br />
to cap its sharing of kerosene subsidy at Rs. 12/litre and<br />
LPG at Rs. 18/kg and the rest by oil PSUs is a welcome<br />
move for OMCs. This adherence is expected to help the<br />
company to sustain cash flows for the expected capex<br />
plans and will maintain greater transparency in earnings.<br />
Recent developments<br />
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IOCL has rejected an offer to buy a stake in a project<br />
of the financially-stressed Nagarjuna Oil Refinery and<br />
help to resurrect it, arguing that the project’s<br />
technical configuration and financial burden were an<br />
obstacle, according to company executives and<br />
officials.<br />
State Bank of India, country largest commercial bank<br />
entered into an MoU with IOCL to engage IOCL Kisan<br />
Seva Kendras (KSK) as Business Correspondents (BCs)<br />
of SBI. The MoU is an initiative as part of the<br />
financial inclusion programme of SBI.<br />
The government is set to start consultations for an<br />
ambitious plan to merge 13 state oil firms to create a<br />
giant corporation whose revenue dwarfs global energy<br />
major Chevron which competes with US conglomerate<br />
General Electric in the Fortune-500 ranking.<br />
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Key Risks<br />
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The Union government is in favour of merging<br />
Chennai Petroleum Corporation Ltd (CPCL) with its<br />
parent, IOCL to bring the standalone refinery under<br />
one umbrella<br />
IOCL-owned Gujarat refinery will supply Bharat Stage<br />
(BS)-IV compliant diesel from January 2017, a senior<br />
official has said.<br />
IOCL is in talks to buy debt-laden Gujarat State<br />
Petroleum Corp’s (GPSC) stake in the underconstruction<br />
Rs 4,500 crore Mundra LNG import<br />
terminal in Gujarat.<br />
IOCL, Oil India (OIL) and Bharat PetroResources (BPRL)<br />
will pay Russia’s Rosneft $3.3 billion for buying equity<br />
stakes in the latter’s two oil and gas projects in<br />
September.<br />
Increase in crude prices or INR depreciation will<br />
increase under recovery.<br />
Lower GRMs and higher inventory/forex losses could<br />
be negative for IOCL.<br />
Delays in Paradip refinery ramp up could adversely<br />
impact its business growth.<br />
Valuation<br />
The Paradip refinery, once commissioned, will add to IOCL’s<br />
refining margins given its high complexity, which should<br />
aid earnings through volume growth and better blended<br />
GRMs, while earnings remain more diversified with stable<br />
co n t r i b u t i o n s f ro m t h e p i p e l i n e s e g m e n t , a n d<br />
petrochemicals. Among OMCs, IOCL’s refineries are better<br />
in terms of complexity and on average have generated<br />
higher refining margins. With decline in under recoveries<br />
on the back of fall in crude oil prices, diesel deregulation<br />
and direct benefit transfer scheme implementation for LPG,<br />
it is expected to help the company to improve its cash<br />
flows thereby reduce its debt which will help the company<br />
to lower its interest cost and improve its profitability and<br />
returns. Robust domestic product demand growth and a<br />
range bound crude price environment should aid the<br />
marketing segment, a gradual expansion in margins is thus<br />
expected to come through as well. In order to meet India’s<br />
rising energy needs, IOCL is in the right path to expand its<br />
refining capacity to over 100 MT by 2022 with an<br />
investment of about Rs 40,000 crore. At current price, the<br />
stock is trading at P/E multiple of 9.4x of FY18E EPS. We<br />
advise our investors to BUY the stock with target price of<br />
Rs. 620, valuing at P/E multiple of 10.9x FY18E EPS.<br />
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