Indian Oil Equity Research

Date of Research – 18 January 2016

Price – Rs. 416.95

About the Company

Indian Oil Corporation Limited (“IOC” or the “Company”) is India’s flagship national oil company with business interests ranging from refining, pipeline transportation and marketing of petroleum products to exploration & production of crude oil & gas. The Company is the market leader, with an overall share of (53.1%) among the PSUs.

IOC and its subsidiary, Chennai Petroleum Corporation Limited, account for over 49 % petroleum products market share, 31 % national refining capacity and 71 % downstream sector pipelines capacity in India. The Company has a portfolio of energy brands that includes Indane LPGas, SERVO lubricants, XtraPremium petrol, XtraMile diesel, PROPEL & petrochemicals. During FY 2013, IOC maintained its leadership position in the industry on the basis of unparalleled performance on all operational parameters.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations4,61,779.674,88,344.934,49,508.663,55,926.62 4,53,725.84 
Expenses4,48,012.044,71,288.394,38,972.743,32,729.91 4,19,712.61  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)13,767.6317,056.5410,535.9223,196.71 34,013.23  
Depreciation5,691.506,359.995,219.015,918.51 6,848.62  
Finance Costs7,083.525,907.884,174.643,629.98 3,721.26  
Other income3,511.643,442.384,203.992,246.08 3,872.39  
Exceptional items(1,746.80)(1,668.09)(1,364.25) – 
PBT4,504.259,977.857,014.3517,258.55 27,315.74  
Tax876.953,011.272,142.575,652.83 7,570.40  
PAT (before Minority Interest and share of Associates)3,627.306,966.584,871.7811,605.72 19,745.34  
Profit/ (loss) attributable to Minority Interest(821.71)(119.01)(40.24)386.50 – 
Share of profit / (loss) of Associates– (640.06) 
Consolidated Profit / (Loss) for the year4,449.017,085.594,912.0211,219.22 20,385.40  

Profitability Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio2.983.492.346.52 7.50 
Net Profit Margin Ratio0.791.431.083.26 4.35 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Share Capital2,427.952,427.952,427.952,427.95 2,427.95 
Share application money pending allotment0.061.20– – 
Reserves & Surplus57,945.3560,608.0265,485.0766,404.32 73,566.01 
Net worth (shareholders funds)60,373.3663,037.1767,913.0268,832.27 75,993.96 
Minority Interest1,943.741,261.761,170.561,073.33 1,414.33 
Long term borrowings18,310.4024,712.2735,865.1636,795.89 30,367.12 
Current liabilities1,32,518.951,30,408.061,41,138.251,04,228.06 1,04,096.63 
Other long term liabilities and provisions710.5711,948.7514,134.9315,930.27 20,495.79 
Deferred Tax Liabilities5,970.206,332.926,456.7036,795.89 9,656.44 
Total Liabilities2,19,827.222,37,700.932,66,678.622,33,743.34 2,42,024.27 


Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
Fixed Assets80,030.5685,969.681,10,527.461,17,088.47 1,28,434.15 
Noncurrent Investments3,813.093,693.838,566.008,761.11 8,666.59 
Current assets1,25,977.44134,438.451,41,165.961,01,085.93 94,474.38 
Long term advances and other noncurrent assets9,981.1013,511.386,297.536,689.38 10,329.46 
Deferred Tax Assets0.640.6433.8647.97 40.64 
Goodwill on consolidation (net)24.3986.9587.8170.48 79.05 
Total assets2,19,827.222,37,700.932,66,678.622,33,743.34 2,42,024.27 

Efficiency Analysis

ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016 
ROCE24.4615.4716.2515.07 21.52 
ROE / RONW7.067.0610.437.08 15.27 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)4,61,779.674,88,344.934,49,508.663,55,926.62 4,53,725.84 
Growth (%)12.93 %5.75 %(7.95 %)(20.82 %) 27.48 % 
PAT (Rs. Cr.)3,627.306,966.584,871.7811,605.72 19,745.34  
Growth (%)(14.96 %)92.06 %(30.07 %)138.22 % 70.13 % 
Earnings Per Share – Basic (Rs. )18.3229.1820.2346.21 41.88 
Earning Per Share – Diluted (Rs. )18.3229.1820.2346.21 41.88 
Price to Earnings15.3612.4617.608.51 9.96 

Dividend History

The Company has maintained an average dividend yield of 2.64 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Indian Oils average current ratio over the last 5 financial years has been 1.04 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Indian Oil’s average long term debt to equity ratio over the last 5 financial years has been 0.50 times which indicates that the Company operates with high level of debt and is not placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Indian Oil’s average interest coverage ratio over the last 5 financial years has been 0.88 times which indicates that the Company will face difficulty to meet its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2016, Indian Oil reported a promoter holding of 58.57 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 16.88 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.