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Why Indian Oil could be Dalal Street's favourite OMC stock

The Paradip refinery is likely to match RIL's gross refining margin (GRM), thereby improving the margin profile of Indian Oil (IOC).

, ET Bureau|
Updated: Jan 03, 2017, 08.48 AM IST
ET Intelligence Group: Indian Oil, the country's largest oil marketing company (OMC), may emerge as a top pick among OMCs in 2017 given expectations of higher ear nings surprise once its 15-million tonnes per annum (MTPA) Paradip refinery achieves full utilisation in March 2017.

The Paradip refinery is likely to match RIL's gross refining margin (GRM), thereby improving the margin profile of Indian Oil (IOC).

At the end of the September 2016 quarter, Paradip refinery was oper ating at 43% of its total capacity. Several factors make the refinery an important catalyst in IOC's future growth. Its operating matrix is quite similar to Reliance Industries' refinery, which delivers a superior GRM.

The complexity of a crude oil refinery is globally measured with the help of the Nelson complexity index. Higher the index better would be theoretical GRM of a refinery. The Nelson complexity index of Paradip refinery will be 12.2, compared with 12.7 for RIL.

Another factor is the Paradip refinery will be optimised to produce greater proportion of high margin products such as diesel, gasoline, and aviation turbine fuel (ATF).


Also, being a coastal refinery, it will help reduce the inventory holding period. This should lower the inventory loss during times of higher volatility in crude prices.

The refinery will account for 20% of the company's total installed capacity of 69 MTPA. This will result in lower import of petroleum products, which in turn will reduce IOC's exposure to currency fluctuations.

The combined impact of these factors is expected to generate $2.5-3.5 per barrel higher GRM for IOC.Analysts expect GRM of $6.1-6.3 per barrel for IOC for the next fiscal, which does not fully reflect Paradip refinery's margin addition.

According to Bloomberg's consensus estimates, the FY18 earnings per share (EPS) for IOC are expected to grow by just 4.4% to Rs 32.7. This is likely to be revised upwards once the new refinery is fully commissioned. At Monday's closing price of Rs 327.1, IOC was valued at 2.1 times its book, which is nearly at 13% and 34% discount to its peers, HPCL and BPCL, respectively.

With over 14% jump in the expected EPS, IOC is among the few companies in the past three months to report earnings upgrades. The valuation gap with other OMCs is likely to converge in the coming months once higher GRM kicks in.Besides, a steady contribution from marketing and pipelines segments will also support earnings.
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