Demand recovering despite product prices at historic highs – Indian Oil Corp.

Update on the Indian Equity Market:

On Friday, Nifty50 ended 1.5% lower at 14,372 dragged by the metal and banking stocks. AUTO (+1.4%), and IT (+0.2%) were the only sectoral indices to end the day with gains. METAL (-3.9%), BANK (-3.2%), and PRIVATE BANK (-3.2%) led the sectoral losers. Auto stocks led the gainers with BAJAJ AUTO (+11.2%), HEROMOTOCO (+4.0%), and EICHERMOT (+1.8%) leading the pack. AXISBANK (-4.5%), ASIANPAINT (-4.3%), and JSWSTEEL (-4.0%) were the top losers.

Excerpts of an interview with Mr. Shrikant Vaidya, Chairman, Indian Oil Corporation (IOC) published in Business Standard on 21^st January 2021:

• Crude oil prices are rising does not impact IOC’s margins as refining margins are influenced by product cracks. Product cracks are yet to recover fully. The increase in crude oil prices is likely to boost margins through inventory gains, provided prices stabilise at these levels.
• India is set to drive global oil demand over the long term. Vaccine rollout suggests a more certain recovery in the oil market in 2021, but demand uncertainty still looms. Saudi Arabia’s decision to reduce crude oil production by 1 mn barrels a day in February and March has provided support to the market but demand concerns remain.
• We may have to wait for fiscal conditions to improve before a significant reduction in excise duty rates are announced.
• With the upcoming Budget, he reiterated the petroleum industry’s demand to move petrol, diesel, aviation turbine fuel, natural gas, and crude oil under GST. Exclusion of these products which account for ~60 percent of refined product volumes, with crude oil and natural gas has resulted in stranded taxes in the hands of oil & gas companies.
• Oil consumption posted a month-on-month increase for the fourth straight month in December 2020. The easing of restrictions has revived demand from transportation.
• IOC is sticking to the investment plans as those are based on long term demand potential in the country. Though they have faced temporary issues due to pandemic restrictions, IOC is on track to achieve its capex target of Rs 260 bn in FY21.
• Since the easing of lockdown, IOC has commenced work on 2800 projects at an anticipated cost totaling Rs 2 trillion.

Consensus Estimate: (Source: market screener website)

• The closing price of IOC was ₹ 96/- as of 22-January-2021. It traded at 8x/ 7x/ 6x the consensus earnings estimate of ₹ 12.8/ 14.2/ 17.3 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 115 implies a PE multiple of 7x on FY23E EPS of ₹ 17.3/-.

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