Indian Oil Corporation (IOC) is one of our core portfolio holdings. IOC and other oil marketing companies (OMCs) like BPCL and HPCL are in a good spot these days due to:
(a) deregulation of petrol prices which means OMCs can derive benefits from operational efficiencies in both refining and marketing, and they will get cash immediately from sales, rather than waiting for government bonds.
(b) crude oil prices have fallen 15% from their recent highs of $83 per barrel to about $73 per barrel. Lower crude oil prices improve profit margin of IOC, and we can expect improved financial performance if crude prices remain between $70 and $80 for next few quarters.
IOC is the largest OMC in India, and has delivered the best Return on Equity among the OMCs over the last 5 years at about 16% per year on average, and the ROE can now increase to 20%+ due to above reasons.
IOC shares generous dividend with shareholders, and has ambitious plans in the energy space. Being a top 5 Govt of India company with a strong balance sheet, new opportunities will materialize in upstream exploration, overseas expansion, and nuclear energy as well in coming years. In addition, IOC may issue about 10% new equity in the near future, which may bring more liquidity to the stock and also fetch better stock prices. Overall, we remain positive on the business outlook for IOC over the next 5 years.
Investors in IOC who are willing to hold the stock for 3-5 will see high-end returns through stock price appreciation and regular dividends.
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