Stock Review: Indian Oil Corporation (IOC)

Petrol price decontrol and capital infusion will help the company restart the projects it had put on hold

 

After the Empowered Group of Ministers (EGoM) decided to decontrol petrol prices in June, Indian Oil Corporation (IOC) has been taking baby steps in the direction of free pricing. Recently, it increased prices by 27 paise a litre.

While investor sentiment improved after the decontrol decision (stocks of oil marketing companies, or OMCs, rose 30-50 per cent then), the response on Tuesday was tepid. The IOC stock fell 0.8 per cent on the Bombay Stock Exchange, even as the broad indices tested older highs.

The Indian crude oil basket rose to $75.56 a barrel in September from $74.84 in June. Every dollar increase in crude oil impacts petrol prices by 35 paise a litre. Consequently, IOC has begun incurring a loss of 25 paise a litre in September for the first time since June.

Though OMCs have benefited from the increase in prices of diesel, LPG and kerosene as well as petrol decontrol, their situation will improve significantly as diesel gets deregulated. Analysts expect the decision on diesel in December as inflation eases.

With rising profitability, IOC is working on its capacities, too. The company was forced to put three projects on hold due to stressed finances, which it can take up now. The crude refining capacities are set to touch 65.7 million tonnes by the end of 2010 and further to 80.7 million tonnes by 2012.

IOC also announced a follow-on public offer on Tuesday. The company plans to raise over `10,000 crore (according to the current market price) by putting 10 per cent of its equity on the block. The proceeds can be utilised for part financing capex plans. The company has planned a capex of `14,500 crore for FY11.

With petrol prices freed and diesel prices likely to be deregulated, the subsidysharing formula on kerosene and LPG will become vital for OMCs like IOC.