Is IOCL the Next Big Stock to Buy in the Oil Industry?

Indian oil corporation Limited is an Indian Multinational oil and Gas company under the ownership of Government of India and administrative control of the Ministry of Petroleum and Natural Gas. 

It is the largest Government owned oil producer in the country both in terms of capacity and revenue.  

The company’s revenue stands at INR 8,66,345 crore as of FY 24.  And profit of the company in FY 24 stands at massive INR 39,619 crore. 

IOCL is one of India’s leading downstream oil and gas companies offering a diverse innovative energy solution. 

Fuelled by a rich legacy dating back to 1959, Indian oil has built a diversified portfolio encompassing the entire hydrocarbon value chain. 

But what do you mean by Downstream companies? What do you mean by Hydrocarbon value chain?  

These are very crucial terms and concepts that we need to understand when we are analyzing the oil companies. 

What is Hydrocarbon value chain?  

The hydrocarbon value chain refers to the series of interconnected activities through which hydrocarbons (like crude oil and natural gas) are discovered, processed, and transformed into useful products that reach consumers. 

Hydrocarbon value chain is classified into three broad categories:  

1. Upstream 

2. Midstream 

3. Downstream 

Upstream companies: Exploration and Production: This is the first stage in the hydrocarbon value chain, where hydrocarbons are located and extracted from the earth. 

• In this exploration is the first step, Geologists and engineers search for oil and gas reserves using seismic surveys and other advanced techniques and Test drilling is conducted to confirm the presence of hydrocarbons. 

• Next step is Production: Hydrocarbons are extracted through wells drilled onshore or offshore. After that Initial processing is also done at the site which separates crude oil, natural gas, and water. 

So, Upstream companies produce crude oil and Natural Gas. 

Example of upstream companies: ONGC. 

Midstream companies: This stage involves moving and temporarily storing hydrocarbons for further processing or distribution. 

In this the most efficient way to transport large volumes of oil and gas over long distances pipelines are used.  

Ships are used for international transport of this crude oil. 

Which means midstream companies are involved in transportation and storage. 

Downstream companies:  

This is the final stage, where hydrocarbons are refined and transformed into consumer-ready products. 

Refining: 

• Distillation: Crude oil is heated to separate its components based on boiling points. 

• Cracking: Heavy hydrocarbons are broken down into lighter ones like petrol and diesel. 

• Blending: Components are mixed to meet fuel quality specifications. 

Petrochemical Processing: 

• Refining byproducts like ethylene and propylene are used to manufacture plastics, fertilizers, and other chemicals. 

Example: Indian oil. 

So, IOCL Company comes under this category of Downstream companies. 

Business Overview:  

Indian Oil Corporation Limited (IOCL) is India’s largest commercial oil company, playing a vital role in the country’s energy landscape. IOCL operates across the entire hydrocarbon value chain, including refining, pipeline transportation, and marketing of petroleum products.  

1. Refining, Pipelines & Marketing:   

IOCL has refining capacity stands at 70.25 MMTPA, the largest among Indian refining companies, with a plan for further enhancement to 87.9 MMTPA by 2026. 

Refining has achieved the highest ever capacity utilization of 104.5% and refineries achieved 97.3% operational availability in 2023-24. 

IOCL operates one of the world’s largest oil and pipeline networks, they manage 19500+km of crude oil, petroleum product and gas pipelines with an annual throughput capacity of 124.4 MMT of oil and 48.73 MMSCM per day of gas. 

Coming to the marketing segment, with a marketing and distribution network spanning 61,000+ touchpoints, Indian Oil is a key player in Asia’s petroleum industry. 

2. Natural Gas: IOCL has emerged as the key player in the natural gas domain. It is the second largest player in India’s natural gas sector. Their strategy involves amplifying LNG procurement, strengthening infrastructure through imports terminals and expanding pipelines and city gas distribution grids. 

Invested US$ 71.41 Million in 2023- 24, producing 1.59 MM Tonnes of natural gas. 

3. Petrochemicals: Indian Oil Corporation Limited (IOCL) has a significant presence in the petrochemicals sector, leveraging its extensive refining and marketing capabilities to produce a wide range of petrochemical products. 

They reported sales of 3.1 MMT in 2023-24 and they launched “CYCLOPLAST” brand for polymer recyclates. 

They are positioned as India’s second largest Petrochemicals Producer in India, targeting capacity expansion to 13.6 MMT by 2030. 

4. Exploration and production: IOCL is also expanding its business to upstream operations because the rewards are higher bur risk is also higher.  

They are focusing more on expanding their presence in the entire hydrocarbon industry. 

Currently, we are actively pursuing operations in 18 domestic and 11 overseas assets, spanning various Gas Collecting Station (GCS), Bokaro- a major production installation for processing of Coal Bed Methane gas countries including the USA, Canada, Oman, the UAE, Venezuela, Libya, Gabon, Nigeria and Russia. 

Industry Overview: 

According to OPEC, India’s oil demand in 2024 is projected to be at 5.59 million barrels per day (b/d), up from 5.37 million b/d in 2023, resulting in a growth of 4.1%.  

 India retains its spot as the third-largest consumer of oil in the world, as of 2023. The consumption of petroleum products has increased from 158.4 million metric tons (MMT) in FY14 to 234.3 MMT in FY24. Over the past decade, the compounded annual growth rate (CAGR) of total petroleum, oil, and lubricants (POL) consumption has been 4.0%.  Domestic consumption of the petroleum products in the year 2023- 24 was 233.3 MMTPA 

Coming to the Refining sector:  

Indian refining capacity has increased from 215.1 Million Metric Tonne Per Annum (MMTPA) to 256.8 MMTPA in last 10 years.  

India is planning to double its refining capacity to 450-500 million tonnes by 2030.  India, the world’s fourth largest crude oil refiner, is expected to add one million barrels per day (mb/d) of refining capacity by 2028.  

 India refining capacity is projected to increase to 309.5 MMTPA by the year 2028. 

The industry is expected to attract US$ 25 billion investment in exploration and production. Strengths: 

1. Leadership position: Indian Oil Corporation Limited (IOCL) stands as a leader in India’s oil refining and marketing industry. As of March 31, 2024, IOCL operated 11 refineries, representing an impressive 31% of the nation’s refining capacity. The company also commanded approximately 42% of the petroleum products market in fiscal 2024. Its extensive, integrated operations, strategically diversified refining capacities, and consistently high utilization levels drive superior operational efficiency. 

IOCL’s strong market position is further bolstered by its well-established marketing and distribution network, comprising 37,472 retail outlets and 12,880 LPG distributors nationwide. This robust infrastructure is complemented by strategic branding and marketing initiatives, ensuring IOCL maintains its dominant presence in the domestic petroleum market while strengthening customer trust and loyalty. 

2. Expansions: The company has significant capex plans spanning the entire downstream value chain with a total outlay of around INR 1.5 lakh crore over the next 3-4 years. The capex plans include the expansion of refineries, setting up of pipelines infrastructure, investments in setting up marketing/retail infrastructure, setting up of petrochemicals plants etc. 

3. Strong Government support: IOCL holds significant strategic importance to the Government of India (GoI), serving as a cornerstone in the implementation of the government’s socio-economic policies. The GoI’s 51.5% stake in IOCL and its active management control further reinforce the company’s critical role. However, any reduction in IOCL’s strategic relevance or a decline in the GoI’s shareholding will be key factors to monitor closely. 

4. Established network of pipeline: IOCL operates an extensive pipeline network spanning over 19,700 kilometers, facilitating the transportation of crude oil, petroleum products, and natural gas. This infrastructure boasts a throughput capacity of 124.4 million metric tonnes (MMT) per annum for oil and 48.73 million metric standard cubic meters per day (MMSCMD) for gas. 

In FY24, IOCL’s liquid pipelines achieved an impressive throughput of 95.80 MMT, up from 95.04 MMT in FY23, which included 51.81 MMT of crude oil and 43.99 MMT of petroleum products. Gas pipelines also saw significant growth, with a throughput of 3717 MMSCM in FY24, compared to 3077 MMSCM in FY23. 

These cross-country pipelines represent a cost-effective and energy-efficient solution for transporting crude oil and petroleum products, underscoring IOCL’s commitment to operational excellence and sustainable logistics. 

5. Strong focus on R&D: IOCL has a total of 1636 effective patents as of FY 24, and they have filed 1736 patents in the last Fy 24.  

IOCL in partnership with Tata Motors launched India’s First Hydrogen bus and they set up New R&D campus for Research in Renewable Technologies. 

Risks: 

1. Exchange rate risk: Crude oil prices have seen significant volatility, with Indian basket prices dropping to $20/bbl in April 2020 and surging to over $110/bbl by March 2022. The average procurement price was $93/bbl in FY23 and $84/bbl in FY24. With an inventory of 70-80 days, IOCL’s operations are sensitive to fluctuations in inventory valuations.  

Additionally, importing 80-85% of its crude oil makes IOCL vulnerable to rupee-dollar exchange rate volatility, impacting import costs. The company mitigates these risks through marketing margins, and its ability to sustain this strategy will remain a critical factor to monitor. 

2. Crack spread volatility: Crack spread measures the difference between the price of crude oil and the price of refined petroleum products like diesel, gasoline, or jet fuel. It indicates the profitability of refining operations. 

If crude oil prices rise or refined product prices drop, the crack spread narrows, reducing refining profitability. 

IOCL’s profitability was impacted in FY23 due to the stagnant retail prices against high crude prices. Even though average crude oil prices reduced in FY24 from FY23, retail prices were unchanged since April 2022, resulting in a higher marketing margin in FY24. 

Financials: 

Sales demonstrated strong growth, peaking at INR 841,756 crore in FY23, with a slight decline to INR 776,352 crore in FY24, while expenses followed a similar trend. Operating profit margin (OPM%) recovered from a low of 3% in FY20 to 10% in FY24, showcasing improved operational efficiency.  

Net profit, which turned negative in FY20 at INR -1,876 crore, rebounded sharply to INR 43,161 crore in FY24, supported by favorable margins and cost management. Earnings per share (EPS) also mirrored this recovery, rising from INR-0.63 in FY20 to INR 29.55 in FY24.  

This highlights the company’s resilience and ability to recover from challenges such as the pandemic and fluctuating crude prices, although maintaining this momentum amidst ongoing market volatility will remain key. 

Shareholding Pattern:  

The shareholding pattern shows stable promoter control at 51.50%, while FII interest has increased to 8.49% in FY24 from 7.19% in FY20. DIIs, however, reduced their stake to 10.23% in FY24 from 13.72% in FY19. The government’s stake rose significantly to 19.57% in FY24, indicating strategic changes. Public shareholding decreased from 29.60% in FY21 to 10.18% in FY24, likely due to buybacks or other strategies. The number of shareholders has more than doubled, reflecting growing retail investor interest. Overall, the pattern indicates changing dynamics and increasing confidence in the company. 

Growth Triggers: 

1. Expanding EV Infrastructure: Indian Oil is making significant strides in electric mobility, supporting greener transportation solutions. As of June 2024, Indian Oil commissioned 10,028 EV charging stations, representing 59.7% of all EV charging stations in the country.  

Additionally, battery swapping services are available at 99 fuel stations, providing flexible and efficient solutions for electric vehicle users. This expansion aims to enhance the accessibility and convenience of EV charging infrastructure, supporting the growing adoption of electric vehicles nationwide. 

2. Policy support:  

In September 2021, the Indian government approved oil and gas projects worth Rs. 1 lakh crore (US$ 13.46 billion) in Northeast India. These projects are expected to be completed by 2025.  

 In February 2021, Prime Minister Mr. Narendra Modi announced that the Government of India plans to invest Rs. 7.5 lakh crore (US$ 102.49 billion) on oil and gas infrastructure in the next five years.  

In budget 2024-25, Rs. 497.25 crore (US$ 59.75 million) allocated to scheme for Development of Pipeline infrastructure for injection of Compressed Biogas (CBG) in City Gas Distribution (CGD) Network.  

In the Union Budget 2023-24, government has set target to Setting up coal gasification and liquefaction capacities of 100 MT by 2030 to reduce import of natural gas, methanol and ammonia. 

ESG: 

Environmental:  

1. Focus on Green Initiatives: Indian Oil is pioneering the green energy transition with initiatives aimed at achieving operational Net-Zero by 2046. Indian Oil is driving the nation’s transition towards carbon neutrality with initiatives in Hydrogen Mobility, towards a Greener Future EV Charging Facility at Indian Oil Petrol Pump in New Delhi Indian Oil’s Solar Cooktop being used in Dhar, Madhya Pradesh Hydrogen Transportation, Biofuels, Electric Mobility, Solar Cooktops, and minimizing water footprint.  

Indian Oil’s brand ‘CYCLOPLAST’ integrates recycled petrochemicals with virgin plastics, promoting responsible disposal and reuse. Eco-friendly garments made from recycled PET bottles showcase Indian Oil’s commitment to sustainability. The establishment of Terra Clean Limited will consolidate green initiatives, optimizing resource allocation and enhancing innovation.  

Social:  

During 2023-24, the Company allocated a substantial portion of its CSR budget, amounting to H 290.03 Crore (63.36% of the total CSR expenditure) to the thematic areas of ‘Health and Nutrition’ as per the guidelines set forth by the Department of Public Enterprises (DPEs) for CSR expenditure by Central Public Sector Enterprises (CPSEs). Further, the Company demonstrated its commitment to the upliftment of aspirational districts by spending H 47.26 Crore in 40 aspirational districts during the year, assigned by the DPEs. 

Throughout the year, the Company undertook 600 community development projects, spanning a diverse array of initiatives nationwide.  

Governance:  

The HSD scam refers to the High-Speed Diesel (HSD) scam in India, which involved illegal practices and fraudulent activities related to the distribution and sale of high-speed diesel. This scam came to light in the early 2000s, where oil marketing companies (OMCs) and private traders were allegedly involved in diverting subsidized or non-taxed diesel to the black market or for non-legitimate uses. 

Indian Oil Corporation Limited (IOCL) was indirectly linked to the HSD scam due to its involvement in the distribution and marketing of high-speed diesel (HSD), but the company itself was not the central actor in the fraudulent activities. 

The Central Bureau of Investigation (CBI) was brought in to investigate the scam, and IOCL was initially under scrutiny due to its involvement in the fuel distribution system. However, after thorough investigations, the CBI found that IOCL was not directly responsible for the diversion and discharged the company from any wrongdoing. 

Conclusion: 

In conclusion, the financial performance of IOCL remains closely tied to global dynamics, particularly fluctuations in crude oil prices and macroeconomic factors. While the company may experience high sales, it is crucial to recognize that profit margins play a pivotal role in its overall profitability. A surge in sales without corresponding margins can significantly impact the company’s bottom line. Therefore, investors must keep a close watch on global scenarios, including geopolitical developments and oil price trends, as these factors directly influence IOCL’s business performance. 

Due diligence is essential when considering an investment in IOCL, as understanding the interplay between crude oil prices, margins, and external market conditions will provide a more comprehensive view of the company’s future prospects. Keeping up to date with these factors will help investors make informed decisions. 

Savart is a SEBI-registered investment advisor, founded by Sankarsh Chanda. The purpose of this content is to educate, not to advise or recommend any particular security. Please remember that investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment. Do not believe in any speculations.