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Indian Oil Corp. (IOC.BO, Buy)
Source of opportunity
We upgrade IOC to Buy (from Neutral) as it is a defensive stock to own
in case we witness oil demand destruction due to oil prices spiking up
from here. It also benefits from regulatory action raising fuel prices. We
believe that the under-recoveries on auto fuels are likely peaking.
The stock has underperformed the broader market over the past six
months, largely pricing in the impact of high oil prices resulting in
higher net under-recoveries for OMCs. However, we believe with current
under-recovery on gasoline around Rs6/litre and on diesel around
Rs15/litre, the government is likely to increase fuel prices despite high
inflation in the economy. Further we believe government’s plans of
divesting in IOC and ONGC (in June) will accelerate the implementation
of fuel price increases resulting in lower under-recoveries and earnings
growth in FY12 for the company.
Catalyst
Key catalysts include 1) Announcement of fuel price increases resulting
in lower net losses for OMC; and 2) Correction in crude oil prices.
Valuation
We raise earnings for FY12E-FY13E by 4%-5% to reflect our expectations
of lower net-under-recoveries. Consequently, we raise our 12-month
target price to Rs388 from Rs375 based on our forward EV/EBITDA
multiple of 6.5X. Our price target implies 17% potential upside from
current levels. We expect any correction in crude prices going forward
would strengthen INR vs. US$ and will be positive for the stock.
Key risks
Key risks include 1) Continued high global oil prices, 2) delay in fuel
prices increases, and 3) weak INR-USD rate.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indian Oil Corp. (IOC.BO, Buy)
Source of opportunity
We upgrade IOC to Buy (from Neutral) as it is a defensive stock to own
in case we witness oil demand destruction due to oil prices spiking up
from here. It also benefits from regulatory action raising fuel prices. We
believe that the under-recoveries on auto fuels are likely peaking.
The stock has underperformed the broader market over the past six
months, largely pricing in the impact of high oil prices resulting in
higher net under-recoveries for OMCs. However, we believe with current
under-recovery on gasoline around Rs6/litre and on diesel around
Rs15/litre, the government is likely to increase fuel prices despite high
inflation in the economy. Further we believe government’s plans of
divesting in IOC and ONGC (in June) will accelerate the implementation
of fuel price increases resulting in lower under-recoveries and earnings
growth in FY12 for the company.
Catalyst
Key catalysts include 1) Announcement of fuel price increases resulting
in lower net losses for OMC; and 2) Correction in crude oil prices.
Valuation
We raise earnings for FY12E-FY13E by 4%-5% to reflect our expectations
of lower net-under-recoveries. Consequently, we raise our 12-month
target price to Rs388 from Rs375 based on our forward EV/EBITDA
multiple of 6.5X. Our price target implies 17% potential upside from
current levels. We expect any correction in crude prices going forward
would strengthen INR vs. US$ and will be positive for the stock.
Key risks
Key risks include 1) Continued high global oil prices, 2) delay in fuel
prices increases, and 3) weak INR-USD rate.
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