Why IOC is stock pick of the week

Indian Oil Corporation (IOC), the largest domestic oil marketing company (OMC) with more than 29,000 retail outlets, has reported bumper profits in the second quarter of 2020-21 and is expected to repeat the same in the third quarter. Opening up of the economy and resumption of economic activities after a long haul are helping OMCs like IOC. India’s oil demand was up 4% m-o-m in December, which was a fourth consecutive m-o-m growth. Though the oil demand for the Oct-Dec period is still down y-o-y, favourable operating factors are helping the OMCs to report better bottom-line numbers. IOC is expected to report y-o-y Ebitda (earnings before interest, tax, depreciation and amortisation) and net profit growth of 15% and 55% respectively during this period.Bumper Ebitda and net profit in the third quarter is expected due to strong marketing margins that will be able to offset muted refining margins and lower marketing volumes. Since oil price continued its upward move in the third quarter as well, there will be significant inventory gains as well (though inventory gains will be lower than the second quarter). However, if oil price surge continues, it will be difficult for OMCs to pass on the entire costs and this in turn, may adversely affect its marketing margins in the coming quarters. Rationalising and fully utilising its vast network of outlets by offering value-added services should help IOC to extract higher profit from the marketing division.Though the refining segment will continue to lag, things have started improving there also. The refining margins, which were languishing at multi-year lows, have started showing signs of improvements. The benchmark Singapore refining profit margin for gasoline climbed to $6.29 on 14 January. After Covid induced lull, IOC’s refineries are also back to 100% capacity utilisation levels and this should help in improving its refining margins.IOC has been able to bring down its debt in the recent past and this has helped IOC to bring down its interest costs. However, the chance of further debt reduction is minimal as IOC has several expansion plans and this will necessitate increased capital expenditures in the short term. In addition to the regular expansion in its refineries, IOC also has plans to enter the ‘next generation’ energy needs. It plans to venture into hydrogen blended CNG and has started pilot testing in 50 DTC buses in the third quarter. In addition to increasing fuel efficiency by 4-5%, blending of hydrogen into CNG can also reduce carbon monoxide and hydrocarbon emissions from heavy vehicles. 80300121 Selection methodologyWe pick up the stock that has shown the maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it.

from Economic Times https://ift.tt/3iowDW7