Buy Indian Oil Corporation; target Rs 433: Edelweiss

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Edelweiss's report on Indian Oil CorporationThe government has announced a 10% divestment (OFS) of Indian Oil (IOCL) shares on August 24, 2015. We present investors with pros and cons in order to facilitate an informed decision regarding the issue. On one hand, IOCL presents good earnings growth potential at attractive valuations despite being the least levered to domestic downstream reforms; on the other, its conglomerate structure entails inferior returns compared to peers. Nevertheless, the stock offers an attractive dividend yield of 3% for FY16E. Maintain ‘BUY’ with target price of INR433.Pros: Earnings drivers structurally in place

We believe recent downstream reforms will structurally revive fundamentals of oil marketing companies (OMCs): 1) We forecast diesel margins to rise 60% over the next 3 years. IOCL will be a key beneficiary as it leads with ~50% share of the retail market; 2) Throughputs per outlet (TPO) are 6% higher than the industry despite higher presence in low‐yielding rural areas; and 3) Most levered to refining business, where margins are expected to revive given the likely demand recovery in Asia.

Outlook and valuations: Attractive; maintain ‘BUY’

We expect IOCL to catch up with peers, after having lagged BPCL/HPCL by 70%/200%  since January 2014. IOCL trades at attractive valuations of 1.2x FY16E PBV, at 30% discount to OMC peers. We maintain ‘BUY/SO’ with target price of INR433, says Edelweiss research report.For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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