A Case Study on IOC (Indian Oil) & why its Book Value can be used as a criteria to buy the stock?

Our last case study on ONGC & analysis of 9 year old investment in its IPOhad us exhausted. 🙂 And with 1600+ words, even our readers were exhausted. 🙂 We even received a mail asking us to reduce the size of our future posts!! So we decided to keep this case study a little shorter.

Indian Oil (IOC) is India’s biggest public sector oil refiner. Unlike ONGC, Oil India & Cairn India which are in business of oil exploration and production, IOC is in business of crude oil refining and marketing of petrol, diesel, kerosene, ATF, etc. You can read more about the company here

Though we haven’t included IOC in our Dead Monk’s Portfolio, we do hold it in our personal portfolio for its high dividend yield. It has been consistently paying dividends for last 14 years.

Indian Oil Logo
In this case study, we try to look at the following issues:

  • We look at how IOC has increased its book value per share over the last 14 years. How this data can be used to make decisions about when to enter this stock for long term?
  • What are the rolling 3 & 5 Year returns of the stock and its relation with P/BV ratio?
  • We also look at reasons as to why this approach might fail.

How IOC has increased its book value and how this data can be used to enter this stock?
Indian Oil Book Value
IOC’s Book Value has been a support for its stock price
The red line in above graph is IOC’s book value per share (adjusted). As evident, it has been continuously increasing over the evaluation period (10+ years). It is similar to a series of steps. On the same axis, we plotted the adjusted share price (blue line0.

And it is not difficult to see that in past, book value has acted as a strong resistance for the stock price. Pardon us for borrowing a term (resistance) from the trading community. 🙂 But the trend is actually ‘un’missable. The stock price has rarely fallen below its book value. And when it has, and if an investor went ahead and bought the shares, he has been handsomely rewarded. You may say that in past, we have been against timing the markets. But here we are advocating the same. True. We don’t feel that it is worthwhile to time the market unless and until you have some insider information. But if you are a disciplined investor, who invests regularly, it makes sense to periodically boost your portfolio returns, by buying good stocks when they are available at multiples below historical averages… Isn’t it?

What are the rolling 3 & 5 Year returns of the stock and its relation with P/BV ratio?

To check the relation between returns & P/BV Ratio, we plotted two graphs. One between P/BV & rolling 3 year returns and another between P/BV & rolling 5 year returns.
ioc returns and book value 3 year
3 year Rolling Returns & P/BV per share of IOC

ioc returns and book value 5 year
5 year Rolling Returns & P/BV per share of IOC
On X-Axis, P/BV Ratio has been plotted on an increasing scale. On Y-Axis, returns (CAGR %) have been plotted. And as evident from the graphs, an investment at lower P/BV values (towards left part of x-axis) in IOC’s stock has resulted in higher returns. The scatter in the graph is downward slopping. Simply speaking, if one invests in IOC’s stock at low P/BV multiples, then probability of high capital appreciation is very high.
Why this approach might fail?

A few immediate concerns about this approach are as follows:
  • This approach relies solely on the stated book value of the share. And book values can be inaccurate because they do not always reflect the true networth of a company. This can be attributed to use of different accounting methods for items like depreciation, which can significantly affect the book value.
  • The above book value based approach does not give any weightage to company’s management (appointed by government of India in this case). And though oil prices (in particular petrol) have been deregulated, govt. still has a shadow control over the prices. But in last 2-3 months, things have started looking brighter for oil companies like IOC.
  • Another issue with this approach is that it does not evaluate alternatives available within the sector. For example, there are other refiners like HPCL, BPCL. And BPCL itself has profitable interests in oil exploration business too.

Please remember…

The above approach uses just one parameter (P/BV) to evaluate the stock. You as a reader, should remember that this is just a case study. Real life and case studies are generally out of synch. 🙂 One should never invest based on just one parameter. This case should not be taken as an investment recommendation. Do your own due diligence before deciding about where to invest your hard earned money.

Disclosures: Long term positions in Indian Oil, Cairn India & ONGC. No positions in HPCL, BPCL or OIL.


  1. Would you be able to share what is your purchase price of these long term investments you have in your personal portfolio, if I am not asking for too much :-). Also, I am a little confused as you guys keep disclosing that you hold for past 10 years etc but both of you seems very young, are you one of those early birds?

  2. @9b9a90b44f22c4de5e876072967b49bc:disqus

    Seems there is a little confusion about our stock holding periods. 🙂

    We maintain both personal as well as our family's investment portfolio. Some stocks in our family portfolio have been held for decades. As far as personal portfolios are concerned, we have only started accumulating stocks in last 5-7 years.
    And as far as the so called '10 year & 15 year' holding periods are concerned, these have been used as cases to describe the benefits of holding good stocks for long term.
    Purchase prices of investments in our personal portfolios remains confidential.

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