IOCL’s Disinvestment & How You Can Benefit From It?

Almost a year back, I had done a case study on Indian Oil Corporation Ltd. The study was an exercise to find a correlation (if any) between company’s share price and its book value per share. And surprisingly, this graph showed something interesting. To cut the long story short, it clearly showed that share prices of IOCL (almost) never stayed below its book value for too long.

So with prices hovering near 200 and adjusted book value of 250+, it seems that it might be a good time to look at this stock again.

The first thing which I decided to do was to update the graph between IOCL’s share price and book value per share. And as expected, this is what I got…

Indian Oil Corporation IOCL Book Value
IOCL || Worth A Second Look

During the last 15 years, share prices of IOCL have dropped below its book value only thrice. Once during the dot com bust of 2000-01, in crash of 2008-09, and now. And presently the Price/Book Value stands at a pathetic 0.75.

But this does not mean that prices cannot fall any lower. They can go down further. But also, the chances of Book Value going down are very remote. Even if we assume a nominal 5-8% annual increase in book value, the price at which shares are available seems to be quite cheap.

So why is it that IOCL is available at such low P/BVs? We can discuss and debate about various possibilities. But I feel that it makes more sense to find indicators which support the view that shares are indeed available at cheap prices. Or rather try to find reasons which might suggest that our hypothesis is not correct. Let’s see…

I have experience of working in oil industry and I feel that Oil Marketing Companies are currently trading at huge discounts to their intrinsic value. I agree that government is the sole decision maker in these PSU companies and we know how the government operates. And this fact in itself would shave off a decent chunk of intrinsic value from the shares of this company. 🙂

Crippled By Politics & Government

But you cannot deny the presence of massive refineries and oil pipelines. And just to give you all an idea of cost of building refineries, just head to this link to see costs of various projects being taken up by these Oil Marketing Companies. Just the cost of putting up a new refinery is in excess of Rs 30,000 crores!!

But on stock exchanges, the entire company which owns 10 such refineries is available for just Rs 50,000 crores. And I haven’t even taken the cost of laying more than 11,000 kms of oil pipelines. Nor have I taken into account the country wide network of retail outlets and a decent overseas presence in Mauritius and Sri Lanka!

And if one closely monitors the energy space, one would understand that it is now almost inevitable that subsidization of fuel would be handled more prudently by the government in years to come. And going forward, with reduction in subsidies by government & various caps on LPG cylinder’s domestic consumption, there is a decent possibility that OMCs like IOCL would benefit in the long run. But this would not happen overnight. And patiencewould be a key here. Agreed that with elections around, there might be temporary vote seeking measures like increasing the no. of subsidized cylinders, etc by the ruling parties. But things are changing on the energy administration space. And in due course of time, these subsidies would play much smaller role when people evaluate the oil companies. 

(Caution: The paragraph which you just read is full of speculation).

Another indicator of stock’s undervaluation is the ongoing discussion on disinvestment. The Petroleum Ministry has summarily rejected Department of Disinvestment’s idea of a stake sale. The reason being quoted is huge undervaluation of shares. But govt seems to have decided for stake sale and may eventually go ahead with sale of its stake to other energy companies like ONGC, OIL, etc. In past too, government has resorted to the so-called cross-holding route to shore up its revenues.Or the government might try the ETF basket route (source). But all-in-all, this indicates that prices are quite low, and even if they were to go down a little further, which is of course possible considering the overhang due to disinvestment and other election-related-factors,  it might be a good idea to accumulate this stock for long term. If not for appreciation, then for a decent dividend yield going forward.

Note – This post should not be considered as an advice to buy shares of company discussed above. 

Disclaimer – Long term positions in IOCL.



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.