Stocks To Buy: Oil & Gas Stock Where Motilal Oswal Sees A 39% Profit Potential

Broking firm, Motilal Oswal sees an upside of as much as 39% on the stock of Indian Oil. The brokerage believes the stock can reach a target price of Rs 98, and has a buy call on the stock. Here's is why Motilal Oswal Financial Services remains optimistic on the stock.

IOCL: Quarterly results

Indian Oil reported an EBITDA of Rs 19.6 billion (-82% YoY) ahead of our estimate of an operating loss of Rs 90 billion. "The beat in EBITDA was fueled by strong reported GRM at USD19.2/ bbl (v/s our estimate of USD8.9/ bbl and USD31.8/bbl in 1QFY23). In the refining segment, throughput came in at 16.1mmt (+5% YoY), broadly in line with our estimate (of 17mmt). In the marketing segment, domestic sales volumes stood at 19.9mmt (in line with our estimate of 19.1mmt; v/s 21.3mmt/17.1mmt in 1QFY23/2QFY22). However, oil marketing companies are estimated to have generated losses of INR1.2/INR12.4 per liter on petrol/diesel, respectively, in 2QFY23," the brokerage has said.

In the marketing segment, domestic sales volumes stood at 19.9mmt (in line with our estimate of 19.1mmt; v/s 21.3mmt/17.1mmt in 1QFY23/2QFY22). However, OMCs are estimated to have generated losses of Rs 1.2/Rs 12.4 per liter on petrol/diesel, respectively, in 2QFY23.

Government compensates on LPG recovery

To compensate for LPG under recoveries, the government recently approved a one-time grant of Rs 108 billion for Indian Oil, which has been recorded under revenue by the company. We had estimated that India Oil would receive the grant to the tune of Rs 121 billion, assuming that 55% of the total announced Rs 220 billion would go to the company.

"We cut our FY23 EPS estimate by 32% due to the under performance seen in 2QFY23 keeping our FY24 estimates unchanged as of now. Singapore gross refining margins has remained subdued in Oct'22 at USD2.5/bbl and we estimate a GRM of USD5/bbl for the remaining quarters of FY23," the brokerage has said.

Projects expansion to benefit the company

The company is set to commission various projects over the next two years driving growth further. Refinery projects, currently underway, are expected to be completed as follows: Panipat refinery (25mmtpa) by Sep'24, Gujarat refinery (18mmtpa) by Aug'23 and Baruni refinery (9mmtpa) by Apr'23, according to the earlier guidance, Motilal Oswal has said.

"We expect dividend payout to be around similar levels of 51% for FY23-24. IOCL trades at 3.3x consolidated. FY24E EPS and 0.6x FY24E PBV. We value the stock at 0.9x FY24E P/BV to arrive at our target price of Rs 95," the brokerage has said.