On Monday, UBS analyst upgraded Indian Oil Corp. (IOCL:IN) to Buy from Neutral, with a new price target set at INR 210.00, raised significantly from the previous INR 150.00. The upgrade is based on several factors that are expected to drive the company's earnings in the upcoming year.
The analyst at UBS identified four key potential earnings drivers for Indian Oil. First, there is an anticipated expansion of integrated margins as crude prices moderate. Second, a shift in profits from refining to marketing is expected, which is beneficial for Indian Oil given that a marketing to refining ratio of 1.2 implies the company stands to gain in a low refining margin environment.
Additionally, Indian Oil's strong distillate yield of 79% as of the fiscal year 2023, attributed to its portfolio of complex refineries, is cited as a third driver. Lastly, the analyst forecasts an improvement in petrochemical (petchem) earnings from the trough levels of fiscal years 2023-24, driven by a recovery in spreads and the commissioning of new capacity.
The UBS analyst has raised the forecast for Indian Oil's EBITDA for the fiscal years 2026-27 by 10-18%, which is 16-18% above the consensus. This adjustment reflects higher marketing margins of 5-10%, a slight cut in gross refining margins (GRM) by 0-3%, and an increased earnings contribution from the petrochemical segment.
The report concludes with an analysis of Indian Oil's valuation, noting that the company trades at a 20% discount to its long-term average price-to-earnings (PE) ratio and broadly in line with its price-to-book value (P/BV). This valuation is presented as indicating an attractive risk-reward scenario for the company's shares.
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