Potential Decrease in Indian Oil Shares: Three Primary Reasons Indicate a Potential 66% Margin Drop, According to Nuvama
Indian Oil Corporation Limited (IOCL) is facing a bearish outlook from brokerage firm Nuvama, primarily due to the high capital expenditure (capex) and margin risks associated with the company's operations.
In the past six months, IOCL's share price has given a return of almost 16%, but this positive trend has been tempered by a 6% fall in the last one month and a correction of over 17% in the last one year. Despite this, the stock has surged 3.6% year to date.
The high capex is expected to weigh on IOCL's return on capital employed (RoCE) and potentially lift the company's debt. Nuvama expects the FY26 capital expenditure guidance of Rs 33,500 crore to remain high, due to refining, petchem expansion, and NE projects.
Margin pressures can arise from volatile crude oil prices, refining margins, and regulatory challenges affecting profitability. In Q1 FY26, the gross refining margins (GRMs) for IOCL plunged 66% year-over-year to $2.15 per barrel. GRMs for IOCL were lower than those of peers like BPCL ($4.9) and HPCL ($3.1).
The inventory loss for IOCL was $4.8 a barrel, despite an increase in Russian crude share to 24% in Q1 from 14% in Q4. This indicates the challenges faced by the company in managing its margins.
Nuvama has retained a 'Reduce' rating on IOCL and has set a target price of Rs 130 on the stock, implying a potential downside of 7% from the current market price. It is worth noting that both IOCL's EBITDA and net profit in Q1FY26 missed Nuvama's estimates.
However, despite the warning of margin risks and high capex, IOCL continues to buy Russian oil based on economic considerations.
Market sentiment indicators such as the put-call ratio for IOC being below 0.8 (around 0.55 to 0.63 in recent readings) indicate a bearish trend among options traders, supporting a negative near-term outlook.
In contrast, IOCL gained market share in Q1 compared to BPCL and HPCL, with LPG underrecoveries for IOCL in Q1 amounting to Rs 23,600 crore.
This article is based on available information and does not contain the exact published analyst note from Nuvama on IOC. For the detailed rationale, it would be best to check their latest research reports or contact them directly.
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