Expanding Refining And Petrochemicals Will Harness India's Secular Demand

Key Takeaways

• Significant refining and retail expansion, combined with rising petrochemical integration, positions Indian Oil for strong revenue growth and sector-leading margin improvements.
  
• Strategic LNG investments, digital transformation, and government support ensure stable, diversified earnings and future operational efficiency gains.
  
• Heavy investment in traditional fuels and petrochemicals amid regulatory, market, and competitive pressures may undermine profitability and leave Indian Oil exposed to future industry shifts.

Catalysts

Engages in the oil, gas, petrochemicals, and alternative energy source businesses in India and internationally.

• Analyst consensus views Indian Oil's ongoing refining expansion as a way to grow revenues, but this likely understates the upside-these projects, aligned with an expected doubling in national energy demand and India's GDP growth trajectory, position Indian Oil for substantial market share gains and volume-driven revenue growth well above market forecasts.
  
• While analysts broadly see increased petrochemical intensity as margin accretive, they may be overlooking the structural step-change possible as Indian Oil triples petchem integration by 2030, which coupled with import substitution should drive sector-leading net margin expansion as prices recover and India's domestic demand surges.
  
• The ramp-up in retail outlet additions to nearly 48,000 by 2027, combined with the transformation into full-service multi-energy stations, will create the largest energy retail footprint in India, unlocking lasting pricing power, improved asset utilization, and durable growth in downstream cash flows.
  
• Indian Oil's long-term LNG supply agreements, capacity expansions at terminals, and government-backed energy security initiatives shield the company from global commodity volatility and create a stable, diversified earnings base that is undervalued in current market multiples.
  
• The launch of Project Sprint, with its focus on digitalization, cost leadership, and operational excellence, will drive sustained improvements in cost structure and operating leverage, setting the stage for accelerated earnings growth and improved return on capital throughout the next decade.

Indian Oil Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Indian Oil compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Indian Oil's revenue will grow by 8.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.2% today to 3.8% in 3 years time.
• The bullish analysts expect earnings to reach ₹359.3 billion (and earnings per share of ₹26.05) by about August 2028, up from ₹168.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 10.6x on those 2028 earnings, down from 11.5x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 17.6x.
• Analysts expect the number of shares outstanding to decline by 2.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.42%, as per the Simply Wall St company report.

Indian Oil Future Earnings Per Share Growth

Risks

• Indian Oil's aggressive capital expenditure on expanding refining and distribution infrastructure, even as long-term fuel demand is threatened by accelerating electric vehicle adoption and stricter emissions regulation, risks creating stranded assets and adversely impacting future return on capital employed, which could drag down earnings over time.
  
• The company's revenue and profit streams remain highly dependent on fuel marketing, with much of the growth still coming from gasoline and diesel sales despite announced diversification efforts, making Indian Oil vulnerable to any sustained decline in core fuel demand and compressing its overall revenue and net margins as the energy transition progresses.
  
• Persistent and significant government influence in pricing and operations, including receivables linked to under-recoveries and compensation delays, continues to undermine earnings visibility, constraining Indian Oil's ability to quickly adapt to market changes, pass on input cost increases, and potentially suppressing future profit and free cash flow growth.
  
• Intensifying competition from private sector and international players in both core fuels and emerging alternative energy segments threatens to erode Indian Oil's market share and pricing power, leading to heightened margin pressure and lower revenue growth in the long term.
  
• The company's major investments to grow petrochemicals come at a time of global overcapacity and margin weakness, and the cyclical nature of this industry means a prolonged downturn or strong import competition could prevent Indian Oil from realizing positive returns on invested capital, negatively affecting future earnings and profitability.

Valuation

• The assumed bullish price target for Indian Oil is ₹199.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Indian Oil's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹199.0, and the most bearish reporting a price target of just ₹95.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ₹9527.1 billion, earnings will come to ₹359.3 billion, and it would be trading on a PE ratio of 10.6x, assuming you use a discount rate of 14.4%.
  
• Given the current share price of ₹141.44, the bullish analyst price target of ₹199.0 is 28.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.