Traditional Refining Will Struggle As Renewables Gain Traction

Key Takeaways

• Reliance on fossil fuels and limited diversification expose Indian Oil to demand, regulatory, and competitive pressures, threatening revenue growth and long-term profitability.
  
• Heavy investment in legacy assets risks stranded infrastructure and weak returns as India shifts toward renewables and decentralized energy solutions.
  
• Long-term growth is underpinned by expanding energy demand, capacity upgrades, clean energy diversification, government support, and strong financial health driving earnings resilience.

Catalysts

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

• The rapid acceleration of global renewable energy adoption and increasing penetration of electric vehicles are poised to structurally reduce demand for gasoline, diesel, and related fossil fuel products in India over the coming decades. This is likely to limit Indian Oil's core revenue growth, as traditional fuels make up the majority of its sales and a shift in end-use consumption erodes long-term volumes.
  
• Escalating regulatory and investor focus on environmental standards will drive higher carbon taxes, stricter emission rules, and increased compliance costs. These added expenses will place additional pressure on Indian Oil's net margins and may outpace its ability to efficiently transition its legacy assets, resulting in structurally weaker profitability over time.
  
• The group's ongoing large-scale capital expenditure in conventional refinery and distribution capacity comes with significant execution and demand risks. As energy usage in India progressively decentralizes toward solar, microgrids, and other distributed renewables, Indian Oil faces the prospect of overinvesting in assets with declining utilization, leading to future write-downs, stranded assets, and lower return on capital employed.
  
• The limited pace and scale of Indian Oil's investments in alternative and clean energy sources leave its earnings profile highly sensitive to global crude volatility, policy changes, and a faster-than-expected decline in fossil fuel demand. This lack of meaningful diversification could result in revenue stagnation and heightened earnings volatility.
  
• Intense competition from new-age energy players and global oil oversupply will continue to constrain refining spreads and product margins, while the growing share of decentralised and renewable-based energy erodes Indian Oil's market relevance, pressuring both top-line growth and long-term earnings resilience.

Indian Oil Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Indian Oil compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Indian Oil's revenue will decrease by 5.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.2% today to 3.2% in 3 years time.
• The bearish analysts expect earnings to reach ₹204.7 billion (and earnings per share of ₹14.45) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 10.4x 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

• India's energy demand is expected to double by 2050, supporting long-term growth in volumes for Indian Oil and likely leading to a sustained rise in revenues.
  
• Substantial refinery expansion and upgradation projects, as well as integrated petrochemical initiatives, will increase production capacity and improve product margins, with positive impacts expected for future earnings and overall profitability.
  
• Indian Oil is actively diversifying into clean energy, including EV charging, hydrogen, biofuels, and natural gas, which will help future-proof its revenue streams and support earnings resilience as fuel demand patterns shift.
  
• The company benefits from government support, including compensation for under-recoveries and favorable regulatory moves, reducing earnings volatility and protecting net margins.
  
• Robust financial health, evidenced by a comfortable debt-to-equity ratio and strong cash flows, positions Indian Oil to pursue growth opportunities and maintain dividend/distribution levels, supporting shareholder value in the long term.

Valuation

• The assumed bearish price target for Indian Oil is ₹112.18, which represents two standard deviations below the consensus price target of ₹158.2. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be ₹6437.8 billion, earnings will come to ₹204.7 billion, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 14.4%.
  
• Given the current share price of ₹141.44, the bearish analyst price target of ₹112.18 is 26.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.