Renewable Energy And Green Hydrogen Initiatives Will Strengthen Future Prospects

Key Takeaways

• Investing in refining capacity and transforming retail outlets boosts future revenues and aligns with evolving customer trends for diverse energy options.
  
• Expansion into renewable energy, green hydrogen, and petrochemicals diversifies revenue and supports long-term growth in a sustainable energy market.
  
• Dependency on imported crude oil, financial pressures from borrowings, and fluctuating global conditions could negatively impact Indian Oil's profitability and margins.

Catalysts

Indian Oil Corporation Limited, together with its subsidiaries, refines, pipeline transports, and markets petroleum products in India and internationally.

• Indian Oil's plan to invest ₹72,000 crores to enhance its refining capacity by 25% will likely lead to higher future revenues as increased capacity will meet growing demand for petroleum products, projected to reach a record high in FY '26.
  
• The transformation of Indian Oil's retail outlets into comprehensive energy stations with various fuel options, including LNG, CNG, and EV charging, aligns with evolving customer preferences and is expected to enhance future revenues and margins.
  
• Indian Oil's significant push into renewable energy and green hydrogen, including a renewable energy portfolio target of 31 gigawatts by 2030 and collaborations to strengthen the green hydrogen ecosystem, is poised to impact future earnings positively by diversifying revenue streams.
  
• The development of advanced petrochemical products and infrastructure, increasing petrochemical intensity, and expanding petrochemical capacities position Indian Oil well for future growth in a high demand market, potentially improving net margins.
  
• Indian Oil's strategic focus on sustainable energy solutions and a commitment to net-zero emissions by 2046 are expected to enhance long-term earnings stability, particularly as global energy markets evolve towards greener options.

Indian Oil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Indian Oil's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 4.1% in 3 years time.
• Analysts expect earnings to reach ₹315.5 billion (and earnings per share of ₹22.06) by about February 2028, up from ₹106.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹123.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, down from 16.3x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 1.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.0%, as per the Simply Wall St company report.

Indian Oil Future Earnings Per Share Growth

Risks

• The depreciation of the Indian rupee against the U.S. dollar increases exchange losses for Indian Oil due to its high dependency on imported crude oil, which could negatively impact net margins and earnings.
  
• Sanctions on Russian crude oil suppliers and declining discounts could reduce the cost advantage previously enjoyed, potentially impacting Indian Oil's future profitability and operating margins.
  
• The substantial increase in borrowings, tied to LPG under-recoveries and higher working capital needs, places financial pressure on the company, which could affect net earnings and potentially limit investment in other opportunities.
  
• The volatility of crude oil prices and crack spreads, influenced by geopolitical factors and economic conditions, introduces significant earnings unpredictability, affecting the company’s revenue and profit stability.
  
• Weakness in global demand and petrochemical spreads, along with new petrochemical capacities worldwide, may continue to pressure Indian Oil's petrochemical revenues and overall profit margins.

Valuation

• The analysts have a consensus price target of ₹148.52 for Indian Oil based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹205.0, and the most bearish reporting a price target of just ₹90.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹7642.2 billion, earnings will come to ₹315.5 billion, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 17.0%.
  
• Given the current share price of ₹125.42, the analyst's price target of ₹148.52 is 15.6% 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.