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Indian Oil's Rs 4,435-crore buyback is now open. Should you tender your shares or hold them?

Anita Gandhi, Whole Time Director at Arihant Capital Markets agreed with Vineeta, saying high dividend yield & falling oil prices have given good safety to the investor in holding stock for the long term.

December 20, 2018 / 12:44 PM IST
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The state-run fuel retailer, Indian Oil Corporation, on December 13, announced the buyback of up to 29.76 crore equity shares, or 3.06 percent of share capital, at Rs 149 per share aggregating to Rs 4,435 crore.

It also approved payment of Rs 6,556 crore as interim dividend to its shareholders.

The actual intention is to push cash-rich PSUs to pay out higher dividends and buyback shares using their reserves so as to help the government meet its budget deficit, analysts feel.

The government, which holds 54.06 percent stake in IOC, is expected to get about Rs 2,400 crore by tendering some of its shares in the buyback. Besides, out of the total dividend payout of Rs 6,556 crore, the government is likely to receive Rs 3,544 crore, and also the dividend distribution tax.

The company has fixed December 25 as the record date for the purpose of ascertaining the eligibility of shareholders for payment of interim dividend as well as for buyback of equity shares.


Analysts said it is obvious that this buyback will help IOC to improve earnings per share and return on equity in near term, but the question is should retail investor participate in share buyback?

Most analysts who Moneycontrol spoke to, said, for short term, one can participate in the buyback. One can tender some shares in the buyback and keep the rest for long term.

But the person who is a medium-to-long term investor is better to hold the stock in portfolio as IOC is expected to give strong returns given stability in oil prices.

"We believe IOC buyback option gives an attractive opportunity for retail investors who can earn potential return of around 8-10 percent in short period. We also assume retail acceptance ratio to be at higher levels. Additional to buyback premium, higher dividend payout (Rs 6.75 per share) has sugared the deal for retail investors," Prashanth Tapse, AVP Research at Mehta Equities said.

Sudeep Anand, Head - Institutional Equity Research at IDBI Capital Markets & Securities also agreed, saying one who has short-term view can tender shares in the buyback, else for medium-to-long term, one should better to hold.

But the buyback through tender offer will not be beneficial for the investor who are looking for long-term value creation, Pratim Roy, Research Analyst at Stewart & Mackertich Wealth Management said.

The company's planned capex, stability in crude oil prices and unwillingness to pass on lower prices to consumers are among major reasons that are highlighted by analysts for taking a long term call for value creation.

Analysts feel there could be some impact on their Q3 earnings due to inventor loss, but that would be manageable.

Pratim Roy believes oil marketing companies (OMCs) in India seem to be in no mood to pass on the benefits to fuel consumers for now.

He said India's state-run fuel majors are earning a near-record margin of around Rs 6 on the sale of a litre of petrol and around Rs 4.8 on diesel. This higher margin would improve the health of OMCs, fortify their balance sheet to some extent, and potentially increase their dividend to the government.

This should also aid OMCs in off-setting the inventory loss likely in Q3 & Re 1 per litre absorption urged by the government, he added. "If the crude maintains the current level then earnings will improve with the help of marketing margins."

Hence, he advised taking long-term call instead of tendering shares in buyback.

Considering the current crude oil price trends, Prashanth Tapse also believes OMCs will continue to reap benefits of lower crude oil and hence set to be at benefiting point for high gross refining margins in coming quarters' earnings.

He expects increase in profitability primarily because of higher gross refining margins, inventory gains and also expects increase in refining throughput. Hence he is optimistic on IOC for medium term with a target of Rs 167 from current levels with stoploss of Rs 137.

IOC has a dividend payout ratio of 40 percent which implies a 6.2 percent dividend yield.

Hence, attractive dividend yield implies investors should continue holding the stock, Vineeta Sharma, Head of Research at Narnolia Financial Advisors said.

Anita Gandhi, Whole Time Director at Arihant Capital Markets agreed with Vineeta, saying high dividend yield & falling oil prices have given good safety to the investor in holding stock for the long term.

Sudeep Anand, Head - Institutional Equity Research at IDBI Capital Markets & Securities highlighted different reasons while taking a long term call.

He said IOC's net debt at the end of first half of FY19 was around Rs 49,000 crore. "However, with the lower crude oil price, short term debt for working capital would reduce substantially which is expected to be lower than the buyback and dividend amount."

Therefore, he does not foresee any increase in debt levels if crude oil price remains below $65 a barrel.

He said being an election year, OMCs may not get higher multiple, but from six-months to one year perspective he expects crude oil price to remain low which would improve the multiples for the stocks. "So, from long term perspective we should remain invested."

Fitch Ratings, which said IOC's current credit has enough headroom to absorb higher leverage arising from a planned share buyback and interim dividend payout, believes the company should benefit from its capex over the long-term, with enhanced asset quality and capacity improving its business profile and operating cash flow.
Sunil Shankar Matkar
first published: Dec 20, 2018 12:44 pm
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