Fears of coronavirus have led to heightened worries of a slowdown and a sharp fall in economic activity. This is likely to immensely benefit a few and one these could be India's largest oil marketing company and refinery major Indian Oil.
10% fall in crude prices
When economic slowdown happens, crude oil prices come crashing down and oil marketing companies like Indian Oil tend to benefit. On Friday, oil prices plunged as much as 10 per cent, after OPEC failed to agree on production cuts. One of the biggest beneficiaries of such a fall are oil refinery and oil marketing companies like Indian Oil.
On Friday, WTI fell to its lowest levels since August 2016.
Solid on dividend yield
Based on last year's dividend of Rs 9.25 per share, the dividend yield from Indian Oil translates to Rs 9.18, based on the current market price of Rs 100.80. This is a solid dividend yield and way above even the interest rates granted by banks in the country. Now, the board of directors of the company are slated to meet once again on March 13, 2020 to consider the payment of interim dividend. This means by the end of the month, you would once again receive dividends from IOC, which makes it a pretty good bet.
Low on valuations and assured business prospects
Over the last few years, we have seen several government companies falter including the likes of MTNL, BSNL, Air India, HMT etc. The business prospects of Indian Oil are unlikely to change. The company remains the biggest Indian company in terms of turnover and an impeccable network of retail fuelling, which is almost impossible to replicate. The company also remains attractive in terms of valuations. The stock is trading at a p/e of just 7 times one year forward earnings, with a book value that is under 0.90 times.
We believe that once the fears over the coronavirus start ebbing, we could see fresh buying in the stock. Those who want to buy and hold for the long term would continue to reap the benefits from regular dividends. In fact, there are many companies like Coal India and Indian Oil, who regularly pay dividends and are good bets at the current prices.
A word of caution
The only risk for Indian Oil is a sustained increase in crude oil prices. That could come from worries over geo-political tensions. However, for the next one year or so, our belief is that prices of crude could be lower and hence Indian Oil looks an attractive play.
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About the author
Sunil Fernandes, the author of this article has spent 25 years in business reporting, including equity research. He has worked with frontline newspapers and investment magazines like Hindustan Times, Deccan Herald, Gulf Times, Dalal Street Investment Journal, Oman Economic Review etc.