With a market capitalisation of ₹2,16,267 crores, the state-owned refiner has demonstrated resilience amid volatile crude oil prices and shifting downstream dynamics. The quarter's performance marks a significant inflection point, with net profit growing 14.73% sequentially and operating profit reaching ₹16,245.00 crores. However, revenue declined 7.13% quarter-on-quarter to ₹1,78,628.15 crores, reflecting softer product realisations despite volume growth.
Financial Performance: Margin Expansion Drives Profitability
Indian Oil's Q2 FY26 results showcase a marked improvement in operational efficiency despite revenue headwinds. Net sales declined 7.13% quarter-on-quarter to ₹1,78,628.15 crores but grew 2.09% year-on-year, indicating volume resilience. The standout metric was the operating margin expansion to 9.09%, up from 6.90% in Q1 FY26 and substantially higher than the 1.98% recorded in Q2 FY25. This represents the company's strongest margin performance in over two years, driven by favourable gross refining margins and improved product spreads.
The profit trajectory tells a compelling story of recovery. Consolidated net profit of ₹7,817.55 crores marks a 14.73% sequential increase and a dramatic turnaround from the loss-making quarter a year ago. On a standalone basis, net profit reached ₹7,479.57 crores with a PAT margin of 4.59%, reflecting improved bottom-line conversion. Operating profit before depreciation, interest, and tax (PBDIT) stood at ₹16,889.33 crores, with the core operating profit (excluding other income) hitting a quarterly high of ₹16,245.00 crores.
Interest costs remained elevated at ₹2,269.69 crores, though the operating profit to interest coverage ratio improved to 7.16 times—the highest in recent quarters—demonstrating the company's enhanced debt servicing capacity. Depreciation stood at ₹4,227.22 crores, reflecting the capital-intensive nature of refining operations. The effective tax rate of 26.23% was higher than the previous quarter's 22.20%, normalising after a period of lower tax incidence.
| Quarter | Net Sales (₹ Cr) | QoQ Change | Operating Margin (%) | Net Profit (₹ Cr) | PAT Margin (%) |
|---|---|---|---|---|---|
| Sep'25 | 1,78,628.15 | -7.13% | 9.09% | 7,817.55 | 4.59% |
| Jun'25 | 1,92,340.65 | -1.50% | 6.90% | 6,813.71 | 3.54% |
| Mar'25 | 1,95,270.29 | +0.65% | 7.70% | 8,123.64 | 4.29% |
| Dec'24 | 1,94,014.49 | +10.88% | 3.90% | 2,115.29 | 1.11% |
| Sep'24 | 1,74,976.12 | -9.73% | 1.98% | -169.58 | -0.26% |
| Jun'24 | 1,93,844.91 | -2.42% | 5.12% | 3,528.49 | 1.92% |
Operational Excellence: Refining Margins Hit Multi-Quarter Highs
The company's operational performance in Q2 FY26 represents a significant achievement in a challenging refining environment. The operating margin of 9.09% reflects improved gross refining margins (GRMs) as the spread between crude oil costs and refined product realisations widened. This margin expansion is particularly noteworthy given that global refining margins have been under pressure from weak diesel demand and elevated crude prices during parts of the quarter.
Indian Oil's return on equity (ROE) averaged 14.86% over the assessment period, demonstrating solid capital efficiency for a capital-intensive business. While this ROE is respectable, it trails some private sector peers who operate with leaner cost structures. The company's return on capital employed (ROCE) averaged 11.59%, with the latest quarterly ROCE at 5.91%, indicating room for improvement in asset utilisation. The company's balance sheet shows total shareholder funds of ₹1,86,487.32 crores as of March 2025, with long-term debt of ₹51,755.75 crores, resulting in a debt-to-equity ratio of 0.74—moderate for the sector.
Key Operational Strength
Operating Profit to Interest Coverage: The ratio of 7.16 times in Q2 FY26 represents the highest level in recent quarters, demonstrating robust debt servicing capacity. This improved coverage provides financial flexibility for capital expenditure programmes and dividend distributions whilst maintaining balance sheet strength.
The company's working capital management showed some strain, with the debtors turnover ratio declining to 4.53 times on a half-yearly basis—the lowest in recent periods. This suggests slower collection cycles, potentially reflecting extended credit to oil marketing customers or delays in subsidy reimbursements from the government. Current assets stood at ₹1,57,643.15 crores against current liabilities of ₹2,30,614.41 crores as of March 2025, indicating reliance on short-term funding for operations.
Industry Context: Refining Recovery Amidst Global Headwinds
Indian Oil's strong Q2 performance comes against a backdrop of mixed signals in the global refining industry. Whilst Asian refining margins have shown improvement from the depressed levels of 2024, the recovery remains fragile due to weak Chinese demand and oversupply in certain product categories. India's refined product demand, however, has remained resilient, supported by robust economic growth and infrastructure development.
The company operates 11 refineries with a combined capacity of approximately 80.7 million tonnes per annum, making it one of the largest refining networks in Asia. This scale provides significant operating leverage when margins improve, as evidenced in Q2 FY26. The integration with pipeline infrastructure and retail marketing network creates competitive advantages through assured off-take and reduced distribution costs.
Market Position & Competitive Moat
Indian Oil commands approximately 34% market share in petroleum products in India, supported by the country's largest retail network of over 37,000 fuel stations. This dominant position, combined with government backing and strategic crude sourcing agreements, provides pricing power and volume stability that private refiners struggle to match. The company's diversification into petrochemicals and exploration further strengthens its integrated business model.
Looking at the broader oil sector, Indian Oil's recovery mirrors improving sentiment across state-owned oil marketing companies. However, the company faces ongoing challenges from electric vehicle adoption, renewable energy mandates, and potential regulatory interventions in fuel pricing. The government's push for ethanol blending and green hydrogen also requires significant capital allocation, potentially impacting near-term returns.
Peer Comparison: Valuation Discount Narrows
Indian Oil's valuation metrics have evolved favourably following the strong Q2 results and subsequent stock price appreciation. At the current price of ₹155.20, the stock trades at a price-to-earnings (P/E) ratio of 14.42 times trailing twelve-month earnings, representing a premium to the sector average of approximately 12 times. However, this premium appears justified given the company's market leadership and improving profitability trajectory.
| Company | P/E (TTM) | P/BV | ROE (%) | Div Yield (%) | Debt/Equity |
|---|---|---|---|---|---|
| I O C L | 14.42 | 1.17 | 14.86 | 1.93 | 0.74 |
| Reliance Industries | 24.16 | 0.23 | 6.74 | 0.37 | -0.11 |
| ONGC | 8.82 | 0.93 | 13.20 | 4.93 | -0.09 |
| B P C L | 8.47 | 1.83 | 20.00 | 2.92 | 0.58 |
| HPCL | 9.44 | 1.89 | 18.58 | 2.32 | 1.31 |
| Oil India | 10.43 | 1.38 | 16.58 | 2.73 | 0.44 |
The peer comparison reveals Indian Oil's competitive positioning. Whilst the company's ROE of 14.86% is lower than Bharat Petroleum (20.00%) and Hindustan Petroleum (18.58%), it significantly outperforms Reliance Industries' 6.74% ROE in the refining segment. The price-to-book value (P/BV) of 1.17 times is reasonable, sitting between the lower valuations of upstream players like ONGC (0.93x) and the higher multiples of downstream peers like HPCL (1.89x).
Indian Oil's dividend yield of 1.93% is modest compared to ONGC's sector-leading 4.93%, reflecting the company's need to retain capital for expansion and modernisation projects. The debt-to-equity ratio of 0.74 is higher than BPCL's 0.58 but lower than HPCL's 1.31, indicating a balanced approach to leverage. The company's market capitalisation of ₹2,16,267 crores positions it as the third-largest in the peer group, behind Reliance Industries and ONGC.
Valuation Analysis: Attractive Entry Point Emerges
Indian Oil's current valuation presents a compelling case for investors seeking exposure to India's energy sector recovery. At ₹155.20, the stock trades at 14.42 times trailing earnings, which represents fair value considering the cyclical nature of refining margins and the company's demonstrated ability to generate strong cash flows during favourable industry conditions.
The enterprise value to EBITDA multiple of 9.09 times is reasonable for a large-cap refiner with stable market share and government support. The EV to capital employed ratio of 1.10 times suggests the market is valuing the company's asset base appropriately, with a modest premium for operational efficiency and market position. The price-to-book value of 1.17 times implies the market recognises the intrinsic value of Indian Oil's extensive refining, pipeline, and retail infrastructure.
The stock's valuation grade of "Attractive" reflects the combination of improving fundamentals and reasonable pricing. After rallying 40.17% from its 52-week low of ₹110.72, the stock now trades just 1.27% below its 52-week high of ₹157.20, suggesting momentum remains positive. The dividend yield of 1.93%, whilst not exceptional, provides some downside protection alongside the potential for capital appreciation.
Historical context is important: Indian Oil traded at significantly higher multiples during previous refining super-cycles, with P/E ratios exceeding 20 times when margins were at peak levels. The current valuation thus offers a margin of safety whilst positioning investors to benefit from any further improvement in refining economics or operational efficiency gains.
Shareholding Pattern: Stable Promoter Base, Rising Institutional Interest
Indian Oil's shareholding structure reflects its status as a government-controlled enterprise with growing institutional participation. The President of India maintains a stable 51.50% promoter holding, unchanged over the past five quarters, providing governance stability and strategic direction aligned with national energy security objectives.
| Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 51.50% | 51.50% | 51.50% | 0.00% |
| FII | 7.70% | 7.48% | 7.38% | +0.22% |
| Mutual Funds | 3.41% | 3.20% | 2.72% | +0.21% |
| Insurance | 7.00% | 7.07% | 7.12% | -0.07% |
| Other DII | 19.60% | 19.60% | 19.71% | 0.00% |
| Non-Institutional | 10.80% | 11.15% | 11.57% | -0.35% |
The most encouraging trend is the steady accumulation by foreign institutional investors (FIIs) and mutual funds. FII holding increased from 7.38% in March 2025 to 7.70% in September 2025, with a sequential gain of 0.22% in Q2 FY26. This suggests growing confidence amongst global investors in Indian Oil's turnaround story and India's energy demand outlook. Mutual fund holdings also rose notably, from 2.72% to 3.41% over the same period, with a 0.21% increase in the latest quarter alone.
Total institutional holdings stand at 37.70%, providing a solid base of long-term investors. The presence of 670 FIIs and 35 mutual fund schemes indicates broad-based interest rather than concentrated holdings. Insurance company holdings have remained stable around 7.00%, whilst other domestic institutional investors (DIIs) maintain a substantial 19.60% stake, reflecting confidence from pension funds and other long-term domestic capital.
Notably, there is zero promoter pledging, eliminating any concerns about financial stress or governance issues. The gradual decline in non-institutional holdings from 11.57% to 10.80% suggests retail investors are booking profits, which is being absorbed by institutional buyers—a healthy sign of market maturity.
Stock Performance: Outperforming Benchmarks Across Timeframes
Indian Oil's stock has delivered impressive returns across multiple timeframes, significantly outperforming the Sensex and demonstrating strong momentum. Over the past three years, the stock has surged 127.23% compared to the Sensex's 41.87% gain, generating an alpha of 85.36 percentage points. This substantial outperformance reflects both the cyclical recovery in refining margins and improved operational execution.
| Period | IOC Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | 0.88% | 0.49% | +0.39% |
| 1 Month | 7.00% | 5.41% | +1.59% |
| 3 Months | 5.61% | 4.07% | +1.54% |
| 6 Months | 15.26% | 7.03% | +8.23% |
| YTD | 13.77% | 8.50% | +5.27% |
| 1 Year | 6.08% | 6.77% | -0.69% |
| 2 Years | 78.60% | 32.92% | +45.68% |
| 3 Years | 127.23% | 41.87% | +85.36% |
| 5 Years | 201.09% | 109.22% | +91.87% |
The stock's recent momentum has been particularly strong, with a 15.26% gain over the past six months versus the Sensex's 7.03% rise, delivering 8.23 percentage points of alpha. Year-to-date returns stand at 13.77%, comfortably ahead of the benchmark's 8.50% gain. The one-month return of 7.00% reflects growing investor enthusiasm following the strong Q2 results and improving technical indicators.
Interestingly, the one-year return of 6.08% slightly underperformed the Sensex's 6.77%, as the stock consolidated gains made during the previous refining margin expansion cycle. However, this consolidation phase appears to have ended, with the stock breaking out to new highs in recent sessions. The risk-adjusted return of 0.25 over one year, whilst positive, lags the Sensex's 0.54, reflecting higher volatility of 24.31% compared to the benchmark's 12.52%.
The stock's beta of 0.44 classifies it as a low-beta stock, meaning it is less volatile than the broader market. This defensive characteristic makes Indian Oil attractive for risk-averse investors seeking energy sector exposure without excessive volatility. The stock currently trades above all key moving averages—5-day (₹152.72), 20-day (₹152.40), 50-day (₹146.37), 100-day (₹146.06), and 200-day (₹138.50)—signalling strong technical momentum.
Investment Thesis: Multiple Tailwinds Converging
Indian Oil's investment case rests on several converging positive factors that support a constructive outlook. The company's proprietary Mojo Score of 78 out of 100 translates to a "BUY" rating, reflecting strength across valuation, quality, financial trends, and technical indicators. Each of the four key parameters—near-term drivers, quality, valuation, and overall assessment—points towards a favourable risk-reward profile.
The near-term drivers are particularly encouraging. The quarterly financial trend has turned positive, with operating margins at multi-quarter highs and profitability showing strong sequential growth. Technical indicators have also turned bullish, with the stock breaking above key resistance levels and maintaining momentum. The combination of positive fundamentals and technical strength creates a supportive environment for continued price appreciation.
From a quality perspective, Indian Oil scores well on several parameters. The company has delivered healthy long-term growth, with sales expanding at a compound annual rate of 12.84% and operating profit growing at 41.22% over five years. The absence of promoter pledging, high institutional holdings of 37.70%, and consistent dividend payments underscore financial stability. The average ROE of 14.86% demonstrates solid capital efficiency, though there is scope for improvement to match best-in-class peers.
"With operating margins at 9.09%—the highest in recent quarters—and operating profit to interest coverage at 7.16 times, Indian Oil has demonstrated its ability to translate favourable industry conditions into strong bottom-line performance whilst maintaining robust financial flexibility."
Key Strengths & Risk Factors
✓ KEY STRENGTHS
- Market Leadership: Commanding 34% share of India's petroleum products market with unmatched distribution infrastructure
- Margin Expansion: Operating margin of 9.09% represents multi-quarter high, driven by improved refining economics
- Strong Coverage Ratios: Operating profit to interest coverage at 7.16 times provides substantial financial flexibility
- Government Backing: 51.50% promoter holding ensures policy support and strategic stability
- Growing Institutional Confidence: FII and MF holdings increased by 0.43% collectively in Q2 FY26
- Integrated Business Model: Vertical integration from refining to retail creates competitive moat and operational synergies
- Strong Long-Term Growth: Sales CAGR of 12.84% and EBIT growth of 41.22% over five years demonstrate resilience
⚠ KEY CONCERNS
- Revenue Decline: Q2 FY26 sales fell 7.13% QoQ to ₹1,78,628.15 crores, reflecting softer realisations
- Working Capital Pressure: Debtors turnover ratio at 4.53 times (H1 FY26) is the lowest in recent periods
- Elevated Leverage: Debt-to-equity ratio of 4.63 times (H1 FY26) is at multi-period high
- Cyclical Exposure: Refining margins remain vulnerable to crude price volatility and global demand shifts
- Energy Transition Risks: Electric vehicle adoption and renewable mandates threaten long-term petroleum demand
- Regulatory Overhang: Government intervention in fuel pricing can compress margins during inflationary periods
- Capital Intensity: Significant capex requirements for modernisation and green energy projects may pressure returns
Outlook: What to Watch in Coming Quarters
Indian Oil's outlook hinges on the sustainability of improved refining margins and the company's ability to manage working capital efficiently. The forward trajectory will be shaped by both favourable industry tailwinds and company-specific execution challenges that require close monitoring.
POSITIVE CATALYSTS
- Sustained Margin Strength: Operating margins holding above 8% would confirm structural improvement
- Volume Growth: India's petroleum product demand growing at 4-5% annually supports revenue expansion
- Petrochemical Ramp-Up: Increasing contribution from higher-margin petrochemical products
- Dividend Upside: Strong cash flows could support higher dividend payouts
- Debt Reduction: Improved cash generation enabling deleveraging and lower interest costs
RED FLAGS
- Margin Compression: Operating margin falling below 6% would signal deteriorating refining economics
- Working Capital Deterioration: Further decline in debtors turnover indicating collection issues
- Subsidy Burden: Government-mandated fuel price controls during high crude price environments
- Rising Interest Costs: Debt servicing burden increasing if leverage remains elevated
- Weak Demand Indicators: Slowing petroleum product consumption growth signalling economic headwinds
The key monitorable for investors is the trajectory of operating margins over the next two to three quarters. If margins can be sustained above 7-8%, it would validate the thesis that Indian Oil has successfully navigated the challenging period of 2024 and is positioned for a multi-quarter profitability upcycle. Conversely, any sharp compression in margins would raise questions about the sustainability of the current earnings momentum.
Working capital management deserves particular attention. The decline in debtors turnover suggests either extended credit cycles or delays in subsidy reimbursements. Improvement in this metric would free up cash flows and reduce the need for short-term borrowings, directly benefiting return ratios. Investors should track quarterly changes in receivables and the company's commentary on government subsidy settlements.
The Verdict: Cyclical Recovery with Solid Fundamentals
Score: 78/100
For Fresh Investors: Indian Oil presents an attractive entry point at current levels. The combination of 9.09% operating margins, improving profitability trends, and reasonable valuation at 14.42 times P/E creates a favourable risk-reward setup. Investors should build positions gradually, targeting accumulation on any dips towards ₹145-150 levels, with a 12-18 month investment horizon to capture the refining margin cycle.
For Existing Holders: Continue holding with conviction. The Q2 FY26 results validate the turnaround thesis, and the stock's technical breakout suggests further upside potential. Consider adding on corrections, whilst maintaining a trailing stop-loss around ₹140 to protect against any sharp reversal in refining economics. The 1.93% dividend yield provides some downside cushion.
Fair Value Estimate: ₹175-180 (13-16% upside from current levels), based on 16-17 times forward P/E applied to normalised earnings of ₹10.50-11.00 per share, assuming operating margins stabilise around 7.5-8.0% over the next four quarters.
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
