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Spark Capital: Oil India: Offer priced at Rs. 510/sh (40% discount to our TP); Recommend Buy




Spark Capital Advisors(India) Private Limited


31 Jan 2013





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Offer priced at Rs. 510/sh (40% discount to our TP); Recommend Buy GOI has set the floor price for Oil India’s (OIL) divestment (~10% stake) at Rs. 510/sh. Scheduled for sale on Feb 1st, 2013, through the “offer for sale”(OFS) route, it is priced at a ~6% discount to CMP of Rs. 540/sh (Jan 31st, 2013) and 40% discount to our TP. We recommend investors to subscribe to the offer given: 1) Strong production growth of 6% CAGR over FY13E-15E, 2) Direct play on falling oil subsidies, 3) support from net cash of $2.6bn (45% of Mcap), 4) compelling valuation of ~$7/boe of 1P reserves against global peer average of ~$17/boe. Oil India has already signed non binding agreements with 3-4 large players for a potential acquisitions. We believe sealing of a large deals over next 6 months would allay concerns on cash utilisation and provide new pockets of growth and 4) Gas price hike (assumed by FY14E end though not factored in target valuation) could provide further valuation upside of Rs. 100/sh ($2/mmbtu hike to provide an EPS of Rs. 11/sh in FY15E). Overall we expect earnings to grow by 21% CAGR over FY13E-15E. OIL’s Stock is trading at undemanding multiples of ~7.5x FY14E EPS as compared to ONGC trading multiple of ~8.6x FY14E EPS, mainly due to illiquidity and we believe the OFS would help arrest this concern. Recommend Buy with a TP of Rs. 712 Steady volume growth ahead: We expect production to grow by 6% CAGR (FY13E-15E), driven largely by a 9% CAGR growth (FY13E-15E) in gas volumes as new customers commence gas offtake (BCPL COD-Dec’13). Net Realisation to grow 16%yoy in FY14E: Expect UR to decline by ~40% in FY14E to Rs. 1.tn, driven by recent fuel price reforms. Even on a conservative upstream burden of 50% OIL’s net realisation would increase by $8/bbl to $60.5/bbl (+16%yoy). Expect net realisation at $61.2/bbl for FY15E based on 60% upstream share on 0.77tn UR Cash utilisation: Cash on books of $2.6bn (Mar’13) forms about ~45% of Mcap. OIL has already signed non binding agreements with 3-4 large players for potential acquisition. Finalization of any large deal would allay concern Gas price hike: With the tone set by Rangarajan Committee, Oil ministry is already pushing for an immediate price hike for APM gas to $8-$8.5/mmbtu (currently $4.2/mmbtu), which is extremely positive in our view. We are conservative on both the timing and the quantum of increase and expect a $2/mmbtu hike to $6.2/mmbtu by end of FY14E. This would provide an additional PAT of Rs. 7bn in FY15E and an EPS of Rs. 11/sh (valuation upside of ~Rs. 100/share @9x PE)

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