Analyst Research Report Snapshot


Oil India Ltd.- Initiating Coverage - "BUY"




Kisan Ratilal Choksey Shares and Securities Private Limited


17 Jul 2014





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Oil India Ltd.- Initiating Coverage CMP: Rs 580 Target Price: Rs 764 Recommendation: BUY “Negatives priced in...” Company background Oil India (OIL)was incorporated as a private limited company on February 18, 1959 under the name 'Oil India Private Limited', pursuant to a promoters' agreement dated January 14, 1958, between the President of India, Burmah Oil Company Limited and Assam Oil Company Limited. The Company became a deemed public limited company with effect from March 28, 1961. OIL is primarily engaged in the exploration, development, production and transportation of crude oil and natural gas in India. It is the second largest public sector E&P company in India. Investment Rationale Production ramp up and strong reserves: OIL expanded its business activities both within and outside the country, adding hydrocarbon related ventures like gas based power generation to its portfolio. Acquisition of overseas exploration blocks and oil & gas assets is a strategic focus area of OIL. The company has increased its reserves consistently, as evident by the reserve replacement ratio (i.e. addition to reserves in a year versus production in that year) of greater than 1 over the past few years, despite depleting fields. FY13 and FY14 production was down (by nearly 5.5% YoY) because of production disruptions due to employment related bandhs. However, the matter is largely resolved now and we expect FY15 and FY16 production to grow at 5-8%. Lower subsidies: Since decision of deregulation in January 2013, the diesel prices have been increased by OMCs almost every month by around 0.40-0.50 Rs. per litre. Following increase in diesel prices, gross under-recoveries (GURs) of the public sector OMCs decreased 13% (YoY) to Rs. 139,870 crs in FY14 from Rs. 161,000 crs in FY13 primarily driven by 32% fall in under-recoveries on diesel to Rs. 62,800 crs in FY14 from Rs. 92,100 crs in FY13. GUR for FY13 was higher at Rs. 161,000 crs, 16% higher than Rs. 138,100 crs for FY12 owing to higher crude oil prices and absence of commensurate increase in retail prices. The current under recovery on diesel is at Rs 2.8/litre and the new government has indicated that with the narrowing under recovery, diesel deregulation would be easy. We believe that OIL’s net realization which stood at $47.1/bbl in FY14 is likely to improve to $56-60/bbl in FY16. Beneficiary of gas price hike: CCEA had announced the long awaited gas price hike for the domestically produced gas (RIL and others) in June last year; a gas price hike from $4.2/mmbtu to $8.4/mmbtu (a hike of ~100%) effective from 1st April, 2014. OIL’s cost of natural gas production is around USD 2.7-3.06/mmbtu but the cost of exploration and Development in NELP block is much higher. For every $ increase in the gas price we expect OIL India’s PAT to improve by Rs 230 crs, given the significant gas portfolio. We have built a $7/mmbtu price for FY15 implemented with retrospective impact. Valuation and view: We are positive on the stock in the light of regular diesel price hike, benefit of gas price hike, increasing production and cheap valuations. However, we believe that the net realizations for the company for FY15 will continue to be on the lower side with higher subsidy burden imposed on the upstream companies. At CMP of Rs 580, the stock is trading at 7.3X of its estimated PE FY16E. We recommend a Buy on the stock with a Price Objective (PO) of Rs 764.

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