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MOSL: OIL INDIA (Buy) - Above estimates led by higher net realization, production recovered QoQ




Motilal Oswal Securities Ltd.


13 Aug 2014





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OIL INDIA 1QFY15: Above estimates led by higher net realization, production recovered QoQ (OINL IN, Mkt Cap USD5.6b, CMP INR572, TP INR700, 22% Upside, Buy) EBITDA above estimates: Oil India reported EBITDA at INR11b (est. INR9b; +60% YoY, +121% QoQ) and PAT at INR8.5b (est. INR7.2b; +40% YoY, +51% QoQ). Reported numbers were above estimate, primarily led by higher net realizations due to lower than expected subsidy at INR18.5b (est INR23.2b). 1QFY15 net realization at USD52.4/bbl: Gross realization stood at USD108.4/bbl (+6% YoY, +2% QoQ) and subsidy at USD56/bbl (flat YoY and -19% QoQ) resulting in net realization of USD52.4/bbl (v/s 47.1/bbl in FY14). 1QFY15 subsidy is based on USD56/bbl but has provisionally used 4QFY14 volume numbers for calculating the absolute payout, and for this quarters’ volume shall be recovered in 2QFY15. 1QFY15 production marginally below estimate (-3% YoY, +8% QoQ): OINL’s 1QFY15 oil production stood at 0.84mmt (-7% YoY, +7% QoQ) and gas production stood at 0.68bcm (+3% YoY, +8% QoQ). High QoQ increase was due to lower production in 4QFY14, led by strikes and blockades on recruitment issues. USD56/bbl subsidy in 1QFY15: In FY14, 9MFY14 subsidy was based on USD56/bbl, however 4QFY14 subsidy stood at USD69/bbl. Despite likely 46% in reduction in under recoveries by FY16, we only model 28% reduction in OINL’s subsidy. Valuation and view To watchout for subsidy sharing and production trend, while royalty issue will be a near term overhang. Management believes that higher royalty is not its liability and if payable will be recovered from the customers. Upside potential to our FY15 gas price assumption: We model gas price of USD4.2/mmbtu in FY15 and assume est. USD5.3/6.3/mmbtu in FY16/17. However, if then FY15E EPS will increase to that extent. USD1/mmbtu hike increase OINL’s EPS by ~4%. We value OINL at INR700/sh based on average of three methodologies: (1) P/E of 9x FY16E, (2) 4.5x FY16E EV/EBITDA and (3) DCF (WACC of 12%). The stock trades attractively at 8x FY16E EPS of INR71.5 and has an implied dividend yield of 4-5%. Buy.

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