Buy Oil India Ltd For Target Price Of Rs. 526

OIL INDIA LTD (OINL)
PRICE: RS.482 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.526 FY13E P/E: 6.7X

In Q1FY13 Oil India Ltd. has reported higher than expected PAT mainly on account of 1). higher realization due to rupee depreciation, 2). Significantly higher other income, and 3). Lower other expenditure.

In Q1FY13, OINL has shared a subsidy burden of Rs.20.16 Bn which is marginally higher than our estimates. In Q1FY13, OINL’s share of upstream burden is 13.38% as against 12.27% in Q1FY12 and 15.87% in Q4FY12, this is higher than our expectation.

OIL’s subsidy burden in Q1FY13 is US$50.95/bbls in crude price oil equivalent terms versus US$48.80/bbl in Q1FY12 and US$67.50/bbls in Q4FY12.

Management has guided to maintain its crude oil production and natural gas production guidance for FY13E. We expect crude oil production of ~4.0 MMTPA and natural gas production of ~2923 MMSCM for FY13E.

Implementation of EOR/IOR techniques in OINL’s existing producing fields will contribute to higher volumes.

OINL’s good reserve replacement ratio and high 2P & 3P reserves suggest that OINL can continue to grow its volumes in the medium term.

In FY13E, OINL expects to close at least one overseas acquisition deal.

In FY13 fiscal budget cess rate on crude oil production has increased as a result OINL has paid cess of Rs. 4.3Bn in Q1FY13 higher by 80.8% YoY.

Segment wise performance: In terms of segment wise revenue contribution, natural gas segment has contributed higher revenue (+0.36%, Rs.3.5 Bn) on YoY basis as against a drop in crude oil (-2.6%, Rs.19.86 Bn) and pipeline transportation (-0.3%, Rs.0.6 Bn).

In Q1FY13, OIL’s net realized crude price was US$53.9/bbls (Rs. 2913/bbls) versus US$59.6/bbls (Rs.2663/bbls) in Q1FY12 and US$55.0/bbls (Rs.1957/bbls) in Q4FY12. In rupee terms, realization is better due to rupee depreciation against dollar.

For FY13E, we expect OINL’s net crude realization to be USD$ 60.50/bbls (Brent crude ~$109/bbls) and ~USD$65.10/bbls (Brent $105/bbls) for FY14E. We believe one should focus more on OINL’s net realization.

We expect OINL to report an EPS of Rs. 67.3 FY13E and Rs.69.9 FY14E. We believe that most negatives about high under-recoveries and uncertain subsidy mechanism are already discounted at the current levels and any news flow on price hikes/decreasing under-recoveries via lower oil prices would be triggers for
the stock.

Valuation & Recommendation- SOTP

Our positive view on OINL is premised on: 1) relatively under-exploited resource base; 2) quality assets with relatively low finding and development costs; 3) resilient production growth; 4) strong balance sheet; 5) an attractive valuation; and 6) OINL’s potential to maintain a reserve replacement ratio (RRR) of 1.

On the basis of our estimates, the stock at current market price of Rs.482 is reasonably valued at 2.8x EV/EBIDTA, 6.7x P/E and 5.9x P/cash earnings on the basis of FY13E. We recommend Accumulate (earlier BUY) on OINL with a revised price target of Rs.526 (earlier Rs.521).