Q2FY16 results were in-line: OIL reported net profit of R6.7 bn (lower 13% q-o-q but higher 11% y-o-y). OIL earned $46.4/bbl on crude oil sold to state refiners after a subsidy payout of R845m. While oil production volumes at 0.8mmt saw a marginal downtick, gas production volumes were higher 9.3% q-o-q and 1.2% y-o-y. We believe that gas production will be ramped up further to meet the requirements of the Assam Gas Cracker (AGC), which is likely to get commissioned by FY16-end. As a result, we assume flat gas volumes for FY16e, with a volume uptick in FY17e. OIL is producing crude oil at an annualised rate of 3.3mtpa, which should sustain in our view.
Recent indications on subsidy sharing are positive but gas price a near-term dampener: The government has fixed its fuel subsidy payout at R12/litre for Kerosene and R18/kg for LPG for FY16 with the balance subsidy to be paid by the upstream companies. This formula has potential to be adopted in the future too as the formula provides a fixed subsidy outgo for government while providing a reasonable visibility to Oil India’s realisation on sale of its oil to state refiners. We estimate that this formula will result in Oil India earning more as oil price increases but will find its revenue capped at the oil price of c$60/b. This is because, as per the subsidy sharing formula, OIL will find a majority of its incremental revenue towards meeting its subsidy obligation. Additionally, starting Oct’15, the domestic gas price was reduced from $4.66/mBtu to $3.82, an 18% drop. We further estimate that the domestic gas price will decrease to c$3.4/mBtu starting Q1FY17.
Valuation and risks: With 43% upside we reiterate our Buy rating but marginally cut our target price to Rs 575 (from Rs 583). We lower our FY16/17/18 net profit estimates by 2%/5%/1% to factor in the lower gas prices and minor changes in crude oil production. We continue to value OIL at a P/E (price to earnings ratio) of 9.0x FY16 core EPS estimates (a c20% discount to global peers as there is a lack of complete clarity regarding subsidy sharing in India).
We value OIL’s 5% stake in the listed Indian Oil Corporation at the market price and with a holding company discount of 20% (we were earlier valuing this at cost price). We continue to value OIL’s 5% stake in the Mozambique gas block at Rs 64/share (as per our NAV estimate, which translates into a c40% discount to the purchase price).
Key downside risks include a higher subsidy share than estimated and lower-than-expected oil/gas production.
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