Feb 01, 2013, 01.21 PM IST | Source: Moneycontrol.com

Oil India FPO attractively priced: Angel Broking

Angel Broking has come out with its report on Oil India FPO. According to the research firm, company's valuation gap is expected to narrow gradually with global peers. Angel recommends investors with long-term horizon to Subscribe to the shares of Oil India.

Angel Broking has come out with its report on Oil India  FPO. According to the research firm, company's valuation gap is expected to narrow gradually with global peers. Angel recommends investors with long-term horizon to Subscribe to the shares of Oil India.

"Oil India is a government-owned company that explores, develops and produces oil and gas. It is India's second-largest E&P company in terms of production and reserves. Currently, Oil India has 2P reserves of 941mnboe, indicating a reserve life of 22 years. During FY2012, Oil India's cost of oil production stood at US$8.3/bbl, which is one of the lowest in our view. Its cost of natural gas production stood at US$1.4/mmbtu. Due to lower cost of production, Oil India enjoys robust operating margins (~30%) despite lower net realizations, on the back of subsidy sharing with Oil Marketing Companies (OMCs).

Upstream oil PSU companies have been sharing under-recoveries by the downstream companies who sell diesel, kerosene and LPG cylinders at subsidized rates. As there is no concrete formula or methodology to determine the annual subsidy of any of these companies, investors have remained concerned over the lack of visibility on profitability of downstream and upstream companies. During FY2012, subsidy shared by Oil India rose by 123.3% yoy to Rs 7,352cr. However, given the rising under-recoveries, government has hinted at diesel price de-regulation (diesel contributes 60% to total under-recoveries). Hence, going forward, diesel price deregulation is likely to result in lower subsidy burden on upstream companies including Oil India and thus higher realizations. Oil India's Management also expects the subsidy amount to decline significantly during FY2014.

As on September 30, 2012, Oil India had net cash of Rs 252/share on the balance sheet. Considering the operating cash flow and the company's capex requirements over the coming few years, we believe the company will maintain high cash balance, which could pave way for acquisition of oil and gas assets. The company aims to acquire shale gas assets in the US.

Historically, Oil India stock has traded at a lower EV/1P Reserves compared to its global peers on account of lower realizations on crude oil (subsidy sharing with downstream companies' results in lower net realizations). However, we believe that the government's initiatives to raise (de-regulate) the price of diesel gradually should lead to lower subsidy sharing by upstream companies from FY2014 and hence, result in higher realizations. Consequently, we expect Oil India's valuation gap to narrow gradually with global peers. We derive a SOTP-based target price of Rs 600 and recommend investors with long-term horizon to Subscribe to the shares of Oil India," says Angel Broking research report.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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