Buy Oil India; target Rs 635: Motilal Oswal

Motilal Oswal is bullish on Oil India and has recommended buy rating on the stock with a target price of Rs 635 in its February 13, 2013 research report.

"Oil India reported EBITDA of INR11.2b for 3QFY13 (v/s our estimate of INR12.9b, adjusted for subsidy) - down 16% YoY and 2% QoQ. EBITDA was below our estimate, as unrest in Assam resulted in lower production. PAT was also lower at INR9.4b (-7% YoY and -1% QoQ). Oil production for 3QFY13 was 0.92mmt (-4% YoY and QoQ) while gas production was 0.68bcm (flat YoY and down 2% QoQ). Management has hinted that production is gradually nearing normal levels post the unrest.

Expect upstream to share 40% subsidy for FY13 against 9MFY13 average of 36%: In 3QFY13, Oil India's subsidy share was INR19.5b and its share in upstream subsidy was 12.9%. Upstream sharing in 9MFY13 was at ~36% of the total under recoveries. We estimate Oil India's share at 13.3% of the upstream sharing (40%) for FY13.

Net realization at USD52.6/bbl: Oil India's gross realization was in line at USD108.6/bbl (v/s our estimate of USD109/bbl) and subsidy burden stood at USD56/bbl, resulting in net realization of USD52.6/bbl (v/s USD57/bbl in 3QFY12 and USD52.5/bbl in 2QFY13).

DD&A at INR2.2b: DD&A was INR2.2b (v/s our estimate of INR3b), lower sequentially due to decrease in dry well expenses from INR1.2b in 2QFY13 to INR0.7b. However, decrease in DD&A was negated by lower other income of INR4.9b (v/s our estimate of INR5.5b).

Valuation and view: We have factored in gas price of USD7/mmbtu from FY15 onwards for Oil India. Also, in line with the announced reforms, we have assumed a diesel price hike of INR0.45/liter/month. We estimate 30% and 50% reduction in under-recoveries for FY14 and FY15, respectively. Of the INR753b reduction in under-recoveries in the next two years, we believe 90% would go towards reducing government subsidy and expect only 10% benefit for upstream companies, resulting in the upstream sharing increasing to 50%/60% in FY14/FY15 from the current 40%. The stock trades at 6.6x FY15E EPS of INR80.9. Our target price is INR635/share. Buy the stock," says Motilal Oswal research eport.

Non-Institutions holding more than 90% in Indian cos

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