Buy Oil India; target Rs 720: Religare Retail

Religare Retail Research report on Oil India

OINL's Q1 PAT at Rs 6.1bn was below our/street estimates on lower crude sales (0.87mmt) and realisations (US$ 45.9/bbl) and a drop in VAP sales (10.3tmt vs. 12tmt in Q4FY13). NG prod./sales however inched up QoQ to 7.22/5.7mmscmd. Maintain BUY on: (a) a likely improvement in crude realisations on lower gross U/R of Rs 1398bn/939bn in FY14/FY15, (b) higher crude production/sales in the quarters ahead and (c) cheap valuations of 6xFY15E (ignoring earnings upside from NG price hikes in FY15).

Crude sales/realisations lower QoQ: Despite higher production (0.89mmt vs. 0.86mmt in Q4FY13), crude sales declined to 0.87mmt (from 0.88mmt in Q4FY13) due to a major fire at the Numaligarh refinery in May'13. Crude realisations dropped as well, as OINL was made to subsidise OMCs at the prevalent discount of US$ 56/bbl despite muted crude prices of US$ 102/bbl (US$ 111/bbl in Q4FY13). We expect a pick-up in the company's crude oil sales over the coming quarters as the Numaligarh refinery resumes operations.

Realisations to improve on lower U/R: We expect U/R drop to Rs 1398bn/939bn in FY14/FY15 on: (a) a sustained increase (Rs 0.5/ltr/month) in diesel prices and (b) sluggish fuel demand growth due to higher prices and a poor macro. If crude prices remain muted, upstream subsidy/bbl could come down as well. We model for FY14/FY15 realisations of US$ 55/59/bbl for OINL.

Significant investment plans lined up: OINL is actively scouting for exploration/ production assets to support its inorganic growth. It recently acquired Videocon's 10 percent stake in a Mozambique offshore block via a 40:60 consortium with ONGC. With cash reserves of US$ 2bn+, we don't see such acquisitions as an impeding factor.

"Maintain BUY with a TP of Rs 720 on attractive valuations, factoring in the overhangs of higher U/R but not the earnings upside from gas price hikes in FY15, says Religare Retail Research report.

Also Read:Oil India hopeful that subsidy concerns will get addressed

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