Buy Oil India; target of Rs 720: Sharekhan

Sharekhan`s research report on Oil India“As a major reform process, the new government has revised the natural gas price from $4.2 per mmbtu to $5.6 per mmbtu, effective from November 1, 2014, which would be reviewed every six months. ONGC and Oil India Ltd (OIL) would be the key beneficiaries. However, it will not be applicable for RIL’s D1 and D3 fields in the Krishna Godavari basin, till its dispute with the government related to its production shortfall is settled. Apart from the gas price revision to $5.6 per mmbtu, in the new formula the benchmark calorific value has been reduced by 10% from the earlier benchmark. Consequently, on the net calorific value basis, the revised net realisation would be $6.2 per mmbtu. We believe while the effective price hike for ONGC and OIL would be around 48% and RIL would also benefit to an extent of 10%. The impact of the revised gas price on earnings of ONGC and OIL would be around 13%-15% for FY2016; consequently we have revised upward our earnings estimate for OIL.” “The government also tried to touch some of the key issues smartly which would encourage further investments in the sector and boost confidence by bringing clarity on the policy. The government would consider differential gas pricing for gas from deep water or ultra deep water wells and by deregulating diesel, it improves visibility and boost investors’ confidence in the sector. As expected, a significantly lower (almost half in FY2016 over FY2014) oil subsidy would reflect favourably in the earnings of ONGC, OIL and all the three governmentowned oil marketing companies (OMCs). We remain positive on OIL and retain our Buy recommendation with a revised price target of Rs720,” says Sharekhan research report.  

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