REDUIRE on Oil India – Gradual takeover – HDFC Securities

Mr. Harshad Katkar and Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities

Our REDUCE recommendation on Oil India with a price target of INR 88 is based on (1) a mixed realization of crude oil and gas and (2) no growth in oil and gas production. Despite the production cuts in OPEC and non-OPEC countries, we expect oil prices to remain at 34/37 USD per barrel in FY21 / 22E versus 61 USD / bbl in FY20, given the weakness of the global macro. In the absence of subsidy sharing with the WTO, OIL remains a pure game on the price of crude oil. 2Q FY21 EBITDA / APAT was 38/125% higher than our estimate, due to significantly lower operating costs than expected and a lower tax provision.

– Autonomous financial performance: 2Q sales amounted to INR 22 billion -33% year-on-year, due to a 26% drop in the realization of crude in rupees to INR 3,099 / bbl. EBITDA fell 41% year-on-year to INR 7 billion (vs. INR 2 billion in Q1).

– Exceptional loss: The expenditure of INR 1,341 million incurred to control the May / June 2020 eruption on the Oil India well in Baghjan, Assam, was classified as an exceptional item in the second quarter. Adjusted for loss, APAT stands at 3.4 billion INR in 2Q versus APAT of -1.6 / + 6.3 billion INR in 1QFY21 and 2QFY20.

– Autonomous operational performance: production of crude oil corrected to 41.7 USD / bbl, + 42 / -30% QoT / YoY; also, gas realization corrected to 3.2 USD / mmbtu, + 36 / -11% QoT / YoY. Oil sales volumes were 0.72 mmt, -1 / -8% QoT / YoY while gas sales volumes were 0.40bcm, -31 / -40% QoQ / YoY.

– Change in estimates: We are increasing our EPS estimate for FY21E from 31.1% to INR 17.3 to reflect better than expected performance during the quarter.

– Outlook: Oil realization should remain modest at 34/37 USD / bbl in FY21 / 22E and gas realization should slide to 2.3 / 1.9 Mbtu in FY21 / 22E against 2.8 USD in FY20. The correction in oil and gas prices and lower production is expected to result in a 39/50/82% year-on-year reduction in Autonomous Revenue / EBITDA / APAT during FY21 to 74/13 / 4 billion INR. However, in FY22E it is expected to increase 15/11/36% year-on-year to reach 85/14/6 billion INR, due to oil realization up 9% year-on-year.

– We estimate the stand-alone activity of Oil India at INR 21 (5.5x EPS from Sep-22E) and its investments at INR 67. The stock is currently trading at 5.1x EPS FY22E.

Shares of OIL INDIA LTD. was last trading on BSE at Rs 91.75 from the previous close of Rs. 91.9. The total number of shares traded during the day was 104,766 in more than 1,199 trades.

The share hit an intraday high of Rs. 93.3 and an intraday low of 90.05. The net turnover during the day was Rs. 9,636,279.

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