Higher net realisations enabled Oil India (OIL) to deliver results in line with the Street’s expectations for the December 2010 quarter. While the net profit was up 27 per cent over last year to Rs 908 crore, the revenues were up 21 per cent to Rs 2,751 crore.
Going ahead, while new discoveries coupled with higher oil and gas prices would act as catalysts for the stock, reforms in the retail fuel pricing side would also come as a boost. On the flip side, a higher proportion of subsidy share will be the key monitorable and an overhang on the stock. OIL currently trades at nine times the FY12 earnings. A strong balance sheet coupled (net cash at Rs 500 a share) with robust production growth and a high untapped resource base make it the preferred stock of most brokerages. Analysts expect a 26-28 per cent upside in the stock over the next one year.
Good quarter
The bottom line for the quarter gone by was hit by a one-time provision of Rs 94 crore towards a staff pay revision and a write-off of Rs 81 crore on an unsuccessful exploration in Libya. This was offset by robust other income of Rs 226 crore (up 26 per cent y-o-y). Higher realisations from both oil (up 14 per cent y-o-y) and gas (up 102 per cent y-o-y) aided the top line growth for OIL. Transportation revenues jumped 52 per cent y-o-y to Rs 70 crore due to a revision of tariffs for third-party crude oil transportation. The hike in gas price (under the administrative pricing mechanism) in June 2010 drove the gas realisations to $3.09/mmbtu. Oil India paid Rs 580 crore in the form of oil subsidy, an uptick of 20 per cent on a y-o-y basis. The company contributed 3.53 per cent of the total under-recoveries incurred by the oil marketing companies in the December 2010 quarter. Oil production grew 6 per cent y-o-y while gas fell 1 per cent y-o-y but grew 6 per cent sequentially after Numaligarh Refinery, its major client, resumed full offtake.
| ATTRACTIVELY VALUED | ||
| In Rs crore | FY11E | FY12E |
| Sales | 8,939 | 9,846 |
| Ebitda (%) | 50.9 | 51.7 |
| Net profit | 3,095 | 3,392 |
| P/E (x) | 10.3 | 9.4 |
| E: Analyst estimates Source: Bloomberg | ||
Outlook
Surging crude oil prices have led to an increase in under-recoveries, leading to concerns that the government may raise the subsidy-sharing burden of upstream companies. While analysts expect OIL’s subidy share to rise to 12-13 per cent levels, the government has maintained that upstream companies will not share more than 33 per cent of the total gross under-recoveries. This implies a 10 per cent subsidy sharing for Oil India in FY11 and FY12. Analysts believe a 12-13 per cent subsidy sharing could hit OIL’s FY12 and FY13 earnings estimates by nine to 15 per cent. While the upcoming state elections and high inflation would make reforms unlikely, a modest rise in diesel prices or reduction in import duty is a possibility. If this happens, OIL’s subsidy burden will come down and its net oil price will get a boost, leading to an earnings per share (EPS) uptick of eight to 17 per cent and a rise in fair value assumptions by four to 10 per cent.