Oil India Ltd’s (OIL) stock has seen a good run-up of more than 15 per cent since its closing lows of Rs 436 on May 31. The run-up has come primarily as the overall burden of oil and gas companies is now seen declining to lower than FY12 levels of Rs 1,38,500 crore as compared to Rs 2,00,000 crore pegged at the start of FY13, thanks to softening crude oil prices. Hopes of the government allowing an increase in diesel prices have also boosted sentiments.
However, while on one side relief is being felt, on the under recovery front, the subsidy sharing mechanism still remains the major overhang. The government works on an ad-hock subsidy sharing mechanism and actual share in subsidies becomes clear only by the end of the fiscal. Further, a new trend emerged in the March 2012 quarter as Oil India’s share amongst the upstream companies increased to 16 per cent (from 12 per cent earlier). This move increased its annual subsidy share to 13.5 per cent in FY12 compared to 10.9 per cent in FY11, and added to the discomfort and uncertainties on the subsidy sharing by the company. The good part is the absolute subsidy share of Oil India may still fall in FY13, helped by lower crude oil prices. On the business front, the prospects remain healthy with steady increase in production.
For the stock (now at Rs 502), the current one-year consensus target price stands at Rs 543 and takes into consideration the subsidy burden and good operational performance. While this indicates an upside potential of eight per cent, any significant acquisition by this cash-rich company or fuel price hikes (especially diesel) can provide further triggers. On the flip side, the stock may see some pressure during the follow-on public offering (FPO), due to increase in supply.
| OPERATIONAL GAINS | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Net sales | 9,519 | 10,591 | 11,286 |
| % change y-o-y | 18.9 | 11.3 | 6.6 |
| Ebitda | 4,353 | 4,984 | 5,637 |
| Ebitda (%) | 45.7 | 47.1 | 49.9 |
| Net profit | 3,469 | 3,521 | 3,819 |
| % change y-o-y | 20.3 | 1.5 | 8.5 |
| EPS (Rs) | 57.7 | 57.4 | 61.1 |
| P/E (x) | 8.7 | 8.8 | 8.3 |
| E: Average estimates Source: Capitaline Plus, Bloomberg, Analyst reports | |||
Subsidy estimates lowered
The subsidy burden estimates for oil companies for FY13 has been tweaked by almost 35 per cent to Rs 1,29,000 crore compared to earlier estimates of Rs 2,00,000 crore at the start of the year. Analysts at Citi, assuming crude oil price at $110 a barrel and rupee at 54 to a dollar in a June 19 report, had arrived at a subsidy burden of Rs 1,51,900 crore. However, a June 28 report by analysts at HSBC Global Research assuming crude oil price at $100 a barrel and rupee at 55 to a dollar arrived at an overall subsidy burden of Rs 1,29,700 crore for FY13. On this basis and assuming upstream share at 40 per cent (Rs 51,880 crore), it should translate into a subsidy burden of Rs 7,000 crore for Oil India in FY13, compared to Rs 7,400 crore last fiscal. HSBC analysts have estimated crude oil at $90 a barrel during FY14 and FY15, which should lead to an even lower burden during the coming years.
Looking at inorganic route
The other area of action could be acquisition. Oil India had cash and investments of Rs 13,568 crore as on March 31, 2012, part of which is expected to be utilised to acquire a producing property or a discovered field. Analysts at HSBC observe the company is actively looking to buy shale gas assets and other conventional producing assets abroad. They add the company is looking to spend Rs 6,000 crore to acquire an upstream asset. If this materialises, it should immediately add to Oil India’s revenues and profits. Sujit Lodha at Asian Market Securities adds that an acquisition will be a key trigger for the stock.
Steady production growth
Meanwhile, Oil India has shown steady production growth. While its FY2012 crude oil and gas production grew 7.2 per cent and 11.9 per cent over FY11 respectively, its five-year oil and gas production have grown at a compounded annual growth rate (CAGR) of four per cent and 3.1 per cent respectively, a trend which is likely to continue. Analysts at HSBC expect the company’s oil production to grow at 3.4 per cent CAGR over the next three years, and estimate its gas production to rise from 5.8 mmscmd currently to 5.9 mmscmd and six mmscmd during FY14 and FY15, respectively.
In the petrochemical segment, analysts at HSBC expect the new petrochemical plants like BCPL (Bhramhaputra Cracker & Petrochemical Ltd) to be commissioned over the next three years, adding to the company’s long-term growth.
Longer term gains
Any increase in gas prices will be welcomed, though likely in the longer-run. Analysts at Bank of America-Merrill Lynch (BofA-ML) in their report observe that Reliance wants KG D6 gas price hike before April 2014. While a hike before April 2014 is not ruled out, a hike in April 2014 is imminent. The price of administered pricing mechanism (APM) gas produced by ONGC and Oil India thus, may also be hiked when KG D6 gas prices are increased. The expected hike of $6-8/mmbtu according to BofA-ML analysts is likely to boost FY14 EPS of ONGC and Oil India by 15-33 per cent and boost their fair values from FY15 by 10-19 per cent.
