Oil India: Buy

The company's good operating and financial performance and a healthy balance-sheet bodes well.



The stock of public sector hydrocarbon explorer, Oil India, has been on quite a weak wicket over the past month, falling close to 13 per cent compared to the 4 per cent dip in the Sensex. Strong September quarter results declared by the company in mid-November have been of little help. Oil India's woes seem to have been compounded by reports that the government may divest an additional 10 per cent in the company in the coming months. This is in keeping with the pattern of public sector stocks being punished in the run-up to their further public offers.

At current levels though, the stock offers a good buying proposition for investors with a long-term perspective. Its current price of Rs 1,143 is just a tad higher than its September 2009 public issue price of Rs 1,050, a level below which the government may be disinclined to sell.

Also, the stock's current price discounts its trailing 12 month earnings by around 7.9 times, lower than the levels it has historically traded at, and cheaper than the valuation commanded by its bigger peer ONGC. Buttressing our recommendation is the company's good operating and financial performance (despite the subsidy overhang), and a healthy balance-sheet which should aid expansion plans.

Strong and steady

Oil India, which currently operates predominantly in the North East, has been growing its output at a steady clip. Sweating its assets better through improved and enhanced techniques, the company increased its crude oil production from 3.57 mmt

in FY-10 to 3.61 mmt in FY -11. It expects to further increase production to 3.76 mmt in the current fiscal. Also, natural gas production is expected to increase from 2,349 mmscm in FY-11 to 2,633 mmscm in FY-12. Good growth in the recent September quarter in production of crude oil (up 5.5 per cent) and natural gas (up 16 per cent) lend confidence about the company's projections. A healthy reserve replacement ratio (1.42) adds to the comfort level.

Also, the company's large acreage (127,260 sq km within the country and 38,605 sq km outside) could provide a fillip to output, if it can capitalise on the opportunity. While so far Oil India has been operating in onshore fields, it has also made its foray as an operator in offshore blocks and deep water blocks, through the NELP auctions. These blocks, including some in the high-potential Krishna Godavari basin, may hold promise for the company.

While the company's overseas ventures have so far not contributed to output, investments in blocks such as the discovered asset in Venezuela (drilling expected to commence in FY -13) are expected to aid Oil India. The company is also reported to be in talks to take over the assets of French oil producer Maurel et Promin in Gabon.

Oil India plans to invest around Rs 3,180 crore in FY-12, much of it towards exploration and development of its existing acreage. Over the next five years, investments to the tune of Rs 19,000 crore have been planned, and also include forays into shale gas, CNG networks and coal bed methane gas.

Subsidy overhang

In addition to improvement in physical output, the recent September quarter also saw Oil India post strong net realisations, thanks to a combination of high crude oil prices (around $112 a barrel) and restricted subsidy burden (33 per cent on upstream

companies, of which Oil India's share was around 12 per cent). The company's net realisation per barrel increased to $86.27 from $63.17 in the year ago period and $59.55 in the June quarter. The recent hikes in the price of petroleum products and duty cuts also resulted in overall under-recoveries decline significantly on a sequential quarter basis.

While the subsidy burden on the upstream companies has been restricted in the first two quarters, it remains to be seen whether this would be carried through for the rest of the fiscal. If FY-11 is anything to go by (when upstream burden was raised to 38.7

per cent in the fag end), the sting in the tail may well be reserved for the last quarter, especially given the difficult financial situation that the downstream oil refiners find themselves in. Notwithstanding the recent moderation in under-recoveries, the overall

burden for FY12 is estimated to be in excess of Rs 120,000 crore. However, even if the upstream burden is increased, Oil India's net realisation should continue to be reasonable around the $60 a barrel levels, similar to the previous years.

Strong financial performance

Despite the subsidy overhang, Oil India has been growing at a healthy clip. Sales increased at an annual growth rate of 12 per cent, while profits rose around 15 per cent on average from FY-07 to FY-11.



In the latest September quarter, the company's sales grew by a strong 38 per cent, while its bottomline increased around 24 per cent. Oil India has negligible debt on its books and is cash-rich (around Rs 13,600 crore as on September 2011), giving it adequate muscle to fund its growth and expansion plans. The company's low finding and development costs ($5.45 a barrel in FY-11) also aid its margins. Operating margins (more than 60 per cent) and net margins (around 35 per cent) are quite healthy. Oil India is also a high dividend-yielding stock (around 3 per cent over the last two fiscals).

Risks

A sharp increase in subsidy burden which could depress the company's net realisation could dampen the stock's prospects. Also, effective and quick utilisation of its cash pile is imperative.

Read the rest of this article by Signing up for Portfolio.It's completely free!

What You'll Get





This article is closed for comments.
Please Email the Editor