Oil India - Operational performance improves QoQ - Centrum

Although OIL's subsidy burden increased sequentially, better operational performance and higher other income led to 2.6% QoQ jump in bottom-line at Rs9.5bn. Crude and natural gas production jumped by 1.5% and 10.4% QoQ respectively. Subsidy sharing however increased by 3.1% QoQ at Rs20.8bn. Higher cash balance on the balance sheet led to 6.7% QoQ rise in other income at Rs4.0bn. Thus, higher production and consequent higher sales of oil and gas coupled with higher other income led to a sequential jump in bottomline. Although, the stock looks attractive on current valuations, the lack of any triggers is likely to keep valuations suppressed. Hence, we downgrade the stock to 'Neutral' from Buy.

Revenue growth led by higher volumes; rupee depreciation helps too: OIL reported 3.3% QoQ jump in revenues led by higher volumes and ~2% rupee depreciation. Net realisation for the quarter stood at US$52.5/bbl against US$53.9/bbl in Q1. On a YoY basis however, the performance was muted as the company earned US$86.3/bbl net realisation in Q2FY12.

Higher crude and natural gas production: Crude and natural gas production jumped by 1.5% to 0.96mmt and 10.4% to 0.69bcm QoQ respectively. Crude production which was affected due to labour issues in Q1 normalized in Q2 and startup of Numaligarh refinery and demand from customers led to higher natural gas production.

Dry well write offs jump but higher other income mitigates the impact: Dry well write offs jumped 61.1% QoQ at Rs1.2bn yet were 74.7% lower on a YoY basis (Rs4.6bn in Q2FY12). Higher cash balance (Rs139.5bn) on the balance sheet fetched higher other income which stood at Rs4.0bn thus partially mitigating the impact of higher write offs. Overall, the company was able to report 2.6% QoQ jump in bottom-line at Rs9.5bn.

No near term catalyst, downgrade to 'Neural': During the quarter, OIL made investment in shale gas assets in the US. However, the company is still scouting for a meaningful acquisition (which would increase crude and natural gas volumes) as now the cash has piled up to over Rs140bn. Although, operational performance has been improving over the past couple of years, we believe utilisation of cash remains a key trigger. Devoid of any key triggers we have reduced our target P/E multiple for the stock from 9x to 8x. Also, based on H1 numbers, we have revised our estimates for FY13E and FY14E. The valuations look attractive at 8.4x and 7.2x our FY13E and FY14E EPS of Rs56.4 and Rs65.7. However, due to lack of a trigger we downgrade the stock to 'Neutral' from Buy with a revised target price of Rs526.

Source : Equity Bulls

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