Oil India Limited - Kotak

OIL India's share price has corrected by ~25% in the last 4 months mainly on account of the concern of higher subsidy burden and expectation of subsidy on gas (from FY15 and onwards) resulting in lower gas price realization. We believe this is too premature to consider the subsidy burden from sale of gas. Also, the major correction in the stock price discounts most of the negatives, we opine.

Forex: The rupee has appreciated by ~8% in the last few days which will lower subsidy burden on retail fuel sales, going forward. Additionally, during the same period Brent crude oil price has corrected by ~5%. Cumulatively, this will result in lower subsidy burden on PSU upstream oil and gas exploration companies.

We have tweaked our estimates accordingly to reflect the impact of subsidy burden on the earnings of OIL India. At the current price of Rs. 448/-, OIL India is trading at a very attractive valuations and cash in books provide down side support.

OIL is expected to invest Rs. 35.81 bn in FY14E on E&P activities out of this Rs. 27.9 bn would be domestic and rest overseas (without Mozambique). Exploration would constitute ~30.5% of total capex. In FY14E, the Company plans to drill 11 exploratory drilling wells and 19 development wells.

We maintain our positive view on OINL given the recent key policy actions taken by the government such as regular diesel price hike, natural gas price hike from FY15E and onwards. The key trigger in the short term is one-time diesel price hike. The Company's management is hopeful that the Government will implement a transparent and consistent subsidy-sharing mechanism. The company has sought a minimum net crude price realization of US$65/bbl in its representations to the Government and an expert committee, headed by Dr. Kirit Parikh.

We expect OINL to report an EPS of Rs. 54.6 for FY14E and Rs.63.2 for FY15E. On the basis of our estimates, the stock at current market price of Rs. 448 is cheaply valued at 8.2x P/E and 6.7x P/cash earnings on the basis of FY14E. We recommend BUY on OINL with a revised price target of Rs. 562/share (earlier Rs.550). We are bullish on OIL India from medium to long term on account of key triggers such as 1). Increase in domestic gas price, 2). Regular diesel price hike resulting in lower subsidy burden.

Our positive view on OINL is premised on: 1) Relatively under-exploited resource base; 2) quality assets with relatively low finding and development costs; 3) resilient production growth; 4) strong balance sheet; 5) an attractive valuation; and 6) OINL's potential to maintain a reserve replacement ratio (RRR) of 1.

Source : Equity Bulls

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