Oil India - Better realisations ahead; higher royalty a potential overhang - Religare

Like ONGC, OINL's current valuations don't price in any improvement in realisations. We, however, expect OINL's crude/NG realisations to improve over FY15-FY16 led by pricing reforms, and reiterate BUY on the stock given its attractive valuations (6.4x FY16E EPS). That said, we remain concerned about (a) geopolitical risks to OINL's production, (b) a likely higher royalty payout ahead, and (c) its smaller balance sheet size of US$ 3.5bn with limited scope for organic/inorganic growth on a standalone basis.

- Attractively valued, pricing reforms not factored in: Trading at a P/E of 6.4x FY16E, the OINL share price (like ONGC) doesn't factor in any improvement in crude/NG realisations. As per our sensitivity analysis, OINL should see an EPS gain of Rs 1.8/sh for every US$ 1/bbl improvement in its crude realisations (current: US$ 52/bbl) and Rs 6/sh for every US$ 1/mmbtu increase in gas realisations (current: US$ 4.2/mmbtu).

- Potentially higher royalty an overhang: The SC recently directed ONGC to pay royalty on onshore crude production in Gujarat at market prices (of crude) instead of the price post-subsidy, till a final decision on the issue is taken. If the Assam govt. raises a similar demand, the impact could be significant for OINL (~US$ 10/bbl) as virtually its entire production is in onshore Assam.

- BUY with a revised TP of Rs 610/sh (from Rs 675): We adjust our earnings estimates to reflect (a) improved crude realisations of US$ 57/62 per barrel in FY15/FY16 on a reduced U/R burden, (b) higher NG realisations of US$ 6/mmbtu based on CCEA approval for price revision, and (c) likely higher royalty payment on gross realised crude prices, negating earnings gains from higher crude realisations. Though we like OINL for its discounted valuations and healthy return ratios (FY16 ROE: 19%), we are concerned about (a) geopolitical risks to its production, (b) limited logistical ability to enable crude offtake beyond the regional refineries, and (c) its smaller balance sheet size with limited scalability on a standalone basis.

Source : Equity Bulls

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