Oil India - Q1: Subsidy burden impacts PAT - AXIS Capital

Oil India (Bloomberg: OINL IN, BUY, TP - Rs 550; 22% upside from CMP of Rs 449)

Oil India's (OINL) PAT at Rs 7.7 bn was lower than our/Street estimates due to subsidy burden of Rs 1.7 bn (nil expected) and lower other income. Under the revised subsidy sharing formula, subsidy burden on upstream is likely to be zero (at crude at USD 50/bl) for rest of the year.

Revised subsidy sharing is positive for upstream: FY16 subsidy sharing announced by government implies marginal burden of USD 2/bl on upstream companies (with crude at USD 55/bl). This will improve OINL's FY16E net realization to ~USD 53/bl (vs. USD 47/bl in FY15) and EPS to Rs 59. Maintain BUY with TP of Rs 550. At CMP, the stock trades at 8x FY16E EPS of Rs 59 and 6x FY17E EPS of Rs 71.

Key events to watch out for: (a) commissioning of BCPL#, (b) domestic gas price notification for H2FY16, and (c) resolution of geopolitical issues in Assam, which has been an overhang on OINL's volume growth.

Volume growth a cause of concern

In Q1FY16, OINL'S crude production volumes declined 4% from Q2FY15 levels due to unplanned shutdown of NRL# refinery (key consumer). Also, continued geopolitical issues have led to ~10% reduction in OINL's overall volumes from 2012 levels. OINL's volume growth also remains contingent on commissioning of a single consumer (BCPL). Our volume growth assumption of ~3.5% CAGR over FY15-17E assumes start-up of BCPL in H2FY16.

Prefer downstream over upstream

Despite lower subsidies, continued weakness in crude prices will impact stock performance of upstream stocks. On the other hand, downstream companies (HPCL, BPCL, IOC) will benefit from (a) expansion in marketing margins as exemplified by recent price hikes, (b) firm GRMs with Q1FY16 margins already at USD 8/bl, and (c) additional reforms (Direct Benefit Transfer for kerosene), which will further improve working capital situation.

# NRL: Numaligarh Refinery Ltd; BCPL: Brahmaputra Cracker and Polymer Ltd

Key assumptions: Crude at USD 55/ bl for FY16 and USD 65/ bl FY17. INR/USD at 62.4 for FY16 and 63 for FY17.

Shares of OIL INDIA LTD. was last trading in BSE at Rs.460.05 as compared to the previous close of Rs. 460.35. The total number of shares traded during the day was 14942 in over 868 trades.

The stock hit an intraday high of Rs. 464.8 and intraday low of 457.85. The net turnover during the day was Rs. 6894521.

Source : Equity Bulls

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