REDUCE on Oil India - Grim outlook unless crude prices recover - HDFC Securities

Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities

Our REDUCE recommendation on Oil India with a price target of INR 99 is premised on (1) a muted crude oil and gas realisation, and (2) lack of production growth for both oil and gas. Despite production cuts from OPEC and non-OPEC countries, we expect oil prices to remain at USD 36/41 per barrel in FY21/22E vs. USD 63/bbl in FY20, given the weak global macros. With no subsidy sharing with OMCs, OIL remains a pure-play on the crude oil price. 1QFY21 EBITDA was in line with estimates; however, OIL reported an after-tax loss of INR 2.5bn (HSIE PAT of INR 327mn), driven by (1) 46% or, INR 1bn higher depreciation than-anticipated, and (2) an exceptional loss of INR 934mn.

Standalone financial performance: Sales dipped by 33/48% QoQ/YoY to INR 17bn due to 37/50% fall in crude realisation in rupee terms to INR 2,226/bbl. EBITDA tumbled by 85% YoY to INR 2bn (vs. operating loss of INR 11bn QoQ) dragged by the fixed employee and operating costs that together comprised 87% of sales vs. 140/58% QoQ/YoY. Fixed depreciation cost of INR 4bn (+42/-10% QoQ/YoY) and an exceptional loss of INR 934mn led to a post-tax reported loss of INR 2,486mn vs. RPAT of INR 9,256/6,248mn QoQ/YoY.

Exceptional loss: The expense of INR 934mn incurred in May and Jun-2020 to control the blowout incident at Oil India's well in Baghjan, Assam, has been classified as an exceptional item in 1Q. On adjusting for the loss, the after-tax loss comes to INR 1.9bn in 1Q vs. APAT of INR 7/6bn QoQ/YoY.

Standalone operational performance: Crude oil realisation corrected to USD 29.3/bbl, down 42/54% QoQ/YoY whereas gas realisation fell further to USD 2.3/mmbtu, lower by 26/35% QoQ/YoY. Coupled with the fire at Bagjan, OIL lost production owing to the country-wide lockdown. As per the management, this translated into a YoY volume decline of (1) 6.4% in oil production and (2) 5.5% in gas production, in May and June-20. Oil sales volumes were 0.73mmt, -2/-8% QoQ/YoY while gas sales volumes were 0.58bcm, +8/-6% QoQ/YoY.

Outlook: Oil realisation should remain muted at USD 32/37/bbl in FY21/22E and gas realisation should slide to USD 2.7/mmbtu in FY21 and FY22E, from USD 2.8 in FY20. The correction in oil and gas prices and dip in production should result in 40/42/56% YoY reduction in revenue/EBITDA/APAT in FY21E to INR 73/11/16bn. However, in FY22E, it should increase by 11/13/17% YoY to INR 90/21/22bn, owing to 15% higher oil realisation YoY.

We value Oil India's standalone business at INR 32 (6x Mar-22E EPS) and its investments at INR 67. The stock is currently trading at 4.9x FY22E EPS.

Shares of OIL INDIA LTD. was last trading in BSE at Rs.97.35 as compared to the previous close of Rs. 99.6. The total number of shares traded during the day was 111505 in over 963 trades.

The stock hit an intraday high of Rs. 99.4 and intraday low of 97.1. The net turnover during the day was Rs. 10873620.

Source : Equity Bulls

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