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Research
Accumulate Oil India - Elara Capital
Posted On : 2010-05-28 10:41:47( TIMEZONE : IST )
- Rating : Accumulate
- Target Price : INR1,350
- Upside : 9%
- CMP : INR1,241 (as on 26 May 2010)
Below expectation Q4FY10 rounds off a successful year
Oil India reported its Q4FY10 results with in-line revenue but a lower-than-expected bottom-line. The Q4FY10 revenue came in at INR18.32bn - almost in-line with our estimate of INR18.43bn. However, the company missed our net profit estimate by 21%, reporting a bottom-line of INR4.3bn vs our estimate of INR5.7bn. The earnings miss was primarily due to a higher expenditure on the operational front and bigger well write-offs during the quarter. Overall, the FY10 was a progressive year for Oil India, with YoY crude production growth of 3% and natural gas output growth of 6%.
Strong outlook, acquisition plans light up the horizon
Oil India has guided towards further growth from FY10 crude production level of 3.6MMT to 3.8MMT in FY11, and then plans to ramp up to 4.0MMT by FY12. Considering the progress so far, we believe that the company is likely to meet these targets. However, we are conservatively modeling in a slightly lower production of 3.75MMT for FY11 and 3.9MMT for FY12. Similarly, Oil India plans to double its existing gas production levels (6.7mmscmd) by FY12 to 12mmscmd. While we think this is on the optimistic side, considering its move to increase the production from only the associated reserves, we believe that the company can more likely achieve a 15% CAGR for the next two years. In terms of inorganic growth, it has earmarked ~USD500mn for acquisitions in FY11-12. We are, however, keen on the pricing that the Oil India would offer for these acquisitions.
Expected rally due to fuel reforms, cash comfort make us positive
Upgraded in our recent sector update 'Gearing up for the next trigger' published on May 24, 2010, we maintain our Accumulate rating and TP on Oil India due to the potential from fuel pricing reforms. We also get comfort from its cash balance of INR355/share, ~29% of its market cap – a key strength in the current weak market conditions. We value Oil India at 5.4x EV/EBITDA, only a 10% discount to global peers compared to the historical discount of 20-25%, in the backdrop of the fuel pricing reforms and prospects of low subsidy burden.
