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Accumulate Oil India - Alok Deshpande, Elara Capital.
Posted On : 2010-07-28 04:09:46( TIMEZONE : IST )
- Oil India
- Rating : Accumulate
- Target Price : INR1,430
- Upside : 7%
- CMP : INR1,343 (as on 27 July 2010)
Higher subsidy dents Q1
Oil India reported its Q1FY11 results below expectations with revenue coming in at INR15.7bn vs our estimate of INR17.1bn and Street at INR18.0bn. The top-line was dented largely due to higher than expected subsidy payout of INR7.3bn while we had anticipated Oil India to bear about INR6.0bn in Q1FY11. This led to a net realization of USD49.7/bbl vs Street and our estimate of ~INR55/bbl. The production was also lower in Q1FY11 at 0.77MMT (vs normal rate of 0.90MMT) due to the extended shutdown at the Numaligarh refinery. However, due to prior guidance by the management, we believe this was more than factored in the estimates. The company performed better operationally with EBITDA margin of 44% and this coupled with lower DDA costs led to an estimate beat at the bottom-line.
Back on track post-Q1FY11, much better performance in store
With the Numaligarh refinery restarting operations, we believe the company is well on track to achieve its FY11 crude production target of 3.6MMT, a 6% growth over FY10 production levels. Additionally, we believe the company is likely to deliver strong financial performance in the remaining three quarters as with the deregulation of petrol and diesel, the subsidy burden will be much lower.
Top upstream pick in the medium term – Maintain Accumulate
For a 2-3 quarter investment horizon, we believe Oil India offers investors a favorable risk-reward balance. The stock has rallied with the sector and the market, and considering the broader market valuations, Oil India seems to have the best downside protection, in our view. On the downside, we feel that the stock has a reasonable floor around INR1,200 levels as at these levels the stock would be valued at an EV/EBITDA multiple of 4x, a discount of 20% to even the trough E&P multiple. Moreover, ~27% of the market cap being in cash gives us further comfort. With the Street expected to turn neutral/underweight on Reliance and Cairn, we see Oil India as the best alternative. Maintain Accumulate and TP of INR1,430/sh (5.5x EV/EBITDA).
