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Buy Oil India, target Rs 230: Sharekhan by BNP Paribas

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Sharekhan by BNP Paribas has a buy call on Oil India with a target price of Rs 230.

The current market price of Oil India is Rs 171.10.

Time period given by the brokerage is one year when Oil India price can reach the defined target.

Investment rationale by the brokerage:

Operating profit marginally above estimates on account of lower opex and higher gas sales volume: For Q3FY2019 Oil India Limited’s (OIL) operating profit stood at Rs 1,521 crore (up 24.3 per cent YoY; up 3.2 per cent QoQ), slightly above our estimate of Rs 1,473 crore, owing to lower-than-expected other operating expenses (down 31 per cent QoQ on account of a decline in provisions and lower insurance, rent & sundry expenses) and higher-than-expected gas sales volume at 0.65bcm (up 7.1 per cent YoY; flat QoQ). However the benefit of the above was partially offset by lower-than-expected oil sales volume at 0.81mmt (down 2.4 per cent YoY; down 2 per cent QoQ) and lower than expected net oil realisation at $66.7/bbl (up 12.2 per cent YoY; down 9.2 per cent QoQ).

PAT increases by 74.9 per cent YoY to Rs 1,233 crore, significantly above our estimates: Adjusted profit after tax (PAT) at Rs 1,233 crore (up 74.9 per cent YoY; up 43.1 per cent QoQ) was significantly above our estimate of Rs 866 crore due to a marginal beat in operating profit, substantially higher than expected other income (up 2.8x YoY primarily on the account of higher dividend income) and lower-than-expected effective tax rate of 24.4 per cent (vs our assumption of 32 per cent).

Outlook – fuel subsidy provision adequate till oil price of $65/bbl; domestic gas price also slated to be hiked in H1FY2020E: The Government has made fuel subsidy provision of Rs37,478 crore for FY2020E, which we believe is adequate to manage under-recoveries on LPG and kerosene till international oil price of $65/bbl and Rs/USD rate of Rs72. Hence, we assume that upstream PSUs would be exempted from subsidy sharing in FY2020E and thus model net oil realisation of $59/bbl (as compared to our earlier assumption of $55/bbl). Moreover, we expect the domestic gas prices to increase in H1FY2020 given the rise in natural gas price in the U.S. and U.K. (both together account for 72 per cent of weightage of domestic gas pricing formula). We continue to assume flat oil production over FY2018-FY2020E and gas production CAGR of 2 per cent over the same period.

Valuation – Maintain Buy with revised target price of Rs 230: We have increased our FY2019E and FY2020E earnings estimates to factor in higher net oil realisation (as adequate fuel subsidy provision allays concern of subsidy sharing by upstream PSUs), lower operating expenses and lower effective tax rate for FY2019E. We have also introduced our FY2021E EPS of Rs27.8. We have revised our price target (PT) upwards to Rs230 (in-line with revision in our FY2020E EPS) and maintain our Buy rating as the stock is factoring in bear case net oil realisation of $40-45/bbl. Moreover, the high dividend yield of nearly 8 per cent also provides comfort to the investoRs At CMP, the stock trades at 5.4x FY2019E EPS and 6.5x FY2020E EPS.

Source: Economic Times