Stock Fundamentals

Oil India: BUY

Anand Kalyanaraman | Updated on March 12, 2018 Published on August 03, 2013

The company is expanding its overseas presence.

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IW04_SI_Oil India underrecovery.eps

Production growth and gas price hike should help mitigate concerns on under-recovery.



The recent sharp fall in the stock of oil and gas explorer, Oil India, provides a good buying opportunity for investors. The stock has lost around 19 per cent over the last couple of months. This is primarily due to the rout of the rupee and rising crude oil price.

These could increase under-recoveries of oil marketing companies (due to selling fuel below cost), which in turn could mean a higher burden on upstream entities such as Oil India. At Rs 487, the stock now quotes below the floor price of Rs 510 set by the government during its stake sale in February.

This translates to a price-to-earnings ratio of around eight times — lower than the levels Oil India had traded at in the past (around 10-12 times) and cheaper than bigger peer ONGC (10 times).

Under-recovery risk

Rising burden due to under-recoveries is a valid concern. In 2012-13, the burden borne by upstream companies (Rs 60,000 crore) was almost double that in 2010-11.

In fact, despite lower crude oil price last year, the discount which Oil India had to offer oil marketing companies was increased to $56 a barrel of oil from $54.8 a year ago. Also, Oil India's share in the upstream pie was increased to more than 13 per cent from 11 per cent a couple of years back.

These factors reduced the company’s net realised price in 2012-13 to $33.1 a barrel, the lowest in many years. Due to under-recovery sharing, Oil India’s profit was impacted by around Rs 4,500 crore.

With the Government continuing to struggle on the fiscal deficit front, the possibility of upstream companies being saddled with more burden cannot be ruled out. But there are some mitigating factors. Both crude oil price rise and a weak rupee increase the gross rupee realisations of oil producers, providing them buffer.

Also, if the Government continues with the current practice (started in January 2013) of gradually increasing the price of diesel, the burden could moderate.

Growing the business

Besides, there are other positives which should hold the company in good stead. One, the Government’s recent price hike proposal could double gas rates by April next year and add around Rs 1,000 crore to Oil India’s annual profit at current levels of production.

Oil India had grown output over the past few years, but in 2012-13, civil disturbance in the North East (the company’s main area of operation) impacted production of both oil and gas.

The company expects to tide over this and improve oil output to 3.95 million tonnes in 2013-14 from 3.7 million tonnes last year. Gas production is expected to rise to 2.74 mmscm from 2.64 mmscm. Besides its on-shore producing assets in the North East, Oil India has significant acreages in other regions of the country, including in the offshore Krishna Godavari basin. Its healthy reserve replacement ratio of 164 per cent of domestic assets in FY-13 provides comfort.

Oil India is expanding its overseas presence. It recently agreed to acquire for $2.475 billion a 10 per cent stake (jointly with ONGC) in the Rovuma offshore gas block in Mozambique, touted to hold among the largest reserves globally.

This could add significantly to output in the long term (next three-four years). Also, the company, along with Indian Oil, has acquired 30 per cent stake in a producing shale asset in the US.

After many years, Oil India’s international foray seems to have started paying off. The Carababo field in Venezuela in which the company has 3.5 per cent stake has started producing and output is expected to increase significantly in the next couple of years. The company is also reported to have struck oil in Gabon.

Financial strength

In the case of public sector oil companies, annual results rather than the quarterly ones serve as better indicators since the final under-recovery adjustment happens in the last quarter.

After growing sales and profit around 19 per cent in 2011-12, Oil India’s performance in 2012-13 was disappointing. Sales remained flat and profit grew just around 4 per cent — a combination of fall in output and high subsidy burden. Profitability though remained healthy with operating margin at around 64 per cent and net margin at around 38 per cent.

With output growth expected to be brought back on track, the company’s financial performance should improve this year.

Also, Oil India has a strong balance-sheet with negligible debt-to-equity and cash of more than Rs 12,000 crore as of March 2013. This provides it adequate room to fund its expansion plans. Deployment of the cash hoard in growth projects should assuage investor concerns on profitable utilisation.

Oil India is also a high dividend yield stock (current yield is around 6 per cent) with a track record of sharing profits with shareholders.

This can provide a hedge to investors in a volatile market.

Published on August 03, 2013
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