1. business and industrial
2. energy
3. oil

India Equity Research Oil & Gas November 13, 2014
Oil India BUY Target (INR) 713 Continuation of adhoc subsidy hurts bottomline Company Update  While reported PAT dropped 33% y‐o‐y due to higher provisional subsidy burden, the burden remains provisional and could be lowered Last Price (INR)
598
going forward, in our view. Additionally, a rise in crude and natural gas Bloomberg code
OINL IN
Reuters code
OILI.BO
production q‐o‐q remains the key positive. We retain our estimates for Avg. Vol. (3m)
483,333
Oil India and maintain our Sep15 TP of INR713/share. We prefer Oil Avg. Val.(3m)(INRmn)
295
India to ONGC in the E&P segment as it is likely to benefit more from 52‐wk H/L (INR)
670 / 438
lower subsidy burden and currently trades at better valuations. 28,009
Sensex
MCAP (INRbn/USDbn)
359.18 / 5.85
Maintain BUY. Shareholding (%)
06/14
09/14
67.6
67.6
MFs, FIs, Banks
8.0
8.2
FIIs
9.6
9.7
3.1
11.7
3.1
11.4
Promoters
Public
Others
2Q hit by adhoc subsidy burden Oil India’s 2QFY15 reported PAT of INR6.1bn dropped 33% y‐o‐y and 29% q‐o‐q as subsidy was kept constant at USD56/bl even though crude prices dropped by 6.5% y‐o‐y. However, burden sharing remains adhoc and provisional and is likely to be reduced in 2HFY15, in our estimates. While the INR13.2bn tax demand from Assam Government is likely to remain an overhang, the 4.1% and 2.5% q‐o‐q growth in crude and natural gas production is the key positive, in our view. Stock Chart (Relative to Sensex)
700
Subsidy burden could be lowered going forward We continue to estimate a 50:50 burden sharing formula between government and upstream companies, given the diesel de‐regulation and the recent drop in crude price bringing down under‐recoveries to manageable level for the fiscal budget and making the USD56/bl formula becomes unviable for upstream companies. We currently estimate FY15f under‐recovery at INR772bn and INR512bn for FY16f, based on a crude price of USD85/bl and USDINR exchange rate of 60.5. We note that the government currently has INR78.4bn of provision left in its FY15 budget after accounting for the INR350bn it paid for unmet FY14 UR and INR170bn provision made for 1HFY15. Based on our estimates, the government could do a 50% share with just the remaining provision with a carry forward into next year budget of only INR137bn (including INR65bn of 4Q under‐recovery, which is carried forward in any case). Additionally, FY16 budget allocation required even after the carry forward would be only INR330bn, nearly half of the INR598.4bn made in FY15 budget and INR707.7bn borne in FY14. 600
500
400
Nov13
Mar14
Jul14
Oil India
Nov14
Sensex Rebased
Stock Perfm. (%)
1m 3m
1yr Absolute
‐0.4
4.8
29.3
Rel. to Sensex
‐6.9
‐3.4
‐8.8
Financials (INRmn)
03/14
03/15f
03/16f
Sales
96,364
130,808
137,189
‐3
36
5
40.0
48.4
49.1
29,607
44,272
47,744
Sh o/s (diluted)
601
601
601
A.EPS (INR)
79.4
YoY (%)
EBITDA (%)
A.PAT
49.3
73.6
YoY (%)
‐18
50
8
D/E (x)
‐0.2
‐0.1
‐0.1
P/E (x)
12.1
8.1
7.5
EV/E (x)
8.1
5.4
5.0
RoCE (%)
RoE (%)
11
15
15
20
15
19
Quarterly Trends* 12/13
03/14
06/14
09/14
25,345
20,810
Sales (INRmn)
26,070
PAT (INRmn)
9,030 5,656 8,519 6,083
18,252
*Standalone
Please refer to the disclaimer towards the end of the document. Prefer OIL to ONGC in E&P; retain BUY Lower subsidy burden and a hike in natural gas prices along with a rise in production are likely to drive Oil India’s PAT to a growth of 49% y‐o‐y in FY15f and a further 8% y‐o‐y in FY16f. Although 2Q subsidy burden has been a disappointment, it remains provisional, in our view and we retain our estimates. We prefer Oil India to ONGC in the E&P segment and we maintain BUY with a Sep15 TP of INR713/share. Our estimates are based on an average of 9.0x multiple to its 1‐year forward earnings, 4.5x multiple to its 1‐yr forward EBITDA and a DCF fair value on the core business. Additionally, we value listed investments at a 20% discount to CMP while valuing unlisted investments at book value. Risk factors to our estimates include a change in crude prices, INR exchange rate and subsidy sharing formula of the Union Government. Varatharajan S, +91 022 66842855 [email protected] Saurabh Bharat, +91 022 66842856 [email protected] Oil India
Exhibit 1: 2QFY15 result snapshot (INRbn) Sep13
Jun14
q‐o‐q (%)
Sep14
y‐o‐y (%)
28.3
26.5
‐17.3
21.9
‐22.6
Total operating income Total operating expenses 16.6
14.1
‐1.6
13.8
‐16.6
EBITDA 11.7
12.5
‐35.1
8.1
‐31.0
Other Income 3.5
2.8
52.6
4.3
23.7
Depreciation 1.9
1.6
24.7
1.9
3.8
13.3
13.7
‐23.8
10.4
‐21.6
EBIT Interest Recurring PBT Net extra ordinary items 0.0
0.9
‐8.9
0.8
25083.9
13.3
12.9
‐24.8
9.7
‐27.5
0.0 PBT (reported) Total taxes Net income (reported) 0.0 13.3
12.9
4.3
4.3
9.0
8.5
Shares outstanding (mn) 60.1
60.1
EPS (INR) 15.0
Operating ratios (%) 0.0 ‐27.5
3.6
6.1
‐28.6
‐32.7
60.1
14.2
9.7
‐24.8
10.1
‐28.6
‐32.7
EBITDA margin 41.4 47.0 ‐21.5
36.9 ‐10.9
EBIT margin 47.1 51.8 ‐7.9
47.7 1.3
Net profit margin 31.9 32.1 ‐13.6
27.7 ‐13.0
Source: Company, IL&FS Institutional Equities Exhibit 2: Production details for 2QFY15 (mn tonnes) Sep13
Jun14
q‐o‐q (%) Sep14
y‐o‐y (%)
‐4.0
Crude production (Including JV) 0.92
0.84
4.1 0.88
Gas production (Including JV) 0.67
0.68
2.5 0.69
4.2
Total production 1.58
1.52
3.4 1.57
‐0.6
Source: Company, IL&FS Institutional Equities Exhibit 3: Crude realization for 2QFY15 (USD/bl) Sep13
Jun14
q‐o‐q (%)
Sep14 y‐o‐y (%)
Gross realization ‐6.5
108.3
108.4
‐6.6
101.3 Subsidy 56.0
56.0
0.0
56.0 0.0
Net realization 52.3
52.4
‐13.6
45.3 ‐13.5
Source: Company, IL&FS Institutional Equities Exhibit 4: One year forward P/E (x) Exhibit 5: One year forward EV/EBITDA (x) 15
9
1‐yr fwd PE
Target PE
Avg PE
7
7
5
Feb11
Jan12
Dec12
Nov13
Source: Bloomberg, IL&FS Institutional Equities Oct14
Sep15
Target EV/EBITDA
Average EV/EBITDA
11
3
Apr10
1‐yr Fwd EV/EBITDA
3
Apr10
Feb11
Jan12
Dec12
Nov13
Oct14
Sep15
Source: Bloomberg, IL&FS Institutional Equities Oil & Gas 2 Oil India
Financials and Valuations (Consolidated) Income statement (INRbn)
Balance sheet (INRbn)
Fiscal year ending
Total operating income
EBITDA
Other income
Depreciation
EBIT
Interest
Net extra ordinary items
PBT (reported)
Total taxes
PAT (reported)
(+) Share in assoc. earnings
Less: Minority interest
Prior period items
Net income (reported)
Adjusted net income
Adjusted dil. shares (mn)
Adjusted EPS (INR)
Fiscal year ending
Net worth
Minority interest
Total debt
Deferred tax liability
Total liabilities
Net block
CWIP
Goodwill
Investments
Cash
Inventories
Debtors
Loans and advances
less: Current liabilities
less: Provisions
Net working capital
Total assets
03/14
03/15f
03/16f
03/17f
96
131
137
142
39
63
67
70
14
17
16
17
8
9
9
9
45
71
75
78
1
6
4
4
0
0
0
0
44
66
71
74
14
21
23
24
30
44
48
50
‐
‐
‐
‐
‐
‐
‐
‐
(0) (0) (0) (0)
29
44
48
50
29
44
48
50
601.1
601.1
601.1
601.1
49.3
73.6
79.4
83.2
Cash flow statement (INRbn)
Key Ratios
Fiscal year ending
Net profit + Depreciation
Deferred tax
Working capital changes
Less: Other income
Cash flow from operations
Capital expenditure
Others
Cash flow from investing
Equity raised
Change in borrowings
Dividends paid (incl. tax)
Others
Cash flow from financing
Net change in cash
Fiscal year ending
P/E (on Adjusted EPS)
P/BV
EV/Sales
EV/EBITDA
ROCE ROE
EBITDA margin
Net profit margin
Operating income y‐o‐y
Adjusted EPS y‐o‐y
Gross asset turnover
Working capital cycle (days)
Net debt to equity
Net debt to EBITDA
03/14
03/15f
03/16f
03/17f
38
53
56
59
1 ‐
‐
‐
‐7
0
0
0
14
17
16
17
18
36
40
41
‐20
‐23
‐23
‐24
‐70
17
16
17
‐91
‐7
‐7
‐6
‐
‐
‐
‐
89
‐26
0
0
‐15
‐16
‐18
‐18
‐6
‐5
‐6
‐6
68
‐47
‐24
‐24
‐5
‐18
10
11
03/14
03/15f
03/16f
03/17f
205
233
262
294
‐
‐
‐
‐
101 76 76 76
13 13 13 13
319
321
351
383
59
65
78
95
29
43
50
54
53
53
53
53
50
50
50
50
117
99
108
119
10
10
10
10
8
8
8
8
27
27
27
27
17
17
17
17
17
17
17
17
128
110
119
130
319
321
351
383
03/14
12.1
1.8
3.2
8.1
11.2
14.9
40.0
26.8
‐3.0
‐17.6
1.0
10.5
‐0.2
2.6
03/15f
8.1
1.5
2.6
5.4
15.0
20.2
48.4
30.0
35.7
49.5
1.3
16.9
‐0.1
1.2
03/16f
7.5
1.4
2.4
5.0
15.1
19.3
49.1
31.1
4.9
7.8
1.1
16.1
‐0.1
1.1
03/17f
7.2
1.2
2.3
4.7
14.4
18.0
49.1
31.4
3.3
4.7
1.0
15.6
‐0.1
1.1 Oil & Gas 3 Oil India
Analyst Certification The following analyst(s) is(are) primarily responsible for this report and, certifies(y) that the opinion(s) on the subject company(ies) and its security(ies) and any other views or forecasts expressed herein accurately reflect their personal view(s): Varatharajan S and Saurabh Bharat Disclosures Meaning of IL&FS Broking Services Private Limited’s equity research ratings The rating represents the expected change in the price of the stock over a horizon of 12 months. Buy: more than +15% Add: +5% to +15% Reduce: ‐5% to +5% Sell: less than ‐5% Analyst disclosures None of the analysts involved in the preparation of this research report or a member of his/her household is an officer, director or supervisory board member of any of the company(ies) that is/are the subject of this research report. 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Oil & Gas 4