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2Q11 Preview: Back on track
We expect Oil India to report a strong set of 2Q numbers on 12 November after market close. We expect a 62% q-q surge in net profits thanks to substantial reductions in the fuel subsidy burden and a 133% increase in natural gas prices. After getting de-railed by a longer-than-expected shutdown at its anchor customer, Numalighar Refinery limited (NRL), last quarter, Oil India is back producing at all-time high levels. We believe the stock is attractively priced following the 11% correction. Mirae will be hosting Mr. Narendra Bhalla, Executive Director of Corporate Affairs, for a post-results road show in Hong Kong on Wednesday, 17 November,2010.
Top line at INR24bn: up 55% q-q and 14% y-y
We predict Oil India will report 2Q revenues of INR24bn, up 55% q-q and 14% y-y, thanks to robust production growth and various forms of domestic fuel-policy magic cast by the government in the previous quarter. We expect Oil India’s fuel subsidy burden to nearly halve this quarter thanks to gasoline de-regulation, with 5%, 32%, and 10% hikes in diesel, kerosene and LPG prices, respectively. Natural gas should also be a major growth driver following a 133% hike in APM gas prices announced in April.
We expect Oil India’s oil price realizations to continue improving in coming years as the government looks to gradually raise retail diesel prices. We see little risk for the Indian government intervening in gasoline prices as we expect oil prices to march up to USD100/bbl in a gradual manner. We were encouraged to see Indian Oil raising petrol prices by INR0.33/litre this week. Stronger oil price realizations, coupled with production growth should allow for strong revenue growth going forward.
Operating profit should nearly double q-q: INR10bn
We forecast an operating profit of INR10bn this quarter, up 106% q-q and 13% y-y. Despite limited upside from higher oil prices due to under-recoveries, we expect it to maintain a solid profitability buffer due to one of the leanest cost structures in the E&P universe. Oil India has been able to achieve this because the majority of its producing assets are located in onshore Assam, where it has been operating for nearly a century. Oil India has all the onshore infrastructure it needs, and a competent in-house oil field service crew. Oil India’s integrated production infrastructure, in-house expertise and century long experience in a single onshore basin allows it to optimize costs in a manner most upstream companies are not able to.
All-time high production should lift profitability
After becoming side-tracked by a longer-than-expected refinery maintenance operation at NRL, we expect Oil India to return to its production growth trajectory this quarter. As per monthly statistics provided by the Directorate General of Hydrocarbons, Oil India’s oil production from Assam is at an all-time high. We expect Oil India to have higher production levels in 2Q as it compensates for lower 1Q production, thereby meeting its organic annual production guidance of 26m barrels (up 3% y-y).
Oil India’s long-term production outlook remains promising. Gas production should nearly double by FY14 upon commissioning of the Brahmaputra Cracker and Polymer Limited (BCPL). It will sell 6mmscmd of gas to BPCL (up 90% from current production levels of 6.7mmscd). Oil India also plans to double its crude oil production capacity over the next few years through acquisitions.
1H net profit equates to 44% of full year target – maintain BUY
We forecast 1H net profit of 13bn, roughly 44% of our full-year target. We maintain our BUY rating and DCF based target price of INR1671/share heading into the 2Q results. The stock has corrected nearly 12% from its all-time high after investor euphoria surrounding “diesel de-regulation” subsided. Trading at roughly 10x FY12E earnings, we see very little downside risk from current levels. The Indian government’s commitment towards allowing market-determined gasoline prices amid higher oil prices and clarity surrounding the future of subsidy sharing mechanisms could be the near-medium term catalysts.
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