Oil India- Cut FY11E EPS & PO on negative surprise on subsidy „:: BofA Merrill Lynch

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Oil India Ltd
   
Cut FY11E EPS & PO on
negative surprise on subsidy
„FY11E EPS cut by 8% and PO by 1% on higher subsidy
FY11 subsidy sharing has been finalized. The main negative surprise is that
upstream companies have had to bear 38.7% of FY11 subsidy as against the
expected 33.3%. We therefore cut our FY11E EPS by 8% and our PO by 1% to
Rs1,583/share. Despite a higher share in subsidy we expect OIL’s FY11 EPS to
be 13% YoY higher driven mainly by the steep hike in APM gas price from June
2010. The share of upstream in subsidy being increased to 38.7% is a concern
but we still retain Buy on OIL. A near term trigger is likely to be fuel price hike to
cut FY12E subsidy, which has the potential to improve OIL’s FY12 earnings
outlook. Our revised PO also offers 21% potential upside.  
OIL’s FY11E EPS up 13% YoY despite higher subsidy
Despite a higher share in subsidy for upstream OIL’s FY11 EPS is expected to be
13% YoY higher. We estimate OIL’s FY11 oil price net of subsidy at US$58.3/bbl
up 4% YoY over US$56.2/bbl in FY10. However the rupee has also appreciated
by 4% YoY in FY11, thereby taking away OIL’s oil price realization gains. The
main driver of OIL’s FY11 earnings is thus expected to be the more than doubling
of APM gas price from June 2010.
Increase in upstream share in subsidy a concern
The share of upstream in subsidy being increased to 38.7% is a concern. It
means that upstream share in subsidy being 33% is no longer sacrosanct. It has
created uncertainty about upstream company earnings. There appears to be a
risk that upstream share in subsidy may be increased even in future to cap their
earnings growth.