Oil India, Q2FY13 Result Update:: Centrum

Operational performance improves QoQ
Although OIL’s subsidy burden increased sequentially, better
operational performance and higher other income led to 2.6% QoQ
jump in bottom-line at Rs9.5bn. Crude and natural gas production
jumped by 1.5% and 10.4% QoQ respectively. Subsidy sharing
however increased by 3.1% QoQ at Rs20.8bn. Higher cash balance on
the balance sheet led to 6.7% QoQ rise in other income at Rs4.0bn.
Thus, higher production and consequent higher sales of oil and gas
coupled with higher other income led to a sequential jump in bottomline.
Although, the stock looks attractive on current valuations, the
lack of any triggers is likely to keep valuations suppressed. Hence, we
downgrade the stock to ‘Neutral’ from Buy.
Revenue growth led by higher volumes; rupee depreciation helps
too: OIL reported 3.3% QoQ jump in revenues led by higher volumes and
~2% rupee depreciation. Net realisation for the quarter stood at
US$52.5/bbl against US$53.9/bbl in Q1. On a YoY basis however, the
performance was muted as the company earned US$86.3/bbl net
realisation in Q2FY12.
Higher crude and natural gas production: Crude and natural gas
production jumped by 1.5% to 0.96mmt and 10.4% to 0.69bcm QoQ
respectively. Crude production which was affected due to labour issues in
Q1 normalized in Q2 and startup of Numaligarh refinery and demand
from customers led to higher natural gas production.

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Dry well write offs jump but higher other income mitigates the impact:
Dry well write offs jumped 61.1% QoQ at Rs1.2bn yet were 74.7% lower on a
YoY basis (Rs4.6bn in Q2FY12). Higher cash balance (Rs139.5bn) on the
balance sheet fetched higher other income which stood at Rs4.0bn thus
partially mitigating the impact of higher write offs. Overall, the company
was able to report 2.6% QoQ jump in bottom-line at Rs9.5bn.
No near term catalyst, downgrade to ‘Neural’: During the quarter, OIL
made investment in shale gas assets in the US. However, the company is
still scouting for a meaningful acquisition (which would increase crude
and natural gas volumes) as now the cash has piled up to over Rs140bn.
Although, operational performance has been improving over the past
couple of years, we believe utilisation of cash remains a key trigger.
Devoid of any key triggers we have reduced our target P/E multiple for the
stock from 9x to 8x. Also, based on H1 numbers, we have revised our
estimates for FY13E and FY14E. The valuations look attractive at 8.4x and
7.2x our FY13E and FY14E EPS of Rs56.4 and Rs65.7. However, due to lack
of a trigger we downgrade the stock to ‘Neutral’ from Buy with a revised
target price of Rs526.