Oil India- Good results; upgrade to ADD- Kotak Sec

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Oil India (OINL)
Energy
Good results; upgrade to ADD on reasonable valuations. OIL reported 2QFY11
EBITDA at `14 bn (+103% qoq, +34% yoy), moderately ahead of our `13.4 bn
estimate. We have upgraded the stock to ADD from REDUCE noting (1) correction of
14% in the price over the last two months and (2) 18% potential upside to our revised
12-month target price of `1,640 (`1,550 previously). Key downside risk stems from
higher-than-expected subsidy resulting from (1) higher-than-expected crude price and
(2) delay in implementation of diesel deregulation.




2QFY11 net income at `9.2 bn (+27% yoy and +83% qoq); our estimate was `9.1 bn
OIL reported 2QFY11 net income at `9.2 bn (+27% yoy, +83% qoq), in line with our estimate of
`9.1 bn. The impact of lower subsidy share at `4 bn (our estimate was `4.6 bn) was nullified by
lower gas sales at 442 mcm (our estimate was 492 mcm). Reported EBITDA was at `14 bn
(+103% qoq and +34% yoy). The higher yoy EBITDA reflects (1) higher net realized price at
US$63.2/bbl (+US$6.2/bbl yoy) and (2) revision in APM gas price. Qoq comparison is not valid as
1QFY11 results were impacted by extended shutdown of Numaligarh refinery for ~100 days.

Recent correction offers opportunity to re-enter the stock; upgrade to ADD
We have upgraded OIL to ADD from REDUCE previously noting (1) decline in its price over the last
two months and (2) the stock now offers 18% potential upside to our revised 12-month target
price of `1,640. OIL stock has declined by 14% in the last two months versus the BSE-30 Index’s
3% rise over the same period. We find OIL’s valuations attractive with the stock trading at 8.9X
FY2012E EPS; the market (BSE-30 Index) is currently trading at14.8X FY2012E ‘EPS’.

Clarity on subsidy-sharing and deregulation critical given surge in crude oil prices
We believe that government action on (1) deregulation of diesel prices and (2) subsidy-sharing
mechanism will be critical for the sector. However, we see OIL’s 1HFY11 subsidy burden as
providing some degree of comfort on the share of upstream companies being fixed at one-third of
the overall under-recoveries. This should allay street’s concerns about upstream companies being
asked to bear more than one-third of the total subsidy burden.

Fine-tuned FY2011-13E EPS estimates
We have revised our FY2011-13E EPS to `144 (+8.9%), `160 (+7.4%) and `171 (+5.7%) to
reflect (1) higher crude oil price assumption (+ve impact), (2) stronger rupee (-ve impact), (3)
higher oil sales (+ve impact), (4) lower gas sales (-ve impact) and (5) other minor changes. We
assume that upstream companies will bear one-third of total under-recoveries.

􀁠 Net realized price for crude oil. OIL’s 2QFY11 net realized crude price was US$63.2/bbl
versus US$49.7/bbl in 1QFY11 and US$56.9/bbl in 1QFY10. OIL’s subsidy burden in
2QFY11 was `4 bn or US$12.3/bbl in crude price oil equivalent terms versus crude price
equivalent of US$28.4/bbl in 1QFY11 and US$10.5/bbl in 2QFY10.
􀁠 Increase in crude sales volumes. 2QFY11 crude sales volume increased by 2.8% yoy
and 23.7% qoq to 951 mn tons. The steep qoq increase in the sales volumes reflects an
extended shutdown of Numaligarh refinery, OIL’s main crude buyer, in 1QFY11. We note
that Numaligarh refinery restarted operations from June 26, 2010.
􀁠 Gas sales volumes disappoint. 2QFY11 gas sales volume declined 3.9% yoy to 442
mcm. The management highlighted that the lower off-take was the result of shutdown
taken by several key customers in Assam and Rajasthan.
􀁠 DD&A expenses 7.8% lower qoq. DD&A expenses declined 7.8% qoq to `1.8 bn, due
to lower E&P activity in the monsoon season. The company has written off `470 mn on
account of dry wells in Libya.