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In the absence of any clear direction from the government, forecasting upstream subsidy
payments has become more difficult this year. We assume a steady improvement in net
realisation, but lower than our earlier forecasts. We lower our forecast EPS by 8-11% for FY12-14
and reduce TP to Rs1,390; maintain Hold.
Cautious view on subsidy sharing
The move by the Indian government (GOI) to increase FY11 upstream subsidy to 39% (as
against an earlier promise of 33%) has highlighted the absence of any clear cut formula for
subsidy sharing. There is more uncertainty this year given that reported under-recoveries will be
lower, primarily due to GOI cutting taxes. We model our subsidy payments assuming: upstream
companies will not benefit from the GOI duty cuts; and the exact subsidy-sharing ratios (35-40%)
have been derived by assuming some improvement in net oil realisation. In FY12F, the upstream
subsidy works out to 49% of reported under-recovery. Our guiding principle is that there are no
prospects for any sharp improvements in net realisations as long as GOI has to bear some
burden of the downstream under-recoveries.
Longer-term prospects linked to legacy assets
Oil India (OIL) has improved its production growth rate by using improved production and
exploration techniques in its legacy assets in North-East India. Going forward, we expect more of
the same. Exploration in the NELP blocks is yet to provide any significant discoveries and OIL
has as yet been unsuccessful in its objective of making any significant overseas acquisitions.
Hence OIL’s net cash balance (US$2.6bn) is rising and the contribution of cash in our SOTP
valuation is 35%.
Maintain Hold, TP Rs1390
Our new forecasts for net oil realisation over FY12-14F (US$59-62/bbl) have dropped, which
leads us to cut our FY12 and FY13 EPS forecasts by 7% and 11%. We maintain Hold but cut our
SOTP valuation for OIL from Rs1,460 to Rs1,390. While valuations for the stock remain
undemanding on our forecasts, there seem few prospects for an improvement in valuation until
there is clarity on OIL’s ability to benefit from any improvement in global oil prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In the absence of any clear direction from the government, forecasting upstream subsidy
payments has become more difficult this year. We assume a steady improvement in net
realisation, but lower than our earlier forecasts. We lower our forecast EPS by 8-11% for FY12-14
and reduce TP to Rs1,390; maintain Hold.
Cautious view on subsidy sharing
The move by the Indian government (GOI) to increase FY11 upstream subsidy to 39% (as
against an earlier promise of 33%) has highlighted the absence of any clear cut formula for
subsidy sharing. There is more uncertainty this year given that reported under-recoveries will be
lower, primarily due to GOI cutting taxes. We model our subsidy payments assuming: upstream
companies will not benefit from the GOI duty cuts; and the exact subsidy-sharing ratios (35-40%)
have been derived by assuming some improvement in net oil realisation. In FY12F, the upstream
subsidy works out to 49% of reported under-recovery. Our guiding principle is that there are no
prospects for any sharp improvements in net realisations as long as GOI has to bear some
burden of the downstream under-recoveries.
Longer-term prospects linked to legacy assets
Oil India (OIL) has improved its production growth rate by using improved production and
exploration techniques in its legacy assets in North-East India. Going forward, we expect more of
the same. Exploration in the NELP blocks is yet to provide any significant discoveries and OIL
has as yet been unsuccessful in its objective of making any significant overseas acquisitions.
Hence OIL’s net cash balance (US$2.6bn) is rising and the contribution of cash in our SOTP
valuation is 35%.
Maintain Hold, TP Rs1390
Our new forecasts for net oil realisation over FY12-14F (US$59-62/bbl) have dropped, which
leads us to cut our FY12 and FY13 EPS forecasts by 7% and 11%. We maintain Hold but cut our
SOTP valuation for OIL from Rs1,460 to Rs1,390. While valuations for the stock remain
undemanding on our forecasts, there seem few prospects for an improvement in valuation until
there is clarity on OIL’s ability to benefit from any improvement in global oil prices.
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