This Energy Stock Is A 'Buy' For Close To 100% Gains, Says Prabhudas Lilladher

Turnaround viewed for the company by Oil India

The oil drilling and exploration company is seen to be in a turnaround stage and the brokerage firm highlighs its FY22/23E consolidated earnings and factors in 1) higher oil realization of USD65/70/bbl v/s USD50/55/bbl earlier, 2) higher domestic gas prices of USD2.5/3.0/mmbtu and 3) incorporate stake hike in Numaligarh refinery (NRL) to 69.63% v/s 26% earlier. The brokerage firm views the company's earnings will play out on augment crude and gas realization, even as volume growth will be back ended.

"FY25E consolidated EBIDTA is estimated to increase to Rs167bn (about 3x FY21 levels), post commissioning of 6MTPA NRL refinery expansion and increase in gas volumes. NRL remains a prized acquisition, as company retains 50% of excise duty from sale of petrol and diesel, and is EPS accretive. We had earlier put the rating 'Under Review', but with favorable risk-reward assign 'BUY' with TP of Rs328, based on 5x/EV/E FY23E and add value of investment in IOCL", added the brokerage firm in its report.

 

Hike in Numaligarh Refinery Highly rewarding for the company:

The company has recently increased its stake in Numaligarh refinery Ltd (NRL) to 69.63% (26% earlier) at Rs69.9bn, as a part of government's direction to BPCL for exiting its NRL stake prior to divestment.

"The acquisition is EPS accretive as the company's profits adjusted for higher debt (due to stake acquisition) will be at Rs6.4bn, even after factoring Rs5/litre cut in excise duty. NRL remains a prized asset, as it retained 50% of excise on fuel sales. Refinery expansion to 9MTPA (currently 3MTPA) can lead to step jump in OINL's FY25E consolidated EBIDTA to Rs167bn (~3x FY21E) and lower net debt/EBIDTA to 1.3x (FY21 3.1x)", added the brokerage report.

Oil India to benefit from higher realisation:

The company is seen to benefit from sharp recovery in crude oil prices post pandemic, due to production cuts by OPEC+ countries. The brokerage sees the company's oil realization to increase to decade high levels of $69.2/bbl for FY23E from $44.0/bbl in FY21. Also, domestic gas prices which had fallen by 58% in last five years will see about 50% hike from current $2/mmbtu in H2FY22, as international prices rise.

Though volumes at the firm suffered, brokerage is of the view that volumes will . stabilize and recover as new fields are brought into production; factored in 3.5% CAGR

improvement in volumes from FY21 lows.

Capital allocation concerns overstated:

Oil India's consolidated debt increased to Rs178bn in FY21 vis-à-vis net cash of Rs128bn in FY12 due to acquisition of 1) 4% stake in Mozambique gas field for USD1bn 2) Stakes in Russian oil fields for USD1.1bn and 3) 43.63% stake increase in NRL for Rs69.9bn (USD937mn). The company has already recouped 60% of its Russian investment in last four years. While NRL investment will be value accretive given excise benefits and expansion plans. Mozambique asset is one of the world's largest discovery, but has been delayed due to political tension. With spot LNG prices recovering sharply as economies move to gas for curbing pollution, we believe Oil India investment will pay off.

Disclaimer:

The stock of Oil India is taken from the Prabhudas Lilladher and cites its bullishness on the stock. Note the report is just for informational purpose and readers should not construe it as an investment advice.

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