Buy This Navratna Oil & Gas Stock For A Target Price of Rs. 290 Says Sharekhan

Oil India Limited (OIL), a navratna company, is India's second-largest national oil and gas corporation. It is a state-owned enterprise under the administrative authority of the Ministry of Petroleum and Natural Gas. The company's stock has risen from Rs 127.90 on March 3, 2021 to Rs 259.40 as of March 3, 2022, 9:29 IST, representing a return of +131.40 (102.74 percent) in a year. On a year-to-date (YTD) basis the stock is up by +60.50 (30.43%) and in the last 6 months, the stock has surged +79.40 (44.14%). In the last 1 month, the stock has climbed by +28.10 (12.15%) and +36.65 (16.46%) in the last 5 days. Sharekhan has issued a buy call on the stock with a target price of Rs. 290, amid rising geopolitical tensions between Russia and Ukraine.

Key investment rationale for Oil India Ltd as per the brokerage

• The recent geopolitical tensions between Russia and Ukraine have further increased the international gas price and this bodes well for sustained hike in India's domestic gas price (that is a combination of US Henry hub gas, NBP, Russia and Canada gas prices). Oil India's management guided for 98%/22% hike in APM gas price to $5.8/7 per mmBtu for H1FY23/H2FY23 and this would make gas business profitable from Q1FY23 and against EBIT loss of Rs. 543 crore/Rs. 906 crore in 9MFY22/FY21. Additionally, Brent crude oil prices have rallied by 30% in CY22YTD to ~$102/bbl on geopolitical tensions and thus profitability of upstream oil business would witness significant improvement in the coming quarters.
• The management has guided for impressive oil/gas production of 3.4 mmt/4 bcm for FY23, as compared to FY22 annualised oil/gas production of 3 mmt/2.7 bcm based on 9MFY22 performance. We believe that these targets are bit ambitious given a weak production track record and model oil/gas production volume CAGR of 2%/4% over FY21-24E and await actual delivery on production guidance to raise our assumptions.
• Singapore complex GRM has further increases to $7.7/bbl currently as compared to $6.1/bbl in Q3FY22 and Numaligarh Refinery Ltd (NRL) (Oil India holds a 70% stake) also enjoys excise duty benefits. Cyclical GRM recovery and planned capacity expansion to 9mtpa (an increase of 3x from current capacity of 3mtpa) by FY2024E-2025E would mean strong profitability at NRL and drive long-term value for Oil India.

Buy for a target price of Rs. 290

Sharekhan has claimed that "Rising geopolitical tensions between Russia and Ukraine and a calibrated production increase by the OPEC is expected to keep oil price elevated in the near term while domestic gas price would also witness a steep hike in FY23. This would benefit earnings of upstream oil & gas companies including Oil India. Earnings tailwinds from improving oil & gas realisation, sharp recovery in RoE, healthy dividend yield of 5-6% and long-term value creation from NRL (benefit of sustained recovery in refining margin) makes Oil India one of best bets in the Indian oil & gas space."

"The recent sharp surge in crude oil prices and expectation of further steep hike in domestic gas prices from April 2022 would drive a 40% CAGR in OIL's standalone PAT over FY2021-FY2024E and improve RoE to 12.5% (versus only 5.4% in FY2021). Moreover, the recent stake increase in NRL could create long-term value for OIL. Hence, we maintain a Buy rating with an unchanged SoTP-based PT of Rs. 290. The stock trades at 3.9x its FY2023E EPS (including earnings contribution from NRL)," the brokerage has noted.

Disclaimer

The stock has been picked from the brokerage report of Sharekhan Ltd. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.