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

Oil India Limited (OIL) is the second-largest national oil and gas business in India and a state-owned Navratna enterprise of the Government of India. The firm has a market capitalization of Rs 24,160.55 Cr, and its shares have risen from Rs 125.60 on February 23rd, 2021 to Rs 224.55 on February 23rd, 2022, 10:59 am IST, representing a gain of +98.95 (78.78 percent) in one year. On the NSE, the stock has climbed by +25.75 (12.95 percent) on a year-to-date (YTD) basis, and by +56.40 (33.54 percent) in the last six months and even the share moved up by +7.25 (3.34%) in 1 month. On the NSE, the share reached a 52-week high of Rs 267.80 on 1st October 2021 and a 52-week low of Rs 112.00 on 12th April 2021. Following the release of the company's Q3FY22 earnings, brokerage firm Sharekhan issued a buy call with a target price of Rs. 290.

Q3FY22 results of OIL India

Sharekhan has highlighted that "Oil India Limited's (OILs) Q3FY22 standalone operating profit of Rs. 1,267 crore, up 39% q-o-q was below our estimate of Rs. 1,528 crore due to higher-than-expected cost of support services (up 50% q-o-q). Operational performance was largely in-line with crude oil realisation of $78.6/bbl (up 10% q-o-q) and oil/gas sales volume of 0.73 mmt/0.63 bcm, down 1.6%/6.2% q-o-q. EBIT from oil business increased by 24.4% q-o-q to Rs. 1,199 crore and gas EBIT loss declined by 68.5% q-o-q to Rs. 108 crore primarily due to rise in oil & gas realisation. Standalone adjusted PAT of Rs. 1,267 crore, up 147% q-o-q was above our estimate of Rs. 889 crore due to higher-than-expected other income (up 161% y-o-y; up 163% q-o-q) led by a rise in the dividend income."

Key management conference highlights as per the brokerage

• Management has guided for impressive oil/gas production of 3.4 mmt/4 bcm as compared to FY22 annualised oil/gas production of 3 mmt/2.7 bcm based on 9MFY22 performance.
• Oil India expects the domestic gas price to increase to $5.5-5.75/mmBtu H1FY23 and $7/mmBtu for H2FY23 as compared to the current domestic gas price of $2.9/mmBtu.
• Standalone capex guidance at Rs. 4,300 crore for/FY2023E and expect to maintain a similar capex run-rate going forward.
• NRL's expansion to 9 mtpa is expected to get completed by FY25 with an estimated capex of Rs. 28,000 crore. OIL capex share at Rs. 6,500 crore. NRL will continue to receive excise duty benefits.
• Oil India's consolidated net debt at Rs. 17,000 crore as of December 31, 2021. This includes standalone net debt of Rs. 12,900 crore.

Buy for a target price of Rs 290 per share

The brokerage has claimed that "The recent sharp surge in crude oil prices and expectation of a 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 a revised SoTP-based PT of Rs. 290. The stock is trading at 4x its FY2023E EPS (including earnings contribution from NRL)."

According to Sharekhan, investors should be wary of the stock's key risks, which include a sharp decline in international oil & gas prices and lower-than-expected production (In case of delayed ramp-up from new fields) could impact earnings outlook and valuation, as well as any unwarranted capex for overseas/domestic acquisition, could raise capital allocation concerns.

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.