Buy This Navratna Stock With A Target Price of Rs. 236 Says HDFC Securities

Oil India Ltd. (OIL) gets a buy rating from the brokerage firm HDFC Securities. OIL is a navratna company, and its shares are now trading at a market price of Rs. 199.70 as of 7 January, 9:07 IST. The brokerage company has set a target price of Rs. 236 for the stock, which it expects to reach in 6 months, representing an increase of 18.59 percent over the current market price.

Q2FY22 results of OIL according to HDFC Securities

• OIL numbers were inline expectations in Q2FY22. Consolidated net revenue was up by 32.7% YoY to Rs 7254 crore. The company's EBITDA increased by 23.6% YoY to Rs 2,161 crore and net profit was up by 29.2% YoY to Rs 1152 crore in Q2FY22.
• The Crude Oil and Natural Gas production in Q2FY22 improved by 1.78% and 26.38%, respectively as compared to Q2FY21. Average Crude Oil price realization for Q2FY22 stood at US$ 71.35 / bbl vis-à-vis US$ 42.75 / bbl for Q2FY21, increased by 66.90%.
• Crude Oil price realization for the half-year ended 30 Sept 2021 is US$ 69.28/ bbl vis-a-vis US$ 36.48/ bbl for the half-year ended 30 Sept 2020, increased by 89.91%.

The brokerage’s take on OIL

HDFC Securities on 7th Jan 2022 has said in its research report that "Oil prices have climbed on an expectation of demand recovery, as vaccination roll-outs are picking up. Crude Oil (WTI) climbed sharply by 54.7% YoY to US$ 77.3/bbl. Higher crude oil prices lead to higher realization for OIL and help shore up its profitability. Apart from this, Natural gas has rallied sharply in the last few months and momentum could continue in the near to medium term. Natural Gas price is at US$ 3.8 /mbtu, which is up by 41% YoY. The annual demand is expected to hit pre-pandemic levels in 2022, according to the International Energy Agency (IEA). This is spurred by the return of vehicular traffic in most of the major countries in the world as well as the improving overall economic outlook."

According to the brokerage "The government, using rates prevalent in gas-surplus nations fixes the price of natural gas produced by ONGC & OIL from fields given to them on nomination basis, every six months (Oct 01 & Apr 01). The company has guided oil production for FY23/24E at 3-3.1mmt and gas production at 3.2-3.25bcm. We expect upward revision in domestic gas price to continue for H1FY23. We thus expect OIL's gas realisation to improve to $2.6/$3.4/$3.8 per mmBtu in FY22E/FY23E/FY24E as compared to $2.3/bbl in FY21."

HDFC Securities has also highlighted that "Energy and oil demand have picked up significantly in 2021 after the massive drop in 2020. Oil demand could grow sharply in the next few years as economies recover from the pandemic. Thus, OPEC expects global oil demand is likely to rise by 1.7 million barrels per day in 2023 to 101.6 million bpd, adding to robust growth already predicted for 2021 and 2022, and pushing demand back above the pre-pandemic 2019 rate. A recent sharp recovery in oil prices and potential upward revision in domestic gas prices could help to improve earnings as well as the profitability of OIL in near to medium term."

Buy With A Target Price of Rs. 236

The brokerage has claimed that "OIL will benefit from a sharp recovery in crude oil prices post-pandemic, due to production cuts by OPEC+ countries. We expect OIL's crude oil realization to increase to $80/bbl for FY23E from $44.0/bbl in FY21, Oil sales volume (mmt) could go up to 3.2mmt in FY23E from 2.9 mmt in FY21 and Gas sales volume could be stable to 2.3 bcm in FY23E. Gas prices have also risen are expected to rise even further. OIL is also enjoying its low-cost structure. Moreover, the recent stake increase in NRL could create long-term value for OIL. Besides, the earnings outlook for the core oil & gas E&P business has improved considerably with a sharp recovery in oil & gas price. However, volumes have disappointed OIL given ageing fields, fire at Baghjan gas field and disruptions due to pandemic. However, we expect volumes to stabilize and recover as new fields are brought into production; and have factored in 5% CAGR improvement in volumes from FY21 lows."

"Investors could buy the stock in the Rs 196-200 band and add more on dips to Rs. 168-172 band (Rs 66/share for standalone equity value+ Rs 104/share for investment value), based on SOTP valuation. Base case fair value of the stock is Rs 219.5 (Rs 115.5/share for standalone equity value+ Rs 104/share for investment value) and the bull case fair value of the stock is Rs 236 (Rs 132/share for standalone equity value+ Rs 104/share for investment value) over the next 2 quarters. At the CMP of Rs 197.85, the stock trades at (1.4x Dec 23E EV/EBITDA, 3.5x Dec 23E EPS, on a consolidated basis)," further added the brokerage.

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. 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.