Oil India - Benefits from no exposure to market-linked crude?

Despite a sharp correction of 20% in the past three months and a marked underperformance compared with ONGC, IIFL Institutional Equities maintains a BUY call on the stock. The brokerage has forecast a 15% YoY increase in OIL's consolidated earnings in FY16ii and envisages minimal damage to OIL's overall dividend stream.

Nov 30, 2015 12:11 IST India Infoline News Service

IIFL feels that the recent underperformance is over exaggerated. Despite a feeble crude oil scenario at present, the brokerage believes that OIL's earnings will be insulated from market-linked crude, as it is not exposed to it. OIL's 1HFY16 EPS is flat YoY, which shows its high level of resilience during a testing time for the industry. The stock has seen some serious corrections though in the past few months and has underperformed ONGC by 15% during the period. ONGC is more exposed to the vulnerabilities of market-linked crude oil, as one-third of its portfolio is market-linked.

Crude and gas production has been disappointing at best during the past three years. As per IIFL, the management has guided to 5.5% YoY increase in crude and 11% YoY growth in gas production for FY16. Following the commissioning of the BPCL cracker, the brokerage envisages a resumption of gas volume growth over FY16-17ii and builds in a modest 2% YoY growth in crude production over FY16-17ii.

Notwithstanding the above, OIL is trading at a lifetime low at 6.3x FY17ii EPS. Considering the soft crude price environment, IIFL envisages the company to report 15% YoY EPS growth in FY16ii. At 5.8%, the current dividend yield remains attractive. The company would benefit from the fact that MoPNG is proposing reduction in cess on crude production. The brokerage reckons that even a $5/bbl reduction can accrete Rs.7 to OIL's FY17ii EPS and thus sees a favourable risk-reward at the current price of the stock. 

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