Oil India (OINL) has traded at a steep discount to its global peers over the past few years on the back of issues such as 1) subsidy burden and 2) government controlled gas prices (which are much lower than industry levels). However, of late government is trying to set right these issues by taking measures such as 1) partial de-regulation of diesel prices, 2) capping of sale of subsidised LPG cylinders and 3) showing intent to raise gas prices to about US$8/mmbtu as compared to current price of US$4.2/mmbtu. These steps, we believe, will lead to re-rating of OINL towards its global peers.
OINL has also been trading at a discount to its domestic peer ONGC. Although ONGC is much larger in size, OINL has delivered a much better financial and operational performance over the past few years. During FY09-12, OINL crude oil and natural gas production CAGR were at 5.1% and 7.7% respectively. In comparison, ONGC registered -2.2% and 1.2% CAGR in oil and gas production respectively. In terms of hydrocarbon 3-P reserves, oil-to-gas ratio for OINL is at 1.8x much better than 0.74x for ONGC. Going ahead, while OINL production is expected to see muted growth of 2% in FY14E and FY15E, ONGC’s production is expected to be flat at best. Given these trends, we expect the valuation discount between the two players to narrow down.
OINL is a cash rich company with Rs139bn of cash and cash equivalents at the end of September 2012 (44% of the current market cap). This will help the company grow inorganically for which has a well laid out strategy especially for the international markets. Additionally, the company is well placed to invest in its domestic gas operations which will now be more remunerative.
In our estimates we have factored in 80% jump in gas realizations (lower than currently spoken about US$8/mmbtu). Also we have conservatively assumed diesel price hike of Rs4/litre during FY14 (Rs6/litre if OMCs raise Rs0.5/litre every month). In spite of these conservative assumptions, OINL trades at P/E of 8.2x FY14E EPS of Rs64.3 and EV/BOE (2P reserves) of US$3.3/boe, which we find attractive. We recommend investors with a long-term horizon to subscribe in the offer for sale scheduled for February 1, 2013 at Rs510.
|Y/e 31 Mar (Rs m)||FY12||FY13E||FY14E||FY15E|
|yoy growth (%)||18.5||10.2||11.0||2.2|
|yoy growth (%)||19.3||(2.2)||14.6||0.5|
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