Fw: Stock Idea: Oil India (High on cash, low on valuation)

 

 

Stock Idea [May 11, 2012]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA Oil India Cluster: Apple Green Recommendation: Buy Price target: Rs600 Current market price: Rs460 High on cash, low on valuation Key points  Holds substantial hydrocarbon reserves with a fairly healthy reserve-replacement ratio: Oil India Ltd (OIL), the state-owned upstream oil exploration company, has several commercialised onshore hydrocarbon discoveries across reserves in Rajasthan and the north-eastern region of India. It also has international presence through participatory interest in oil blocks in the Middle East and Africa. The total 1P (proven) and 2P (proven and probable) reserves of the company stood at 505 million barrels (mmbbls) and 944mmbbls as on March 2011. In addition to the huge oil reserves, the company's reserve-replacement ratio (RRR) is quite healthy at 1.42x which implies a comfortable level of accretion of oil reserves through new discoveries.  Rising subsidy burden is a drag on valuation but largely priced in: The under-recoveries of the oil marketing companies are estimated to have shot up to Rs140,000 crore in FY2012 as the government has been unable to revise the retail price of the petroleum products. This is likely to almost double the subsidy burden of the upstream exploration companies. We believe that the same is already reflected in the recent underperformance of the upstream stocks like OIL and ONGC. Plus there is scope for positive surprises in the form of the cooling off of the crude oil prices and/or the achievement of political consensus by the government to at least partially pass on the impact of firm crude oil prices to the consumers through a revision in the petroleum prices. Healthy balance sheet with huge free cash; impressive dividend yield: As per our estimates, OIL would have net cash of around Rs11,511 crore (ie over $2.2 billion or Rs191 per share) as on March 2012, which amounts to 41% of its market cap and over 100% of its annual net revenues. Despite a healthy dividend pay-out (estimated Rs20 per share for FY12 on post-bonus equity-yield of 4.3%), a higher share of subsidy burden and the exploration related capex, the free cash accretion would remain strong and limit the downside risk from the current level. Valuation attractive; recommend Buy with price target of Rs600: We prefer OIL because its huge reserves and healthy RRR would provide a reasonably stable revenue growth outlook. Further, its valuation is attractive as it is trading at its lowest valuation since its IPO. In terms of valuation, the fair value works out to Rs600 per share (based on the average fair value arrived at using the DCF, PE and EV/EBIDTA valuation methods). This offers around 30% upside from the current level. Hence, we initiate coverage on OIL with a Buy recommendation and price target of Rs600. At the current market price the stock trades at PE of 7.5x its FY2013E EPS of Rs61 and 7x its FY2014E EPS of Rs66. Click here to read report: Stock Idea   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article.