* A sharp decline in oil price and rupee appreciation led to a 15% cut in our FY2018E and FY2019E earnings estimate for Oil India:
Brent oil price recently declined sharply by 10% to $48.9/bbl, as compared to a sharp rebound to $55/bbl in Q4FY2017 (post decision by OPEC and non-OPEC oil-producing nations to cut oil supplies by 1.8million barrels per day). Consequently, we have also cut our net oil realisation assumption to $47.4/$51.6 per barrel for FY2018E/FY2019E for Oil India Limited (Oil India). Moreover, we have lowered our gas price assumption to $2.9/$3.3 per mmbtu and revised our assumption for Indian rupee to Rs66 for FY2018E and FY2019E, given the recent ~3.4% rupee appreciation to Rs64.8. Thus, we have lowered our FY2018 and FY2019 earnings estimates for Oil India by 15%.
* Flat-to-declining oil production and higher operating expenses due to wage revision pose medium-term concerns:
We expect Oil India to report flat-to-declining oil production over FY2018E-FY2019E due to its poor track record of decline in oil production (The company’s oil production has been declining at an average rate of 3.3% over FY2013-FY2017). Moreover, we expect Oil India’s overall operating costs to increase due to the wage revision taken in Q4FY2017. Wage revision is likely to increase employee cost by Rs60crore-70 crore per quarter.
We expect Oil India’s oil and gas realisation to remain under pressure over FY2018E-FY2019E, given weak international oil and gas prices. We are also concerned about the company’s flat-to-declining oil production. Thus, we remain cautious over our earnings outlook for Oil India.
We maintain our Hold rating on the stock with a revised SOTP-based price target of Rs290. The revision in our price target is on the account of lower valuation of Rs176/share for the company’s standalone business (valued at 6.5x FY2019E EPS) and Rs114/share for its investment in Indian Oil Corporation Limited (IOCL) along with other unlisted investments. At the CMP, Oil India is trading at 10.3x FY2018E EPS and 9.8x FY2019E EPS.
* Key risks to our rating and price target:
Higherthan- expected oil and gas realisation and substantial improvement in oil production are key risks to our rating and price target.
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