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Crude production improves, prognosis stronger

Our view

The 1QFY23 operating profit at Rs 26.3bn (+114% YoY; +35% QoQ), stood below our estimates on a) higher operating expenses as OINL accounted for a Rs 2700mn write off towards drywells and b) lower other income. Despite the miss on estimates, the profitability stood stronger on higher crude realization of USD 112.7/bbl and 4% YoY & QoQ higher crude oil production. The Numaligarh Refinery (NRL) reported a PAT of Rs 14bn backed by strong core GRM of USD 36.7/bbl. The prognosis for crude oil & natural gas production is yet higher, with OINL targeting a production of 4.1mmt of crude oil and 5bcm of natural gas production by FY25. The NRL expansion is also on track for commissioning around FY25. ADD

Result Highlights

* 1QFY23 Profitability: Reported EBITDA and PAT stood at Rs 26.3bn (+114% YoY; +35% QoQ) and Rs 15.6 (+206% YoY; -5% QoQ), on backs of 70% YoY higher crude oil realization at USD 112.7/bbl and 4% YoY & 4% QoQ higher crude production, along with 10% YoY and 6% QoQ higher natural gas production.

* Crude Oil Production: The crude oil production for the 1QFY23 stood at 0.78mmt (+4%YoY; +4% QoQ). Backed by on-going drilling and production enhancement programs , OINL is looking forward to improve production to above 4mmt by FY25.

* Natural Gas Production: The natural gas production for 1QFY23 stood at 8.3mmscmd (+10% YoY; +6% QoQ). On the lines of production growth in crude, natural production is also expected to grow to 13-14mmscmd by FY25, with a large part of incremental production coming from Baghjan field.

* Capex: The planned capex for FY23 stands at Rs 43bn, of which Rs 12bn is already spent in 1QFY23.

* NRL: NRL’s core GRM stood at a strong USD 36.7/bbl, leading to a 1QFY23 PAT of Rs 14060mn (1QFY22: Rs 6780mn)

* Windfall Tax: The windfall taxes come into effect 1st Jul’22 onwards hence would impact realization in 2QFY22 and onwards. While the windfall tax is adjustable against OIDB cess but calculation of Royalty is unlikely to be impacted.

Valuation

We value OINL at a Mar’23 TP of Rs 255/sh on SOTP basis, where the standalone business is valued at Rs 155/sh, on DCF basis over FY24-40e (WACC: 12%; Terminal Value: 0), implying a EV/EBITDA of 3.0x FY24e for SA business and investment in NRL at Rs 65/sh, with listed investment contributing ~ Rs 35/sh. Our TP implies a target P/E multiple of 4.6x FY24e, as compared to 3.4x the stock is currently trading at.

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