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Oil jump to bring big gains; other upsides, too

We reinitiate coverage on Oil India (OIL) with a BUY rating and target price of Rs205 (55% upside). We estimate OIL’s FY22E EPS to be up 131% YoY driven by 32% YoY rise in Brent and jump in share of profit from Numaligarh Refinery (NRL) on hike in its stake to 70%. Oil price recovery has been driven by OPEC+ capping supply and vaccine rollout hopes driving global oil demand to pre-Covid levels in a few quarters. Raising stake in NRL would be earnings-accretive even if we assume an excise duty cut of Rs5/l on auto fuels. If excise is not cut and/or stake rises to 83%, upside to FY22E EPS would be 11-21%. OIL’s FY22E gas price would be up just 8% YoY on current formula. However, a formula change may set floor price at US$3-4/mmbtu, which would boost FY22E EPS by 3-10%.

* Oil price recovery to drive surge in FY22E EPS: Brent is over US$69/bbl now vs ~US$45/bbl in FY21E driven by recovery in demand from Apr’20 lows and OPEC+ capping supply to ensure supply deficit when second wave of Covid in the US and Europe hit demand recovery. Vaccine rollout is expected to drive global oil demand recovery in H2CY21E. We estimate Brent at US$60/bbl to drive 131% YoY rise in FY22E EPS. Upside to FY22E EPS would be 11% if Brent is at US$65/bbl.

* Stake hike in NRL to be earnings-accretive: OIL is set to raise its stake in NRL from 26% to 69.6-83.3% (69.6% in base case) for a consideration of Rs70bn-92bn. NRL is allowed to keep 50% of the excise duty it collects, which boosts its profit. Increase in NRL’s FY22E GRM would be US$27.5/bbl even if excise is cut by Rs5/l (base case) and US$32.5/bbl if excise in not cut. OIL’s share in NRL’s profit, net of rise in interest cost due to debt raised to fund the stake rise, is set to increase by: 1) Rs7.9bn (94%) YoY in base case, 2) by Rs11.9bn (143%) YoY if excise is not cut, and 3) by Rs10.1bn-15bn (121-179%) YoY if stake is hiked to 83.3%.

* Gas price formula change on the cards? As per the prevailing formula, gas price plunged to a low of US$2/mmbtu in H2FY21 and is estimated to be up just 8% YoY at US$2.5/mmbtu in FY22E. A committee appointed to review the formula, as gas prices have been consistently below cost for domestic producers, may have proposed a floor price; if set at US$3-4/mmbtu, it would boost FY22 EPS by 3-10%.

* Target price implies 55% upside; share price reflects long-term oil price of just US$48/bbl: Our target price of Rs205 implies 55% upside and is based on: 1) Brent at US$60/bbl in FY22-FY23E and in the long term; 2) gas price at US$2.5- 3.1/mmbtu in FY22-FY23E (LT US$4/mmbtu); 3) NRL stake valuation at 3x FY21E EV/EBITDA (Rs82bn); and 4) Mozambique gas reserves at 0.67x valuation in last deal in the asset (US$400mn). OIL’s current share price reflects long-term Brent of just US$48/bbl (OIL’s realisation at US$47/bbl) vs current price of US$69/bbl.

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