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Volumes to revive to pre-COVID levels in FY22E

* Oil India (OINL) reported volumes in line with our estimate, while higher opex led to a miss on EBITDA. It expects oil/gas production of ~3.05mmt/~3.2bcm in FY22 (factoring in stabilization of the Baghjan field).

* The Baghjan blowout was completely controlled by the middle of Nov’20 and INR4.5b was charged as losses under exceptional items in FY21. Baghjan is a prominent field and OINL expects production to rise with the stabilization of production (post blowout) and ongoing debottlenecking.

* Brent prices have spiked to USD75/bbl on the back of strong global demand and the speedy lifting of the lockdown/restrictions. We believe supply would soon catch up with a spurt in demand, with OPEC+ planning further easing of production cuts from Aug’21 (article).

* We forecast Brent prices at USD64/60/bbl in FY22E/FY23E, considering the easing of the current 5.8mnbopd of production cuts over the next couple of quarters. The stock trades at 32% discount to its one-year forward long term P/E average of 8.5x. We maintain our Buy rating.

Miss led by higher opex in 4QFY21

* Net oil/gas sales were in line with our estimates at 0.70mmt/0.56bcm (- 6%/+5% YoY) in 4QFY21. EBITDA came in lower than our estimate at INR4.25b (-37% YoY) due to higher opex in 4QFY21. The company disbursed INR9.8b under pay revision to unionized employees. It recognized an exceptional item of INR0.7b as expense/losses to control the Baghjan blowout. PAT stood at INR8.5b (-8% YoY). Adjusted PAT stood at INR9.2b.

* In FY21, EBITDA stood at INR12.7b (down 71% YoY due to higher other expenditure). PAT declined by 33% YoY to INR17.4b (adjusted PAT fell 15% to INR21.9b). It paid INR11.6b under the Vivad se Vishwas scheme. Crude oil prices were lower in FY21, impacting realization, which stood at USD44.3/bbl (v/s USD60.8 in FY20). Oil/gas sales fell 6% YoY to 2.88mmt/2.27bcm in FY21.

* OINL acquired additional 54.16% stake (thus increasing its stake to 80.16%) in the Numaligarh Refinery (NRL) for a total cash consideration of INR87b.

Capex guidance for FY22 and NRL

* Capex guidance for FY22 is INR41b, which includes exploration and survey expenditure of INR4-5b, total exploration expense of INR24-25b, and the remainder is investment in Mozambique and other infrastructure.

* NRL expansion capex is estimated at INR220b, which has been approved by the Cabinet in FY21 (work orders and other activities have started; commissioning expected by CY24). There are some refinery reconfiguration plans as well. These are yet to be approved by the government. Post approval, capex may rise to INR280b. Capex would be funded in a debt-toequity ratio of 70:30. Equity of 30% would be funded by NRL (through internal accruals) and remaining by its owners. OINL’s contribution would be INR35b.

Valuation and view

* The management expects oil/gas production of ~7.2mntoe over FY24-25 (v/s ~6.2mntoe at present). OINL is also planning on arresting the decline from age old fields through advanced recovery methods. During FY21, it acquired four blocks in OALP Round-V, increasing its acreage by 13%.

* We expect no incremental change in oil and gas production volumes in the near term, apart from YoY revival in production to pre-COVID levels in FY22 (along with a revival in production from the Baghjan field).

* In FY21, OINL recognized provisions of INR10b, of which INR5b was impairment and write-offs. It has already taken significant provisions in US Shale assets last year, while Mozambique and Russia blocks will see provisions in the future.

* The stock trades at 6.3x FY23E EPS of INR24. We use a SoTP-based fair value of 7x FY23E adjusted EPS of INR23.6 and add investments to arrive at our TP of INR175/share. We maintain our Buy rating.

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