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Earnings hit by higher provision and other opex

Oil India’s 1QFY23 standalone EBITDA was INR 26.4bn, lower than JMFe/consensus of INR 29.7bn/ INR 30.6bn due to higher: a) provision for potential dry well write-off; and b) other opex. Crude sales volume was 1% higher than JMFe at 0.76mmt (up 4.2% QoQ and up 5.8% YoY) while crude realisation was in line at USD 108.6/bbl. However, gas sales volume was 5% below JMFe at 0.6bcm (though production was only 1% below JMFe) while domestic gas realisation was largely in line at USD 6.1/mmbtu. We maintain BUY rating (revised TP of INR 265) as CMP is discounting only ~USD 50/bbl of net crude realisation while our TP is based on FY24 net crude realisation of USD65/bbl; every USD5/bbl change in net crude realisation results in our EPS and valuation change by ~14%. The company is also a key beneficiary of the higher domestic gas price in FY23 given sustained high global gas prices. At CMP, Oil India is trading at 5.1x FY24E EPS and 0.5x FY24E BV (vs. 3-year average of ~0.8x).

* EBITDA below estimate due to higher provisions and other expenses: Oil India’s 1QFY23 standalone EBITDA was INR 26.4bn, lower than JMFe/consensus of INR 29.7bn/ INR 30.6bn due to higher other expense on account of: a) higher provision for potential dry well write-off (at INR 3.9bn in 1QFY23 vs. average quarterly run-rate of ~INR 2.5bn) while actual dry-well write off was steady at INR 0.5bn; and b) higher insurance, rent, CSR, sundry expense etc. (at INR 3.2bn in 1QFY23 vs. average quarterly run-rate of ~INR 1bn). As per the accounting policy, Oil India first creates provision on initial indication of well not producing; and after regulatory approval it classifies it under dry well write-off. Hence, PAT was also lower at INR 15.6bn vs. JMFe/consensus of INR 20.6bn/ INR 19.7bn; this was partly due to lower other income.

* Crude sales volume slightly higher while gas sales volume 5% below estimate; both crude and gas realisation in line: In 1QFY23, crude sales volume was 1% higher than JMFe at 0.764mmt (up 4.2% QoQ and up 5.8% YoY) while crude realisation was in line at USD 108.6/bbl (linked to Brent price). However, gas sales volume was 5% below JMFe at 0.6bcm (though production was only 1% below JMFe) while domestic gas realisation was largely in line at USD 6.1/mmbtu

* Maintain BUY as Oil India as CMP discounting only ~USD 50/bbl of net crude realisation: We have cut our FY23-24 EBITDA by 3-5% to account for 1QFY23 results and moderation in refining margin assumption for NRL (given the decline in regional refining margin); we have revised our TP to INR 265/share (from INR 280). We maintain BUY rating on Oil India as CMP is discounting only ~USD 50/bbl of net crude realisation while our TP is based on FY24 net crude realisation of USD65/bbl. Every USD5/bbl change in net crude realisation results in our EPS and valuation change by ~14% - please refer Exhibit 6 for valuation sensitivity to crude realisation. Further, Oil India is also a key beneficiary of the sharp jump in domestic gas price given the spike in global gas prices. At CMP, Oil India is trading at 5.1x FY24E EPS and 0.5x FY24E BV (vs. 3-year average of ~0.8x).

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