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Upside risk on volumes key to sustaining valuations

* Oil India (OINL)’s 1QFY25 EBITDA came in line at INR24.7b (up 6% YoY), due to 12%/24% YoY growth in oil/gas sales and a healthy net oil realization of USD74.3/bbl. OINL’s oil/gas production stood at 0.87mmt/0.82bcm, up 6%/9.8% YoY, respectively. However, reported PAT was 20% below our estimate at INR14.7b, due to lower-than-expected other income.

* In the 1Q Earnings Call, Oil India (OINL) management reiterated its target of increasing production from 6.5mmtoe in FY24 to 9mmtoe by FY26. Oil production is expected to ramp up from 3.4mmt in FY24 to 3.8mmt and more than 4mmt in FY25/FY26, while gas production is likely to be 5bcm by FY26. In contrast, we build in oil and gas production of 3.7mmt and 4.2bcm in FY26, respectively. FY25 capex guidance was INR69b. Numaligarh refinery has achieved 65% physical completion and is slated to start in Dec’25. Construction of the INR72b PP project (360 KTA capacity) at NRL will begin in 2QFY25.

* Other key takeaways of the earnings call were:

* OINL plans to drill 78 wells in FY25 and 100 wells in FY26/FY27;

* Utilization of the expanded capacity at NRL will be ~60%/~100% in 4QFY26/ FY27; and

* As of 30 Jun’24, OINL’s SA debt amounted to INR113b, while NRL’s debt stood at INR95b.

* After a strong run-up, OINL now trades at 11.7x FY26E standalone P/E and 1.9x P/B. Our oil and gas production assumptions continue to trail management guidance. Should the company achieve production guidance, there will be an upside risk to our/street estimates. We believe that building an exploration and development pipeline is instrumental in sustaining volume growth in the medium to long term, especially beyond FY26. We raise our TP to INR740/share as we build in oil and gas production of 3.7mmt and 4.2bcm in FY26, respectively. We value the standalone business at 10x FY26E P/E, NRL stake at 2.5x FY24 P/B, and include the value of equity invested to date in NRL capacity expansion.

Reiterate BUY. EBITDA in line; strong operational performance continues

* Oil India’s 1QFY25 EBITDA was in line with our estimates, though PAT was 20% below our expectations, mainly due to lower other income. 1QFY25 witnessed oil and gas sales rising 12% and 24% YoY, respectively. Oil and gas production in 1QFY25 rose 6% and 10% YoY, respectively, which too we believe was a robust performance.

* Revenue was in line with our estimate at INR58.4b (+26% YoY).

* Oil sales came in at 0.83mmt (our estimate of 0.86mmt, +12% YoY). Gas sales stood at 0.68bcm (our estimate of 0.67bcm, +24% YoY).

* Oil realization, net of windfall tax, was USD74.3/bbl (our estimate of USD73/bbl).

* EBITDA came in-line with our estimate at INR24.7b (+6% YoY).

* However, reported PAT was 20% below our estimate at INR14.7b (est. INR18.2b, -9% YoY), due to lower-than-expected other income.

* Numaligarh refinery performance:

* PBT stood at INR6b (vs. loss before tax of INR1b during 1QFY24), driven by high crude throughput (764tmt) and distillate yield (87.2%) QoQ.

* GRM stood at ~USD6.4/bbl in 1QFY25 (vs. negative GRM of USD15.6/bbl in 1QFY24).

Valuation and view

* Production growth guidance remained robust, with drilling activity and development wells in old areas contributing to this growth. OINL is also applying new technologies to grow production. Capacity expansion for NRL (from 3mmt to 9mmt) would also be completed by Dec’25, which would drive further growth.

* OINL remains a strong conviction at 1.9x FY26E P/B (standalone) valuation. It is a unique play to benefit from the strong multi-year uptrend in both upstream and refining. The stock currently trades at a P/E multiple of 11.6x FY26E EPS and 8.6x FY26E EV/EBITDA. We value the stock at 10x FY26E standalone adj. EPS and add investments to arrive at our TP of INR740. Reiterate BUY.

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