Buy Oil India Ltd for the Target Rs.495 By Emkay Global Financial Services Ltd
Higher provisions, lower oil output weigh on earnings
Oil India reported a significant earnings miss in Q2FY26, due to a Rs7.2bn provision in Andaman and a Rs3.6bn forex loss. Standalone adjusted revenue saw a 1% miss on weak oil production owing to the blockade, while EBITDA was over 50% lower at Rs10.5bn due to a jump in expenses. APAT of Rs8.3bn was down 32% QoQ. Crude oil output fell 3.1% YoY, while gas output rose 0.6%. Other income at Rs8.3bn saw a 66% beat, on higher dividend income. NRL posted better numbers, with EBITDA/PAT of Rs9.9bn/7.2bn, up 26%/48% QoQ (ETR was low at 16%), respectively. Reported basic GRM was USD10.6/bbl, with a minor inventory impact. The management highlighted that oil production has normalized. NRL’s expansion is on track, with primary units to be commissioned by Dec-25 and stabilization in the ensuing 2-3 quarters. DNPL has also achieved mechanical completion; commissioning is expected by Apr-26, which should coincide with NRL’s ramp-up and higher gas intake. We cut FY26/27/28E consolidated EPS by 5-7% each, building in lower USD65/bbl Brent and H1 run rate in standalone, although assuming better earnings for NRL, given the jump in diesel cracks. We retain our TP of Rs495 as the cut in standalone value is offset by NRL and IOCL investment. We retain BUY on the stock.
Result highlights
OIL’s crude sales-to-production ratio improved to 98% vs 96% QoQ, while gas was lower at 82% (from 84% QoQ). Crude realization for Q2 stood at USD68.2/bbl (1% beat), while gas realization was steady at ~USD7.0/mmbtu (5% miss). Employee costs grew 16% YoY and 13% QoQ to Rs5.3bn (13% above estimate) on higher gratuity, while other expenses doubled YoY and QoQ to Rs23.0bn (92% above estimate) on elevated provisioning. DD&A rose 9% QoQ to Rs5.8bn, while finance cost rose 13% YoY to Rs2.6bn. Total statutory levies were 2% lower than estimated at Rs12.7bn, mainly on lower royalty. ETR was lower at 21%. The Board declared an interim dividend of Rs3.5.
Management KTAs
In Q2, the economic blockade by an ethnic group led to restricted movement and well closures, with crude output dropping to 8,100mt/d, although the same has normalized now at 9,600mt/d. The revised oil production guidance for FY26 is 3.55mmt, while for FY27/28, it is likely at ~3.75/4.0mmt, respectively. Gas guidance for FY26/27/28 is 3.6/3.8/4.6bcm. NRL’s consumption is currently ~0.92mmscmd, and will rise to 3mmscmd post-expansion. OIL had drilled 18 new wells in Q2, achieving 100% of its drilling target, with 32 wells drilled in H1FY26 (up 28% YoY). OIL would study one of the drilled wells in Andaman; it will drill two more ahead. The results are encouraging, with gas occurrence. FY26 capex target was Rs70bn, of which Rs19.3/17.0/6.5/22.8bn would be for exploration/development/seismic/PPE; 70–75% of this was incurred in H1 at Rs55.6bn.
Valuation
We value OIL on a DCF-based SOTP, comprising standalone and NRL’s numbers; investments are valued at our TP/BV, with a 30% holdco discount. Key risks: Adverse oil and gas prices, policy issues, local tensions, cost overruns, outages, and dry holes.
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