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We upgrade Oil India (OIL) to BUY from Add on attractive valuation and strong production outlook, retaining our FY27-29E earnings and TP of Rs575 (Jun27E). OIL’s 1QFY27 SA revenue was largely in line, with crude production a 3% beat, while gas was 5% lower. EBITDA at Rs40.8bn was a 4% beat on lower production costs/statutory levies, while PAT of Rs28.7bn was a 24% beat, largely driven by higher other income. Crude production rose 11% yoy to 0.95mmt, with the current run-rate higher at ~11ktpd; the management expects ~1mmt output each in 2Q-4Q, implying FY27 production of +3.95- 4mmt, and targets 4.2mmtpa by FY29. Gas output fell 8% yoy to 0.76bcm, due to downstream shutdowns/seasonality. However, evacuation bottlenecks are expected to ease by CY27-end, enabling 3.5-4mmscmd of incremental volumes from 1QCY28, while NRL expansion would add ~1.5mmscmd by 3QFY28. 200mtr of DNPL-IGGL connectivity is pending, after which the national grid would be linked in 2-3 months. NRL reported robust GRMs despite windfall taxes and lower excise duty. The expansion is on track for completion by Mar-27, with utilization to ramp up to 75% by FY28-end. OIL targets 100 wells in FY27, with drilling to rise 10% annually, with increasing focus on deepwater. We factor in $85/80 crude in FY27/28E; material decline in crude prices remains a key risk.

Results highlights

OIL’s crude sales-to-production ratio declined to 96% vs 98% qoq, while gas was slightly higher at 81%. Crude realization for 1Q stood at $98.7/bbl (2% miss), while gas realization was 9% higher qoq at ~$7.4/mmbtu (in line). Employee costs fell 8% yoy/12% qoq to Rs4.3bn (14% below estimate), while other expenses were down 38% qoq to Rs13.0bn (5% below estimate) on lower contract costs and provisions. NRL’s EBITDA/APAT of Rs18.9bn/14.1bn was up 33%/44% qoq, largely supported by stronger GRMs, with reported basic GRM higher at $36.0/bbl vs $21.2/bbl in 4Q. Other income of Rs5.2bn (up 3x yoy) was higher than the Rs1.8bn we estimated, largely owing to exceptional dividend income from Singapore/Russia. SA DD&A of Rs6.2bn (flat qoq) was 15% below estimate, on lower depreciation.

Management KTAs

The FY28 gas production target is 3.8bcm, with all new gas qualifying as NWG. OIL is focused on well intervention, optimization, and workovers under a more integrated approach. In 1Q NEEPCO cut gas usage amid higher prices and BCPL faced financial issues, with 30 gas wells now shut due to lower offtake. DNPL is now a common carrier, while IGGL DFL should be ready by FY28-end. The Vijayapuram-4 well in Andaman is slated for drilling in Dec-26. Deepwater drilling would commence with rigs tendered for Jul-27/Mar-28. Post-expansion, NRL opex should decline to $3.5/bbl from $4-4.5/bbl, while PNCPL is targeted for commissioning by Dec-26.

Valuation

We value both OIL and NRL using a DCF methodology, with an implied target PER of 8.5x Jun28E consolidated EPS. We lower our WACC estimate to 11.0%/9.7%, for OIL/ NRL. Key risks: Adverse oil and gas prices, policy issues, local tensions, cost overruns, outages, dry holes.

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