Neutral Oil India Ltd For Target Rs.440 by Motilal Oswal Financial Services Ltd
Weak execution dents growth outlook
Oil India’s (OINL) 1QFY26 revenue came in line with our estimate at INR50b, as both oil and gas sales stood in line with our estimates. Oil realization was USD66.2/bbl. EBITDA came in 26% below estimate at INR16.1b (-35% YoY), as other expenses came in above our estimate. EBITDA, adjusted for impairment of INR3.1b, stood 12% below estimate. Reported PAT was 34% below our estimate at INR8.1b, as lower-than-expected finance costs were offset by higher-thanexpected DDA.
* Upstream has remained our least preferred sector since Jun’24: We have been bearish on crude oil prices since Jun’24 when Brent oil prices were USD83/bbl amid record-high OPEC+ spare capacity (Oil price outlook: Has the crude oil party peaked?). Since then, Brent prices have corrected 23%, while OINL stock price has corrected 16%. In the past few quarters, strong volume growth guidance by OINL, after years of under-investment and sluggish volume trajectory, has fueled investor enthusiasm in the stock. While we have had a BUY rating on OINL, upstream has been our least preferred sector (Upstream remains our relatively less preferred sector despite cheap valuations).
* In the past few quarters, OINL has struggled to raise production/sales, with no YoY production/sales growth in 1Q.
* Cut FY26/FY27 SA earnings estimates by 7%/6%; higher gas realization argument under pressure: Given continued weak volume growth, we cut our FY26/FY27 SA EPS estimates for OINL by 7%/6%. While we like increased exploration intensity (which is key to building a robust development pipeline), we believe this will likely be accompanied by higher dry well write-offs, which will weigh on earnings.
* Benefits of increased new well gas proportion for OINL will be mostly offset by subdued gas realization amid a weaker crude oil price outlook.
* On our revised estimates, OINL is estimated to report SA PAT CAGR of -4% over FY25-27. Given a sluggish earnings outlook, we cut FY27 PE multiple to 6x. Our SA PAT estimates for OINL are 17%/23% below Street estimates for FY26/FY27.
* Oil prices may remain under pressure amid record-high OPEC+ spare capacity: Current OPEC+ spare capacity is 4.6mb/d, which is at a multi-year high. OPEC+ has already accelerated the unwinding of 2.2mb/d spare capacity in a bid to increase its market share. Further, tariff-related uncertainty can lead to soft world GDP growth, and therefore oil demand may remain under continued pressure.
* Lastly, a weaker oil price outlook also raises risks of further impairments, especially for OINL’s overseas assets.
* Key risks/monitorables to watch out for:
* Physical completion of Numaligarh refinery expansion is expected in Dec’25 and a potentially delayed start can impact our valuation.
* While we are building in a crude oil price of USD65/bbl in FY26/27, downside risks to crude oil price remain elevated.
* Cut to Street earnings estimates as OINL is guiding for 11% volume CAGR over FY25-27, which we believe is aggressive.
* Considering the above factors, we downgrade OINL to Neutral. We arrive at our SoTP-based TP of INR440 as we model a CAGR of 2%/4% in oil/gas production volume over FY25-27.
Other key takeaways from the conference call
* The company has set oil/gas production targets of 3.7mmt/3.65bcm for FY26 and 3.95mmt/4.31bcm for FY27.
* NRL planned capex for FY26/FY27: INR91.3b/INR73b – largely for refinery and petchem unit.
* OINL and ONGC have signed a JOA on 12th Aug’25 for three OALP Round IX exploration blocks totaling ~10,965 sq. km, including ultra-deepwater and challenging onshore terrains.
* OINL has recovered 95% of its investment in Russia
Result below our est. due to higher-than-estimated opex
* OINL’s revenue came in line with our estimate at INR50b, as:
* Oil sales came in line with our estimate at 0.82mmt. Gas sales stood 6% above our estimate of 0.7bcm.
* Oil/gas production was flat YoY at 853mmt/827bcm in 1Q.
* Oil realization was USD66.2/bbl (our estimate of USD65.1/bbl).
* EBITDA was 26% below estimate at INR16.1b (-35% YoY), as other expenses came in above our estimate.
* During the quarter, OINL exited from two overseas blocks in Bangladesh and booked impairment expenses of INR3.1b. EBITDA, adjusted for impairment expenses, stood 12% below our estimate.
* Reported PAT was 34% below our estimate at INR8.1b, as lower-than-expected finance costs were offset by higher-than-expected DDA.
* Numaligarh refinery’s 1Q performance:
* PAT stood at INR4.9b (vs. PAT of INR4.3b during 1QFY25), as GRM stood at USD5/bbl.
* Crude throughput stood at 799.3tmt (up 5% YoY), and distillate yield was at 85.4% (vs. 87.2% in 1QFY25).
* During the quarter, OINL paid INR5.5b toward the fourth and final call for equity shares of NRL.
Valuation and view
* In the past few quarters, OINL has struggled to raise production/sales, with no production/sales growth YoY of 1Q. Further, we like the increased exploration intensity (which is key to building a robust development pipeline), though we believe this will likely be accompanied by higher dry well write-offs, which will weigh on earnings. Also, the benefits of increased new well gas proportion for OINL will be mostly offset by subdued gas realization amid a weaker crude oil price outlook.
* Given continued weak volume growth, we cut our FY26/FY27 SA EPS estimates for OINL by 7%/6%. On our revised estimates, OINL will report SA PAT CAGR of - 4% over FY25-27. Given a sluggish earnings outlook, we cut FY27 PE multiple to 6x. Owing to the above factors, we downgrade OINL to Neutral. We arrive at our SoTP-based TP of INR440 as we model a CAGR of 2%/4% in oil/gas production volume growth over FY25-27.
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