We maintain ‘outperform’ on Oil India (OIL) with a revised target price of R773 per share (earlier R670) based on 9x FY16e P/E (from 10x) post lower subsidy assumptions. We think implementation of the transparent sharing mechanism will be a stock re-rating catalyst. Onshore royalty uncertainty is a major concern, as it affects OIL’s entire crude volume and could reduce FY16e earnings by 14%. However, the earnings risk on this count reduces with expected lower subsidy per barrel and gets offset by attractive valuation of 7.3x FY16e P/E.
We have revised FY15e/16e EPS by 11%/28% to factor in lower subsidy at $45/34 per barrel (from $56 per barrel). The FY15-17e estimates factor in upstream sharing of 60% of gross under-recoveries for OIL, more conservative than the graded realisation using the Kirit Parikh formula. We trim gas realisation to $5.6 per mmBtu for FY16e/17e after the government announcement.
Our sensitivity analysis across crude price levels of $80-120 per barrel suggests OIL’s FY16e earnings are more leveraged to lower oil subsidy discounts than ONGC’s and more resilient at lower oil prices. OIL’s mean EPS in the analysis was in line with its base-case FY16e EPS of R85.9.
Production will likely recover after a sluggish FY14 in which strikes hurt volumes.