Investor's Eye
[September 03, 2013] | | |
| Summary of Contents
STOCK UPDATE Oil India
Recommendation: Buy
Price target: Rs650
Current market price: Rs430 Near-term concerns overshadow fundamentals We attended the analyst meet of Oil India Ltd (OIL) yesterday. Our key takeaways are as follows: -
Performance remained subdued in Q1FY2014: In Q1FY2014, OIL posted a net profit of Rs609.1 crore (a decline of 34.5% year on year [YoY]) on account of a lower sales volume of crude oil due to the continued external environmental issues, and law and order challenges. The crude oil production and sales volume declined by 4.6% YoY and 7.5% YoY respectively. However, the production and sales volume of natural gas reported a growth of 5% YoY and 7.6% YoY respectively. Further, on account of a lower net realisation and a higher than expected other expenses, the operating profit margin (OPM) contracted by over 1,000 basis points to 39%. -
Production guidance maintained for FY2014; high reserve replacement ratio: The management of OIL shared that the external environmental issues, and law and order challenges had a cascading effect on the production of crude oil and the impact of the same could also be reflected in FY2014. However, they believe the production could turn around in FY2015. For FY2014, the management expects the production of crude oil and natural gas to be around 3.95 million metric tonne (MMT) and 2.74 billion cubic metres (BCM) respectively. The company's 2P (proven and probable) reserves of oil and gas as on March 2013 stood at 941 million barrels (MMBBL). The reserve replacement ratio (RRR) of the company has also remained consistently over one in the last five years, indicating a healthy outlook. -
Significant gas volume uptick in long run; through recent acquisition: During our interaction with the management, we found them to be very positive on the recent acquisition of 5% stake in the Mozambique-based asset. OIL and ONGC Videsh Ltd (OVL) have signed a definitive agreement with Videocon Mauritius Energy to acquire 100% of shares in Videocon Mozambique Rovuma 1 Ltd, the company (Videocon) holds 10% interest in the Rovuma Area 1 block in Mozambique. We learned that OIL and OVL will pay $2.47 billion to acquire 10% stake in the asset, where OIL will own 5% stake. The management shared that the Rovuma asset has the potential to become one of the world's largest liquefied natural gas (LNG)-producing hubs with first output expected in 2018. Moreover, the transportation cost of LNG from the Mozambique gas field would be around 0.7/mmbtu (million british thermal units) compared with 2.8/mmbtu from the USA; hence, LNG from the Mozambique gas field would have an advantage on the landed cost front in India. -
Mozambique asset acquisition could be funded through foreign debt: We learned that the acquisition of the asset could take place during the end of FY2014 and OIL needs around $1.24 billion for its effective stake of 5%. In spite of having significant cash on its books, the company plans to raise a foreign debt (from ECB and international bond issue) of around 80-90% of the required fund for the acquisition. It plans to raise the foreign debt because of two reasons, ie (1) the foreign debt could give a natural hedge with dollar denominated realisation and loan payment, and (2) lower cost of borrowings. At the current dollar rate, OIL needs to arrange around Rs8,000 crore funds while it has cash reserves of Rs12,000 crore. -
Capex target maintained; thrust in exploration and development activities: The company plans for a capital expenditure (capex) of around Rs3,600 crore in FY2014 after incurring highest ever capex of Rs2,890 crore in FY2013. We believe a significant chunk of the capex would be towards exploratory and development drilling works. The total capex plan outlay during the 12th Five Year Plan remains at Rs19,000 crore. The major area of capex remains around exploration and development activities. Among its international assets, oil and gas fields in the USA and Venezuela are likely to produce meaningfully in the coming years. Also, the management indicated that they have struck oil in Libya and Gabon. The drilling activities in the three fields in India are likely to start soon.
The company is planning to increase its capex in FY2014. Also, there could be further capex support for the newly acquired asset. Hence, we believe the dividend payout may not be high in FY2014 like it was in FY2013 (50% payout). -
Risk in under-recoveries looks higher in the current environment: We believe with the recent appreciation of the dollar and crude oil prices, the under-recoveries in FY2014 would be much higher than initially expected. On the other hand, the management of OIL shared that they have submitted their recommendations for adopting more transparent subsidy sharing mechanism rather than the current ad hoc mechanism. They believe that if any dynamic and transparent mechanism would be adopted then it would bring clarity on the subsidy sharing. -
Valuation-despite attractive valuation, near-term outlook mired by rising under-recoveries and uncertainty on subsidy burden: Despite the attractive valuations (EV/EBITDA of 3x FY2013 and 2.7x FY2014) and comfort of huge cash on its books, the rising under-recoveries and the uncertainty related to the subsidy sharing burden would continue to act as a drag on the valuation of the upstream public sector companies. The situation could deteriorate further if the crude oil prices increase on account of any adventurous move by the USA or its allies against Syria. However, given the valuation and the comfort of around 6% dividend yield, it is advisable to gradually accumulate the stock at lower levels with a medium- to long-term outlook. Dishman Pharmaceuticals & Chemicals
Recommendation: Buy
Price target: Rs130
Current market price: Rs41 Visit note We recently visited Dishman Pharmaceuticals & Chemicals (Dishman Pharma) and met Sanjay Majmudar (non-executive independent director). He outlined the steps taken to revive growth and also explained about the positive changes that are taking place in the company. Our key takeaways are as follows: -
CRAMS-no more client-specific issues; better growth ahead: Dishman Pharma's contract research and manufacturing services (CRAMS) business witnessed a weak growth during the past couple of years. The weaker growth was mainly due to genericisation of Eprosartan, leading to pricing pressure, and smaller orders linked to AstraZeneca's key molecule, Brilinta. While the supply of Eprosartan continues to give steady business (likely to maintain nearly Rs100 crore revenues per year) with nearly 30% of the operating profit margin (OPM), Brilinta seems to come up with larger orders for the company. It expects revenues of nearly $10 million from the supply of active pharmaceutical ingredients (APIs) for Brilinta by the end of FY2014, which can go up to $20 million in FY2015. -
Margin in vitamin D business to look up: To improve the profitability of its Netherland-based vitamin D business, the company has changed its strategy of sourcing raw material from the local market and instead set up facilities in India for the same. As per the management, the India-based vitamin D facility is currently working at 50% capacity utilisation and is likely to reach 70-80% capacity utilisation by next year. A complete vertical integration of the vitamin D business would improve the OPM by 3% to 4% (current EBIDTA margin at 14.6% in Q1FY2014). -
Hi-Po facility to see gradual ramp-up; three kilo-laboratories to give incremental revenue: Dishman Pharma has started supplying a small quantity of API from its hi-potency (Hi-Po) facility, which currently generates $4-5 million. The facility has the potential to generate $20-25 million in revenues in a couple of years. The company has also set up three kilo-laboratories under this facility with the investments of Rs3 crore, which are expected to generate nearly $4-5 million in revenues. -
Our take-new strategies may change the wind: We observed that multiple growth elements, which were elusive so far, are coming up gradually, which will help improve the financial health of the company. The company seems to have learnt lessons from its past experiences and is actively focusing to derisk various business verticals. For example (1) in the CRAMS business, it is reducing its dependence on a couple of big clients (ie dependence on Abbott and AstraZeneca) and multiple mid-sized clients; (2) the company is relentlessly trying to optimise its under-utilised facilities through different product offerings (supply of generic API and other miscellaneous products from its Chinese facilities); and (3) it has inducted new faces in the management (Mark Griffiths, the chief executive officer [CEO] of Carbogen Amcis, as a global CEO of the establishment, and Arpit J Vyas, managing director and whole-time director) to play active role. However, we are still sceptical towards frequent changes in the management's growth strategies and its ability to deal with the prevailing volatile macro-economic scenario. -
We maintain our estimate and price target: Our estimate is in sync with what the management indicated during our interaction. We maintain our estimate and price target of Rs130 (6x FY2015E earnings per share [EPS]). We have a Buy rating on the stock .
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Regards,
The Sharekhan Research Team | |
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