Investor's Eye: Update - Oil India (Revised gas price a positive, IOC proposal not so)

 

Investor's Eye [January 13, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK UPDATE Oil India Recommendation: Buy Price target: Rs650 Current market price: Rs482 Revised gas price a positive, IOC proposal not so Revised gas price could positively affect the earnings (could lead to a growth of 8-10%) and valuation (about Rs60 per share) of Oil India Ltd (OIL); every $1 rise in gas price to affect OIL's PAT by 3.5%  The proposal to buy stake in Indian Oil Corporation (IOC) would be negative, given the fundamentals and stock performance of IOC; the proposal could drag OIL's fair value by Rs21 per share On a net basis, the fair value would be positively affected by Rs30-40/share; further, with an impressive dividend yield and healthy RoE, we retain our Buy rating on OIL Valuation: walking the mid path but remains beneficial on a net basis; also available at an attractive dividend yield  We expect the revised gas price to translate into a meaningful earnings growth of around 6-12% (depending upon the quantum of gas price revision). The earnings of OIL could improve by around Rs900 crore in the best case scenario (revised price at $8.4 per mmBtu). With the revised price, our valuation for the gas business could improve by around Rs60/share (based on the discounted cash flow method). On the flipside, to purchase a 5% stake in IOC OIL is likely to shell out around Rs2,500 crore, which is around Rs42 per share. Even if we assign a 50% discount to the assumed investment, on a net basis (on occurrence of both the events), there is a potential to revise the fair value of OIL by Rs30-40 per share. However, we have not revised our price target and await for clarity on the quantum of the price revision and investment in IOC. Moreover, we like the high dividend yield aspect of OIL (yield of 5-6% at the current price), apart from its reasonable valuation of 6-7x price/earnings ratio (FY2015E) and 3x enterprise value/earnings before interest, tax, depreciation and amortisation at the current price. The stock also promises return on equity of around 20% and is available at 1.2x its FY2015E book value. Hence, we retain our Buy rating with a price target of Rs650.  Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards, The Sharekhan Research Team

 

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