Oil India's 4Q profit was hit by the ad hoc increase in the share of subsidy of upstream companies. The company has an aggressive E&P capex plan; growth beyond FY13 would depend on that. Despite the subsidy overhang, we continue to prefer upstream PSUs over OMCs on a risk-adjusted basis.
n Strong profits, excluding subsidy. Oil India posted net profit of `5.6bn, down 38% qoq, due to ad hoc increase in subsidy share of upstream companies. In 4Q, its subsidy share was `16.1bn (3QFY11: `5.6bn; 4QFY10: `6.7bn), leading to net realization of US$52.9/bbl after a subsidy discount of US$51.1/bbl. Crude production volume was in line with estimate, but sales volume was 2-3% higher due to drawdown of inventory.
n Aggressive E&P plans ahead. The company had `118bn in cash as of end-FY11, and a capex plan of `32bn for FY12 for the existing assets. Also, it is scouting for an overseas acquisition. Growth beyond FY13 would be driven by these plans.
n Subsidy overhang continues. Upstream companies' FY11 subsidy share was raised to 38.8% (from 33.3%), underlining the ad hoc nature of the subsidy sharing, and continues to be a key overhang on the stock. Our FY12-13e earning is based on upstream companies sharing 33.3% subsidy; we may reduce our estimates by 8-10% if subsidy share is raised to 38.8%.
n Valuation. We continue to prefer upstream PSUs over OMCs on a risk-adjusted basis; we view them as safe de-regulation plays. At current market price, the stock trades at 9.2x FY12e EPS.
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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