Emkay Global has issued a BUY rating for Oil India Ltd. with a revised target price of Rs 665, suggesting an upside potential of around 26% from its current market price of Rs 525. Oil India’s Q2 FY25 results saw a moderate decline in EBITDA due to increased provisions and subdued production. However, improved earnings from associate investments and lower taxes mitigated the impact on PAT. Emkay highlights that while Oil India’s near-term output faces challenges, strategic investments in refinery expansions and gas infrastructure position the company for sustainable growth.

Key Financial Highlights

Revenue and Profit Growth: Oil India reported standalone revenue of Rs 55.2 billion in Q2 FY25, a 4% decrease compared to Emkay’s estimates, mainly due to lower production and sales. Adjusted PAT was Rs 18.3 billion, a slight 6% miss but in line with consensus estimates due to increased other income.
Decline in EBITDA Margin: EBITDA for the quarter stood at Rs 21.8 billion, reflecting a 39.6% margin. The margin missed expectations due to higher provisions and write-offs, particularly from dry wells and other operational costs.

Dividend Declaration: Oil India declared an interim dividend of Rs 3 per share, with the ex-dividend date set for November 14, 2024.

Operational Performance and Production Metrics

Crude Oil and Gas Production: Oil production increased by 5% year-over-year to 0.88 million metric tonnes (MMT), although gas production saw a slight decline due to offtake issues. Oil India expects steady output growth of 4-5% in the coming quarters.
NRL Performance: The Numaligarh Refinery Limited (NRL), a subsidiary, reported an EBITDA decline of 46% quarter-over-quarter, attributed to inventory losses and a basic gross refining margin (GRM) decrease to USD 2.3 per barrel. NRL’s capacity expansion project is now 70% complete, and once fully operational, it is expected to enhance both output and profitability.

Expansion and Capital Expenditure Initiatives

Refinery and Gas Infrastructure Projects: The NRL expansion to a 6 MMT per annum capacity is expected to be completed by December 2025, with 70% of the planned Rs 280 billion project cost already invested. Oil India also plans to expand its gas infrastructure, including the IGGL pipeline, which will connect to the national grid by December 2024.
Ongoing Investments and Capex Plans: For FY25, Oil India has earmarked a capex of Rs 60-70 billion, primarily targeting upstream projects, seismic surveys, and new drilling initiatives. Expansion of the DNPL pipeline, which is crucial for meeting increased gas demand, is projected to be completed by March 2026.

Valuation and Investment Perspective

Attractive Valuation Amid Uncertain Short-Term Outlook: Oil India’s stock currently trades at 10.3x FY25E P/E and 8.5x EV/EBITDA, presenting an attractive entry point for long-term investors. Emkay’s revised target price of Rs 665 incorporates a 5% decrease, reflecting recent volatility in crude prices and NRL’s GRM fluctuations.
Valuation Approach: Emkay values Oil India on a sum-of-the-parts (SOTP) basis, combining discounted cash flow (DCF) analysis for standalone operations and NRL, with a target price-to-book value for its investments. The company’s standalone business is valued at Rs 435 per share, while the NRL stake contributes Rs 156 per share to the target price.

Risk Factors and Market Considerations

Dependency on Crude Oil and Gas Prices: Oil India’s profitability is sensitive to fluctuations in global crude oil and gas prices. Any adverse movement could impact earnings significantly.
Project Delays and Cost Overruns: Oil India faces risks from potential delays or cost escalations in its ongoing refinery and gas pipeline projects. Any delays could impact production timelines and profitability projections.

Conclusion and Investment Recommendation

Emkay Global’s *BUY* recommendation for Oil India underscores the company's strategic expansion in refining and gas infrastructure, which is expected to drive future growth. While current margins face pressure from provisions and lower GRMs, Oil India’s long-term growth prospects remain intact due to its planned expansions and increased production efficiency.