From Equity Master....
Oil India Limited
Company background:
Business
Oil India is the second largest national oil and gas company in India after ONGC as measured by total proved plus probable (2P) oil and natural gas reserves and production. During FY09, The company's production amounted to around 25 m barrels of oil and around 2.3 bn cubic meters of natural gas. That amounted to around 10.4% and 7% of India's total production of crude oil and natural gas, respectively.
All of the company's oil reserves, as well as 94% of its natural gas reserves, are located onshore in the Upper Assam basin in Assam and Arunachal Pradesh. It also has natural gas reserves in the Jaisalmer basin in Rajasthan. As of March 31, 2009, the company's 2P crude oil reserves were around 575 m barrels and 2P natural gas reserves were around 63 bn cubic meters. It also has 40% participating interest in the crude oil reserves in the Kharsang fields in the Assam-Arakan basin in Arunachal Pradesh.
Oil India also owns and operates a 1,157 kilometer cross-country crude oil pipeline. It also has interest in downstream activities through a 26% equity stake in NRL (Numaligarh Refinery Ltd), a 10% equity stake in BPCL and a 23% equity stake in DNP (Duliajan Numaligarh Pipeline) Limited.
Key management personnel
Mr. N.M. Borah, 57 years, is the Chairman and Managing Director of Oil India. He holds a bachelor's degree in petroleum engineering from the Indian School of Mines, Dhanbad and also holds a post graduate diploma in petroleum prospecting and reservoir evaluation from the Norwegian Institute of Technology, Trondheim, Norway. He has over 35 years of experience in the oil and gas exploration and production industry. He also currently holds the additional charge of Director (Operations) of Oil India.
Mr. T.K. Ananth Kumar, aged 56 years, is Oil India's Director (Finance). He holds a bachelor's degree in commerce from Osmania University and is also a Chartered Accountant. He has 28 years of experience in the oil and petroleum industry. Prior to joining Oil India, he was the Director (Finance) of NRL for over three years and was with HPCL for 22 years. At Oil India, he is in charge of financial management and the strategic management of the Company.
Mr. B.N. Talukdar, aged 54 years, is Oil India's Director (Exploration and Development). He holds a bachelor's degree in technology (petroleum engineering) from the Indian School of Mines, Dhanbad. He has over 32 years of experience in the oil and petroleum industry. He heads all exploration, development, reservoir management and well construction management activities in the South Bank region.
Reasons to apply
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Existing high quality reserves: Upstream oil and gas is a risky business and there is no certainty that exploration activities will result in discoveries. Hence, existing reserves provide a degree of certainty for the investor.
As of March 31, 2009, the company's proved plus probable (2P) crude oil reserves were around 575 m barrels and 2P natural gas reserves were around 63 bn cubic meters. All of the company's oil reserves, as well as 94% of its natural gas reserves, are located onshore in the Upper Assam basin in Assam and Arunachal Pradesh. This basin has been in continuous production since 1889. All of Oil India's reserves consist of sweet crude.
Low finding and lifting costs: Oil India's reserves are located onshore and it has infrastructure it has installed over decades. As a result, it has low finding and lifting costs when compared to new players who have to explore in extremely difficult terrains. Moreover, it benefits from low interest expense and relatively high use of in-house services in place of more expensive third-party contractors.
Experience in handling ageing fields: As of now, oil and natural gas production in India is derived mainly from ageing and depleting fields. As an experienced player, Oil India uses oil recovery techniques at an earlier stage in the life of its oil fields to achieve maximum recovery from its reserves. As a result, the company has maintained production rates in its fields in the last three decades.
Exploration area in producing basins: An upstream oil and gas company must explore for additional reserves as it goes along producing from existing ones. Hence, the location and size of the exploration area that a company has determines the prospect for growth in reserves for the company. Oil India's petroleum exploratory licenses (PELs) cover acreage in the Upper Assam and Assam-Arakan basin, the Krishna-Godavari basin and the Rajasthan basin. All these basins have commercial production or known accumulation of hydrocarbons.
Reasons not to apply
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Valuations not attractive: Instead of applying for Oil India's IPO, the investor has the choice of buying the shares of its peer ONGC from the secondary market. Hence, we must compare their relative valuations. On comparing Oil India with ONGC, it becomes clear that the issue is not really cheap at around Rs 1,943 m per million tonne of oil equivalent (MTOE) as compared to ONGC's Rs 1,874 m per MTOE. As such, we believe the Oil India IPO does not offer any margin of safety in terms of valuations at the upper end of the offer price.
Not aggressive in acquiring exploration area: Oil India has not been as aggressive in obtaining exploration area as its other upstream counterparts. It has pursued a selective bidding strategy in the past seven rounds of NELP auctions in India and intends to continue doing so in the future rounds. As of June 30, 2009 Oil India holds petroleum exploratory licenses (PELs) as operator covering an area of around 26,660 square kilometers. It has a participating interest as non-operator covering an area of 88,205 square kilometers. It also has participating interest in 41,273 square kilometers of exploration acreages in Egypt, Gabon, Iran, Libya, Nigeria, Timor Leste and Yemen.
As a result, increase in Oil Inida's reserves might grow at a slower rate as compared to other upstream companies in the future.
Financial Performance
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Profit & Loss Data (Rs m) FY05 FY06 FY07 FY08 FY09
Net sales 39,276 56,613 54,765 61,185 72,007
% Growth 44.1% -3.3% 11.7% 17.7%
Operating expenditure 22,415 30,049 32,485 37,372 43,607
EBIDTA 16,861 26,564 22,280 23,812 28,400
EBIDTA margin (%) 42.9% 46.9% 40.7% 38.9% 39.4%
Other income 1,904 3,639 5,335 6,770 9,372
Depreciation 2,295 3,314 2,595 3,093 3,768
Interest 167 162 140 344 87
Other income as % of sales 4.85% 6.43% 9.74% 11.06% 13.02%
Profit before tax 16,304 26,728 24,881 27,145 33,916
Tax 5,615 9,845 8,426 9,245 12,253
Effective tax rate 34% 37% 34% 34% 36%
Profit after tax after adjustments 10,808 18,371 15,404 17,796 22,309
% Growth 70.0% -16.2% 15.5% 25.4%
Net profit margins (%) 27.5% 32.5% 28.1% 29.1% 31.0%
Fully diluted EPS (Rs) * 44.9 76.4 64.0 74.0 92.8
Balance Sheet Data (Rs m)
Equity 46,620 59,216 68,200 79,046 93,870
Debt/Loans 2,812 2,950 8,140 1,749 565
Debt to equity 0.1 0.0 0.1 0.0 0.0
Return on equity 23.2% 31.0% 22.6% 22.5% 23.8%
Dividend payout 36.0% 35.2% 41.5% 38.7% 34.2%
Concluding remarks
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Oil India has in place reserves with low operating costs. However, the company is not as aggressive as its peers in acquiring exploration licences due to which its growth prospects are comparatively weaker. On comparing Oil India with its peer ONGC, it becomes clear that the issue is not really cheap at around Rs 1,943 m per million tonne of oil equivalent (MTOE) as compared to ONGC's Rs 1,874 m per MTOE.
Oil India's comparative analysis
(FY09 data) Oil India ONGC
Million tonnes of oil equivalent (2P ) 130 1,344
Sales (Rs m) 72,007 1,045,694
Operating margins 39.44% 40.69%
Return on equity 23.80% 22.50%
Valuations*
Market price 1,050 1,178
Price to earnings (based on FY09 EPS) 11.3 12.73
Price to book value (based on FY09 book value) 2.7 2.9
Market capitalisation (Rs bn) 253 2,519
Market cap per MTOE (Rs m) 1,943 1,874
* Valuations and related data for Oil India assumed at a higher offer price of Rs 1,050 per share
Note: 7.9 barrels of crude oil = 1 tonne of equivalent (TOE); 1,125 cubic meters of natural gas = 1 TOE
Source: Oil India IPO prospectus, ONGC's Analyst presentation, Equitymaster Research
We believe the Oil India IPO does not offer any margin of safety in terms of valuations at the upper end of the offer price and hence, is not attractive. As such, we recommend you to ‘Avoid' the IPO.
Zerodha (Trading Account)
RHP
