Motilal Oswal Recommends Buying Oil India Stock with Target Price of ₹720

Motilal Oswal is positive about Oil India (OINL) and has given a “Buy” rating on the stock, with a target price of ₹720, as per their report dated October 9, 2024.

Oil India’s Stock Outlook

• Oil India’s stock price has fallen by 22% in the last five weeks due to weak crude oil prices. However, Motilal Oswal continues to recommend buying the stock, highlighting several reasons:

1. The company’s standalone business, which excludes investments and the Numaligarh Refinery stake, is trading at a low price-to-earnings ratio (7x FY27E P/E), which they believe is cheap.
2. Oil India has strong growth prospects with production expected to grow by 9% annually from FY24 to FY27, which will help protect against lower oil and gas prices.
3. The expansion projects for the Indradhanush gas grid and the Numaligarh refinery are on track and will create more value in the future.

Even in a scenario where crude oil prices drop to $60 per barrel and gas prices fall to $6 per mmbtu, Motilal Oswal’s target price would only fall slightly to ₹563 per share, meaning the stock has limited downside risk from its current price.

Stock Valuation

• Oil India’s current market price of ₹574 per share implies that its standalone business is trading at about 7x its expected FY27 earnings, which is considered inexpensive. At the current price, the stock offers a dividend yield of 2.9% for FY26 and 3.2% for FY27.
• If Oil India’s investment in the Numaligarh Refinery is valued at 2.5x its FY24 book value, and its investment in Indian Oil Corporation (IOCL) is valued at ₹225 per share, Oil India’s standalone FY27 P/E would be even lower, at 6.6x.

Strong Production Growth

• Oil India’s production of oil and gas is projected to reach 3.9 million metric tons (mmt) and 4.5 billion cubic meters (bcm) by FY27, with growth rates of 5% for oil and 12% for gas from FY24 to FY27.
• The company plans to drill 78 new wells in FY25 and 100 wells in both FY26 and FY27 to boost long-term production. The management has set a target of increasing total production from 6.5 million metric tons of oil equivalent (mmtoe) in FY24 to 9 mmtoe by FY26.

Expansion Projects to Boost Demand

• Oil India’s growth in the past was limited by low demand in the North East region, but new projects like the Indradhanush gas grid (IGGL) will open new demand opportunities. Gas consumption at the Numaligarh Refinery is also expected to rise as its capacity expands from 3 million metric tons per year (mmtpa) to 9 mmtpa.
• The completion of the IGGL project will help gas distribution companies expand their networks across North Eastern states, creating additional demand for 3-3.5 bcm of gas. Once the Urja Ganga pipeline is connected with IGGL, gas from the North East can be transported to other parts of India, opening up new markets.

Key Projects and Risks

• Oil India’s management expects the first phase of the IGGL project to be completed by the fourth quarter of FY25, with the second phase finished by March 2025 and the third phase by March 2026.
• While falling crude oil prices pose a risk to Oil India’s earnings, Motilal Oswal’s target price is based on assumptions of crude prices at $75 per barrel and gas prices at $6.75-$7 per mmbtu for FY26 and FY27. If oil prices fall to $60 per barrel, Oil India’s estimated earnings would decline by about 25%-27%, and the stock’s target price would drop to ₹563 per share.

Final Valuation and Conclusion

• Oil India has strong production growth prospects, with new technologies and well-drilling activities contributing to this growth. The expansion of the Numaligarh Refinery is also expected to be completed by December 2025, driving further growth.
• Motilal Oswal remains confident in its “Buy” recommendation, valuing Oil India at 1.5 times its FY27 estimated price-to-book ratio. The stock is currently trading at a 10.3x price-to-earnings ratio for FY27 and a 7.3x enterprise value-to-EBITDA ratio. Based on their analysis, the stock’s fair value is ₹720 per share, reaffirming their recommendation to buy.