Oil India's Q2FY19 results (Outperformer) - Stronger realizations drive strong earnings growth

Q2FY19 highlights

• Adjusted PAT of Rs8.6bn, up 33% yoy, with EBITDA of Rs15.2bn growing 47% yoy (IDFCe Rs16.8bn EBITDA, Rs8.4bn PAT).
• Miss vs estimates driven by higher opex, even as oil & gas production was marginally ahead of estimates
• Oil production of 0.86mt, flat yoy, in line. Gas production of 0.73bcm, down 4%, 5% above estimates. LPG production of 8.8 tmt fell 6% yoy but was above est of 8.5 tmt.
• Oil sales of 0.83mt fell 1% yoy marginally above est of 0.82mt – production to sales ratio of 97% vs 99% in Q2FY18. Gas sales of 0.65bcm was up 2% yoy, 7% ahead of est. LPG sales of 8.6tmt (-12% yoy)
• Net realisations- crude at $73.4/bbl up 47/2% yoy/qoq a tad above IDFCe of $73.3/bbl. The increase in line with the 44% yoy increase in Brent crude prices. Blended Gas realisation of Rs7.8/scm was up 32% yoy, ahead of est Rs7.4/scm.

Key positives: yoy growth in net realisations.

Key negatives: Production growth remains muted 

Impact on financials: Revise FY19/20E EPS by +14/12% respectively to factor changes in oil price/production. TP raised to Rs340/sh. 

Valuations & View

While the yoy growth in earnings is a positive driven by higher oil realisations, lack of growth in production remains a concern. As per management, the sales/production ratio should improve over FY20, with our estimates at 1.5% for oil and 2.5% gas production growth for FY20E. With higher net realisations and some production growth profitability should remain healthy over FY19-209E. Current valuations (adjusted for Rs60/sh of IOCL investment value and Rs44 from Tass/Vankor) of 4x FY20E EPS (consol EPS Including share of NRL/BCPL profits, excluding dividend income) underplay the gradual improvement in operating metric and the higher contribution of NRL to group profitability. A higher than expected contribution to subsidy by FY20E (we model US$3/bbl) is a key downside risk to our estimates. Reiterate outperformer.​