New Petrochemical Capacity At NRL Will Expand Future Product Offerings

Key Takeaways

• Expanded capacity and product diversification at NRL could boost revenue and margins through increased crude processing and higher-value petrochemical products.
  
• Enhanced exploration and production efforts, including reducing gas flaring and targeting high-potential areas, could drive earnings and reserve growth.
  
• Declining oil prices, operational challenges, and development delays pose risks to Oil India's revenue and profitability amidst exploration uncertainties.

Catalysts

Engages in the exploration, development, and production of crude oil and natural gas in India.

• Oil India's ongoing capacity expansion in NRL (Numaligarh Refinery Limited) is at 78% completion, with expectations to operationalize by December 2025. This expansion could significantly increase crude oil processing, thereby boosting future revenue.
  
• The development of petrochemical capacity in NRL, expected to complete by December 2028, could enhance product diversification and increase margins due to higher-value product offerings.
  
• The successful testing of crude oil in the north bank of the Brahmaputra and plans for further exploration and production activities act as catalysts for potential reserve additions and production growth, positively impacting future earnings.
  
• Installation of 11 compressors to reduce gas flaring and connect remote facilities to the gas distribution network could enhance net margins by increasing sellable gas volumes and reducing environmental penalties.
  
• The strategic focus on increasing exploration acreage under the open acreage licensing policy, particularly targeting high-potential areas, sets the stage for new discoveries and production growth, which could lead to significant revenue and earnings upside over the medium term.

Oil India Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Oil India's revenue will decrease by 10.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.5% today to 39.4% in 3 years time.
• Analysts expect earnings to reach ₹92.8 billion (and earnings per share of ₹62.06) by about March 2028, up from ₹73.8 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹111.3 billion in earnings, and the most bearish expecting ₹61.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.5x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 17.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.58%, as per the Simply Wall St company report.

Oil India Future Earnings Per Share Growth

Risks

• Decrease in crude oil price realization from USD 84.1 to USD 73.82 per barrel is a potential risk that could negatively impact Oil India's revenue and net margins.
  
• The sharp fall in Numaligarh Refinery Limited's (NRL) gross refining margin from USD 12.72 to USD 2.10 per barrel for Q3, FY '25, indicates operational challenges and could affect future earnings.
  
• A significant drop in other income, primarily due to lower dividend receipts, suggests potential shortfall in earnings, impacting Oil India's profitability and cash flow.
  
• Exploration and development risks in new areas, such as the deep and ultra-deep offshore waters, could incur high costs and uncertainty in revenue generation if hydrocarbon deposits are not viable.
  
• The delay in infrastructure development, like pipeline authorization and augmentation, limits the ability to ramp up natural gas production and sales, potentially affecting revenue from domestic and international markets.

Valuation

• The analysts have a consensus price target of ₹570.611 for Oil India based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹755.0, and the most bearish reporting a price target of just ₹280.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹235.2 billion, earnings will come to ₹92.8 billion, and it would be trading on a PE ratio of 15.5x, assuming you use a discount rate of 15.6%.
  
• Given the current share price of ₹369.15, the analyst price target of ₹570.61 is 35.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.