Declining Hydrocarbon Demand And Rising Costs Will Burden Operations

Key Takeaways

• Weak diversification and fossil fuel dependency expose Oil India to declining demand, regulatory pressures, and narrowing revenue streams.
  
• Escalating compliance, financing, and production costs threaten profitability, margins, and the long-term sustainability of growth initiatives.
  
• Ongoing capacity expansions, investment in renewables, and strong international earnings position Oil India for enhanced growth, sustainability, and improved profitability.

Catalysts

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

• The accelerated global transition toward renewable energy sources, combined with India's commitment to net zero by 2070, will steadily erode demand for oil and gas, resulting in long-term pressure on Oil India's revenues and top-line growth prospects even as large-scale CapEx is being allocated to fossil fuel projects.
  
• Stringent environmental regulations and the introduction of carbon pricing in major global economies will increase compliance liabilities and operational costs for Oil India, further compressing net margins and profitability over time.
  
• Oil India's core business faces a structural risk due to inadequate diversification into non-fossil segments, leaving the company overexposed to declining hydrocarbon demand and jeopardizing earnings stability and future revenue streams.
  
• Aging and declining domestic oil fields are expected to drive up production costs and lead to ongoing declines in output, undercutting both operating margins and sustained earnings despite short-term production ramp-up efforts in select fields.
  
• Heightening ESG requirements and the risk of restricted access to international capital markets will result in higher financing costs for future projects, constraining the company's ability to fund growth initiatives and impacting long-term earnings potential.

Oil India Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Oil India compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Oil India's revenue will decrease by 11.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 20.3% today to 31.0% in 3 years time.
• The bearish analysts expect earnings to reach ₹70.8 billion (and earnings per share of ₹43.51) by about August 2028, up from ₹65.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, up from 10.1x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 17.6x.
• 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 13.67%, as per the Simply Wall St company report.

Oil India Future Earnings Per Share Growth

Risks

• Oil India is undergoing significant capacity expansions in upstream production and downstream refining, including the commissioning of the expanded Numaligarh Refinery and major pipeline projects, which are on track to boost crude and gas output as well as refining throughput, supporting long-term revenue growth.
  
• The company's forward guidance sets out a clear production ramp-up in both crude oil and natural gas from financial year 2026 to 2028, implying increased sales volumes and a positive outlook for operating cash flows and profit generation.
  
• Substantial ongoing and planned capital expenditures, including in new upstream wells, refinery expansion, and pipeline connectivity, are accompanied by detailed execution timelines and are expected to translate into higher asset utilization and improved top-line results.
  
• Oil India is diversifying into renewable energy, with over ₹25,000 crores earmarked for green projects such as solar plants, compressed biogas, and a hydrogen pilot; these investments aim to position the company for long-term sustainability and could help stabilize or improve profit margins by reducing reliance on fossil fuel revenues.
  
• The company's international investments, notably in Russian assets, are generating robust dividend inflows that have already recovered the initial investment amounts in many cases, contributing materially to consolidated earnings and strengthening group net profit, which could support future EPS and shareholder returns.

Valuation

• The assumed bearish price target for Oil India is ₹305.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Oil India's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 ₹305.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹228.1 billion, earnings will come to ₹70.8 billion, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 13.7%.
• Given the current share price of ₹408.0, the bearish analyst price target of ₹305.0 is 33.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.