>OIL INDIA LIMITED (CITI)

■ Initiate at Hold; TP of Rs1,165 — We initiate coverage of OIL with a Hold (2L) rating and target price of Rs1,165, comprising: (i) Business valued at P/E of 7.5x FY11E core EPS (@$65 net crude) and (ii) Cash at Rs385/share (Mar- 10E). The core P/E is at a 15% discount to ONGC’s current multiple of 9.0x to factor in OIL’s untested exploration track record ex-Assam. At our target, the imputed EV/boe (1P/2P) is US$8.8/4.8 and headline P/E of 9.3x FY11E. All things being equal, we might reconsider our Hold rating and turn more positive at ~Rs1,050.

■ Stable operations, looking for growth — OIL, which has predominantly focused on Northeast Indian onshore blocks, has gradually gained exposure to domestic offshore via NELP blocks as well as abroad. Though the strategic shift to reinvest cash flows from the pre-NELP blocks is in the right direction, it will take time to show results, especially given lack of prior experience.

Initiate at Hold: Coming Out of Its Shell

■ Small in size, but good operating track record — OIL’s 2P reserves at 974 mmboe pegs it at ~1/10th the size of ONGC, though proportion of crude oil at 60% of reserves is higher than ONGC’s 53%. With lifting costs at US$4.6/bbl (FY09), F&D of US$3.7/bbl (FY08), and R/P of ~25 years (on 2P), OIL’s operations are on a solid footing. Though volume growth (boe) of 5% over FY10-12E should remain moderate, it is slightly better than ONGC.

■ Subsidies: what to expect — We assume upstream bears all of petrol/diesel losses. As auto fuels generate +ve margin at our forecast of $60 (FY10E) and $65 (FY11E+), we factor nil subsidies for upstream in FY10-12E.

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