You are using an older browser version. Please use a supported version for the best MSN experience.

Higher subsidy, production decline drag down Oil India

LiveMint logoLiveMint 02-06-2014 Pallavi Pengonda

Production hiccups meant expectations were low from the quarterly results of Oil India Ltd (OIL). But the state-run oil company disappointed even those reduced hopes because, apart from lower production, it faced a higher subsidy burden in the three months ended March.

Revenue declined by 21% year-on-year to `1,948 crore. Crude oil and gas production declined both sequentially and compared with a year ago, thanks to blockades and strikes in the North-East where most of its production takes place. A higher subsidy burden also meant net price realization was hit. In fact, the firm’s net price realization at $37.36 per barrel is the lowest for at least the past eight quarters.

Graphic: Sarvesh Sharma/MintAs a result, operating profit nearly halved to `477 crore compared with the same period last year. Operating profit was also adversely impacted as employee costs and other expenses as a percentage of revenue increased considerably in the March quarter. The net profit decline, though, was relatively low on account of strong other income growth. Net profit decreased 26% to `565 crore.

Investors are unlikely to grumble about the results. Sure, the stock fell by 2% in reaction to the numbers when the results were announced last week, but in keeping with the excitement of the oil and gas sector, it too had performed well in the run-up to the general election. That was on hopes of continuing reforms such as the ongoing consistent diesel price hikes that will eventually lead to deregulation. At the current market price of `576, OIL’s shares trade at about 8.6 times its estimated earnings for the current fiscal year.

Production growth may not recover in a hurry. But analysts don’t seem to be losing much sleep over it. It is the expected decline in losses on selling fuel below cost and the gas price hike that they seem to be excited about.

The firm will benefit from the freeing of diesel prices by fiscal year 2016 and will also gain from the higher domestic gas price where $1 per million British thermal unit higher realization increases its profit after tax by 6%, IIFL Research says.

Upsides from here on depend on how those factors play out.

More From LiveMint

image beaconimage beaconimage beacon