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Stock pick of the week: Why analysts are bullish on Oil India


Oil India reported year-on-year sales and net profit growth of 51% and 33%, respectively, in the second quarter of 2018-19.

Despite this, the market’s sentiment has remained weak towards the company because of difficulty in analysing the complexities of the sector and the company.

Oil India, which is engaged in the business of crude oil and natural gas exploration, should benefit from higher crude oil prices in normal circumstances. Better realisation, triggered by high crude oil prices, was a key reason behind the company’s high revenue and net profit growth in the second quarter.

Analysts’ views
Buy: 20

Sell: 3

Hold: 5

But the stock market reacted negatively to high crude prices, fearing that the government may raise oil subsidy on upstream oil companies. This situation changed in the third quarter of 2018-19. The sudden fall in international crude oil prices to $55 (Rs 3,865) per barrel from $85 (Rs 5,973) per barrel, reduced the risk of subsidy. However, the crude oil price continues to slide and this fall will bring down Oil India’s realisation.

Analysts, though, are not worried because at current valuation, the market has already priced in the impact of the fall in Oil India’s realisation at $40 (Rs 2,811) per barrel. Being a domestic crude oil and natural gas producer, the company’s realisation will also benefit from the recent fall in the rupee against the US dollar. Though high dividends and share buybacks from cashrich companies are usually treated positively by the market, it is treating public sector companies a bit differently now.

This is because of the belief that these high dividends and buybacks are not in the interest of the company or its shareholders. Instead, it is forced on them by the government to manage its fiscal deficit targets. Market’s reaction to the recent share buyback announced by Oil India was also on similar lines.

However, Oil India is still cash rich and this buyback will no way impacts its regular capital expenditure of around Rs 3,000 per annum. Perception of positive news such as high dividends and buybacks as a negative, has led to Oil India trading at very low valuations, making analysts bullish on this counter. Oil India is also into allied activities like transportation of crude oil and production of LPG and the company also provides exploration and production services to other upstream companies.

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Oil India compared with Sensex and ETt oil & gas index. Stock price and index values normalised to a base of 100. Source: ETIG & Bloomberg


Selection Methodology: We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.





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