Stock in Action - Oil India Ltd

Movement of the Day

Analysis   

1. Stock is trading ahead of short term and medium and long term moving averages as of now.
2. The counter's 14-day relative strength index (RSI) came at 65.98.
3. A level below 30 is defined as oversold while a value above 70 is considered overbought.

Probable Rationale Behind the Surge    

1. Crude Oil Prices Below $80 per Barrel: The optimism surrounding OIL is linked to the sustained decline in crude oil prices, specifically below the $80 per barrel mark. The company is expected to benefit from this situation, as it improves visibility for net crude realisation of $75 per barrel. A Brent crude price range of $75-80 per barrel is considered favorable for OIL.  

2. Government Support and Windfall Tax Changes: The government's stance on windfall taxes suggests that it is comfortable with ONGC and Oil India realizing a net crude price of $75 per barrel. This support and regulatory environment contribute to positive market sentiment regarding OIL's prospects.

3. Key Beneficiary of Lower Crude Prices: The information highlights that OIL is perceived as a key beneficiary when crude oil prices stay below $80 a barrel. This is consistent with the current market conditions where Brent crude futures are trading below $80, creating a favorable environment for OIL.  

4. Valuation and Realization Expectations: Motilal Oswal's expectation of strong oil sales realizations for OIL in FY24, along with attractive valuations, is a crucial factor driving the surge in its stock. The company is expected to generate positive free cash flow despite ambitious capital expenditure plans, making it an attractive investment option.

5. Multi-Year Upcycle in Upstream Sector: Analysts anticipate a multi-year upcycle for the upstream sector after eight years of underinvestment. OIL, being part of the upstream sector, is positioned to benefit from this trend, making it a preferred choice for investors in the oil and gas industry.  

6. Positive Operating Cash Flows: OIL is expected to experience strong operating cash flows in FY24-25 due to increased oil and gas realizations. Despite ambitious capital expenditure plans, the company is forecasted to generate positive free cash flow, adding to the positive outlook.

Attractive Historical Valuations: OIL, is noted for its attractive valuations compared to other upstream peers in the Asia-Pacific Universe. Despite considerable growth in return on equity (ROE) from FY14-23, the valuations of OIL remain near or below historical levels, making it an appealing investment opportunity.

Financial Summary

Analysis

Oil India Ltd demonstrated a consistent improvement in operational efficiency, with Operating Profit Margin increasing from 32% in 2021 to 42% in 2023.
The Net profit of the company, Oil India Ltd exhibited a positive trend in profitability, with Net Profit Margin increasing from 23.5% in 2021 to 27.3% in 2023, indicating enhanced efficiency in converting revenue into net profit over the period. This suggests improved financial performance and effective cost management.

Conclusion

In summary, the surge in Oil India Ltd.’s stock can be attributed to a combination of factors, including favourable crude oil prices, government support, positive market sentiment, strong operating cash flows, and attractive historical valuations within the context of a multi-year upcycle in the upstream sector. These factors collectively contribute to the optimism and increased investor interest in Oil India Ltd.