Oil & Gas · Based on these changes in assumptions, Cairn India would have the most positive...

December 12, 2011

Oil & Gas Crude strength, rupee weakness and high UR: Impact Analysis

SECTOR

UPDATE

Brent crude oil price has remained over US$100/bbl from past ten months owing to disruption in supply from MENA countries due to political unrest and

strong demand growth from Asian countries. Further, OPEC’s weighted fiscal break-even cost has increased by 15% over the past one year to

US$88/bbl, which is also putting upward pressure on crude oil price. We are revising our crude oil price assumption upwards by US$5/bbl for

FY12/FY13E to US$110/95/bbl, respectively. Further, keeping in view economic slowdown and incremental refinery capacity, we are expecting Singapore

refining margin to remain stable at US$6.2/bbl in FY12E and US$6.5/bbl in FY13E. Also, rupee depreciated almost 17% in the span of just four months

and is now averaging at Rs50.1/US$ in till date Q3FY12 due to a) persistent higher inflation, b) strengthening dollar due to euro-zone debt trouble and c)

mounting import bill due to persistent strength in crude oil prices. Further, as Euro lost its shine, US dollar emerged strongly as reserve currency. We are

thus revising our exchange rate assumption to Rs47.5/US$ for both FY12 and FY13 from Rs46/45 earlier.

With the change in crude oil price and exchange rate assumption, our industry’s under-recovery estimate is set to increase to Rs1,029/950 bn for

FY12/FY13 from earlier Rs1,061/725 bn. Also, we are changing subsidy sharing ratio between the government/Upstream/OMCs to 43/42/15 from earlier

47/38/15 owing to rising fiscal deficit and reluctance of government to allow upstream to report higher net realization. Again, we are expecting natural gas

demand-supply gap to increase to over 70mmscmd by FY15 due to constrained domestic supply growth. Further, most of the incremental growth in

natural gas supply in India is likely to be met through LNG import with incremental capacity.

Based on these changes in assumptions, Cairn India would have the most positive impact, while HPCL is likely to be the worst hit company. We are

revising estimates upwards for Cairn India and Petronet LNG, maintaining estimates for GSPL and revising downwards for rest of the coverage universe.

Since our recent downgrade of PSU oil companies, stock prices have fallen by 5-15%. We are maintaining our ratings in Petronet LNG (BUY), GSPL

(ACCUMULATE), ONGC (ACCUMULATE), IOCL (HOLD) and GAIL (HOLD), while upgrading BPCL (BUY from ACCUMULATE), Cairn India

(ACCUMULATE from HOLD) and HPCL (ACCUMULATE from HOLD) and downgrading RIL (ACCUMULATE from BUY) and Oil India (ACCUMULATE

from BUY).

We keep Petronet LNG and BPCL as our top picks. Expected drop in crude oil prices, GRM expansion on full utilization of Bina refinery and huge

resource potential in E&P assets in both Mozambique and Brazil are likely to drive BPCL’s valuation. Further, long-term growth visibility, strong business

model, capacity expansion, higher marketing margin for spot cargoes due to huge demand-supply gap in natural gas, expected long-term contracts from

Gazprom and other sources for Kochi terminal and Dahej expansion are key growth triggers for the company’s valuation.

Key risks to our assumptions are a) sudden spike in crude oil prices due to rising tension over Iran and western countries over Iran’s nuclear programme,

and b) delay in approvals from the government for E&P exploration and development plan.

Table: Valuation snapshot

Company

MCap

(Rs bn)

CMP

(Rs)

Target

(Rs)

Upside

(%) Reco

P/E (x) P/B (x) EV/EBITDA (x)

FY12E FY13E FY12E FY13E FY12E FY13E

BPCL 200 553 631 15.1 BUY 35.2 18.9 1.3 1.4 17.7 14.0

Cairn India 585 308 329 2.0 ACCUMULATE 8.0 6.9 1.2 1.0 6.0 5.3

GAIL India 497 394 415 1.6 HOLD 12.2 10.9 2.1 1.8 7.6 6.7

GSPL 47 84 95 5.5 ACCUMULATE 9.1 8.8 1.9 1.6 5.6 5.3

HPCL 100 294 324 11.0 ACCUMULATE 12.3 8.0 0.8 0.7 16.0 12.4

IOCL 656 270 285 6.6 HOLD 15.9 13.2 1.1 1.0 9.9 9.2

Oil India 286 1,181 1,260 6.1 ACCUMULATE 9.2 7.8 1.6 1.4 3.5 3.2

ONGC 2,239 262 295 8.0 ACCUMULATE 9.4 9.1 1.7 1.5 3.8 3.6

Petronet LNG 119 159 200 24.6 BUY 11.5 10.2 3.6 3.0 7.6 6.5

RIL 2,473 755 847 4.6 ACCUMULATE 11.8 11.4 1.2 1.1 6.2 6.3

Source: Bloomberg; IDBI Capital Research

Sudeep Anand +91-22-4322 1190 [email protected]

2

Sector Update – Oil & Gas

Summary

Brent Crude has averaged US$114/bbl in YTDFY12 against US$86.7/bbl in FY11 and currently trading at ~US$108/bbl.

However, with continuous worsening global economic condition and increasing European debt woes, we have witnessed

regular downgrading in global crude oil demand forecast by IEA and OPEC. Global oil demand is once again revised

downwards by International Energy Agency (IEA) in November 2011 by 70 kbopd for 2011 and by 20 kbopd for 2012 to

89.2 mbopd in 2011 (+0.9 mbopd y‐o‐y) and 90.5 mbopd (+1.3 mbopd) in 2012. The downward revision was primarily driven

by lower demand expected from US, China and Japan. Further, global economic forecast has also been revised downwards

by 0.3%/0.5% for CY11/CY12 to 4% each in September 2011. Keeping in view deteriorated economic condition of Euro-zone

and Asian countries like India and China, further downward revision is likely.

Figure: Crude oil price over US$100/bbl from past 9 months


Table: Global oil demand-supply (mbpd)

2008 2009 2010 2011E 2012E

Demand

OECD Demand 47.6 45.6 46.2 45.8 45.6

Non-OECD demand 38.9 39.9 42.1 43.4 44.9

Total demand 86.5 85.5 88.2 89.2 90.5

YoY growth (%) (0.6) (1.2) 3.2 1.1 1.5

Supply

Non-OPEC supply 50.6 51.5 52.6 52.8 53.7

YoY growth (%) 1.2 1.8 2.1 0.4 1.7

OPEC supply

Crude 31.6 29.1 29.5 30.5 30.5

NGLs 4.5 4.9 5.3 5.9 6.3

Total OPEC 36.1 34.1 34.8 36.4 36.8

Total supply 86.7 85.6 87.4 89.2 90.5

Total stock change 0.2 0.1 (0.8) 0.0 0.0

OPEC crude capacity 34.2 34.9 35.1 34.3 35.1

Implied OPEC spare capacity 2.6 5.8 5.6 3.8 4.6

Source: IEA; IDBI Capital Research

0

40

80

120

160

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

(US

$/bb

l)

2006-10 Avg (2006-10) 2010 2011


3

Figure: Global GDP forecast

Source: IMF

However supply scenario improving; pressure on OPEC spare capacity easing

On supply front, Libyan crude oil supply also improved during November 2011. Crude oil production in Libya increased to

500kbopd against 75kbpd in September 2011. Further, IEA expects Libya production to increase to 1.2mbpd by CY12

against its normal production level of 1.6mbpd before the unrest, which is likely to improve OPEC’s spare capacity.

OPEC’s spare capacity is likely to come back to its 2010 average of 5mbpd by end-CY11, which had fallen to 4mbpd in

Q2-Q3CY11. Further, IMF expects global production capacity to rise by 6.8mbpd by 2016, with about 2.6mbpd of

capacity expansion to come from non-OPEC countries. Therefore, balance 4.2mbpd of capacity increase is expected to

come from OPEC countries, primarily driven by Iraq as its oil facilities continue to come back online. Consequently, we

expect OPEC’s spare capacity to stabilize at ~8mbpd in medium term.

Figure: Expanding OPEC spare capacity

Source: IEA; Industry; IDBI Capital Research

Expect crude oil price to fall below US$100/bbl in near term….

OPEC is investing in about 132 projects and spending over US$300 bn during CY11-CY15. This is likely to increase the

spare capacity to 8mbpd by CY15 from current ~4.5mbpd, showing incremental supply growth over demand growth

during the period. Further, with rising non-OPEC production growth and higher US shale gas output, contribution from

OPEC crude over world oil basket would fall over the long term. OPEC expects crude oil demand to grow at a CAGR of

1.3% during CY11-CY15 to 92.9mbpd, lower than supply CAGR of 1.5%. Therefore, we expect crude oil price to soften

in near to medium term to US$90-US$95/bbl from current ~US$108/bbl.

(2)% 0% 2% 4% 6% 8% 10%

US

Euro region

UK

Japan

Russia

MENA

China

India

Brazil

World GDP

2012 2011

0.0

2.0

4.0

6.0

8.0

2007 2008 2009 2010 2011E 2012E 2013E

(mbp

d)

4


…but OPEC’s break-even cost has increased; steep fall in crude oil price like 2008 looks unlikely

In order to ensure macroeconomic stability, few countries under OPEC like Saudi Arabia and UAE have taken significant populist measures and investing heavily in infrastructure projects, higher government salaries, subsidies and housing allowances. Therefore, their fiscal break-even costs have increased sharply to ~US$90/bbl from earlier US$76/bbl in CY09-CY10. Though Kuwait and Qatar remain amongst few who can easily manage in lower crude oil price, Saudi Arabia and UAE may find it suitable to join the voices of Venezuela and Iran for higher crude oil prices. OPEC’s weighted average break-even costs have increased to ~US$88/bbl from earlier US$77/bbl in 2010. Therefore, we may not see such a sharp correction in crude oil prices as we had witnessed in late-2008. However, still we are hopeful of correction in crude oil prices to the levels of US$90/bbl by early 2012.

Figure: Change in fiscal break-even crude oil price for different OPEC countries

Source: IMF; Industry; IDBI Capital Research

Figure: Percentage increase in total Government expenditure in 2011 over 2010 for OPEC countries

Source: IMF; IDBI Capital Research

Crude oil price assumption revising upwards by US$5/bbl

Crude oil prices have remained above US$110/bbl on most days of this fiscal despite economic difficulties around the

world. Driven by the above hypothesis, we are increasing our crude oil price assumption by US$5/bbl for FY12E/FY13E

to US$110/US$95/bbl respectively.

Correction in GRMs driven by sharp fall in gasoline crack spreads

Singapore complex refinery margins have contracted sharply to US$6.8/bbl in November 2011 compared to US$10.3/bbl

in October 2011 and are currently hovering at US$3-4/bbl. This is primarily driven by sharp correction in gasoline spread

owing to restarting of refineries in Singapore and weaker demand growth for gasoline in Asian countries. Gasoline crack

spread fell to US$2.5/bbl in November 2011 from US$16.8/bbl in October 2011. However, Diesel crack and SKO crack

spreads over Dubai crude remain robust.

0

20

40

60

80

100

120

Iran Iraq Kuwait Oman Saudi Arabia UAE Algeria Qatar

2010 2011

0%

5%

10%

15%

20%

25%

30%

35%

Algeria UAE Iran Kuwait Qatar Oman Iraq Saudi Arabia

OPEC’s weighted average break-even price at US$88/bbl


5

Figure: Sharp fall in Singapore refining margins in November 2011


Figure: Gasoline spread plunges Figure: Gasoil spread remains strong



Figure: Jet-Kero spread stable Figure: FO spread volatile but remained strong

Source: Bloomberg; IDBI Capital Research Source: Bloomberg; IDBI Capital Research

L-H differential also under pressure with higher Libyan sweet-light crude production

L-H differentials made a high of US$5.3/bbl in June 2011 since January 2009 due to steep cut in Libyan sweet-light

crude oil production. However, as the production is resuming post Gaddaffi in Libya (now producing at over 500kbopd),

L-H differential is continuously coming down and is now at ~3.2/bbl. We expect it to further fall to ~US$2/bbl levels due to

a) further uptrend in Libyan production volume and b) improvement in higher-complex refinery capacity.

0

2

4

6

8

10

12


(US

$/bb

l)

2008-10 Avg (2008-10) 2010 2011

(10)

0

10

20

30


(US

$/bb

l)

2006-10 Avg (2006-10)

2010 2011

0

10

20

30

40

50


(US

$/bb

l)

2006-10 Avg (2006-10)

2010 2011

0

10

20

30

40

50


(US

$/bb

l)

2006-10 Avg (2006-10)

2010 2011

(20)

(10)

0

10


(US

$/bb

l)

2006-10 Avg (2006-10)

2010 2011

6


Figure: Contracting L-H differntials


Figure: Improvement in Libyan light-sweet crude oil production volume


Modest refinery capacity addition over crude oil demand growth; GRMs to remain stable

We expect modest refinery capacity addition till 2013 of ~2.3mbpd from 2011, which is slightly lower than the crude oil

demand growth of 2.4mbpd during the period. According to Oil & Gas Journal, total capacity addition in 2012 is likely to

be 1.2mbpd, primarily in China and other Asian countries. Further, about 1.1mbpd of additional capacity is expected to

come on stream in 2013, primarily in China and Latin American countries. However, as we have witnessed significant

delays in projects in the past, actual capacity addition may come on the lower side. In H1FY12, Singapore complex

refining margins stood at US$8.7/bbl which is now corrected to ~US$4/bbl. We are expecting Singapore refining margins

to remain in a narrow range of US$5-7/bbl. We are modeling Singapore complex refining margin of US$6.2/bbl in

H2FY12 making it US$7.4/bbl for FY12E and US$6.5/bbl for FY13E.

Table: Refinery capacity addition

2009 2010 2011E 2012E 2013E

OECD countries (445) (250) 269 315 -

China 422 505 270 320 410

Other Asia 765 229 360 175 50

MENA 180 105 200 40 200

Rest of the world (220) 120 250 300 350

Total 702 709 1,349 1,150 1,010

Source: Oil and Gas Journal; Industry; IDBI Capital Research

0

2

4

6

8

10

12


(US

$/bb

l)

2006-10 Avg (2006-10) 2010 2011

0

400

800

1,200

1,600

2,000


(kbp

d)

2006-10 Avg (2006-10) 2010 2011


7

Rupee depreciation – in line with global phenomenon; revising estimates upwards

Rupee depreciated almost 17% in the span of just four months and is now averaging at Rs50.1/US$ in till date Q3FY12.

This is driven by many reasons like a) widening fiscal deficit due to persistent strength in crude oil price, b) strengthening

dollar due to euro-zone debt trouble and c) higher inflation level. Rupee depreciation is generally positive for upstream

and negative for downstream. However, with higher crude oil prices and depreciating rupee, under-recoveries are

mounting and are now expected to touch Rs1,300 bn in FY12. Further, looking at the weak fiscal health, more burden is

likely to come to upstream. With every Re1 depreciation against dollar, under-recoveries go up by Rs84 bn and net

import bill goes up by Rs90 bn. We are revising our exchange rate assumption from Rs46 and Rs45 per US dollar for to

Rs47.5 in both FY12E and FY13E.

Figure: Sharp fall in rupee in recent months

Source: Bloomberg

Revising under-recovery assumption upwards and changing sharing ratio too

Driven by the upward revision in crude oil prices and exchange rate, total under-recoveries for oil marketing companies

are increasing to Rs1,030 bn for FY12E (@US$110/bbl) and Rs876 bn for FY13E (@US$95/bbl). Further, we are

changing our subsidy sharing arrangement between Government/upstream/OMCs to 43/42/15 from earlier 47/38/15.

This is primarily driven by rising fiscal deficit and higher net realization for upstream companies compared to its historical

average realization of past three years.

Table: Total share of under-recovery burden (Rs mn)

FY10 FY11 Q1FY12 Q2FY12 FY12E FY13E

Auto fuel 144,253 364,503 290,337 86,853 763,677 648,912

Cooking fuel 316,315 417,423 145,638 126,279 527,987 300,602

Total 460,568 781,927 435,974 213,133 1,291,664 949,513

Shared by:

Government bonds 260,000 410,000 150,000 0 555,416 408,291

% share 56.5 52.4 34.4 0.0 43.0 43.0

Upstream discount 144,305 302,963 145,088 71,245 542,499 398,796

% share 31.3 38.7 33.3 33.4 42.0 42.0

OMC’s share 56,355 68,964 140,886 141,888 193,750 142,427

% share 12.2 8.8 32.3 66.6 15.0 15.0

Total 460,660 781,927 435,974 213,133 1,291,664 949,513

Upstream distribution

ONGC 115,550 248,923 120,463 57,134 448,104 329,405

% of upstream 80.1 82.2 83.0 80.2 82.6 82.6

OIL India 15,488 32,930 17,807 8,444 64,557 47,457

% of upstream 10.7 10.9 12.3 11.9 11.9 11.9

GAIL 13,267 21,110 6,819.2 5,666 29,837 21,934

% of upstream 9.2 7.0 4.7 8.0 5.5 5.5

Source: Bloomberg; Industry; IDBI Capital Research

35.0

39.0

43.0

47.0

51.0

55.0

Jan-

03

Jul-0

3

Feb

-04

Aug

-04

Mar

-05

Oct

-05

Apr

-06

Nov

-06

Jun-

07

Dec

-07

Jul-0

8

Jan-

09

Aug

-09

Mar

-10

Sep

-10

Apr

-11

Nov

-11

8


Table: Sensitivity analysis of under-recoveries based on crude oil and exchange rate assumptions

45.5 46.5 47.5 48.5 49.5

85 736,941 820,417 903,893 987,370 1,070,846

90 759,751 843,227 926,703 1,010,180 1,093,656

95 782,561 866,037 949,513 1,032,990 1,116,466

100 805,371 888,847 972,323 1,055,800 1,139,276

105 828,181 911,657 995,133 1,078,610 1,162,086

Source: IDBI Capital Research

Utilisation of piling cash balance – growing worries for PSU upstream

ONGC and Oil India combine hold almost Rs410 bn (ONGC Rs274 bn and OIL Rs136 bn) and are earning a return of 7-

9% on that. There are apprehensions amongst investor group about investment in cross companies stake. Currently, net

cash balance values Rs26/share for ONGC (10.5% of total m-cap), and Rs552/share for Oil India (47% of total m-cap).

Therefore, it is clearly reflecting that market is concerned on the higher cash balance of Oil India and not factoring in the

complete value of its cash balance on cross holding fears.

Natural Gas supply growth – dependent on LNG

We are expecting natural gas supply to grow at a CAGR of 7.9% during FY11-FY15E to 244mmscmd in India primarily

driven by higher LNG imports. During the period, we expect domestic gas supply to grow at a CAGR of 1.9%, while LNG

volumes are likely to grow at 24.4%. Consequently, of the total natural gas supply, we expect LNG contribution to grow

from 21% in FY11 to 37% in FY15E. In domestic front, most of the growth is coming from ramp up in KG-D6 in FY15 to

55mmscmd from current 43mmscmd. On imported LNG front, Dahej capacity is increasing from 10mtpa to 15mtpa by

FY15 and Shell, Kochi and Dabhol capacity would be increasing to 5mtpa during FY13-FY14. Further, Adani, IOCL and

ONGC are setting up LNG terminals with capacities ranging from 2.5mtpa to 5mtpa, which would come on stream post

FY15. Additionally, RIL and BP JV company India Gas Solutions and Petronet LNG have already disclosed their

intention to set up LNG terminals, which would increase LNG contribution to total domestic gas supply significantly over

the next five years.

Figure: Natural gas supply growth in India

Source: Industry; IDBI Capital Research

Natural Gas demand-supply gap to widen with time till FY15

Natural gas demand in India is continuously increasing driven by strong demand growth from refinery/petchem, power

and city gas distribution sector. Demand from refinery/petchem is likely to grow at a CAGR of 24% during FY11-FY15E,

while power sector is likely to grow at 10.3. According to the government report, total natural gas demand is likely to

grow at 15% CAGR to 314mmscmd in FY15E. Conservatively, gap between demand and supply is likely to reach ~

70mmscmd by FY15, which provides huge opportunity for LNG importers.

0

50

100

150

200

250

300

FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E

(mm

scm

d)

Mumbai high Other Eastern Offshore RIL (KG-D6) Other Western Offshore PMT and others PLNG Other LNG


9

Table: Widening natural gas demand-supply gap

(mmscmd) FY10 FY11 FY12E FY13E FY14E FY15E

Power 66 88 91 95 102 103

Fertilizer 43 49 57 68 72 75

City Gas 11 14 18 22 29 37

Petchem/ Refinery 24 24 25 42 55 58

Sponge Iron 4 4 6 8 11 14

Total 147 179 197 236 269 314

Source: Industry; IDBI Capital Research

Key Risks

Growing tension between West-Iran to remain a big overhang on crude oil prices

With the tension between US (Western countries as a whole) and Iran refusing to die down owing to latter’s nuclear

programme, risk on potential upside for crude oil price is getting higher. Further, recent western countries sanctions on

trades with Iran have aggravated the conflict. Currently, Iran is producing about 3.7mbpd of crude oil, which is about

12% of OPEC production and 4% of global crude oil production. In our view, volatility in crude oil market would be very

high on further increase in stress in between these two nations and we may see sharp spike in crude oil price.

Delay in approvals impacting outputs

Few companies are facing delay in approvals from the government for their projects. Cairn India is awaiting the

government and partner company’s approval to ramp up its production level in Mangala and start-up of production in

Bhagyam from the past couple of quarters. Further, RIL seeks government’s approval in many of its cases related to KG-

basin. The government is also seeking strict adherence of code and conduct primarily after the CAG report on RIL’s KG-

D6. Such delays may impact the company’s operating performances.

Conclusion

In the medium term we expect crude oil price to cool-off from current levels to close to US$90/bbl, just above the weighted

average of OPEC fiscal break-even level. However, with the upward revision in crude oil price and rupee-US dollar exchange

rate, Cairn India is set to benefit the most, while HPCL the worst in our coverage universe. However, Oil PSUs stocks have

corrected in between 5%-13% since our last downgrades. We are upgrading BPCL (BUY from ACCUMULATE), Cairn India

(ACCUMULATE from HOLD) and HPCL (ACCUMULATE from HOLD), while maintaining our ratings in Petronet LNG (BUY),

GSPL (ACCUMULATE), ONGC (ACCUMULATE), IOCL (HOLD) and GAIL (HOLD) and downgrading RIL (ACCUMULATE

from BUY) and Oil India (ACCUMULATE from BUY).

We keep Petronet LNG and BPCL as our top picks. Expected drop in crude oil prices, GRM expansion on full utilization of

Bina refinery and huge resource potential in E&P assets in both Mozambique and Brazil are key growth triggers for BPCL.

For Petronet, long-term growth visibility, strong business model, capacity expansion, higher marketing margin for spot

cargoes due to huge demand-supply gap in natural gas, expected long-term contracts from Gazprom and other sources for

Kochi terminal and Dahej expansion are key positives.

10


Valuation Snapshot

Table: Recommendation snapshot

Company

MCap

(Rs bn)

CMP

(Rs)

Target

(Rs)

Upside

(%) Reco

P/E (x) P/B (x) EV/EBITDA (x)


BPCL 200 553 631 15.1 BUY 35.2 18.9 1.3 1.4 17.7 14.0

Cairn India 585 308 329 2.0 ACCUMULATE 8.0 6.9 1.2 1.0 6.0 5.3

GAIL India 497 394 415 1.6 HOLD 12.2 10.9 2.1 1.8 7.6 6.7

GSPL 47 84 95 5.5 ACCUMULATE 9.1 8.8 1.9 1.6 5.6 5.3

HPCL 100 294 324 11.0 ACCUMULATE 12.3 8.0 0.8 0.7 16.0 12.4

IOCL 656 270 285 6.6 HOLD 15.9 13.2 1.1 1.0 9.9 9.2

Oil India 286 1,181 1,260 6.1 ACCUMULATE 9.2 7.8 1.6 1.4 3.5 3.2

ONGC 2,239 262 295 8.0 ACCUMULATE 9.4 9.1 1.7 1.5 3.8 3.6

Petronet LNG 119 159 200 24.6 BUY 11.5 10.2 3.6 3.0 7.6 6.5

RIL 2,473 755 847 4.6 ACCUMULATE 11.8 11.4 1.2 1.1 6.2 6.3


Table: Financial summary

Company Sales (Rs mn) EBITDA (Rs mn) PAT (Rs mn) FDEPS (Rs) EBITDA Mrgn (%) PAT Mrgn (%) RoE (%)

FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

BPCL 1,879,454 1,688,198 24,267 30,569 5,678 10,600 15.7 29.3 1.3 1.8 0.3 0.6 3.8 7.2

Cairn India 131,888 141,038 93,857 105,449 73,301 84,700 38.4 44.4 71.2 74.8 55.6 60.1 16.7 16.4

GAIL India 367,302 380,153 65,878 74,416 40,659 45,562 32.1 35.9 17.9 19.6 11.1 12.0 17.9 17.6

GSPL 11,276 11,939 10,383 10,976 5,184 5,383 9.2 9.6 92.1 91.9 46.0 45.1 23.2 20.0

HPCL 1,955,952 1,928,519 20,415 26,461 8,076 12,470 23.8 36.8 1.0 1.4 0.4 0.6 6.1 9.3

IOCL 3,944,958 3,679,807 111,979 120,462 41,117 49,640 16.9 20.4 2.8 3.3 1.0 1.3 6.9 7.9

Oil India 101,280 104,454 45,807 49,855 30,815 36,355 128.2 151.2 45.2 47.7 30.4 34.8 18.6 19.3

ONGC 1,312,620 1,269,872 537,118 552,639 238,595 247,250 27.9 28.9 40.9 43.5 18.2 19.5 19.2 17.7

Petronet LNG 212,577 247,606 17,803 20,675 10,367 11,638 13.8 15.5 8.4 8.4 4.9 4.7 34.8 31.9

RIL 3,404,430 2,852,366 397,389 391,153 209,069 216,301 63.9 66.1 11.7 13.7 6.1 7.6 12.4 11.2


Table: How we compare with consensus

IDBI EPS (Rs) Bloomberg EPS (Rs) % Difference


Bharat Petroleum Corp Ltd 15.7 29.3 41.8 56.6 (62.4) (48.2)

Cairn India Ltd 38.4 44.4 38.9 44.1 (1.3) 0.6

GAIL India Ltd 32.1 35.9 32.3 34.9 (1.0) 2.8

Gujarat State Petronet Ltd 9.2 9.6 9.2 9.8 (0.1) (2.5)

Hindustan Petroleum Corp Ltd 23.8 36.8 38.0 49.2 (37.3) (25.3)

Indian Oil Corp Ltd 16.9 20.4 29.9 38.5 (52.7) (55.6)

Oil & Natural Gas Corp Ltd 27.9 28.9 31.5 33.1 (11.5) (12.6)

Oil India Ltd 128.2 151.2 149.3 156.0 (14.2) (3.1)

Petronet LNG Ltd 13.8 15.5 12.8 13.3 8.1 16.6

Reliance Industries Ltd 63.9 66.1 69.8 75.5 (8.5) (12.5)


COMPANY

REPORT

December 12, 2011

Bharat Petroleum Corporation Ltd.

Mozambique adds shine

COMPANY

UPDATE

CMP Rs553

Target Price Rs631

Potential Upside/Downside +14%

Relative to Sensex

Summary

BPCL’s recent guidance on recoverable reserve base of ~15-30tcf in Mozambique is quite

encouraging, which we value at Rs73/share. Further, Bina refinery operating at ~75% utilization, is

likely to touch 100% utilization by end-FY12 which would help in expanding refining margin.

However, sharp rupee depreciation vs US dollar and high crude oil prices are likely to increase the

company’s net under-recoveries to Rs43/33 bn in FY12/FY13E. Further, the company’s rising debt

level and absence of government’s support is adding to woes. We maintain our P/BV multiple of

1.4x and revise our TP downwards to Rs631 from earlier Rs670 due to downward revision in book

value. The stock has been corrected 13% since our recent downgrade (note dated October 31

2011), and looks attractive at current levels. We are upgrading the stock to BUY from

ACCUMULATE.

Mozambique reserve base valued Rs73/share: With recent gas discovery in an appraisal well drilling in

Mozambique, BPCL (10% stake) disclosed the probable recoverable reserve base of ~15-30tcf of natural

gas equivalents. Even if we consider conservatively ~15tcf of reserve base, the company’s valuation

comes at Rs73/share on US$2/boe of valuation multiple for its reserve base. Further, the company has a

plan to drill two more appraisal well in Mozambique by FY13. Also, BPCL completed appraisal well drilling

in Wahoo South and North in Brazil, where final outcome is likely to come soon. We expect first

production from Mozambique likely to start from CY16. Also, the company is likely to set up two trains of

LNG terminal in Mozambique which is currently in planning phase.

Bina refinery operating at 70% utilization level: Currently Bina refinery is operating at 70% utilisation

levels and is expected to reach 100% utilisation by end of FY12. Also, the company expects GRM of

US$4/bbl premium over Singapore complex refining margin for Bina refinery post completion of full

utilization. Our assumption is conservative at US$2/bbl expansion in FY13E.

Sharp rupee depreciation and higher crude oil prices to swell UR: With the change in crude oil price

and exchange rate assumption, BPCL’s under-recovery is likely to touch Rs43/33 bn in FY12/FY13E

against our earlier assumption of Rs37/28 bn.

Mounting debt level enhances liquidity concern: The company’s gross debt increased to Rs250 bn

from Rs225 bn at the end of Q2FY12. The company expects liquidity crisis if the government does not

provide any subsidy share in next couple of months. Out of the total subsidy burden of Rs300 bn

announced by the government as its share in FY12, the company expects to receive half in January 2012

while rest is expected by April 2012 only.

Stock has corrected 13% since last downgrade; upgrading to BUY: BPCL is currently trading at a

P/BV of 1.3x on FY13E. We maintain our P/BV multiple of 1.4x and revise our TP downwards to Rs631

from earlier Rs670 due to downward revision in book value. However, the stock has corrected 13% since

last downgrade, and looks attractive at current levels. We believe expected fall in crude oil prices and

regular positive news flow in E&P business would act as a trigger for potential upside. Therefore, we are

upgrading the stock to BUY from ACCUMULATE.

Source: Capitaline

BUY

Nifty: 4,867; Sensex: 16,213

Sector Oil and Gas

Bloomberg / Reuters BPCL IN / BPCL.BO

Shares o/s (mn) 361.5

Market cap. (Rs mn) 199,987

Market cap. (US$ mn) 3,829

3-m daily average vol. 43,565

Key Stock Data

52-week high/low Rs722/487

-1m -3m -12m

Absolute (%) (3) (16) (18)

Rel to Sensex (%) (5) (16) (13)

Price Performance

Promoters 54.9

FIIs/NRIs/OCBs/GDR 7.5

MFs/Banks/FIs 19.5

Govt. 0.9

Non Promoter Corporate 4.8

Public & Others 12.4

Shareholding Pattern (%)

Financial snapshot (Rs mn)

Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) PE (x) EV/EBITDA (x) RoE (%) RoCE (%)

FY10 1,238,167 30,539 2.5 17,101 47.3 11.7 14.0 12.5 5.9

FY11 1,536,450 42,762 2.8 16,499 45.6 12.1 10.0 11.2 6.2

FY12E 1,879,454 24,267 1.3 5,678 15.7 35.2 17.7 3.8 3.8

FY13E 1,688,198 30,569 1.8 10,600 29.3 18.9 14.0 7.2 5.0

Source: Company; IDBI Capital Research

70

80

90

100

110

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

BPCL Sensex

Analyst

Sudeep Anand

+91-22-4322 1190

[email protected]

12

Company Update – Bharat Petroleum Corporation Ltd.

Financial Summary

Profit & Loss Account (Rs mn)

Year-end: March FY10 FY11 FY12E FY13E

Revenues 1,238,167 1,536,450 1,879,454 1,688,198

Growth (%) (9.3) 24.1 22.3 (10.2)

EBITDA 30,539 42,762 24,267 30,569

Growth (%) (9.5) 40.0 (43.3) 26.0

Depreciation & amortisation 14,446 18,914 20,347 20,623

EBIT 16,093 23,849 3,920 9,946

Growth (%) (23.8) 48.2 (83.6) 153.7

Interest 11,247 12,468 13,721 13,607

Other income 22,875 17,103 18,828 20,725

EBT 27,721 28,483 9,027 17,065

Income taxes 10,522 11,062 3,159 5,973

Effective tax rate (%) 38.0 38.8 35.0 35.0

Reported net income 16,324 16,350 5,528 10,450

Adjusted net income 17,101 16,499 5,678 10,600

Growth (%) 166.3 (3.5) (65.6) 86.7

Shares outstanding (mn) 361.5 361.5 361.5 361.5

Adjusted EPS (Rs) 47.3 45.6 15.7 29.3

Growth (%) 166.3 (3.5) (65.6) 86.7

Balance Sheet (Rs mn)


Cash and cash eq 7,284 7,971 6,490 1,694

Accounts receivable 26,009 28,779 35,203 31,621

Inventories 141,092 182,135 222,795 200,123

Others current assets 74,480 86,421 85,409 86,129

Investments 119,323 84,600 103,720 116,677

Gross fixed assets 300,792 343,311 368,311 373,311

Net fixed assets 166,908 191,518 196,171 180,548

Intangible assets 4,446 4,605 4,605 4,605

Deferred tax assets, net (11,477) (13,074) (13,530) (14,393)

Other assets 33 33 33 33

Total assets 606,314 655,851 722,762 688,901

Accounts payable 90,969 122,737 168,932 151,741

Other current liabilities 69,948 83,314 90,987 88,080

Provisions 27,652 34,462 37,260 37,727

Debt funds 266,921 251,855 266,855 264,855

Equity capital 3,615 3,615 3,615 3,615

Reserves & surplus 137,814 149,893 144,800 142,884

Shareholder's funds 141,429 153,508 148,415 146,499

Total liabilities 606,314 655,851 722,762 688,901

BVPS (Rs) 391.2 424.6 410.5 405.2


Cash Flow Statement (Rs mn)


Net income + Depreciation 30,769 35,263 25,875 31,073

Non-cash adjustments (12,007) (14,276) (7,791) (18,967)

Changes in working capital (42,307) 13,489 7,794 5,437

Cashflow from operations (23,544) 34,476 25,877 17,543

Capital expenditure (51,650) (43,007) (24,000) (5,000)

Change in investments 43,845 41,512 (19,121) (12,956)

Cashflow from investing (7,974) (4,967) (43,121) (17,956)

Issue of equity 2,350 3,854 - -

Issue/repay debt 28,080 4,137 15,000 (2,000)

Other financing cashflow (1,605) (577) - -

Change in cash & cash eq (6,201) 30,475 (1,480) (4,797)

Closing cash & cash eq 7,284 7,970 6,490 1,694

Financial Ratios


Profitability & Return ratios

EBITDA margin (%) 2.5 2.8 1.3 1.8

EBIT margin (%) 1.3 1.6 0.2 0.6

Net profit margin (%) 1.4 1.1 0.3 0.6

ROE (%) 12.5 11.2 3.8 7.2

ROCE (%) 5.9 6.2 3.8 5.0

Working capital & Liquidity ratios

Receivables (days) 8 7 6 7

Inventory (days) 46 47 42 49

Payables (days) 30 32 30 37

Current ratio (x) 1.5 1.5 1.3 1.3

Quick ratio (x) 0.2 0.2 0.2 0.1

Turnover & Leverage ratios

Gross asset turnover (x) 4.4 4.8 5.3 4.6

Total asset turnover (x) 2.2 2.4 2.7 2.4

Interest coverage ratio (x) 1.4 1.9 0.3 0.7

Adjusted debt/equity (x) 1.7 1.3 1.4 1.4

Valuation ratios

EV/Sales (x) 0.3 0.3 0.2 0.3

EV/EBITDA (x) 14.0 10.0 17.7 14.0

P/E (x) 11.7 12.1 35.2 18.9

P/BV (x) 1.4 1.3 1.3 1.4

COMPANY

REPORT

December 12, 2011

Cairn India Ltd.

Best play on higher crude oil prices

COMPANY

UPDATE

CMP Rs308

Target Price Rs329


Relative to Sensex

Summary

Cairn India is most sensitive to crude price and exchange rate variation in India, where its earnings are

positively co-related with crude price and inversely co-related with rupee-US dollar exchange rate. As

rupee depreciated 10% in till date Q3FY12 compared to Q2FY12 and is currently hovering at

~Rs52.3/US$, Cairn India is the major beneficiary in Oil and Gas space. Further, out of the total cash

balance of US$1.7 bn at the end of Q2FY12, the company has cash balance of US$1.12 bn in dollar

terms, which portends significant gain if converted. With crude oil price continuously over US$100/bbl in

past 9 months and with rising tension between US-Iran, there is an upside risk to our estimates.

The delay in approval from government and ONGC for ramp-up of Mangala field production to 150kbopd

from current 125kbopd and start-up of Bhagyam field is restricting the company’s growth. However, as the

deal between Vedanta and Cairn Energy Plc has now completed, we expect fast track approvals for ramp of

production. Earlier the company had guided for FY12 exit rate of production to be 175kbopd, which we think

difficult to achieve due to delay in approvals. However, we are maintaining our crude oil production

assumption of 136kbopd/187kbopd for FY12E/FY13E. We are revising our EPS estimates upwards by

12.1/12.9% to Rs38.4/44.4 for FY12/FY13E due to upward revision in crude oil prices and exchange rate.

We are revising our TP upwards to Rs329 from earlier Rs304. Upgrading the stock to ACCUMULATE from

HOLD.

Table: TP sensitivity over crude oil prices and WACC

Brent oil price (US$/bbl)

75 85 95 105 115

WA

CC

(%

)

9.0% 269 306 344 381 344

10.0% 264 300 336 372 408

11.0% 259 294 329 364 398

12.0% 254 288 322 356 390

13.0% 250 283 316 349 381


Table: Change in estimates

Key parameters FY12E FY13E

(Rs mn) Old New % Chg Old New % Chg

Revenue 122,755 131,888 7.4 126,974 141,038 11.1

EBITDA 84,902 93,857 10.5 92,006 105,449 14.6

EBITDA margin (%) 69.2 71.2 200bps 72.5 74.8 231bps

Net profit 65,587 73,301 11.8 73,291 84,700 15.6

FDEPS (Rs) 34.4 38.4 11.8 38.4 44.4 15.6


Source: Capitaline

ACCUMULATE

Nifty: 4,867; Sensex: 16,213

Sector Oil and Gas

Bloomberg / Reuters CAIR IN / CAIL.BO

Shares o/s (mn) 1,902.6




Key Stock Data


-1m -3m -12m

Absolute (%) (1) 8 (5)

Rel to Sensex (%) (5) (16) (13)

Price Performance

Promoters 52.1


MFs/Banks/FIs 7.7


Public & Others 2.7




FY10 16,230 7,720 47.6 10,511 5.5 55.5 72.8 3.2 2.9

FY11 102,779 82,451 80.2 63,344 33.3 9.2 6.8 17.1 16.3

FY12E 131,888 93,857 71.2 73,301 38.4 8.0 6.0 16.7 16.4

FY13E 141,038 105,449 74.8 84,700 44.4 6.9 5.3 16.4 16.1


70

80

90

100

110

120

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Cairn India Sensex

Analyst

Sudeep Anand

+91-22-4322 1190

[email protected]

14

Company Update – Cairn India Ltd.

Financial Summary



Revenues 16,230 102,779 131,888 141,038

Growth (%) 13.3 533.3 28.3 6.9

EBITDA 7,720 82,451 93,857 105,449

Growth (%) 15.3 968.0 13.8 12.4


EBIT 6,235 70,521 81,034 90,164

Growth (%) 55.9 1,031.1 14.9 11.3

Interest 148 2,909 2,820 607

Other income 4,077 1,288 3,232 4,554

EBT 10,163 68,900 81,446 94,111

Income taxes (348) 5,556 8,145 9,411

Effective tax rate (%) (3.4) 8.1 10.0 10.0



Growth (%) 30.8 502.6 15.7 15.6

Shares outstanding (mn) 1,897 1,902 1,909 1,909

Adjusted EPS (Rs) 5.5 33.3 38.4 44.4

Growth (%) 29.4 501.1 15.3 15.6



Cash and cash eq 9,294 44,847 97,620 160,610


Inventories 2,909 3,277 4,437 4,988


Investments 17,124 10,944 8,756 8,756


Net fixed assets 97,899 119,904 148,216 162,069



Other assets - 943 - -

Total assets 387,496 458,980 546,456 627,051



Provisions 4,937 16,628 36,728 36,828

Debt funds 34,007 26,782 13,500 6,718

Equity capital 18,970 19,019 19,086 19,086




BVPS (Rs) 178.5 211.9 249.1 293.5



Year-end: March FY10 FY11E FY12E FY13E


Non-cash adjustments (3,430) (3,264) (10,507) (14,386)

Changes in working capital (7,082) (10,088) 14,913 (3,992)

Cashflow from operations 1,779 62,218 92,363 83,625


Change in investments 25,194 (24,004) 2,189 -


Issue of equity 20 670 (185) 0

Issue/repay debt (6,887) (7,098) (13,282) (6,782)

Other financing cashflow (1,908) (236) - -

Change in cash & cash eq (15,464) 5,902 52,773 62,989


Financial Ratios



EBITDA margin (%) 47.6 80.2 71.2 74.8

EBIT margin (%) 38.4 68.6 61.4 63.9


ROE (%) 3.2 17.1 16.7 16.4

ROCE (%) 2.9 16.3 16.4 16.1




Payables (days) 813 235 279 237

Current ratio (x) 2.4 6.3 6.9 9.1

Quick ratio (x) 1.2 4.7 5.5 7.7






Valuation ratios

EV/Sales (x) 34.6 5.5 4.3 4.0

EV/EBITDA (x) 72.8 6.8 6.0 5.3

P/E (x) 55.5 9.2 8.0 6.9

P/BV (x) 1.7 1.5 1.2 1.0

COMPANY

REPORT

December 12, 2011

Gail (India) Ltd.

Gas supply constraint impacts return ratios

COMPANY

UPDATE

CMP Rs394

Target Price Rs415


Relative to Sensex

Summary

The company’s transmission throughput has shown a reduction of 2% in H1FY12 compared to H2FY11

and averaged 118.1mmscmd. Further, with further decline expected in KG-D6 production level, we expect

GAIL’s transmission volume to be negatively impacted. We are factoring 119.5/123.4mmscmd of

transmission volume in FY12/FY13, down from earlier assumption of 122/126.4mmscmd. Further, we

have revised our subsidy share assumption upwards to Rs30 bn from earlier Rs25 bn due to higher share

of upstream burden to 42% from earlier 38%. However, petrochemical margins in India have improved

5.3% QoQ in TD Q3FY12 to average ~Rs80/kg, while its margins over naphtha have also shown an

improvement of 10.6% QoQ to Rs35/kg due to strong domestic consumption.

Further, the company’s pipeline expansion plan is going on schedule and likely to add about ~5,000kms

of pipeline over the next three years with a total investment of Rs286 bn. However, with the poor outlook

on domestic gas supply, the company’s pipeline utilization levels are expected to decline from 60% in

FY11 to 37% in FY14. Consequently, we expect GAIL’s ROCE to come down to 13.6% in FY13E from

16.7% in FY11.

We are revising our PAT estimates downwards by 6% for FY12E, and only 0.9% for FY13E. We are

revising our SOTP-based target price downwards to Rs415 from earlier Rs445. We maintain HOLD rating

on the stock.

Table: EPS sensitivity analysis – transmission volume v/s exchange rate

Exchange rate (Rs/US$)

45.5 46.5 47.5 48.5 49.5

Tra

nsm

issi

on

volu

me

(mm

scm

d)

119.4 34.3 34.8 35.3 35.8 36.3

121.4 34.6 35.1 35.6 36.1 36.6

123.4 34.9 35.4 35.9 36.4 36.9

125.4 35.2 35.7 36.2 36.7 37.2

127.4 35.5 36.0 36.5 37.0 37.5





Revenue 370,739 367,302 (0.9) 377,956 380,153 0.6

EBITDA 69,722 65,878 (5.5) 73,861 74,416 0.8

EBITDA margin (%) 18.8 17.9 (87) 19.5 19.6 3.0

Net profit 43,325 40,659 (6.2) 45,177 45,562 0.9

FDEPS (Rs) 34.2 32.1 (6.2) 35.6 35.9 0.9


Source: Capitaline

HOLD

Nifty: 4,867; Sensex: 16,213

Sector Oil and Gas

Bloomberg / Reuters GAIL IN / GAIL.BO





Key Stock Data


-1m -3m -12m

Absolute (%) (6) (5) (21)

Rel to Sensex (%) (5) (16) (13)

Price Performance

Promoters 57.4


MFs/Banks/FIs 17.9

Govt. 7.2


Public & Others 2.0




FY10 270,353 54,718 20.2 33,278 26.2 14.9 9.1 20.0 16.9

FY11 351,067 64,970 18.5 40,210 31.7 12.4 7.7 20.6 16.7

FY12E 367,302 65,878 17.9 40,659 32.1 12.2 7.6 17.9 14.2

FY13E 380,153 74,416 19.6 45,562 35.9 10.9 6.7 17.6 13.6


70

80

90

100

110

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

GAIL Sensex

Analyst

Sudeep Anand

+91-22-4322 1190

[email protected]

16

Company Update – Gail (India) Ltd.

Financial Summary



Revenues 270,353 351,067 367,302 380,153

Growth (%) 9.1 29.9 4.6 3.5

EBITDA 54,718 64,970 65,878 74,416

Growth (%) 24.1 18.7 1.4 13.0


EBIT 46,483 56,090 56,589 63,567

Growth (%) 25.9 20.7 0.9 12.3

Interest 3,853 3,779 4,187 4,707

Other income 5,797 5,574 6,132 6,745

EBT 48,236 57,990 58,637 65,709

Income taxes 15,313 18,181 18,384 20,601




Growth (%) 17.7 20.8 1.1 12.1

Shares outstanding (mn) 1,268.5 1,268.5 1,268.5 1,268.5

Adjusted EPS (Rs) 26.2 31.7 32.1 35.9

Growth (%) 17.7 20.8 1.1 12.1

DPS (Rs) 7.5 7.5 7.5 7.5



Cash and cash eq 45,486 25,844 18,121 10,392


Inventories 8,578 10,586 11,076 11,463


Investments 10,651 12,363 12,363 12,363


Net fixed assets 151,313 157,349 220,061 279,211



Other assets - - - -

Total assets 344,269 384,369 443,130 495,853



Provisions 50,535 42,304 44,260 45,809

Debt funds 54,132 69,041 94,041 109,041

Equity capital 12,685 12,685 12,685 12,685




BVPS (Rs) 140.4 167.2 190.3 217.2





Non-cash adjustments 810 3,293 (565) 1,239

Changes in working capital 14,632 (5,950) 1,311 1,038



Change in investments (395) (1,711) - -


Issue of equity - - - -

Issue/repay debt 15,890 14,909 25,000 15,000

Other financing cashflow 2,214 5,663 - -

Change in cash & cash eq 7,911 (18,862) (7,723) (7,728)


Financial Ratios



EBITDA margin (%) 20.2 18.5 17.9 19.6

EBIT margin (%) 17.2 16.0 15.4 16.7


ROE (%) 20.0 20.6 17.9 17.6

ROCE (%) 16.9 16.7 14.2 13.6


Receivables (days) 21.0 18.8 21.4 21.5

Inventory (days) 16.1 14.2 15.5 15.9

Payables (days) 46.1 40.9 45.5 46.8

Current ratio (x) 2.5 2.2 2.1 1.9

Quick ratio (x) 1.0 0.8 0.7 0.6






Valuation ratios

EV/Sales (x) 1.8 1.4 1.4 1.3

EV/EBITDA (x) 9.1 7.7 7.6 6.7

P/E (x) 14.9 12.4 12.2 10.9

P/BV (x) 2.8 2.3 2.1 1.8

COMPANY

REPORT

December 12, 2011

Gujarat State Petronet Ltd.

Gasping for gas

COMPANY

UPDATE

CMP Rs84

Target Price Rs95


Relative to Sensex

Summary

Gujarat State Petronet Ltd. (GSPL) is immune to the exchange rate variation and crude oil fluctuation as it

is only present in pipeline business. However, with diminishing outlook on domestic natural gas supply in

India, the company’s return ratio is expected to fall going forward. We expect the company’s volume to

grow to 38mmscmd in FY13E from 35.6mmscmd in FY11. Also, we expect the company’s tariff to remain

stable at Rs820/mscm during FY12-FY13E. In H1FY12, the company’s average volume stood at

36mmscmd. We expect this to decline to 35.6msmcmd in H2FY12 due to fall in RIL’s production volume

from H2FY12. However, we expect its tariff to remain stable at Rs824/mscm in H1FY12.

Further, the company has guided for a capex of Rs120 bn for three of its pipelines – namely Mallavaram-

Bhilwara, Mehsana-Bhatinda and Bhatinda-Srinagar. Capex/km/mmscmd for these pipelines comes at a

range of Rs0.5-0.8 mn/km/mmscmd. This is lower than Rs1.54 for East-West pipeline, which raises risk of

upward revision in capex guidance.

Driven by the lower utilization of its pipeline capacity, we expect the company’s ROCE to fall to 13.9% in

FY13E from 18.5% in FY11. Further, we have not factored in the impact of these three new pipelines in

our model due to uncertainty on gas supply front, which may further dent the return ratio. The stock is

trading at a P/E multiple of 8.8x, P/BV of 1.6x and EV/EBITDA multiple of 5.3x on FY13E. We have

revised our target price downwards to Rs95 from Rs109 on back of falling RIL gas output. Maintain

ACCUMULATE.

Table: EPS Sensitivity based on tariff and volume

Tariff (Rs/mscm)

720 770 820 870 920

Vo

lum

e

(mm

scm

d)

34.0 6.7 7.4 8.2 8.9 9.6

36.0 7.3 8.1 8.9 9.6 10.4

38.0 7.9 8.8 9.6 10.4 11.2

40.0 8.6 9.4 10.3 11.1 12.0

42.0 9.2 10.1 11.0 11.9 12.8


Figure: Volume and tariff trend


750

800

850

900

25.0

30.0

35.0

40.0

FY10 FY11 FY12E FY13E

(Rs/m

scm)

(mm

scm

d)

Volume Tariff

Source: Capitaline

ACCUMULATE

Nifty: 4,867; Sensex: 16,213

Sector Oil and Gas

Bloomberg / Reuters GUJS IN / GSPT.BO



Market cap. (US$ mn) 906


Key Stock Data


-1m -3m -12m

Absolute (%) (15) (23) (22)

Rel to Sensex (%) (5) (16) (13)

Price Performance



FY10 9,920 9,297 93.7 4,110 7.3 11.5 6.2 29.6 18.4

FY11 10,391 9,619 92.6 5,064 9.0 9.3 6.0 28.4 18.5

FY12E 11,276 10,383 92.1 5,184 9.2 9.1 5.6 23.2 15.8

FY13E 11,939 10,976 91.9 5,383 9.6 8.8 5.3 20.0 13.9


Analyst

Sudeep Anand

+91-22-4322 1190

[email protected]

Promoters 37.7


MFs/Banks/FIs 23.9

Govt. 11.0




70

80

90

100

110

120

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

GSPL Sensex

18

Company Update – Gujarat State Petronet Ltd.

Financial Summary



Revenues 9,920 10,391 11,276 11,939

Growth (%) 103.5 4.8 8.5 5.9

EBITDA 9,297 9,619 10,383 10,976

Growth (%) 118.7 3.5 7.9 5.7

Depreciation & amortization 2,365 1,299 1,865 2,164

EBIT 6,933 8,320 8,518 8,813

Growth (%) 172.3 20.0 2.4 3.5

Interest 938 961 1,006 1,031

Other income 275 291 320 352

EBT 6,269 7,650 7,832 8,133

Income taxes 2,131 2,586 2,648 2,749



Adjustments 27 - - -


Growth (%) 232.0 23.2 2.4 3.8


Adjusted EPS (Rs) 7.3 9.0 9.2 9.6

Growth (%) 232.0 23.2 2.4 3.8

DPS (Rs) 1.0 1.0 1.0 1.0



Cash and cash eq 1,742 2,390 5,185 4,886

Accounts receivable 753 698 757 802

Inventories 1,327 623 676 715


Investments 666 766 842 2,842


Net fixed assets 24,368 31,817 37,952 43,788

CWIP 5,387 3,546 3,546 4,546


Other assets 3 2 1 -

Total assets 36,568 42,487 51,492 59,801


Other current liabilities 83 50 58 61

Provisions 3,486 4,692 6,715 8,098

Debt funds 12,595 14,835 16,835 18,835

Equity capital 5,624 5,626 5,626 5,626




BVPS (Rs) 27.8 35.7 43.7 52.1





Non-cash adjustments (7) 2,273 1,710 1,846

Changes in working capital 1,420 (2,753) 581 (224)



Change in investments - (100) (77) (2,000)


Issue of equity 5 1 0 0

Issue/repay debt 1,086 2,239 2,000 2,000

Dividends paid (493) (469) (469) (469)

Change in cash & cash eq 767 648 2,795 (299)


Financial Ratios



EBITDA margin (%) 93.7 92.6 92.1 91.9

EBIT margin (%) 69.9 80.1 75.5 73.8


ROE (%) 29.6 28.4 23.2 20.0

ROCE (%) 18.4 18.5 15.8 13.9




Payables (days) 156 134 100 104

Current ratio (x) 1.6 3.1 3.7 3.5

Quick ratio (x) 0.5 1.1 1.8 1.6






Valuation ratios

EV/Sales (x) 5.8 5.6 5.1 4.8

EV/EBITDA (x) 6.2 6.0 5.6 5.3

P/E (x) 11.5 9.3 9.1 8.8

P/BV (x) 3.0 2.4 1.9 1.6

COMPANY

REPORT

December 12, 2011

Hindustan Petroleum Corporation Ltd.

Value emerging; but not without risk

COMPANY

UPDATE

CMP Rs294

Target Price Rs324


Relative to Sensex

Summary

HPCL is the worst impacted company in our coverage universe in a scenario where rupee is depreciating

and crude oil price is moving higher. The company’s under-recoveries (UR) increase Rs19 bn annually

with every one rupee depreciation against US dollar and by Rs17 bn with every US$5/bbl increase in

crude oil price. On the positive side, in Q2FY12 the company started the test run for its 9mtpa Bhatinda

Refinery (49% stake) and commercial production is expected to start soon, though meaningful

contribution to the company’s bottom-line is expected to come only from FY13E. We expect total crude

throughput for HPCL to increase from 16.8mtpa to 19.8mtpa by FY13E with the start-up of Bhatinda

refinery. On GRM front, the company reported 53% YoY drop in GRM of US$1.5 in H1FY12 primarily due

to higher forex and inventory losses. In H2FY12, we are expecting HPCL to report GRM of US$5.5/bbl

which would keep average for FY12E at US$3.5/bbl (US$4/bbl in FY13E).

Driven by change in crude oil price and exchange rate assumption, we are revising HPCL’s net subsidy

burden upwards to Rs42/31 bn for FY12/FY13E vs. earlier assumption of Rs35/21 bn. Consequently, we

are revising our EPS estimates downwards by 44/25% to Rs23.8/36.8 for FY12/FY13E. The stock is

currently trading at a P/BV of 0.7x on FY13E. We are revising our target price to Rs324 from earlier

Rs350. The stock has corrected over 14% since our recent downgrade (note dated November 1, 2011).

Therefore, we are upgrading the stock from HOLD to ACCUMULATE on the back of cheaper valuation

and expected fall in crude oil prices. However, there is a potential risk of crude oil prices sustaining on the

back of rising tension over Iran crude oil export ban from western countries, which may further deteriorate

the company’s financial health.

Table: HPCL’s share of under-recovery burden (Rs mn)


Auto fuel 32,471 79,470 62,330 19,500 167,155 127,778

Cooking fuel 70,275 91,710 32,685 27,365 116,157 63,648

Total 102,747 171,180 95,015 46,865 283,312 191,426

Shared by:


% share 54.1 52.4 34.5 0.0 43.0 43.0


% share 31.6 38.7 33.3 33.3 42.0 42.0

HPCL 14,644 15,092 30,600 31,253 42,497 28,714

% share 14.3 8.8 32.2 66.7 15.0 15.0


Source: Capitaline

ACCUMULATE

Nifty: 4,867; Sensex: 16,213


-1m -3m -12m

Absolute (%) (7) (19) (26)

Rel to Sensex (%) (5) (16) (13)

Price Performance



FY10 1,114,679 27,658 2.5 14,728 43.4 6.8 11.8 12.7 6.0

FY11 1,384,928 35,541 2.6 17,364 51.2 5.7 9.2 13.7 6.0

FY12E 1,955,952 20,415 1.0 8,076 23.8 12.3 16.0 6.1 3.4

FY13E 1,928,519 26,461 1.4 12,470 36.8 8.0 12.4 9.3 4.3


Analyst

Sudeep Anand

+91-22-4322 1190

[email protected]

Sector Oil and Gas

Bloomberg / Reuters HPCL IN / HPCL.BO





Key Stock Data

Promoters 51.1


MFs/Banks/FIs 28.6


Public & Others 5.4


60

70

80

90

100

110

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

HPCL Sensex

20

Company Update – Hindustan Petroleum Corporation Ltd.

Financial Summary



Revenues 1,114,679 1,384,928 1,955,952 1,928,519

Growth (%) (13.6) 24.2 41.2 (1.4)

EBITDA 27,658 35,541 20,415 26,461

Growth (%) (15.3) 28.5 (42.6) 29.6


EBIT 15,153 20,561 5,245 10,320

Growth (%) (31.1) 35.7 (74.5) 96.8

Interest 9,321 9,105 9,572 9,540

Other income 18,377 14,748 16,255 17,914

EBT 24,208 26,204 11,928 18,694

Income taxes 9,443 9,183 4,180 6,551


Min int / inc from assoc (1) (16) - -


Adjustments 39 (328) (328) (328)


Growth (%) 94.6 17.9 (53.5) 54.4


Adjusted EPS (Rs) 43.4 51.2 23.8 36.8

Growth (%) 94.6 17.9 (53.5) 54.4

DPS (Rs) 12.0 14.0 12.0 12.0



Cash and cash eq 8,030 7,516 2,594 9,624


Inventories 131,050 173,241 244,671 241,239


Investments 96,171 81,175 87,249 89,033


Net fixed assets 161,375 194,891 194,721 199,580

CWIP 89,165 126,482 126,482 126,482



Other assets 9 400 400 400

Total assets 550,517 662,711 745,933 752,931



Provisions 21,253 18,385 23,463 28,706

Debt funds 243,364 311,245 328,245 327,245

Other liabilities 25 10 10 10

Equity capital 3,390 3,390 3,390 3,390




BVPS (Rs) 358.0 391.7 388.0 405.0





Non-cash adjustments 18,050 2,733 1,837 5,207

Changes in working capital 5,203 (28,965) (20,818) 2,110



Change in investments (32,580) 5,454 (6,074) (1,785)

Other investing cashflow 52,127 12,116 - -


Issue of equity 1,375 (1,374) (0) (0)

Issue/repay debt 4,569 62,463 17,000 (1,000)

Dividends paid (2,150) (4,802) (4,785) (4,785)

Change in cash & cash eq (4,733) (5,931) (4,922) 7,030


Financial Ratios



EBITDA margin (%) 2.5 2.6 1.0 1.4

EBIT margin (%) 1.4 1.5 0.3 0.5


ROE (%) 12.7 13.7 6.1 9.3

ROCE (%) 6.0 6.0 3.4 4.3





Current ratio (x) 1.4 1.5 1.4 1.4

Quick ratio (x) 0.2 0.2 0.2 0.2






Valuation ratios

EV/Sales (x) 0.3 0.2 0.2 0.2

EV/EBITDA (x) 11.8 9.2 16.0 12.4

P/E (x) 6.8 5.7 12.3 8.0

P/BV (x) 0.8 0.8 0.8 0.7

COMPANY

REPORT

December 12, 2011

Indian Oil Corporation Ltd.

No growth trigger

COMPANY

UPDATE

CMP Rs270

Target Price Rs285


Relative to Sensex

Summary

IOC’s refinery utilization is likely to increase 4% YoY to 55mtpa (standalone) in FY12 and likely to remain

stable in FY13E. However, the company is set to expand its current consolidated capacity of 65.7mtpa to

98mtpa by FY14, driven by a) 15mtpa greenfield refinery at Paradip, b) brownfield expansion of its Koyali

refinery from 13.7mtpa to 18mtpa and c) brownfield expansion of Mathura plant to 11mtpa from current

8mtpa. On GRM front, the company reported 49% YoY drop to US$2.4 in H1FY12 primarily due to higher

forex and inventory losses. In H2FY12, we are expecting IOC to report GRM of US$6/bbl which would

keep average for FY12E at US$4.2/bbl (US$4.5/bbl in FY13E).

IOC’s under-recoveries (UR) are expected to increase by Rs44 bn annually with every one rupee

depreciation against US dollar, and by Rs59 bn with US$5/bbl increase in crude oil price. Driven by

change in crude oil price and exchange rate assumption, we are revising our UR assumption for IOC

upwards to Rs71/52 bn for FY12/FY13E from earlier assumption of Rs58/46 bn. Consequently, we are

revising our EPS estimates downwards by 34/25% to Rs16.9/20.4 for FY12/FY13E. The stock is currently

trading at a P/BV of 1.0x on FY13E. We are revising our target price downward to Rs285 from earlier

Rs303. The stock has corrected over 7% since our recent downgrades (note dated November 9, 2011).

However, due to lack of any growth trigger we maintain our HOLD rating on the stock. Further, there is a

potential risk of crude oil prices sustaining on the back of rising tension over Iran crude oil export ban from

western countries, which may further deteriorate the company’s financial health.

Table: IOC’s estimated share of UR burden (Rs mn)


Auto fuel 75,483 201,641 156,167 44,583 422,461 358,974

Cooking fuel 183,307 229,477 81,891 72,992 290,258 165,255

Total 258,789 431,118 238,058 117,576 712,720 524,228

Shared by:


% share 58.6 52.4 34.4 0.0 43.0 43.0


% share 29.2 38.7 33.3 33.3 42.0 42.0

IOC’s share of under-recovery burden 31,535 38,032 76,726 78,367 106,908 78,634

% share 12.2 8.8 32.2 66.7 15.0 15.0


Source: Capitaline

HOLD

Nifty: 4,867; Sensex: 16,213


-1m -3m -12m

Absolute (%) (6) (14) (24)

Rel to Sensex (%) (5) (16) (13)

Price Performance



FY10 2,501,053 129,614 5.2 107,994 44.5 6.1 8.5 22.0 12.3

FY11 3,081,315 126,013 4.1 79,016 32.5 8.3 8.8 14.4 9.5

FY12E 3,944,958 111,979 2.8 41,117 16.9 15.9 9.9 6.9 7.2

FY13E 3,679,807 120,462 3.3 49,640 20.4 13.2 9.2 7.9 7.0


Analyst

Sudeep Anand

+91-22-4322 1190

[email protected]

Sector Oil and Gas

Bloomberg / Reuters IOCL IN / IOC.BO





Key Stock Data

Promoters 78.9


MFs/Banks/FIs 5.1

Govt. 0.1


Public & Others 5.4


70

80

90

100

110

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

IOCL Sensex

22

Company Update – Indian Oil Corporation Ltd.

Financial Summary



Revenues 2,501,053 3,081,315 3,944,958 3,679,807

Growth (%) (12.6) 23.2 28.0 (6.7)

EBITDA 129,614 126,013 111,979 120,462

Growth (%) 121.6 (2.8) (11.1) 7.6


EBIT 94,063 76,687 55,688 56,900

Growth (%) 253.8 (18.5) (27.4) 2.2

Interest 17,262 29,803 60,294 53,384

Other income 73,685 54,255 57,712 60,597

EBT 150,486 101,140 53,106 64,113

Income taxes 40,499 20,284 10,650 12,858


Min int / inc from assoc 2,855 2,549 1,338 1,616


Adjustments (862) (709) - -


Growth (%) 388.8 (26.8) (48.0) 20.7


Adjusted EPS (Rs) 44.5 32.5 16.9 20.4

Growth (%) 380.1 (26.8) (48.0) 20.7

DPS (Rs) 13.1 9.7 3.0 4.0



Cash and cash eq 15,984 15,374 24,329 10,844


Inventories 410,765 549,171 703,094 692,636


Investments 214,298 186,469 189,469 192,469

Gross fixed assets 780,202 993,252 1,007,252 1,217,252

Net fixed assets 449,384 615,713 574,163 721,342

CWIP 227,678 142,842 182,842 2,842



Other assets 186 154 154 154

Total assets 1,492,949 1,775,453 2,013,589 1,941,333



Provisions 103,612 69,291 38,835 40,671

Debt funds 494,726 578,376 748,376 658,376

Other liabilities 18,330 19,930 21,269 22,885

Equity capital 24,280 24,280 24,280 24,280



Total liabilities 1,492,949 1,775,453 2,013,589 1,941,334

BVPS (Rs) 216.1 237.1 250.6 266.3





Non-cash adjustments 23,042 (16,441) 10,466 12,174

Changes in working capital (182,446) (50,193) (203,396) (4,497)

Cash flow from operations (16,608) 61,190 (95,521) 120,879


Change in investments 147,917 26,902 (3,000) (3,000)

Other investing cash flow (121,125) (106,127) - -

Cash flow from investing 12,190 (107,323) (57,000) (33,000)


Issue/repay debt 21,257 83,652 170,000 (90,000)

Dividends paid (10,907) (38,128) (8,524) (11,365)

Other financing cash flow - - - -

Change in cash & cash eq. 5,932 (610) 8,956 (13,486)

Closing cash & cash eq. 15,984 15,374 24,329 10,844

Ratio Analysis



EBITDA margin (%) 5.2 4.1 2.8 3.3

EBIT margin (%) 3.8 2.5 1.4 1.5


ROE (%) 22.0 14.4 6.9 7.9

ROCE (%) 12.3 9.5 7.2 7.0





Current ratio (x) 1.8 1.7 1.9 1.9

Quick ratio (x) 0.2 0.2 0.3 0.3






Valuation ratios

EV/Sales (x) 0.4 0.4 0.3 0.3

EV/EBITDA (x) 8.5 8.8 9.9 9.2

P/E (x) 6.1 8.3 15.9 13.2

P/BV (x) 1.3 1.1 1.1 1.0

COMPANY

REPORT

December 12, 2011

Oil India Ltd.

Holding discount impacts rating

COMPANY

UPDATE

CMP Rs1,181

Target Price Rs1,260


Relative to Sensex

Summary

We have revised Oil India Ltd. (OIL) subsidy burden upwards to Rs65/47 bn in FY12/FY13 from earlier Rs58/26 bn due to upward revision in upstream share from 38% to 42%. Due to higher co-relation with the subsidy to its net realization, impact on the company’s earnings is higher than ONGC. We expect OIL to report net realization of US$60/61/bbl in FY12/FY13E, lower from earlier estimate of US$65/68/bbl. Consequently, the company’s EPS estimates have been cut by 8.5/7.5% for FY12/FY13E to Rs128.2/151.2. The company’s crude oil production is likely to grow at a CAGR of 5% during FY11-FY13E to 4mtpa and natural gas production volume to grow at a CAGR of 10.7% to 7.9mmscmd.

However, the main problem with the company is concern over utilization of its huge cash balance of Rs131 bn, which has been raised through IPO and through operating performance. The company is trying to acquire producing/developing assets since IPO but has not closed anything. There are concerns that cash may be utilized for cross holding in ONGC, which would fetch holding discount. Therefore, we are now giving 20% discount to its cash balance till we get the clarity on utilization of funds. We are revising our SOTP-based target price downwards to Rs1,260 from earlier Rs1,484. Hence, downgrade from BUY to ACCUMULATE.

Table: SOTP-based valuation

Rs mn Revised valuation (Rs) Old valuation (Rs)

NPV of domestic oil assets 162,441 707 793

NPV of domestic gas assets 32,863 133 133

Domestic oil and gas assets 195,304 840 926

6x EV/EBITDA 1,582 6 6

Net cash 132,683 441 552

Total price (Rs) 1,260 1,484


Table: EPS Sensitivity Analysis


45.5 46.5 47.5 48.5 49.5

Cru

de

oil

pri

ce

(US

$/b

bl)

87.0 118.5 122.9 127.3 131.7 136.1

92.0 130.0 134.6 139.2 143.9 148.5

97.0 148.5 146.3 151.2 156.1 161.0

102.0 152.9 158.0 163.1 168.3 173.4

107.0 164.3 169.7 175.1 180.5 185.9





Revenue 104,510 101,280 (3.1) 107,282 104,454 (2.6)

EBITDA 47,759 45,807 (4.1) 51,568 49,855 (3.3)

EBITDA margin (%) 45.7 45.2 (47) 48.1 47.7 (34)

Net profit 33,700 30,815 (8.6) 39,346 36,355 (7.6)

FDEPS (Rs) 140.2 128.7 (8.2) 163.6 153.3 (6.3)


Source: Capitaline

ACCUMULATE

Nifty: 4,867; Sensex: 16,213

52-week high/low Rs1,438/1,102

-1m -3m -12m

Absolute (%) (8) (10) (15)

Rel to Sensex (%) (5) (16) (13)

Price Performance



FY10 79,226 34,426 43.5 26,105 113.8 10.4 4.6 22.6 22.5

FY11 83,641 36,162 43.2 28,837 119.9 9.8 4.4 19.6 19.0

FY12E 101,280 45,807 45.2 30,815 128.2 9.2 3.5 18.6 17.8

FY13E 104,454 49,855 47.7 36,355 151.2 7.8 3.2 19.3 18.9


Analyst

Sudeep Anand

+91-22-4322 1190

[email protected]

Sector Oil and Gas

Bloomberg / Reuters OINL IN / OILI.BO




3-m daily average vol. 6837

Key Stock Data

Promoters 78.5


MFs/Banks/FIs 5.3


Public & Others 2.9


70

80

90

100

110

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

OIL Sensex

24

Company Update – Oil India Ltd.

Financial Summary



Revenues 79,226 83,641 101,280 104,454

Growth (%) 10.0 5.6 21.1 3.1

EBITDA 34,426 36,162 45,807 49,855

Growth (%) 21.4 5.0 26.7 8.8

Depreciation & amortization 4,811 4,781 13,613 10,736

EBIT 29,615 31,381 32,194 39,119

Growth (%) 20.5 6.0 2.6 21.5

Interest 37 139 71 36

Other income 9,372 11,851 13,870 15,178

EBT 38,951 43,092 45,993 54,261

Income taxes 12,846 14,255 15,178 17,906




Growth (%) 20.8 10.5 6.9 18.0


Adjusted EPS (Rs) 113.8 119.9 128.2 151.2

Growth (%) 12.6 5.4 6.9 18.0

DPS (Rs) 34.0 37.5 38.5 39.5



Cash and cash eq 85,430 117,714 129,420 152,844


Inventories 4,534 5,004 6,059 6,249


Investments 8,594 8,847 8,847 8,847


Net fixed assets 40,189 42,483 43,922 42,218

CWIP 9,271 13,241 18,013 21,786


Other assets 184 - 0 0

Total assets 170,724 201,111 224,059 249,091



Provisions 14,648 12,220 15,794 17,299

Debt funds 375 10,268 5,211 2,682

Other liabilities 19 1,645 1,645 1,645

Equity capital 2,405 2,405 2,405 2,405




BVPS (Rs) 572.4 648.7 731.9 836.9





Non-cash adjustments 2,534 (1,970) 1,493 (1,251)

Changes in working capital (11,776) 4,901 (1,965) (354)



Change in investments (3,200) (253) - -

Other investing cashflow (1,000) 5,002 - -


Issue of equity 27,772 - - -

Issue/repay debt (190) 9,893 (5,057) (2,529)

Dividends paid (8,944) (9,533) (7,743) (7,761)

Other financing cashflow 48 (49) - -

Change in cash & cash eq 24,730 32,284 11,706 23,424


Financial Ratios



EBITDA margin (%) 43.5 43.2 45.2 47.7

EBIT margin (%) 37.4 37.5 31.8 37.5


ROE (%) 22.6 19.6 18.6 19.3

ROCE (%) 22.5 19.0 17.8 18.9





Current ratio (x) 6.8 7.0 6.5 7.3

Quick ratio (x) 5.1 5.7 5.2 5.9




Interest coverage ratio (x) 811.0 225.4 455.7 1,075.9


Valuation ratios

EV/Sales (x) 2.0 1.9 1.6 1.5

EV/EBITDA (x) 4.6 4.4 3.5 3.2

P/E (x) 10.4 9.8 9.2 7.8

P/BV (x) 2.1 1.8 1.6 1.4

COMPANY

REPORT

December 12, 2011

Oil and Natural Gas Corporation Ltd.

OVL positives to balance higher subsidy share

COMPANY

UPDATE

CMP Rs262

Target Price Rs295


Relative to Sensex

Summary

We have revised our percentage subsidy share assumption from Government/upstream/OMCs of

47/38/15 to 43/42/15 due to poor financial health and reluctance of government to give higher net

realization to upstream. We expect ONGC’s subsidy share burden to go up substantially in H2FY12 to

Rs271 bn compared to Rs178 bn shared in H1FY12, which would bring the total subsidy burden of Rs448

bn in FY12E. Consequently, the company’s net realization would come down to US$55.5/56.5/bbl in

FY12/FY13E from earlier assumption of US$59.7/60.7/bbl (H1FY12 of US$66.5/bbl). However, strong

performance from OVL due to higher crude oil prices would offset the negative impact of higher subsidy

burden. OVL has already surprised us in H1FY12, with 263% YoY growth in its net profit to Rs28 bn due

to lower write-offs. We expect OVL’s net profit to grow 56% YoY to Rs42 bn in FY12.

Overall, we are revising our FY12E/FY13E EPS estimates by (1.5%)/0.7% on the back of change in crude

oil prices and exchange rate assumption. In near term, subsidy sharing ratio and utilization of large cash

balance would be key things to watch. In medium term, production growth at OVL and ramp-up of

marginal fields and start-up of production would be key growth triggers. The stock is currently trading at

a P/E multiple of 9.1x and EV/EBITDA of 3.6x on FY13E. We maintain our TP of Rs295 and

ACCUMULATE rating on the stock.




Revenue 1,320,081 1,312,620 (0.6) 1,261,068 1,269,872 0.7

EBITDA 541,374 537,118 (0.8) 547,936 552,639 0.9

EBITDA margin (%) 41.0 40.9 (9.0) 43.5 43.5 7.0

Net profit 242,122 238,595 (1.5) 245,415 247,250 0.7

EPS (Rs) 28.3 27.9 (1.5) 28.7 28.9 0.7


Table: Sensitivity of FY13E EPS on crude oil prices and exchange rates


45.5 46.5 47.5 48.5 49.5

Cru

de

oil

pri

ce*

(US

$/b

bl)

87 18.7 20.1 21.4 22.8 24.1

92 22.3 23.7 25.2 26.6 28.0

97 25.9 27.4 28.9 30.4 31.9

102 29.5 31.1 32.6 34.2 35.8

107 33.1 34.7 36.4 38.0 39.7

* Keeping subsidy figures unchanged


Source: Capitaline

ACCUMULATE

Nifty: 4,867; Sensex: 16,213


-1m -3m -12m

Absolute (%) (4) 0 (21)

Rel to Sensex (%) (5) (16) (13)

Price Performance


Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) P/E (x) EV/EBITDA (x) RoE (%) RoCE (%)

FY10 1,017,546 443,896 43.6 194,035 22.7 11.5 4.5 20.0 19.1

FY11 1,176,151 484,512 41.2 224,559 26.2 10.0 4.2 20.7 19.8

FY12E 1,312,620 537,118 40.9 238,595 27.9 9.4 3.8 19.4 18.9

FY13E 1,269,872 552,639 43.5 247,250 28.9 9.1 3.6 17.9 17.6


Analyst

Sudeep Anand

+91-22-4322 1190

[email protected]

Sector Oil and Gas

Bloomberg / Reuters ONGC IN / ONGC.BO


Market cap. (Rs mn) 2,238,972



Key Stock Data

Promoters 74.1


MFs/Banks/FIs 7.0


Public & Others 2.0


70

80

90

100

110

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

ONGC Sensex

26

Company Update – Oil and Natural Gas Corporation Ltd.

Financial Summary



Revenue 1,017,546 1,176,151 1,312,620 1,269,872

Growth (%) (2.7) 15.6 11.6 (3.3)

EBITDA 443,896 484,512 537,118 552,639

Growth (%) 6.4 9.1 10.9 2.9


EBIT 256,708 278,248 305,403 315,336

Growth (%) (2.3) 8.4 9.8 3.3

Interest 5,022 4,374 5,526 5,434

Other income 52,728 69,289 64,734 67,937

EBT 304,414 343,163 364,612 377,838

Income taxes 107,138 114,913 122,096 126,525


Min int / inc from assoc 3,240 3,690 3,921 4,063



Growth (%) (1.7) 15.7 6.3 3.6


Adjusted EPS (Rs) 22.7 26.2 27.9 28.9

Growth (%) (1.7) 15.7 6.3 3.6

DPS (Rs) 8.2 8.7 9.0 9.0



Cash and cash eq 223,842 286,883 307,967 334,953


Inventories 82,400 85,676 96,811 91,028


Investments 51,593 33,561 33,561 33,561

Gross fixed assets 1,933,001 2,170,355 2,410,355 2,670,355

Net fixed assets 755,427 840,547 935,547 1,045,547

CWIP 256,164 376,165 417,822 414,974



Other assets 8,413 7,961 7,961 7,961

Total assets 1,569,734 1,825,954 2,001,777 2,121,894



Provisions 75,656 52,623 52,530 54,198

Debt funds 62,669 62,912 51,731 42,786

Other liabilities 191,022 218,523 222,444 226,507

Equity capital 42,778 42,778 42,778 42,778

Reserves & surplus 971,289 1,110,495 1,259,562 1,417,284

Shareholder's funds 1,014,066 1,153,272 1,302,340 1,460,062


BVPS (Rs) 123.5 139.8 157.2 175.7





Non-cash adjustments 39,252 27,058 47,564 (20,456)

Changes in working capital (16,195) 69,577 (27,708) 5,816

Cash flow from operations 305,721 434,721 490,166 469,913


Change in investments (22,485) 19,508 - -

Other investing cash flow 4,326 (5,738) - -

Cash flow from investing (230,691) (263,276) (368,372) (344,455)

Issue/repay debt (164) 4,496 (11,181) (8,945)

Dividends paid (80,781) (117,899) (89,528) (89,528)



Financial Ratios



EBITDA margin (%) 43.6 41.2 40.9 43.5

EBIT margin (%) 25.2 23.7 23.3 24.8


RoE (%) 20.0 20.7 19.4 17.9

RoCE (%) 19.1 19.8 18.9 17.6




Payables (days) 101 115 130 145

Current ratio (x) 2.2 1.7 1.7 2.0

Quick ratio (x) 1.0 0.9 0.8 1.0






Valuation ratios

EV/Sales (x) 2.0 1.7 1.5 1.6

EV/EBITDA (x) 4.5 4.2 3.8 3.6

P/E (x) 11.5 10.0 9.4 9.1

P/BV (x) 2.1 1.9 1.7 1.5

COMPANY

REPORT

December 12, 2011

Petronet LNG Ltd.

In buoyant mode

COMPANY

UPDATE

CMP Rs159

Target Price Rs200


Relative to Sensex

Summary

Petronet LNG’s (PLNG) profit does not get majorly impacted by exchange rate variation, which mitigates

currency related risk for the company. However, most of the recent contracts are linked to Japanese

crude cocktail (JCC) which increases/decreases the input cost with crude oil price variation. However, the

company has back-to-back sale contracts with its buyers which also keep its profits hedged from crude oil

price fluctuations. Further, all its re-gasification and marketing margin on spot cargoes are in rupee terms,

which enhances visibility.

The company’s expansion plans at Dahej and Kochi are running on track and the site for new 5mtpa

Greenfield terminal along East Coast is expected to get finalized in near term. The company has

ambitious plans to operate a total capacity of 25mtpa by FY16E. Strong volume growth with expansion

plans at Dahej, Kochi and East Coast, positive demand-supply scenario and strong marketing margins on

spot cargoes are key growth drivers for the company. We are expecting strong result in Q3FY12 driven by

higher volumes. We have revised our volume estimates upwards by 2% in FY12 as the company is

confident to operate at over 11mtpa of capacity utilization. Therefore, we are revising our EPS estimates

slightly upwards by 2.5% in FY12 and marginal 1% in FY13E. The stock is trading at a P/E multiple of

10.2x, P/BV of 3x and EV/EBITDA of 6.5x on FY13E. We maintain our BUY rating on the stock with

revised DCF-based TP of Rs200 from Rs197 earlier.

Table: Our Assumptions

Dahej - throughput (tbtu) FY11 FY12E FY13E

Long-term volume 375 375 375

Short-term/spot volume 38 98 99

Regas services 28 69 69

Total Dahej volume 440 542 543

% growth 14.2 23.1 0.2

Gross realisation (US$/mmbtu) 7.0 9.4 10.5

Dahej - Regasification margin (Rs/mmbtu)

Regas margin - Long term 32.2 33.8 35.5

Regas/marketing margin - short term/spot 54.7 55.0 70.0

Regas margin - services 32.2 33.8 35.5

Kochi

Spot volume - - 13

Gross realisation (US$/mmbtu) - - 15.2

Regas margin (Rs/mmbtu) - - 60

PLNG - combined

Volume 440 542 556

Gross realisation (US$/mmbtu) 7.0 9.4 10.6

Exchange rate (Rs/US$) 45.6 47.5 47.5

Brent crude oil price (US$/bbl) 86.7 110 95

Source: Company, IDBI Capital Research

Source: Capitaline

BUY

Nifty: 4,867; Sensex: 16,213

Sector Oil and Gas

Bloomberg / Reuters PLNG IN / PLNG.BO





Key Stock Data


-1m -3m -12m

Absolute (%) (6) (8) 37

Rel to Sensex (%) (5) (16) (13)

Price Performance

Promoters 50.0


MFs/Banks/FIs 7.9




Table: Financial snapshot (Rs mn)


FY10 106,491 8,465 7.9 4,045 5.4 29.5 16.0 19.2 12.1

FY11 131,973 12,163 9.2 6,196 8.3 19.2 11.1 25.2 14.2

FY12E 212,577 17,803 8.4 10,367 13.8 11.5 7.6 34.8 18.3

FY13E 247,606 20,675 8.4 11,638 15.5 10.2 6.5 31.9 18.5


70

90

110

130

150

170

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

PLNG Sensex

Analyst

Sudeep Anand

+91-22-4322 1190

[email protected]

28

Company Update – Petronet LNG Ltd.

Financial Summary



Revenues 106,491 131,973 212,577 247,606

Growth (%) 26.3 23.9 61.1 16.5

EBITDA 8,465 12,163 17,803 20,675

Growth (%) (6.1) 43.7 46.4 16.1


EBIT 6,856 10,316 15,922 18,161

Growth (%) (14.2) 50.5 54.3 14.1

Interest 1,839 1,931 1,842 2,334

Other income 978 680 883 972

EBT 5,995 9,064 14,963 16,798

Income taxes 1,950 2,868 4,596 5,160




Growth (%) (22.0) 53.2 67.3 12.3


Adjusted EPS (Rs) 5.4 8.3 13.8 15.5

Growth (%) (22.0) 53.2 67.3 12.3

DPS (Rs) 1.8 2.0 2.1 2.2



Cash and cash eq 3,405 1,540 7,638 15,233


Inventories 2,223 2,480 3,994 4,653


Investments 5,386 11,649 12,649 18,649


Net fixed assets 28,829 27,024 31,144 42,629

CWIP 13,184 22,029 19,826 1,000

Intangible assets - - - -


Other assets - - - -

Total assets 56,352 71,097 87,284 96,409



Provisions 1,557 1,786 1,831 1,918

Debt funds 24,998 32,161 35,948 35,017

Equity capital 7,500 7,500 7,500 7,500




BVPS (Rs) 29.8 35.7 43.8 53.4





Non-cash adjustments 311 690 (2,651) (2,631)

Changes in working capital 3,026 (1,079) (1,499) (527)


Capital expenditure (10,470) (8,889) (3,797) 4,826

Change in investments (2,339) (6,263) (1,000) (6,000)



Issue/repay debt 2,181 7,163 3,786 (930)

Dividends paid (1,536) (1,531) (989) (1,295)

Other financing cashflow - - - -

Change in cash & cash eq (3,173) (1,865) 6,098 7,595


Financial Ratios



EBITDA margin (%) 7.9 9.2 8.4 8.4

EBIT margin (%) 6.4 7.8 7.5 7.3


ROE (%) 19.2 25.2 34.8 31.9

ROCE (%) 12.1 14.2 18.3 18.5





Current ratio (x) 1.6 1.3 1.7 2.0

Quick ratio (x) 1.1 1.0 1.3 1.6






Valuation ratios

EV/Sales (x) 1.3 1.0 0.6 0.5

EV/EBITDA (x) 16.0 11.1 7.6 6.5

P/E (x) 29.5 19.2 11.5 10.2

P/BV (x) 5.3 4.4 3.6 3.0

COMPANY

REPORT

December 12, 2011

Reliance Industries Ltd.

Gas worries hit estimates

COMPANY

UPDATE

CMP Rs755

Target Price Rs847


Relative to Sensex

Summary

We are revising our PAT estimates downwards by 14% driven primarily by lower GRM assumption

and decline in production volume from KG-D6. The company is facing significant delay in

approvals for its capex plan in E&P assets. Further, arbitration process against the government’s

decision on curbing cost recovery made in KG-D6 block may aggravate the situation. However, the

company has aggressive plans in Telecom, natural gas marketing and financial business, which

we are not factoring owing to the gestation period involved. We are downgrading the stock from

BUY to ACCUMULATE with revised TP of Rs847 from earlier Rs996.

Expecting fall in GRMs in H2FY12: We expect GRMs to fall from H1FY12 level of US$10.2/bbl to

US$7.9/bbl in H2FY12 (FY12E average at US$9/bbl), in line with Singapore refining margins. Further, we

expect it to remain stable at US$8.5/bbl in FY13E, below our earlier expectation of US$10/bbl.

Averaging 40mmmscmd of gas production from KG-D6 in FY13E: Natural gas production is

continuously declining and the company is facing higher level of water cuts in its D1 & D3 fields. In

H1FY12, the company produced at an average rate of 47mmscmd, while we expect average production

rate of 41mmscmd in H2FY12 (averaging 44mmscmd in FY12). Further, due to steady fall in production in

recent quarters we are modeling 40mmscmd of gas production in FY13E and FY14E, before ramping up

to 50mmscmd in FY15 and 55mmscmd as plateau production rate thereafter.

Petrochemical margins to remain stable at 11.5%-12%: We expect buoyancy in polymer margin to

continue driven by strong domestic consumption growth, no incremental capacity addition in FY12 and

average demand growth of 4.6% against supply growth of 3% over the next couple of years. Therefore,

we expect RIL’s petrochemical margins to remain stable at 11.6% in FY12E and 12% in FY13E.

Shale gas production guidance revised upwards: RIL has upped production guidance for Pioneer

shale gas assets by 15-25% recently to 28/42kboepd in CY12/CY13E. Further, currently the company’s

net production from all three shale gas assets is about 4.5mmscmed at end of Q2FY12. However, shale

gas is expected to take at least a couple of years to see a material impact on its bottom line.

Delay in approval, arbitration process for cost recoveries are major concerns: RIL has initiated

arbitration process against the government’s decision on disallowance of some of the investments made

in KG-D6 due to drop in production. We believe such arbitration would further slow down the approvals

from the government for development plan in current producing and satellite fields.

Estimates revised downwards on lower GRM assumption; downgrading to ACCUMULATE: We are

revising our EPS estimates downwards by 14% in FY13E on the back of lower GRMs and lower natural

gas production volume from KG-D6. Though the company has some aggressive plans in telecom, natural

gas marketing and financial business, it is early days yet to factor these in. We are revising our TP

downwards to Rs847 from earlier Rs996 and downgrading to ACCUMULATE from BUY.

Source: Capitaline

ACCUMULATE

Nifty: 4,867; Sensex: 16,213

Sector Oil and Gas

Bloomberg / Reuters RIL IN / RELI.BO


Market cap. (Rs mn) 2,473,647



Key Stock Data

52-week high/low Rs1,090/714

-1m -3m -12m

Absolute (%) (13) (8) (23)

Rel to Sensex (%) (5) (16) (13)

Price Performance

Promoters 44.7


MFs/Banks/FIs 11.0

Govt. 0.1






FY10 2,037,397 308,939 15.2 158,976 48.6 15.5 7.9 12.1 8.8

FY11 2,658,106 389,609 14.7 204,591 62.5 12.1 6.3 13.9 10.1

FY12E 3,404,430 397,389 11.7 209,068 63.9 11.8 6.2 12.4 9.2

FY13E 2,852,366 391,153 13.7 216,301 66.1 11.4 6.3 11.3 8.7


70

80

90

100

110

120

Dec

-10

Jan-

11

Feb

-11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

RIL Sensex

Analyst

Sudeep Anand

+91-22-4322 1190

[email protected]

30


Financial Summary



Revenues 2,037,397 2,658,106 3,404,430 2,852,366

Growth (%) 34.7 30.5 28.1 (16.2)

EBITDA 308,939 389,609 397,389 391,153

Growth (%) 31.9 26.1 2.0 (1.6)


EBIT 199,481 248,399 258,609 253,871

Growth (%) 12.2 24.5 4.1 (1.8)

Interest 20,596 24,110 25,882 22,112

Other income 107,913 18,741 34,669 44,588

EBT 286,799 243,031 267,395 276,347

Income taxes 42,563 47,830 58,827 60,796




Growth (%) 6.2 28.7 2.2 3.5


Adjusted EPS (Rs) 48.6 62.5 63.9 66.1

Growth (%) 2.2 28.6 2.2 3.5

DPS (Rs) 7.0 8.0 9.0 10.0



Cash and cash eq 138,908 301,390 661,389 791,233


Inventories 343,933 385,194 493,346 413,345


Investments 131,123 215,962 253,323 298,156

Gross fixed assets 2,210,453 2,350,269 2,324,109 2,474,109

Net fixed assets 1,585,232 1,563,990 1,399,050 1,406,593



Other assets 23 14 4 -

Total assets 2,487,676 2,964,479 3,354,980 3,403,124



Provisions 36,950 47,303 47,857 48,422

Debt funds 646,055 841,062 796,623 772,244

Equity capital 29,780 29,810 29,810 29,810

Reserves & surplus 1,380,250 1,511,117 1,797,989 1,980,184

Shareholder's funds 1,410,030 1,540,928 1,827,800 2,009,994


BVPS (Rs) 473.5 516.9 613.1 674.3





Non-cash adjustments (135,155) (34,971) 108,298 4,127

Changes in working capital (59,381) (10,395) (21,074) 13,351


Capital expenditure (230,168) (336,039) 29,134 (147,056)

Change in investments 26,447 (81,021) (37,361) (44,833)


Issue of equity 5,125 1,957 - -

Issue/repay debt (58,221) 207,014 (44,439) (24,379)

Other financing cashflow (4) - - -



Financial Ratios



EBITDA margin (%) 15.2 14.7 11.7 13.7

EBIT margin (%) 9.8 9.3 7.6 8.9


ROE (%) 12.1 13.9 12.4 11.3

ROCE (%) 8.8 10.1 9.2 8.7





Current ratio (x) 1.8 1.9 2.2 2.7

Quick ratio (x) 0.6 0.9 1.3 1.7






Valuation ratios

EV/Sales (x) 1.2 0.9 0.7 0.9

EV/EBITDA (x) 7.9 6.3 6.2 6.3

P/E (x) 15.5 12.1 11.8 11.4

P/BV (x) 1.6 1.5 1.2 1.1

Company Update – Reliance Industries Ltd.


31

Annexure I

Table: Global upstream valuation

Mkt Cap P/E P/BV EV/EBITDA ROE (%) 2P Reserves

EV/BOE

(US$ mn) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E (US$/BOE)

Integrated

EXXON Mobil Corp 388,633 9.5 9.8 2.4 2.1 4.5 4.5 26 23 18.2

Royal Dutch SHELL PLC-A SHS 129,911 6.1 5.8 1.0 0.9 1.9 1.9 29 28 16.2

BP PLC 137,055 4.0 4.1 0.8 0.7 2.4 2.4 20 18 10.0

PETROBRAS - PETROLEO BRAS-PR 72,500 14.3 13.9 1.6 1.5 4.9 4.5 27 26 8.9

Chevron Corp 208,150 7.6 8.2 1.6 1.4 3.4 3.5 22 19 19.1

Total SA 122,990 7.5 7.4 1.3 1.2 3.4 3.3 17 16 13.8

ENI SPA 86,981 7.8 7.4 1.1 1.0 3.3 3.0 13 13 18.7

Conocophillips 96,142 8.4 8.6 1.4 1.3 3.6 3.7 18 16 10.4

Hess Corp 20,329 9.8 8.8 1.0 0.9 3.6 3.1 11 12 18.3

REPSOL YPF SA 37,191 12.4 10.2 1.1 1.0 4.6 4.1 9 10 22.6

Marathon Oil Corp 19,993 7.7 8.1 1.1 0.9 2.9 3.1 15 13 19.5

STATOIL ASA 82,890 9.4 8.5 1.8 1.6 2.3 2.2 19 20 15.9

Average 116,897 8.7 8.4 1.3 1.2 3.4 3.3 19 18 16.0

Independents

Occidental Petroleum Corp 78,151 11.7 11.4 2.1 1.8 5.5 5.3 18 17 28.2

Encana Corp 14,919 35.9 26.8 0.9 0.9 4.9 4.7 3 3 7.0

BG Group PLC 73,283 11.0 9.5 1.6 1.4 4.9 4.3 15 16 41.5

DEVON Energy Corporation 26,859 10.7 9.6 1.2 1.2 4.6 4.3 13 13 11.9

APACHE CORP 37,357 8.1 8.0 1.3 1.1 3.7 3.4 17 16 18.5

Anadarko Petroleum Corp 40,141 25.8 23.4 2.1 1.9 6.1 5.5 8 8 20.4

Talisman Energy INC 13,545 16.6 11.1 1.4 1.2 3.1 2.7 9 13 12.2

EOG Resources INC 27,700 29.5 23.6 2.3 2.0 6.6 5.9 8 9 24.9

Chesapeake Energy CORP 16,831 9.0 10.4 1.1 1.0 5.6 5.4 13 11 16.2

Nexen INC 8,189 9.7 7.4 1.0 0.9 3.3 3.0 10 12 18.8

Murphy Oil Corp 10,727 9.2 9.5 1.1 1.0 3.4 3.4 12 11 40.2

Noble Energy Inc 16,972 18.9 14.0 2.3 2.0 6.6 5.4 12 15 20.6

Newfield Exploration Co 5,811 10.5 9.2 1.5 1.3 4.9 4.2 14 14 19.4

Santos Ltd 12,644 22.6 21.1 1.4 1.4 7.5 6.7 6 7 14.0

Woodside Petroleum Ltd 27,236 15.3 14.3 2.1 1.9 9.5 7.6 14 14 19.8

pioneer natural resources co 11,249 24.3 18.9 2.0 1.9 8.1 6.7 10 10 14.3

Average 26,351 16.8 14.3 1.6 1.4 5.5 4.9 11 12 20.5

Russian

GAZPROM OAO 130,915 6.2 7.5 1.0 0.9 4.4 4.1 18 15 5.1

ROSNEFT Oil Company 74,717 5.6 6.8 1.1 0.9 4.3 4.8 18 14 4.7

LUKOIL OAO 46,015 3.6 4.0 0.6 0.6 2.8 3.0 17 14 2.7

Average 64,635 5.1 6.1 0.9 0.8 3.8 4.0 18 14 4.2

Asian

PETROCHINA Co Ltd-A 247,771 12.1 10.8 1.8 1.6 5.2 4.7 16 16 13.5

CNOOC Ltd 87,785 9.8 10.4 2.6 2.2 5.5 5.5 27 23 34.5

PTT Explor & Prod Public Co 18,121 12.6 10.3 2.8 2.4 4.9 4.1 23 25 20.3

Oil & Natural Gas Corp Ltd 75,062 8.6 8.2 1.7 1.5 4.0 3.8 22 20 7.8

Average 117,892 11.5 10.5 2.4 2.1 5.2 4.8 22 21 22.8

Global Average 81,444 10.5 9.8 1.5 1.4 4.5 4.2 18 17 15.8


ONGC and Oil India is

trading at a significant

discount compared to

global peer group due

to subsidy share,

while RIL is trading at

a premium due to

integrated business.

32


Annexure II

Table: Global refining valuation

Mkt Cap P/E P/BV EV/EBITDA ROE (%) EV/bpd

(US$ mn) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E (US$ ’000)

US

Valero Energy Corp 12,348 4.6 5.5 0.7 0.6 2.8 3.1 16 13 6.1

Tesoro Corp 3,160 4.0 5.5 0.8 0.7 2.4 3.1 21 14 6.8

Western Refining Inc 1,159 3.7 4.5 1.4 1.1 2.7 3.0 42 33 9.8

Average 5,208 4.1 5.2 1.0 0.8 2.6 3.1 26 20 7.5

Europe

POLSKI KONCERN NAFTOWY ORLEN 5,003 7.3 9.1 0.7 0.6 4.51 5.16 9 7 13.8

NESTE OIL OYJ 2,977 19.6 8.7 0.9 0.8 7.03 5.61 5 10 21.8

TUPRAS-TURKIYE PETROL RAFINE 5,719 9.9 9.3 2.6 2.4 4.04 4.45 27 26 7.2

HELLENIC PETROLEUM SA 2,610 10.8 7.0 0.8 0.7 8.50 6.23 7 11 13.8

Average 4,077 11.9 8.5 1.2 1.1 6.0 5.4 12 14 14.1

Asia ex-Japan

SK Holdings Co Ltd 6,106 4.6 4.2 0.8 0.7 5.87 5.82 24 23 8.0

S-Oil Corporation 11,552 8.8 8.2 2.4 2.0 6.87 6.38 30 27 23.5

GS Holdings 4,964 5.7 5.4 1.0 0.8 5.38 5.09 18 17 8.7

THAI Oil PCL 4,258 8.2 9.0 1.6 1.4 5.55 6.01 20 17 23.7

Caltex Australia Ltd 3,664 12.4 11.3 1.1 1.0 5.95 5.59 8 9 19.6

Petron Corp 2,725 13.3 12.8 2.0 1.8 7.83 7.52 15 15 20.4

Average 5,545 8.8 8.5 1.5 1.3 6.2 6.1 19 18 17.3

Japan

Tonengeneral Sekiyu KK 6,449 4.2 18.4 1.4 1.4 3.59 7.99 31 8 9.4

Idemitsu Kosan Co Ltd 4,425 5.5 5.8 0.6 0.6 5.78 5.85 11 10 25.0

Showa Shell Sekiyu KK 2,669 6.4 10.3 0.8 0.7 6.09 7.41 12 7 12.4

Cosmo Oil Company Ltd 2,325 19.5 11.6 0.5 0.5 7.06 6.63 3 6 16.0

Average 3,967 8.9 11.5 0.8 0.8 5.6 7.0 14 8 15.7

Global Average

8.4 8.4 1.1 1.0 5.1 5.4 18 15 13.7


OMCs are trading at a

significant discount

owing to huge subsidy

burden.


33

Annexure III

Table: Global petrochemical valuation

Mkt Cap P/E P/BV EV/EBITDA ROE (%)

(US$ mn) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E

Taiwan

Formosa Petrochemical Corp 29,165 22.8 18.9 3.5 3.3 14.61 13.09 16 18

NAN YA Plastics Corp 15,013 12.7 10.2 1.6 1.5 14.58 12.78 13 15

Formosa Chemicals & Fibre 15,178 10.3 10.3 1.6 1.6 12.44 12.93 17 15

Formosa Plastics Corp 17,016 11.3 10.8 1.9 1.8 13.45 13.44 18 18

Average 19,093 14.3 12.6 2.1 2.0 13.8 13.1 16 17

Korea

Honam Petrochemical Corp 9,567 9.1 8.0 1.9 1.6 6.77 5.97 24 22

Hanwha Chemical Corp 3,530 6.4 5.9 1.1 0.9 7.13 6.57 19 17

LG CHEM Ltd 19,373 9.5 8.4 2.4 1.9 5.70 4.91 29 28

Average 10,824 8.3 7.4 1.8 1.5 6.5 5.8 24 22

North America

DOW Chemical Co 32,866 10.5 9.9 1.4 1.3 6.09 5.99 14 13

DU PONT (E.I.) DE NEMOURS 44,422 11.9 11.0 4.0 3.3 7.41 6.82 34 33

Eastman Chemical Co 5,388 8.4 8.5 2.9 2.4 4.94 4.90 35 31

Average 27,559 10.3 9.8 2.8 2.3 6.1 5.9 24 24

Europe

BASF SE 66,535 8.5 9.7 2.0 1.9 5.4 5.7 25 20

Air Liquide SA 34,963 16.9 15.9 2.7 2.4 8.9 8.4 17 16

Average 50,749 12.7 12.8 2.3 2.2 7.1 7.1 20 18

Japan

Mitsubishi Chemical Holdings 9,078 9.5 8.6 0.8 0.8 5.36 5.17 9 10

SHIN-ETSU Chemical Co Ltd 20,785 15.1 13.1 1.1 1.0 5.57 5.18 7 8

MITSUI Chemicals Inc 3,422 9.8 9.1 0.7 0.6 5.59 5.38 7 7

SUMITOMO Chemical Co Ltd 6,374 40.7 9.2 0.9 0.9 7.31 6.83 3 10

Average 9,915 18.8 10.0 0.9 0.8 6.0 5.6 6 9

Global Average 23,628 12.9 10.5 2.0 1.8 7.9 7.5 18 18


Valued RIL’s petchem

business at

EV/EBITDA multiple of

6.5x, in line with

global peer group.

34


Notes

Sonam H. Udasi – Head Research (91-22) 4322 1375 [email protected]

Dealing (91-22) 6637 1150 [email protected]

Key to Ratings

Stocks:

BUY: Absolute return of 15% and above; ACCUMULATE: 5% to 15%; HOLD: Upto ±5%; REDUCE: -5% to -15%; SELL: -15% and below.

IDBI Capital Market Services Ltd. (A wholly owned subsidiary of IDBI Ltd.) Equity Research Desk

3rd Floor, Mafatlal Centre, Nariman Point, Mumbai – 400 021. Phones: (91-22) 4322 1212; Fax: (91-22) 2285 0785; Email: [email protected]

SEBI Registration: NSE CM – INB230706631, NSE F&O – INF230706631, BSE CM – INB010706639, BSE F&O – INF010706639, NSDL – IN-DP-NSDL-12-96

Compliance Officer: Christina Fernandes; Email: [email protected]; Telephone: (91-22) 4322 1212 Disclaimer This document has been prepared by IDBI Capital Market Services Ltd (IDBI Capital) and is meant for the recipient only for use as intended and not for circulation. This document should not be reproduced or copied or made available to others. No person associated with IDBI Capital is obligated to call or initiate contact with you for the purposes of elaborating or following up on the information contained in this document.

Recipients may not receive this report at the same time as other recipients. IDBI Capital will not treat recipients as customers by virtue of their receiving this report.

The information contained herein is from the public domain or sources believed to be reliable. While reasonable care has been taken to ensure that information given is at the time believed to be fair and correct and opinions based thereupon are reasonable, due to the very nature of research it cannot be warranted or represented that it is accurate or complete and it should not be relied upon as such. In so far as this report includes current or historical information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed.

Opinions expressed are current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis, the information discussed in this material, IDBI Capital, its directors, employees are under no obligation to update or keep the information current. Further there may be regulatory, compliance, or other reasons that prevent us from doing so.

Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice.

IDBI Capital, its directors and employees and any person connected with it, will not in any way be responsible for the contents of this report or for any losses, costs, expenses, charges, including notional losses/lost opportunities incurred by a recipient as a result of acting or non acting on any information/material contained in the report.

This is not an offer to sell or a solicitation to buy any securities or an attempt to influence the opinion or behaviour of investors or recipients or provide any investment/tax advice.

This report is for information only and has not been prepared based on specific investment objectives. The securities discussed in this report may not be suitable for all investors. Investors must make their own investment decision based on their own investment objectives, goals and financial position and based on their own analysis.

Trading in stocks, stock derivatives, and other securities is inherently risky and the recipient agrees to assume complete and full responsibility for the outcomes of all trading decisions that the recipient makes, including but not limited to loss of capital.

Opinions, projections and estimates in this report solely constitute the current judgment of the author of this report as of the date of this report and do not in any way reflect the views of IDBI Capital, its directors, officers, or employees.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject IDBI Capital and affiliates to any registrati on or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

IDBI Capital, its directors or employees or affiliates, may from time to time, have positions in, or options on, and buy and sell securities referred to herein. IDBI Capital or its affiliates, during the normal course of business, from time to time, may solicit from or perform investment banking or other services for any company mentioned in this document or their connected persons or be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or their affiliate companies or act as advisor or lender / borrower to such company(ies)/affiliate companies or have other potential conflict of interest.

This report may provide hyperlinks to other websites. Except to the extent to which the report refers to the website of IDBI Capital, IDBI Capital states that it has not rev iewed the linked site and takes no responsibility for the content contained in such other websites. Accessing such websites shall be at recipient's own risk.

E-mail is not a secure method of communication. IDBI Capital Market Services Limited cannot accept responsibility for the accuracy or completeness of any e-mail message or any attachment(s). This transmission could contain viruses, be corrupted, destroyed, incomplete, intercepted, lost or arrive late. IDBI Capital, its directors or employees or affil iates accept no liability for any damage caused, directly or indirectly, by this email.

Date post:	12-Mar-2020
Category:	Documents
Upload:	others
View:	0 times
Download:	0 times

Oil & Gas · Based on these changes in assumptions, Cairn India would have the most positive...

Documents