Beyond a Nine-day Wonder - Elara Capital · Refining Oil & Gas Elara Securities (India) Private...

Beyond a Nine-day Wonder

India Refining21 April 2016

Elara Securities (India) Private Limited

Swarnendu Bhushan

[email protected]

+91 22 6164 8504

Durgesh Poyekar

[email protected]

+91 22 6164 8541

Refining


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Swarnendu Bhushan • [email protected] • +91 22 6164 8504 Durgesh Poyekar • [email protected] • +91 22 6164 8541

Beyond a nine-day wonder Refining margin under pressure

Global refiners have been having a bull run of late. The year 2015 recorded a GRM of USD 7.7/bbl, the highest since 2011. This was supported by increased demand for auto fuels, naphtha in gasoline blending & petrochemicals feedstock and low fuel & loss. However, this is set to change. China’s policy of offering tax breaks for small car buyers, which propped up demand, is ending on 1 January 2017. Overall auto sales in China could see tepid growth. In addition, global refinery net capacity is set to increase by ~3mnbopd over 2016-18E, matching demand growth. However, 15% of this demand will be met through bio fuels, implying excess supply of 0.45mnbopd. Additionally, China teapot refineries could add ~82mn tonnes pa. HHence, we expect refining margin to contract to USD 5-6/bbl in the next 2-3 years.

Reliance faces unrefined prospects

With ~70% of standalone EBIT coming from refining, Reliance Industries (RIL IN) looks the most vulnerable in a benign refining environment. Further, our estimates show core expansion projects can add only ~USD 1.6bn (vs the Street expectations of ~USD 3.0bn) amid weak LNG prices and low-cost ethylene expansion in the US. Also, traditional export markets (Africa & Europe) are likely to face competition from the Middle East refineries. Shale investments may turn out to be a dampener, with several companies having taken write-offs. Reliance Jio remains a drag, with more than ~INR 1tn already spent and no commercial launch on the horizon.

OMC marketing margin expansion: an illusion

We reiterate our Contrarian view there will be no significant expansion in marketing margin by OMC on auto fuels post deregulation for the next 2-3 years. While marketing margin on auto fuels remains subdued, we believe commissioning of the 15mn-tonne-pa Paradip refinery will provide Indian Oil (IOCL IN) some respite in a benign refining environment. We believe the best days are over for Bharat Petroleum (BPCL IN) and Hindustan Petroleum (HPCL IN). BPCL’s Mozambique block is not seeing traction while HPCL is vulnerable due to highest leverage to marketing. With MRPL (MRPL IN) showing improvement in core GRM and benefiting from full utilization of its polypropylene unit in FY17, the company is likely to do well. Chennai Petroleum’s (CPCL IN) capex would yield results only from FY18 while its valuation remains highly sensitive to fluctuation in GRM. IIOCL and MRPL are our top picks.

India | Oil & Gas 21 April 2016

Thematic Report

Refining

GRM trend of RIL, MRPL & CPCL

Source: Companies

GRM trend of OMCs

Source: Companies

Price performance

(%) 3M 6M 12M

Sensex 3.1 (4.5) (11.8)

RIL (1.0) 19.3 15.6

IOCL (5.2) 4.1 10.5

BPCL 3.3 7.2 13.1

HPCL (2.4) 10.3 29.9

MRPL 0.3 20.0 (8.4)

CPCL 3.1 (12.0) 162.6

Source: Bloomberg

Key Financials Company Rating Mcap

CMP* (INR)

Target (INR)

Upside/ Downside

(%)

EV/EBITDA (x) P/E (x) ROE (%)

(INR bn)

(USD mn) FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

RIL Sell 3,454 51,833 1,066 966 (9) 13.2 10.3 11.1 9.3 13.7 11.3 12.4 10.6 11.0 12.1 10.0 10.7

IOCL Buy 1,011 15,170 416 599 44 14.7 6.6 5.9 5.2 28.4 8.2 7.5 6.5 7.8 17.9 16.0 16.5

BPCL Reduce 669 10,043 926 909 (2) 9.4 7.8 8.7 7.0 13.2 11.4 12.9 10.4 24.3 24.2 18.8 20.6

HPCL Reduce 288 4,321 850 875 3 8.5 6.7 6.7 6.5 10.6 8.6 9.2 9.0 17.6 19.8 16.5 15.2

MRPL Buy 118 1,765 67 90 34 NA 6.7 4.6 4.7 NA 24.9 6.3 6.3 (28.2) 12.7 32.2 25.8

CPCL Sell 30 452 202 154 (24) NA 6.0 7.6 5.8 NA 5.5 11.0 7.7 (2.3) 29.4 12.7 16.2

1 USD = INR 66.6; Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate

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Refining

2 Elara Securities (India) Private Limited

Table of Content

The new normal…………………………………………………………………………………………………………….. 3

Benign refining environment………………………………………………………………………………………. 4

Global refining utilization improves…………………………………………………………………….. 4

Capacity glut adds to woes………………………………………………………………………………….. 4

Refining margin already cooling off……………………………………………………………………. 7

Downstream party winding down……………………………………………………………………………… 8

Exports to suffer: RIL most vulnerable…………………………………………………………………. 8

OMC not out of the woods…………………………………………………………………………………... 9

Under-recoveries: gone or in hiding? ………………………………………………………………… 11

Company Section

Reliance Industries

Likely to suffer the most……………………………………………………………………..………………… 15

Concerns remain; limited upside…………………………………………………………………………. 17

Oil marketing companies

IOCL: best pick among OMC……………………………………………………………………..…………. 25

Sifting for winners……………………………………………………………………..…………………………... 26

Chennai Petroleum

GRM softening to hit CPCL the hardest……………………………………………………………… 37

Mangalore Refinery

Core performance improving………………………………………………………………………………. 41

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All good things come to an end

SG refining margin in 2015 rose to USD 7.7/bbl, primarily led by strong crack spread on light distillates (naphtha & gasoline). However, our research shows the glut in refining supply will worsen and margin will soften. Additionally, competition is expected to intensify in the export markets and may force a change in rules on the domestic front for the long term. TThis report highlights champions — IOCL and MRPL — that are going to last well beyond the nine-day wonder.

Not so benign for RIL

On the back of strong refining performance, RIL has outperformed the Nifty by 26% in the past year. Our research shows the era of strong refining margin is over and RIL would be adversely hit by softening GRM. Returns from the core refining and petrochemicals projects worth ~USD 15bn also remain elusive. We downgrade RIL to SSell rating with a new target price of INR 966 from INR 1,070 based on a SOTP valuation.

Exhibit 1: RIL outperforms the Nifty 26% in past year

Source: Bloomberg, Elara Securities Research

Best is in the past for HPCL and BPCL

Over the past year, HPCL has outperformed IOCL, BPCL and Nifty by 19%, 16% and 41%, respectively, due to an expected expansion in marketing margin on gasoil and gasoline. However, we have seen only slight margin expansion in gasoil and no expansion in gasoline from FY14. We firmly believe that in the absence of expansion in marketing margin, FY16 will be the best year for earnings. We expect HPCL to post only a ~2% EBITDA CAGR during FY16-18E. We add INR 155 for its investments to arrive at a new target price of INR 875 from INR 1,016 based on 5.5x (from 6.0x) FY18E EV/EBITDA. We revise our rating to Reduce from Buy, given a benign refining environment and no expected expansion in marketing margin.

BPCL may fare slightly better than HPCL and report improved profitability with the commissioning of its Brownfield expansion at Kochi. We expect an EBITDA CAGR of 5% during FY16-18E. However, concerns remain on its E&P portfolio amid low LNG and crude oil prices. We add INR 234 for its investments to arrive at a new target price of INR 909 from INR 1,006 based on 5.5x (from 6.0x) FY18E EV/EBITDA. We downgrade our rating to RReduce from Buy, given 1) a benign refining environment, 2) no expected expansion in marketing margin and low LNG & crude oil prices.

Indian Oil to shine, thanks to Paradip!

IOCL is expected to post an EBITDA CAGR of 12% during FY16-18E. The INR 345bn Paradip refinery may even surprise, with a higher-than-estimated utilization of 30% in FY17 and 70% in FY18. We slightly revise our target price to INR 599 from INR 607 based on 5.5x (unchanged) FY18E EV/EBITDA. We reiterate our BBuy rating.

Exhibit 2: HPCL outperforms Nifty 41% in past year


MRPL shows improvement in its core performance

The company seems to have stabilized post the INR 150bn Brownfield expansion. Utilization of the polypropylene unit has been ramped upto 100% in the past few days. We expect a standalone EBITDA CAGR of 20% during FY16-18E. The recently merged OMPL is yet to stabilize but it is likely from FY17. We reiterate our BBuy rating with a target of INR 90 on 5.5x FY18E EV/EBITDA.

GRM hook to hit CPCL hard

Although IOCL has infused funds into CPCL, we expect it to underperform on the operational front in a falling GRM environment. CPCL is implementing a residue upgradation project, which should improve distillate yields. However, the benefits are likely to accrue from FY18. We have a TP of INR 154 on 5.5x FY18E EBITDA. We revise our rating to Sell from Reduce, due to the correction of 41% in the stock price since its Q3FY16 result.

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Nifty IOCL BPCL HPCL

The new normal � Benign GRM environment vs robust GRM of USD 7.7/bbl in 2015

� Core projects of RIL to add USD 1.6bn vs guidance of USD 3.0bn; Jio to remain a drag

� Paradip to drive IOCL’s performance; EBITDA CAGR of ~40% over FY15-18E

Refining


Global refining utilization improves Higher demand for petroleum products as a result of lower prices resulted in an increase in global refinery utilization in 2015. The IEA stated utilization of 81.5% in Q4CY15, the highest since 2007. Higher utilization also has supported strong refining margin.

Exhibit 3: Global refining utilization in an uptrend

Source: IEA, Elara Securities Research

Low fuel prices boost auto demand

Low pump prices resulted in increased demand for auto fuels as seen in auto sales growth globally in 2015. This was supported by tax breaks on smaller vehicles in China from October 2015 to rejuvenate its fledgling auto industry. Auto sales in China grew by 7% in 2015. Post the tax break on smaller vehicles from October 2015, growth has been in the double digits. It is likely to continue in 2016, but is expected to slow in 2017 upon expiry of the scheme from January 1, 2017. Similarly, India recorded growth of 8% in auto sales in 2015 vs 0.7% in 2014, as per Bloomberg. In particular, gasoline demand in India was supported by higher sales of two-wheelers, as per Petroleum Planning and Analysis Cell (PPAC). Robust demand of gasoline thus helped in strong crack spread. Gasoline spread increased from ~USD 11.0/bbl in FY15 to ~USD 14.4/bbl in FY16.

Cheaper naphtha another plus

Low naphtha prices raised profitability of naphtha-based petrochemical producers. This combined with increased blending of naphtha into gasoline resulted in naphtha crack spread moving from a loss of USD 1.8/bbl in FY15 to a gain of USD 2.7/bbl in FY16. Crack spread was more pronounced at USD 6.0-6.6/bbl in H2FY16. However, lower economic growth restricted cracks of middle distillates (kerosene, jet fuel & diesel). Gasoil registered a decline in cracks from USD 17.2/bbl in FY15 to USD 13.8/bbl in FY16. Low oil prices also helped GRM through lower fuel & loss. At 10% fuel & loss, a refinery loses only USD 3/bbl at crude cost of USD 30/bbl instead of USD 10/bbl at crude cost of USD 100/bbl, a boost of USD 7/bbl in GRM.

Exhibit 4: Strong auto sales growth


Capacity glut adds to woes A global refining surplus is re-emerging, with significant capacity growth expected over the next three years, particularly in Asia, the Middle East, and in Latin America. During 2016-18E, around 1.6mnbopd of refining capacity would be added in the Asia-Pacific region, as per our analysis. The Middle East will add another 0.75mnbopd of refining capacity and condensate splitters during the same period. Additionally, there would be an addition of 0.5mnbopd of condensate splitters in the US.

According to OPEC, Iraq targets constructing four Greenfield refineries with total capacity of 0.75mnbopd. Projects also are planned at existing refineries at Karbala & Erbil in Iraq and Sitra in Bahrain. National Iranian Oil Refining Company is undertaking projects at Bandar Abbas, Abadan, Isfahan and Tabriz. The African continent has made announcements of refinery additions. However, they have been delayed and unlikely to fructify in the next 2-3 years.

Net capacity addition of ~3mnbopd over 2016-18

Including the main projects, US-based Valero Energy (VLO US, CMP: USD 59, Not Rated) estimates ~3mnbopd of net capacity addition (net of closures & restarts) would take place during 2016-18.

Exhibit 5: Estimated net global refinery CDU additions

Source: Valero Energy, Elara Securities Research

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China Middle East Other (incl US and Latin America

Benign refining environment � Capacity utilization of 81.5% in Q4CY15, the highest since 2007

� Refinery capacity addition to outpace demand by ~0.45mnbopd over 2016-18

� China teapot refineries can potentially add ~82mmtpa of throughput

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We expect demand to grow at ~1mnbopd each year. Although demand and supply growth appears to be in sync, 15% of this demand growth is expected to be met through bio fuels. This translates into supply addition of 3.0mnbopd during 2016-18E vs demand addition of 2.55mnbopd. Additionally, there are a few gas-to-liquids (GTLs) and coal-to-liquids (CTLs) projects, which would add to the supply. Hence, capacity growth would outgrow demand even if we exclude the impact of yield improvements, GTLs and CTLs.

Global capacity utilization stood at 81% in Q4CY15, according to IEA, which means there will still be a lot of capacity surplus for the long term. Unless closures take place, refining utilization will remain low and result in poor refining margin.

Capacity closures led by Japan & Australia

Since 2008, 6.3mnbopd of refining capacity has been shut, as per Valero Energy. Out of this, 1.2mnbopd of capacity has been shut in Japan, due to poor demand

and mandatory requirement of atleast 13% cracking ratio. Australia also has seen a closure of 0.3mnbopd of refining capacity. While the smaller ones remain permanently closed, a few large ones have been revived in the past few years to take advantage of a good refining environment.

Exhibit 7: Closure of capacity accelerates in the Asia-Pacific region


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Exhibit 6: Major refining capacity additions

Year Company Location Capacity (bopd) Greenfield / Brownfield

Asia Pacific

2016 Sinopec Jiujiang 30,000 B

2016 CNOOC Taizhou 60,000 B

2016 Sinopec Hainan 75,000 B

2017 CNOOC Huizhou, Guangdong 200,000 B

2017 PetroChina Huabei, Renqiu, Hebei 100,000 B

2017 Sinopec, Kuwait Petroleum, Total Zhanjiang 300,000 G

2016 PetroChina, Saudi Aramco Kunming, Yunnan 200,000 G

2018 BPCL Bina 36,000 B

2016 BPCL Kochi 120,000 B

2016 IOCL Paradip 300,000 G

2017 PetroVietnam, Idemitsu Kosan, Kuwait Petroleum, Mitsui Chemicals Nghi Son, Vietnam 200,000 G

Middle East

2017-18 Saudi Aramco Jazan, Saudi Arabia 400,000 G

2018 Oman Oil Refineries Sohar, Oman 82,000 B

2016 Qatar Petroleum, Total, Idemitsu, Cosmo, Marubeni & Mitsui Laffan 2, Qatar 150,000 B

2016 Persian Gulf Star Bandar Abbas, Iran 120,000 G

Latin America

2016 Ecopetrol Cartagena, Colombia 85,000 B

US (condensate splitters)

2016 Valero Energy Houston 90,000 G

2016 Valero Energy Corpus Christi 70,000 G

2016 Enterprise Products Partners Mont Belvieu 85,000 G

2016 Magellan Midstream Corpus Christi 100,000 G

2016 Martin Midstream Corpus Christi 100,000 G

Source: OPEC, Companies, Elara Securities Research

Refining


Exhibit 8: Closures and restarts

Company Refinery Country/ Region

Capacity (bopd)

Year Restarted Remarks

Chevron Perth Amboy, NJ US 80 2008 No Bought by Buckeye Partners in 2012; being operated as a terminal

Big West Bakersfield, CA US 65 2008 No Bought by Alon; a few secondary units have been used to process intermediate feedstock; being revamped to process light crude

Bayernoil Ingolstadt, Germany Europe 102 2008 Yes Bought over & restarted in 2012 by Gunvor

Shell Yabucoa, Inc. Yabucoa, Puerto Rico Puerto Rico 76 2008 No

Sunoco Westville, NJ US 145 2009 No

Valero Energy Delaware US 210 2009 Yes Bought by PBF and restarted in 2011

Western Bloomfield, NM US 17 2009

Flint Hills Resources North Pole, AK US 85 2009

Petroplus Teesside, UK Europe 117 2009 No Bought by Greenergy & used as a logistics terminal

Total Gonfreville L'Orcher, France Europe 90 2009

Total Dunkirk, France Europe 140 2009 No

Nihonkai Oil Toyama, Japan Japan 57 2009

Western Yorktown, VA US 65 2010

Shell Montreal, Canada Canada 130 2010 No

Petroplus Reichstett, France Europe 85 2010

ConocoPhillips Wilhelmshaven, Germany Europe 260 2010 No Bought over by Hestya & converted into logistics terminal

Fuji Oil Sodegaura, Japan Japan 50 2010 No

JX Holdings Oita, Japan Japan 24 2010 No

JX Holdings Mizushima, Japan Japan 110 2010 No

JX Holdings Negishi, Japan Japan 70 2010 No

JX Holdings Kashima, Japan Japan 18 2010 No

Sunoco Marcus Hook, PA US 175 2011 No Converted into a logistics terminal

Hovensa St. Croix, USVI US 150 2011 No

OMV Petrom Arpechim, Romania Europe 70 2011

Tamoil Cremona, Italy Europe 94 2011

Toa/Showa Shell Ogimachi, Japan Japan 120 2011 No

Fushun Petrochem. Fushun, China China 70 2011

Alon Paramount, CA US 90 2012


LyondellBasell Berre L'Etang, France Europe 105 2012 No

Petroplus Coryton, U.K. Europe 175 2012 No Bought over by Vopak, Greenergy & Shell and converted into logistics terminal

Petroplus Petit Couronne, France Europe 160 2012 No

Total/Erg Rome, Italy Europe 88 2012

ExxonMobil Fawley, U.K. Europe 80 2012

Unipetrol Paramo, Czech Republic Europe 20 2012

Hovensa St. Croix, USVI US 350 2012 Probable Bought over by Limetree Bay Holdings in late 2015, expected to start within 18 months

Valero Energy San Nicholas, Aruba US 235 2012 Probable Citgo plans to restart the same

TNK-BP Lisichansk, Ukraine Europe 175 2012 No Rosneft planned restart in 2014; caught between Russia-Ukrainian tension

Shell Clyde, Australia Australia 75 2012 No

Hess Port Reading, NJ US 70 2013

Imperial Oil Dartmouth, Canada Canada 88 2013

Shell Harburg, Germany Europe 107 2013 Probable Nynas took it over and is upgrading the CDU for restarting it in 2016

ENI Porto Marghera, Italy Europe 80 2013

Cosmo Oil Sakaide, Japan Japan 140 2013 No


MOL Mantova, Italy Europe 69 2014

Essar Stanlow, U.K. Europe 101 2014 No Partial shutdown

Murphy Milford Haven, U.K. Europe 130 2014 No Bought by Puma Energy & converted into logistics terminal

Cosmo Oil Yokkaichi, Japan Japan 43 2014 No

Idemitsu Kosan Tokuyama, Japan Japan 114 2014 No

Caltex Kurnell, Australia Australia 135 2014 No Being dismantled

Tonen-General Kawasaki, Japan Japan 67 2014 No

Tonen-General Wakayama, Japan Japan 38 2014 No

JX Holdings Muroran, Japan Japan 180 2014 No

Kyokuto Petroleum Ltd. Chiba, Japan Japan 23 2014 No

Chinese Petroleum Corp. Kaohsiung, Taiwan Taiwan 200 2015 No

BP Bulwer Island, Australia Australia 102 2015 No

Idemitsu Kosan Chiba, Japan Japan 20 2015 No

Tonen-General Kawasaki, Japan Japan 10 2015 No

Petrobras/Nansei Sekiyu Nishirara, Okinawa Japan 100 2015 No

Tamoil Collombey, Switzerland Europe 55 2015

Total Lindsey, U.K. Europe 110 2016

Total La Mede, France Europe 159 2016


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Refining margin already cooling off As China’s tax breaks on smaller vehicles ends from January 1, 2017, demand for gasoline in China is expected to slow. Additionally, we expect oil prices to rebound soon, which will reduce the benefits from lower fuel & loss.

Asia’s refining margin also is being threatened by the possible revival of China’s teapot refineries. Teapot refineries account for ~30% of 15mnbopd of China’s total refining capacity, as per Platts. Due to restrictions on direct import of feedstock, utilization has been at 25-30%. Boosted by the strong refining environment, these refiners have been applying to the regulator for direct import of crude oil. While 12 quota applications have been approved, other eight are awaiting approval. If all 20 start, they may add ~82mmtpa of throughput, negatively affecting regional refining margin.

Exhibit 9: GRM already cooling off

Source: Reuters, Elara Securities Research

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Refining


Exports to suffer: RIL most vulnerable In Q3FY16, RIL exported ~68% of products. The African countries account for ~18% of total exports while the Middle East 33% of light distillates & 10% of middle distillates. The Middle East currently consumes Euro-II fuels. Since most Middle East refineries produce low- and ultra-low sulfur gasoline and gasoil, they end up exporting their products and depend on imports for domestic consumption of high sulfur products. Any company exporting to the region would have lower realization due to high sulfur products.

Exhibit 10: RIL middle distillates exports

Source: Company, Elara Securities Research

Exhibit 12: RIL’s light distillates exports


Spoiler alert: the Middle East

In 2014, the Middle East was a net exporter of ~85mn tonnes. As new refineries stabilize, net exports will increase and may have an adverse effect on imports. Additionally, battling huge fiscal deficit, several countries are scaling back subsidies on petroleum products. Reduction of these subsidies is expected to result in poor demand. This may further boost net exports of petroleum products from the Middle East.

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Downstream party winding down � RIL exports likely to be affected by competition from the Middle East

� Marketing margin story has not played out for OMCs

� Under-recoveries threat looms large

Exhibit 11: Gasoil fuel sulfur specifications

Note: * Information in parts per million (ppm); For additional details and comments per country, visit www.unep.org/transport/pcfv/

Source: UNEP, Elara Securities Research

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Exports derail RIL prospects further

RIL exports a lot of products to countries on the continents of Africa and Europe. The Middle East refineries, due to their proximity, enjoy benefits on crude as well as product freight. As a result, RIL would have a tough time competing with Middle East refineries in the region. This may put further pressure on refining margin.

Exhibit 13: Net exports from the Middle East rising

Source: BP Statistical Review, Elara Securities Research

MRPL focus now on the domestic front

MRPL also has been steadily reducing its reliance on exports. Exports have fallen from 48% in FY13 to 30% in Q3FY16. Its Board of Directors also has approved setting up upto 100 retail outlets. The company is expected to formalize its retail entry strategy in the near term.

Exhibit 14: Exports from MRPL in a downtrend


OMC not out of the woods Marketing margin expansion: an illusion

Post deregulation of gasoil in October 2014, the Street had widely anticipated marketing margin would expand. We retain our Contrarian stand there would be no significant expansion in marketing margin. Recent data underscores our assumptions. PPAC states average gross marketing margin on gasoil stands at INR 2.6/liter in FY16, which is slightly higher than INR 2.3-2.4/liter during the regulation. Post deregulation of gasoline in June 2010, we witnessed margin expansion only in FY14. Gross marketing margin on gasoline stood at INR 3.0/liter in FY14. Since then, there has been no

meaningful expansion in it. Gross margin on gasoline stands at INR 3.0/liter in FY16.

Exhibit 15: Marketing margin on gasoil up slightly

Source: PPAC, Elara Securities Research

Exhibit 16: Status quo on marketing margin on gasoline


Changing rules of the game

Due to the supply glut in the export markets, there is an increased focus of non-OMC in the domestic market. MRPL has had the license to open upto 500 retail outlets and had not expanded earlier due to regulations. However, post deregulation it has obtained the Board’s approval to open upto 100 retail outlets. It is expected to formalize its retail entry strategy in the near term. Essar Oil (Not Listed) has already opened ~1,400 retail outlets. RIL has set up ~600 retail outlets. Business Standard states that RIL is offering discounts on auto fuels to attract volume.

Exhibit 17: Marginal growth in market share of gasoline for non-OMC

Source: Companies, Elara Securities Research

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-15

Jul-1

5

Au

g-1

5

Sep

-15

Oct

-15

No

v-15

Dec

-15

Jan

-16

Feb

-16

Mar

-16

(INR/

lit)

Gross marketing margin Gasoline Avg gross margin on Gasoline

0%

20%

40%

60%

80%

100%

Q1F

Y15

Q2F

Y15

Q3F

Y15

Q4F

Y15

Q1F

Y16

Q2F

Y16

Q3F

Y16

IOCL BPCL HPCL Non-OMCs

Refining


Exhibit 18: Marginal growth in market share of gasoil for non-OMC


Years of regulation had allowed OMC to expand their marketing and distribution networks across the country unabated. They also had been investing in newer

technologies and service standards. Now that the market has been deregulated, it has become a big entry barrier for non-OMC, which have not invested in setting up their marketing & distribution networks. Absence of product pipelines is also an issue. Hence, there has been a lot of pressure on the government to extend common carrier principle to product pipelines of OMC, especially ones that are under-utilized. In September 2015, Petroleum and Natural Gas Regulatory Board (PNGRB) came up with a draft notification identifying 24 product pipelines of IOCL, BPCL and GAIL, many of which are underutilized, and invited comments from companies as to why these pipelines should not be offered as a common carrier to other firms. If this were to happen, it would change the rules of the game in favor of large companies, such as RIL & Essar Oil, to the detriment of OMC.

0%

20%

40%

60%

80%

100% Q

1FY1

5

Q2F

Y15

Q3F

Y15

Q4F

Y15

Q1F

Y16

Q2F

Y16

Q3F

Y16

IOCL BPCL HPCL non-OMCs

Exhibit 19: Major product pipelines

Company Pipeline Length

(km) Capacity

((mmtpa) Utilization

((% in FFY15)

IOCL Barauni -Patna- Kanpur (including Gawaria-Lucknow branch line) 745 3.5 64.7

IOCL Guwahati –Siliguri 435 1.4 127.6

IOCL Haldia-Barauni (2) 526 1.3 96.4

IOCL Haldia-Mourigram-Rajbandh 277 1.4 130.6

IOCL Koyali-Ahmedabad 116 1.1 67.7

IOCL Koyali-Viramgam-Sidhpur-Sanganer 1,287 4.6 75.0

IOCL Koyali-Ratlam 265 2.0 7.4

IOCL Koyali-Dahej 197 2.6 50.7

IOCL Mathura-Tundla 56 1.2 79.8

IOCL Mathura-Bharatpur 21

IOCL Mathura-Delhi (including Bijwasan-Panipat pipeline) 258 3.7 70.6

IOCL Panipat-Amabala-Jalandhar (including Kurukshetra-Roorkee-Najibabad branch line) 434 3.5 66.7

IOCL Panipat-Delhi (including Sonepat-Meerut branch line) (1) 189 3.0 40.9

IOCL Panipat-Bathinda 219 1.5 89.7

IOCL Panipat-Rewari 155 2.1 72.1

IOCL Chennai-Trichy-Madurai 683 2.3 106.0

IOCL ChennaiI - Meenambakkam ATF 95 0.2 101.7

IOCL Chennai-Bengaluru 290 2.5 58.4

IOCL Digboi - Tinsukia 75 1.0 48.2

IOCL Devangonthi - Devanhalli 36 0.7 33.5

IOCL Panipat-Jalandhar LPG pipeline 274 0.7 68.1

BPCL Mumbai-Manmad-Bijwasan 1,389 6.0 103.8

BPCL Bina-Kota 259 4.4 53.4

BPCL ATF P/L Mumbai Refinery (MR)-Santacruz 15 1.4 46.9

BPCL ATF P/L Kochi Refinery (KR)-Kochi Airport 34 0.6 20.2

BPCL Kota - Jobner (1) 210 1.7 0.0

BPCL Mumbai-Uran (2) LPG pipeline 28 0.8 6.9

HPCL Mumbai-Pune-Solapur 508 4.3 82.9

HPCL Vizag-Vijayawada-Secunderabad 572 5.4 80.9

HPCL Mundra-Delhi 1,054 5.0 68.5

HPCL Ramanmandi-Bahadurgarh 243 4.7 61.6

HPCL Ramanmandi-Bathinda 30 1.1 56.5

HPCL Awa-Salawas (1) 93 2.3 0.9

HPCL Bahadurgarh-Tikrikalan (2) 14 0.8 1.1

GAIL Jamnagar-Loni LPG pipeline 1,414 2.5 93.0

GAIL Vizag-Secunderabad LPG pipeline 618 1.3 83.5

Petronet CCK Cochin-Coimbatore-Karur (CCK) 293 3.3 74.5


Refining

Oil

& G

as


Low oil prices a major boost

Deregulation along with low oil prices has led to debt levels almost halving at OMC during FY14-H1FY16. This is reflected in stock performance as well.

Exhibit 20: Decrease in debt Standalone net ddebt (INR mn)

FY13 FY14 FY15 H1FY16 Remarks

IOCL 778,219 779,906 495,987 483,486

BPCL 212,379 197,883 104,171 124,834

HPCL 323,111 318,953 170,386 186,773

MRPL 53,739 (18,188) (23,932) (39,706)

Outstanding payment to Iran is also included in cash

CPCL 56,662 54,062 43,592 35,311

RIL (233,600) 154,870 270,550 287,990 Huge capex distorts the debt levels


INR 290bn capex to comply with BS VI norms

With the aim to curb rising vehicular pollution, the Central government has decided to skip BS-V emission norms and leapfrog directly to BS-VI norms across the country by April 2020. To become compliant with BS-V norms, investment envisaged prior to this directive was for ~INR 800bn. However, it includes ~INR 150bn for expansion & upgradation at the Numligarh Refinery and BPCL’s investment of ~INR 180bn for Kochi IREP. Individual PSU refineries have yet to plan capex roll-out for BS-VI compliance. However, as per the latest estimates of Petroleum Ministry, PSU refineries will need to invest ~INR 290bn to become compliant with BS-VI norms. India’s refineries had invested ~INR 300bn to become complaint with BS-III & IV norms.

Under-recoveries: gone or in hiding? Gasoil deregulation in October 2014 brought about a structural change in under-recoveries of OMC. Additionally, the government restricted access to subsidized LPG cylinders and introduced Direct Benefit Transfer (DBT) where it would directly compensate consumers for LPG cylinders. The government further came out with a subsidy-sharing formula for kerosene wherein it would bear upto INR 12/liter of subsidy while anything above that would be borne by upstream companies.

However, even in a low oil price environment, OMC have provided for net under-recoveries of INR 3bn in Q3FY16. This is cause for concern since it ignites memories of 2002-04 when even after deregulating prices of gasoline and gasoil, prices were again regulated once oil prices rose. If OMC were forced to bear under-recoveries, HPCL would be the worst affected as it has the highest leverage to marketing.

Exhibit 21: Net under-recoveries of OMC


Valuation: IOCL and MRPL are our top picks

We have used EV/EBITDA to value the core refining and marketing businesses. We then have added the value of investments and other businesses. For RIL, we have used an EV/EBITDA of 6x, while for IOCL, BPCL, HPCL, MRPL and CPCL, we have used 5.5x to account for uncertainties associated with their businesses.

We expect RIL EBITDA to increase from INR 316bn in FY15 to INR 452bn in FY18E, led by core expansion. Our research shows contribution of expansion will be USD 1.6bn on full utilization of the new units. Even if we assume an increase of 25% annually in EBITDA from the shale segment, we expect negative valuation, even at an EV/EBITDA of 7x. While our Telecom Analyst Aliasgar Shakir suggests a negative valuation for telecom, we ascribe nil value for the telecom business on a more conservative note. We downgrade RIL to SSell rating with a new target of INR 966 from INR 1,070.

Of the three OMC, our conviction is the strongest for IOCL, which we believe will benefit from the commissioning of the Paradip refinery. We reiterate our Buy rating with a new target price of INR 599 from INR 607. Due to the recent run-up in the stock, we downgrade BPCL to RReduce from Buy with a new target price of INR 909 from INR 1,006. We revise our rating for HPCL to RReduce from Buy with a new target price of INR 875 from INR 1,016.

MRPL has started showing an improvement in its core performance. OMPL is also likely to stabilize from FY17. We reiterate our BBuy rating with a target price of INR 90.

CPCL has a debt-equity ratio of 2.1x due to large debt on books. It is also implementing INR 34bn capex (residue upgradation project and replacement of the existing crude oil pipeline), which will take time to yield results. We revise our rating to Sell from Reduce with an unchanged target price of INR 149.

(5,000)

0

5,000

10,000

15,000

20,000

25,000

FY12 FY13 FY14 FY15 9MFY16

(INR

mn

)

IOC BPCL HPCL

Refining


Exhibit 22: Valuation summary Company CMP (INR) Target (INR) Upside (%) Rating Valuation (FY18E)

RIL 1,066 966 (9) Sell 6.0x EV/EBITDA

IOCL 416 599 44 Buy 5.5x EV/EBITDA

BPCL 926 909 (2) Reduce 5.5x EV/EBITDA

HPCL 850 875 3 Reduce 5.5x EV/EBITDA

MRPL 67 90 34 Buy 5.5x EV/EBITDA

CPCL 202 154 (24) Sell 5.5x EV/EBITDA

Source: Elara Securities Estimate

Exhibit 23: Change in estimates for Reliance Industries

(INR mn) Old NNew ((%) change

FY17E FY18E FY17E FY18E FY17E FY18E

EBITDA 356,251 415,725 377,035 452,033 5.8 8.7

PAT 231,669 261,376 249,278 293,668 7.6 12.4

EPS (INR) 78.9 89.0 84.9 100.0 7.6 12.4

Target price (INR) 1,070 966 (9.7)

Rating Reduce Sell


Exhibit 24: Change in estimates for IOCL



EBITDA 275,546 304,185 268,350 303,366 (2.6) (0.3)

PAT 141,667 159,138 136,869 158,592 (3.4) (0.3)

EPS (INR) 58.4 65.5 56.4 65.3 (3.5) (0.3)

Target price (INR) 607 599 (1.3)

Rating Buy Buy


Exhibit 25: Change in estimates for BPCL

(INR mn) Old NNew (%) change


EBITDA 90,373 111,966 89,727 111,616 (0.7) (0.3)

PAT 54,117 66,627 51,991 64,254 (3.9) (3.6)

EPS (INR) 74.8 92.1 71.9 88.9 (3.9) (3.5)


Rating Buy Reduce


Exhibit 26: Change in estimates for HPCL



EBITDA 70,988 73,868 71,450 74,102 0.7 0.3

PAT 31,343 31,976 31,651 32,132 1.0 0.5

EPS (INR) 92.6 94.4 93.5 94.9 0.9 0.5


Rating Buy Reduce


Refining

Oil

& G

as


Risks to our call Strengthening refining margin is the biggest risk to our call. However, looking at the upcoming capacities and persistent lack of demand, it is very unlikely that refining margins will strengthen. Expansion of marketing margins on auto fuels could further strengthen profitability of OMC. Rise in LNG prices could boost profitability of petcoke gasifier and ROGC for RIL. However, LNG supply is increasing by ~60% in next 2-3 years while demand

growth would be subdued in light of restart of nuclear reactors in Japan and Korea. Hence, likelihood of increase in LNG prices is low. RJio could again be a game changer if it grabs higher market share than estimated. Slower than expected ramp up of Paradip refinery could be a risk for IOCL. However, we have already taken a lower utilization of 30% in FY17 and 70% in FY18 and see a lower possibility of this risk playing out.

Exhibit 27: Change in estimates for MRPL



EBITDA 39,906 39,793 40,799 40,245 2.2 1.1

PAT 20,337 20,808 20,959 20,973 3.1 0.8

EPS (INR) 10.5 10.8 10.9 10.9 3.4 0.6

Target price (INR) 90 90 0.0

Rating Buy Buy


Exhibit 28: Change in estimates for CPCL



EBITDA 9,925 13,043 9,925 13,043 0.0 (0.0)

PAT 2,763 3,952 2,763 3,952 (0.0) 0.0

EPS (INR) 18.6 26.5 18.6 26.5 (0.3) 0.1

Target Price (INR) 149 154 3.6

Rating Reduce Sell


Refining


Notes

Glo

bal

Mar

kets

Res

earc

h



Likely to suffer the most Refining margin to wither

We believe Reliance Industries (RIL IN) will suffer the most once refining margin comes off from the highs of 2015. An overwhelming dependence on exports for placement of ~70% of its refined products leaves it vulnerable to increased competition in the exports market, particularly from the Middle East refiners, due to close proximity to Africa & Europe. Low LNG prices would cap benefits from its petcoke gasifier to a mere USD 0.4/bbl improvement in refining margin.

Total increment of only USD 1.6bn from core projects

All core projects of ~USD 15bn would result in an annual incremental EBITDA of only USD 1.6bn. That too would be affected, if petrochemical margin were to fall post commissioning of new ethylene capacity in the US or from a further dip in LNG prices. While ethane imports provide a feedstock option for its petrochemical segment, its economic attractiveness has declined, in our view.

Shale remains a dampener

Several companies have written off investments in shale assets in the US, due to a fall in realization. At a cumulative investment of USD 8.7bn, RIL had posted an EBITDA of USD 58mn in Q3FY16. EBITDA stood at USD 1.1/mcfe in Q3FY16, which suggests it would incur EBIT losses considering high depreciation. Even if we assume 25% annual growth in EBITDA for 9MFY16, the segment indicates a loss per share of INR 60 at 7x EV/EBITDA.

Telecom may erode value

Even if Reliance Jio achieves a market share of 10% by FY19E, Elara Telecom Analyst Aliasgar Shakir says high capex and low realization may result in a negative NPV. EBITDA would break-even only in the third year of operations.

Valuation –downgrade to Sell with a new TP of INR 966

Refining contributes 70% of RIL’s EBIT. Given our concerns on refining margin, we believe refining EBITDA will decline from FY16. Attempts to push products in the domestic market may see further compression of refining margin through cross-subsidization. The telecom segment remains cause for concern with possible value erosion of ~INR 110 in a base case scenario. Even if we set aside value erosion in Reliance Jio, we arrive at a new SOTP-based target price of INR 966 from INR 1,070, after valuing core refining and petrochemical segments at 6x (unchanged) FY18E EV/EBITDA.

India l Oil & Gas 21 April 2016

Thematic Report/Target price/Rating change

Reliance Industries

Rating: Sell Target Price: INR 966 Downside: 9% CMP: INR 1,066 (as on 13 April 2016)

Key data*

Bloomberg /Reuters Code RIL IN/ RELI.BO

Current /Dil. Shares O/S (mn) 3,240/3,240

Mkt Cap (INR bn/USD mn) 3,454/51,833

Daily Vol (3M NSE Avg) 4,185,949

Face Value (INR) 10

1 USD = INR 66.6

Note: *as on 13 April 2016; Source: Bloomberg

Price & volume

Source: Bloomberg

Shareholding (%) Q1FY16 Q2FY16 Q3FY16 Q4FY16

Promoter 45.2 45.2 46.7 45.2

Institutional Investors 31.7 31.8 32.9 32.3

Other Investors 12.8 12.8 10.3 12.8

General Public 10.3 10.3 10.2 9.8

Source: BSE

Price performance (%) 3M 6M 12M

Sensex 3.1 (4.5) (11.8)

Reliance (1.0) 19.3 15.6

Cairn 23.6 (5.9) (31.8)

ONGC (4.4) (16.0) (31.6)

Source: Bloomberg

Standalone key Financials YE March

Revenue (INR bn)

YoY (%)

EBITDA (INR bn)

EBITDA margin (%)

Adj PAT (INR bn)

YoY (%)

Fully DEPS (INR)

RoE (%)

RoCE (%)

P/E (x)

EV/EBITDA (x)

FY15 3,291 (15.6) 316 9.6 227 3.3 77.4 11.0 6.1 13.7 13.2 FY16E 2,402 (27.0) 407 16.9 276 21.7 94.2 12.1 7.8 11.3 10.3 FY17E 2,376 (1.1) 377 15.9 250 (9.5) 85.2 10.0 6.6 12.4 11.1 FY18E 2,676 12.6 452 16.9 294 17.3 100.0 10.7 7.7 10.6 9.3

Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate

0

5

10

15

20

750

850

950

1,050

1,150

Apr-15 Aug-15 Dec-15 Apr-16

Vol. in mn (RHS) Reliance Industries (LHS)

Reliance Industries


Standalone Financials (YE March) Financials (YE March) FY15 FY16E FY17E FY18E

Income Statement (INR bbn)

Net operating income 3,291 2,402 2,376 2,676

EBITDA 316 407 377 452

Depreciation 85 90 96 107

Forex loss 0 0 0 0

EBIT 231 317 281 345

Interest cost 24 39 37 34

Other income 87 77 77 65

PBT 295 354 321 376

Less: taxation 67 78 71 83

Effective tax rate (%) 22.9 22.0 22.0 22.0

PAT 227 276 250 294

Balance Sheet (INR mn) FY15 FY16E FY17E FY18E

Equity Capital 32 32 32 32

Reserves 2,129 2,366 2,580 2,831

Total Borrowings 891 850 800 700

Deferred Taxes 127 127 127 127

Total Liabilities 3,180 3,375 3,539 3,690

Fixed Assets 1,903 2,085 2,258 2,287

Investments 1,126 1,126 1,126 1,126

Inventories 366 255 218 236

Debtors 47 34 34 38

Cash 116 88 98 326

Loans & Advances 416 262 269 202 Other Current Assets 0 0 0 0 Net Current Assets 151 165 155 278 Total Assets 3,180 3,375 3,539 3,690

Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E

Operating Cash Flow 491 325 367 505

Capex (477) (272) (270) (136)

Free cash flow to firm 14 53 97 370

Investing cash flow (742) (272) (270) (136)

Financing cash flow 0 (81) (86) (142)

Net change in cash (251) (28) 11 227

Opening cash 366 116 88 98

Closing cash 116 88 98 326

Ratio Analysis FY15 FY16E FY17E FY18E

Income Statement Ratios (%)

Revenue growth (15.6) (27.0) (1.1) 12.6

EBITDA growth 2.7 28.8 (7.4) 19.9

PAT growth 3.3 21.7 (9.5) 17.3

EBITDAM 9.6 16.9 15.9 16.9

PAT margin 6.7 11.2 10.2 10.7

Return & liquidity ratios

Interest/PBIT (x) 0.1 0.1 0.1 0.1

Net debt/Equity (x) 0.2 0.2 0.1 0.0

ROE (%) 11.0 12.1 10.0 10.7

ROCE (%) 6.1 7.8 6.6 7.7

Per share data & valuation ratios

EPS (INR) 77.4 94.2 85.2 100.0

EPS growth (%) 3.3 21.7 (9.5) 17.3

Book Value (INR) 736.2 816.8 889.7 975.3

DPS (INR) 10.0 11.6 10.5 12.3

P/E (x) 13.7 11.3 12.4 10.6

EV/EBITDA (x) 13.2 10.3 11.1 9.3

Price/Book (x) 1.4 1.3 1.2 1.1

Dividend Yield (%) 0.9 1.1 1.0 1.2

Note: pricing as on 13 April 2016; Per share calculation excludes treasury shares. Net debt calculation includes current investments. Source: Company, Elara Securities Estimate

Revenue & margin growth trend

Source: Company, Elara Securities Estimate

Adjusted profit growth trend


Return ratios


9.6

16.9 15.9

16.9

0.0

5.0

10.0

15.0

20.0

0

1,000,000

2,000,000

3,000,000

4,000,000

FY15 FY16E FY17E FY18E

(%)

(INR

mn

)

Net revenues (LHS) EBITDA Margin (RHS)

3.3

21.7

(9.5)

17.3

(20)

(10)

0

10

20

30

40

(100,000)

0

100,000

200,000

300,000

400,000


(%)

(INR

mn

) Adj PAT (LHS) PAT Growth (RHS)

6.1

7.8

6.6

7.7

11.0

12.1

10.0 10.7

5.0

7.0

9.0

11.0

13.0


(INR

mn

)

ROCE (%) ROE (%)

Reliance Industries

Oil

& G

as


Concerns remain; limited upside Limited upside from petcoke gasification

The purpose of a petcoke gasifier is to replace LNG as a source of energy (power & steam) with synthetic gas produced from cheap petcoke, a product of the refinery. However, LNG prices have cracked from the highs of USD 20/mmBtu in early 2014 to below USD 5/mmBtu currently. This limits benefits of the petcoke gasifier project.

Exhibit 1: Petcoke gasifier economics

Composition of synthesis gas (bcm/year)

Cogen fuel 5.1 used for power+steam

Hydrogen 1.3 Synthetic NG 1.1 feed to new cracker

Heater fuel 0.4 fuel all new process heaters

CO 0.2 feed to acetic acid plant

Total 8.0 24mmscmd considering 330days/year


Savings potential

The petcoke gasifier replaces ~10mmscmd of LNG currently being used in the refinery & petrochemical setup. In addition to servicing increased power requirement of the expansion, it frees off-gases, which can be used as feedstock in the refinery’s off-gas cracker unit (ROGC). An easy way to calculate savings is to calculate the replacement cost of ~10mmscmd of LNG and load it onto the refining segment to calculate the increase in GRM. This coupled with the advantage of almost nil cost of feedstock for the ROGC gives full potential of the gasifier as well as the ROGC.

Exhibit 2: Building savings model

Source: Elara Securities Research

Improvement in GRM

At a LNG price of USD 7.5/mmBtu, we estimate GRM improvement will be USD 0.4/bbl. A minimum of USD 6.0/mmBtu LNG price is required for incremental value from the petcoke gasifier.

Exhibit 3: GRM breakdown Production economics Petcoke consumed mn tonnes 9.8 Petcoke cost INR/tonne 4,000

USD/tonne 61 Feedstock cost USD mn 594 Production (NG equivalent) Bcm 3.3

TrBtu 119 Output price USD mn 1,088 Opex USD/mmBtu 2.4

USD mn 285 EBITDA USD mn 209 Throughput mn tonnes 68

Improvement in GRM USD/bbl 0.4

Conversions Exchange rate USD-INR 66 LNG USD/mmBtu 9.2

TrBtu/1 bcm of NG 36

Price build up of LNG from FOB

FOB USD/mmBtu 7.5 Shipping USD/mmBtu 0.3 Customs % 5.0

USD/mmBtu 0.4 Regas charges USD/mmBtu 0.5 Transmission charges USD/mmBtu 0.5

Gate price USD/mmBtu 9.2


Low LNG prices would keep savings in check

Global LNG trade in 2015 stood at 245mn tonnes. However, Japan, the largest importer, is likely to see a decrease in demand once its nuclear reactors come online. Additionally, a total of ~140mmtpa of new liquefaction capacity is coming onstream in the next few years. This is expected to put LNG prices under pressure even if oil prices rise. As a result, savings potential of the petcoke gasifier would remain suppressed for a long time.

Exhibit 4: Supply increasing ~60% of total trade by FY16

Source: International Gas Union, Elara Securities Research

0

100

200

300

400

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

E

(mn

ton

nes

)

Liquefaction Capacity Actual Trade

Huge capacity addition led by Australia

Emergence of new demand centers amid low LNG prices; restart of nuclear reactors in

Japan cause for concern

Petcoke gasifier

Power requirement for the expanded

setup

Ref off-gases

Replacement of current

consumption of LNG for refinery

LNG for existing petrochemical

Feedstock for ROGC

Load it onto refining to estimate improve-

ment in GRM

Almost nil feedstock cost

for ROGC

31

7

3

4

24

14

Reliance Industries


Refining EBITDA likely to decline

Our calculations show a boost to refining of ~USD 0.4/bbl because of petcoke gasifier. We estimate an increase in refining EBITDA of only 6% in FY18 over FY15, even after contribution from petcoke gasifier. We expect RIL GRM ex-petcoke gasifier will reduce because of 1) increased competition in the exports market, 2) absorption of freight to remain competitive in exports, and 3) continued exports to regions, which require low-quality products (and thus low realization).

Exhibit 5: FY16 looks the brightest


Throughput (mn tonnes) 67.9 68.7 68.0 68.0

GRM (USD/bbl) 8.6 10.5 8.4 8.8

USD-INR 61.4 64.6 67.2 68.0

EBITDA (INR mn) 187,250 245,746 186,525 199,224


Almost nil feedstock cost for ROGC

The 1.365mn tonne pa new ethylene plant would be fed from the refinery off-gases, which would come at almost nil cost. Instead, the ROGC would have used ~4mmscmd of LNG. We calculate savings in ROGC, due to the petcoke gasifier, will stand at USD 481mn.

Exhibit 6: Savings in ROGC

Feedstock to ROGC

mmscmd 4

mmscm 1,460

mmBtu 52,560,000

Saving USD mn 481


Full potential of gasifier/ROGC/new products

In addition to USD 209mn estimated for refining and USD 481mn in savings from almost nil feedstock cost to ROGC, ROGC & downstream crackers would generate USD 936mn of EBITDA at current rates. All together, we estimate a boost of USD 1,627mn as a result of the petcoke gasifier and ROGC & downstream projects.

Exhibit 7: EBITDA calculations

FY13 FY14 FY15 9MFY16

Estimated pdt sales (tmt)* 7,511 7,548 7,475 6,069

EBITDA (USD mn) 1,765 1,820 1,915 1,608

EBITDA (USD/tonne) 235 241 256 265

*Excluding internal consumption; Source: Elara Securities Research

Exhibit 8: Total boost to EBITDA

Increase in refining EBITDA (USD mn) [A] 209

Saving due to almost nil feedstock cost (USD mn) [B] 481

Average 3yr petchem EBITDA (USD/tonne) 250

Increase in petchem EBITDA due to new vol (USD mn) [C] 936

Total increase in EBITDA (USD mn) [A+B+C] 1,627


Petchem EBITDA gets a major boost

Segment-wise EBITDA is likely to almost double during FY15-18E, due to savings from ROGC being fed on refinery off-gases instead of LNG & expansion in petrochemical production capacity.

Exhibit 9: Almost doubling of petrochemicals EBITDA


Sales (mn tonnes) 7.5 8.0 9.4 11.3

Margin (USD/tonne) 256 259 250 250

Saving due to ROGC (USD mn) 481

USD-INR 61.4 64.6 67.2 68.0

EBITDA (INR mn) 117,570 134,254 157,233 224,704


Margin threat from ethylene expansion

Due to availability of cheap and abundant shale gas, North America is adding ~8.5mn tonne pa of new polyethylene capacity to its existing capacity of ~20mn tonne pa. This low-cost expansion is likely to keep petrochemical margin under pressure.

Exhibit 10: Polyethylene projects in North America

Company Capacity (mtpa) Grades Location Start-up

US Projects

Sasol / INEOS 470,000 HDPE Texas 2016

ExxonMobil 1,300,000 mLLDPE, LLDPE Texas 2017

LyondellBasell 454,000 Unspec US 2017

Chevron Phillips

1,000,000 HDPE (500kt), LLDPE (500kt)

Texas 2017

Dow Chemical 750,000 PE (ELITE 400kt), LDPE (350kt)

Texas 2017

Formosa Plastics

1,090,000 LDPE (567kt), PE unspec (535kt)

Texas 2017

Sasol / INEOS 900,000 LLDPE, LDPE Louisiana 2018

Shell 1,600,000 HDPE/LLDPE (550 kt, 2 unites), HSPE (500 kt) Pennsylvania 2018

Mexico and Canada Projects Nova Chemicals 454,000 LLDPE Canada 2016

Nova Chemicals 470,000 Unspec

North America, World

NA

Source: ICIS, Elara Securities Research

Ethane project dampener too

When oil prices were low, ethane offered attractive saving potential compared to naphtha for petrochemical production. However, with reduction in oil prices, ethane has lost its attractiveness to naphtha. Nonetheless, it provides access to diverse feedstocks for the petrochem segment.

Shale segment another albatross

As oil prices fell since late-2014, we have witnessed huge write-offs in shale assets in the US. It is estimated nearly 40% of shale reserves there would be written off if oil prices were to remain low.

Reliance Industries

Oil

& G

as


Exhibit 11: Major write-offs since 2015

Company Date Impairment ((USD bn) Remarks

BHP Billiton Jan-16 10.3 USD 10.3bn write-down on its US shale oil and gas assets

EQT Corp Feb-15 0.16 EQT writes off its USD 162mn Utica Shale holdings in Ohio

Statoil Apr-15 4.0 USD 4bn write-down on its US shale oil and gas assets

Shell Aug-14 1.9 Shell writes-off USD 1.9bn in US shale assets

Chesapeake Energy Aug-15 4.0 USD 4bn on its acreages in August

Whiting Petroleum

Aug-15 0.87 Whiting Petroleum took an USD 870mn hit over its takeover of Kodiak Oil and Gas

Whiting Petroleum Nov-15 2.57

Write down of USD 1.7bn in Texas Assets and USD870mn for goodwill for Kodiak

Devon Energy Mar-15 5.5 US assets

Chesapeake Energy

Mar-15 5.0 US assets


We have seen RIL realization from its shale assets declining to USD 2.4/mcfe in Q3FY16 from an average of USD 6.5/mcfe in FY14 and USD 5.1/mcfe in FY15. EBITDA/mcfe has fallen to USD 1.1 in Q3FY16 from USD 4.1 in FY14 and USD 3.3 in FY15. Although depreciation cost is not available for RIL, a study of comparative companies suggests a depreciation of ~USD 3.5/mcfe. This means RIL will be incurring a loss of USD 2.4/mcfe from its shale assets.

Exhibit 12: Profitability of shale assets

Source: Elara Securities Research

On a cumulative capex of USD 8.7bn, it generated an annualized EBITDA of USD 276mn, a return of ~3%. Low realization suggests RIL may take write-offs in its assets. Even if it does not, using a high EV/EBITDA of 7x also results in negative valuation of INR 60 for the shale segment.

Exhibit 13: Valuation of shale business (FY18E)

EV/EBITDA (x) 7

EV (USD mn) 3,019

EV (INR mn) 203,766

Debt (INR mn) 320,000

Valuation (INR) (60)


Delayed RJio launch

RJio’s delayed upcoming telecom service launch on pan-India basis is likely to happen at the beginning of FY17. Our channel checks show out of the planned 75,000 cell sites for pan-India coverage, RJIO has commissioned about 55,000 sites. The remaining sites are at some stage of frequency testing & commissioning, which is likely to get delayed to Q1-Q2FY17. Apart from this, there will be in-building network coverage planning in multiple large commercial premises in urban areas.

RJio is the first operator in the world to have full IP-based LTE network with no fallback of 2G & 3G network. While this allows the company to offer full-fledged high speed 4G network, RJIO’s network launch with just about ~75,000 cell sites on a combination of 2300-1800MHz spectrum may not be adequate compared to incumbents like Bharti Airtel (BHARTI IN, RRating: Accumulate, CMP: INR 359, TP: INR 380) operating with more than 150,000 2G and 75,000 3G cell sites over and above 4G sites.

Aggressive pricing to target market share

The new operator launch in 2008-09 indicates telecom companies have remained aggressive until they reach close to 60-70% capacity utilization as they prioritize volume over profitability to recover from perishable minutes. We expect RJio to remain irrational on pricing until it reaches about 60-70% capacity utilization. With a pan-India launch, our base case factors in a 11% subscriber market share over the first five years of operations by FY21, driven by low voice RPM of INR 0.20/min and data ARMB of INR 0.15/MB, respectively. This is at a 40-50% discount to current voice pricing of INR 0.33-35/min and data pricing of INR 0.25/MB offered by incumbent operators.

Exhibit 14: Voice RPM at a 40% discount to peers


2.0

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(INR/m

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MOU Voice RPM (INR/min) (RHS)

Reliance Industries


Exhibit 15: Favorable data demand elasticity with 50% pricing discount


Exhibit 16: Likely high market share focus with free capacity


Likely EBITDA break-even in the third year

With data being the key proposition, we expect RJio to garner more than 70% revenue contribution from data unlike just 20% generated by current telcos. We believe RJio will remain a data provider, garnering INR 150 data ARPU with 1GB usage, ie, nearly 1.3-1.5x data usage per user compared to the current usage. Voice offered on VoLTE network may not be its mainstay, expecting weak network and low value proposition. We expect INR 60 voice ARPU with less than a 30% revenue contribution.

Our base case expects RJio’s EBITDA to break even in its third year of operations as it leverages its fixed cost led by network, subscriber acquisition & servicing and employee cost.

Exhibit 18: Base case – EBITDA break-even in 3 years


Investment IRR of only ~8%, below WACC

RJio has invested about INR 1,000bn in the past five years even before the launch of operations. We believe high capex will be the biggest dent on its returns. Our base case generates an IRR of ~8% despite factoring in a 30% EBITDA margin in the fifth year and more than 40% EBITDA margin by the seventh year of launch. This is led by 17.5% subscriber market share by the end of the license period in FY30E and a healthy INR 210 ARPU, better than the industry leader Bharti’s ARPU of INR 198. This does not include interest cost.

Our post tax project NPV at an 11% WACC works out to be –INR 82/share for the firm. To date, the company has taken on debt of INR 370bn for RJio. This gives a negative value of INR 200/share for equity valuation.

0.08 0.09 0.10 0.11 0.12 0.13 0.14 0.15 0.16

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Data usage/user Data tariffs (INR/MB) (RHS)

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Base case Bear case Bull Case

(200)

(100)

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Base Case Bear Case Bull Case

Exhibit 17: Scenario analysis FY19 (three years from launch)

Subs mkt share (%)

Data revenue (INR mn)

Voice revenue ((INR mn)

EBITDA (INR mn)

EBITDAM (%) Break Even IRR

(%) NPV/share

@ 11%

Base 8 1,59,414 57,547 20,293 9 3rd year - FY19 8 (82)

Bear 5 72,234 39,114 (25,698) (23) 2nd year - FY18 (10) (350)

Bull 13 3,81,929 1,03,405 1,84,286 38 2nd year - FY21 18 318


Reliance Industries

Oil

& G

as


Retail segment: strategy changing

RIL has increased its pan-India footprints by 37% over Q1FY14-Q3FY16 to 12.8mn sq ft. The number of stores has almost doubled from 1,511 in Q1FY14 to 3,043 in Q3FY16. However, growth has been seen only in digital and the fashion & lifestyle segments. The number of stores in the digital segment has increased 10x to 1,537 in Q3FY16 from those in Q1FY14, while the fashion & lifestyle segment has seen far slower growth, with the number of stores at 909 in Q3FY16 vs 591 in Q1FY14. There has been shrinkage in the value format segment,

with the number of stores falling from 769 in Q1FY14 to 597 in Q3FY16.

The focus of RIL is to expand faster in the digital segment, with high revenue potential as well having a sizeable presence in the high margin fashion & lifestyle segment and retreating from the loss-making value format segment.

Also, with competition from eCommerce heating up, RIL is trying its hand at the eCommerce segment, especially in the fashion & lifestyle segment.

Exhibit 19: Base case scenario

3 years 5 years 10 years End of license period 14 years

Subs market share (%) 7.5 11.0 15.5 17.5 Subs base (mn) 89 139 208 234

Voice revenue (INR mn) 57,547 1,11,107 1,88,294 2,14,749

Voice ARPU (INR/month) 66 71 77 77

Voice RPM (INR) 0.19 0.19 0.19 0.19

MOU (minutes/sub/month) 337 372 414 418

Voice traffic (mn minutes) 2,96,035 5,82,604 10,06,896 11,59,845 Data revenue (INR mn) 1,59,414 3,44,320 7,47,706 10,36,530

Data ARPU (INR/month) 182 220 308 374

Data RPM (INR) 0.13 0.13 0.12 0.12

Data usage per user (MB/month) 1,380 1,731 2,610 3,173

Data traffic (mn MB) 12,12,072 27,14,038 63,44,883 87,95,784

Total Revenue (INR mn) 2,16,961 4,55,427 9,36,000 12,51,278 Network Cost share 34% 23% 20% 20%

Spectrum and license costs 11% 11% 11% 11%

Access and Roaming Charge 12% 11% 10% 8%

Employee Expenses 10% 6% 5% 5%

Selling and admin costs 19% 11% 9% 8%

Ad exp 6% 3% 2% 2% EBITDA Margin 9% 34% 44% 45%

NPV @11% (2,63,648)

Per Share NPV (82)

IRR 8.2%


Exhibit 20: Stores breakdown category-wise (Q1FY14)

Exhibit 21: Stores breakdown category-wise (Q3FY16)

Source: Company, Elara Securities Research Source: Company, Elara Securities Research

Digital, 151

Fashion & Lifestyle,

591

Value, 769

Digital, 1,537

Fashion & Lifestyle,

909

Value, 597

Reliance Industries


Revenue has grown 1.7x to INR 60,420mn in Q3FY16 vs INR 35,000 in Q1FY14 while EBITDA has grown 3.5x to INR 2,430mn in Q3FY16 vs INR 700mn that in Q1FY14. EBITDA margin has improved steadily from 2% in Q1FY14 to 4% in Q3FY16 as RIL increase its presence in the digital and fashion & lifestyle segments and decreased its presence in the value format segment.

Exhibit 24: Revenue and EBITDA margin trend


We assume sales growth of 20% during FY16-18E and value the retail segment at INR 72 on 0.7x FY18E sales of INR 304bn.

Valuation: downgrade to Sell with a new TP of INR 966

We remain concerned on the company’s ability to generate good refining margin, due to 1) concerns on benchmark refining margin, 2) increasingly competitive exports market, that too in regions which consume Euro-II or low, 3) limited benefits from core sector expansion, and 4) concerns over telecom. As a result, we downgrade RIL to SSell with a new target of INR 966 from INR 1,070) based on a SOTP valuation.

Exhibit 25: Valuation of RIL

INR Remarks

Refining 407 6x FY18E EBITDA

E&P 55 Includes (INR 60) for shale, valued at 7x FY18E EBITDA

Petrochem 459 6x FY18E EBITDA

Investments/RGTIL 32

Reliance Retail 72

Infotel 0 (INR 200) as per out Telecom Analyst

Total 1,025

Net debt / (cash) 59

Target price 966


Exhibit 26: Major assumptions


Refining Throughput (mn tonne) 67.9 68.7 68.0 68.0

GRM (USD/bbl) 8.6 10.5 8.4 8.8

E&P KG D6 gas (mmscmd) 12.3 11.1 9.0 8.1

KG D6 oil (kbopd) 5.6 4.1 3.5 3.1

PMT PM gas (mmscmd) 5.5 5.2 4.8 4.3

PM oil (kbopd) 19.8 18.8 17.7 16.0

Tapti gas (mmscmd) 1.1 0.5 0.5 0.0

Petrochem -Polymers (kmt) 4,300 4,577 4,575 5,325

-Fibre intermediates (mmt) 4.9 6.4 8.3 9.5

-Polyester (kmt) 1,847 2,449 3,382 3,382

Petchem EBITDA per tonne (USD/tonne) 256 259 250 250


0.0

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(%)

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Revenue EBITDAM (RHS)

Exhibit 22: Revenue mix category-wise (Q1FY14) Exhibit 23: Revenue mix category-wise (Q3FY16)

Source: Company, Elara Securities Research Source: Company, Elara Securities Research

Digital, 19

Fashion & Lifestyle, 26

Value, 55

Digital, 28

Fashion & Lifestyle, 25

Value, 47

Reliance Industries

Oil

& G

as


Coverage History

Date Rating Target Price Closing Price

1

08-Jan-2014 Reduce INR 884 INR 849

2

17-Jan-2014 Reduce INR 887 INR 885

3

17-Apr-2014 Sell INR 887 INR 959

4

18-Jul-2014 Reduce INR 953 INR 977

5

27-Aug-2014 Reduce INR 955 INR 996

6

13-Oct-2014 Reduce INR 950 INR 958

7

16-Jan-2015 Accumulate INR 991 INR 867

8

8-Jul-2015 Accumulate INR 971 INR 997

9

24-Jul-2015 Reduce INR 1,016 INR 1,025

10

16-Oct-2015 Accumulate INR 1,076 INR 912

11

19-Jan-2016 Reduce INR 1,070 INR1,044

12

13-Apr-2016 Sell INR 966 INR 1,066

Guide to Research Rating BUY Absolute Return >+20%

ACCUMULATE Absolute Return +5% to +20%

REDUCE Absolute Return -5% to +5%

SELL Absolute Return < -5%

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Not Covered Covered

Reliance Industries


Notes

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kets

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earc

h



IOCL: best pick among OMC OMC losing handle on marketing margin

Marketing margin on auto fuels have not expanded significantly, which is in line with our assumption and against Consensus view. We estimate net marketing margin on gasoil has increased from 70p/liter prior to deregulation in October 2014 to INR 1.1/liter in FY16. Net marketing margin on gasoline, which was deregulated in June 2010, also appears to stand at INR 1.5/liter, slightly higher than INR 1.4/liter in FY14. As Street reconciles its long held unfounded expectation on marketing margins with reality, we expect derating of OMC. In such a scenario, IOCL which is leveraged the least to marketing, stands to benefit the most.

IOCL GRM to rise despite benign refining environment

We believe commissioning of IOCL’s 15-mn-tonne pa Paradip refinery with a high complexity of 12.2 will increase overall GRM. BPCL is expected to post a GRM increase due to a 6-mn-tonne pa expansion and complexity rise at the Kochi refinery. However, HPCL’s GRM is likely to suffer contraction in a benign refining environment.

Under-recoveries rears its ugly head

After gasoil was deregulated, the government introduced direct benefit transfer (DBT) for LPG. It also agreed to bear upto INR 12/liter of subsidy on kerosene and the rest by upstream companies. However, in Q3, OMC collectively borne net under-recoveries of INR 3bn. While this is insignificant, it raises doubts on whether deregulation on gasoil and gasoline will continue if oil prices rise further. This puts HPCL at the highest risk as it is the most leveraged to marketing.

E&P, once jewel in the crown for BPCL, is now a lemon

Among OMC, BPCL is the one with the largest diversification in E&P, with several assets in Brazil and Mozambique. However, with oil prices having crashed and Petrobras, operator of its Brazil blocks, trying to emerge out of its corporate governance issues, it has put monetization of its assets at risk. Additionally, LNG prices also have tumbled. This has put the Mozambique investment at risk.

Valuation – IOCL is the top pick

We value IOCL at 5.5x FY18E EV/EBITDA. We lower the multiple for BPCL & HPCL from 6.0x to 5.5x due to rising concerns on marketing margin and likely under-recoveries. We reiterate BBuy on IOCL with a new TP of INR 599. We downgrade HPCL and BPCL to Reduce with new target of INR 875 and INR 909 respectively.

India l Oil & Gas 21 April 2016


Oil Marketing Companies

GRM trend of OMCs

Source: Companies, Reuters

Marketing margin trend of OMCs

Source: Companies

Price performance of OMCs

Source: Bloomberg

Key Financials Company EV/EBITDA (x) P/E (x) ROE (%)

FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

IOCL 14.7 6.6 5.9 5.2 28.4 8.2 7.5 6.5 7.8 17.9 16.0 16.5

BPCL 9.4 7.8 8.7 7.0 13.2 11.4 12.9 10.4 24.3 24.2 18.8 20.6

HPCL 8.5 6.7 6.7 6.5 10.6 8.6 9.2 9.0 17.6 19.8 16.5 15.2

1 USD = INR ; Note: pricing as on 13 April 2016; Source: Company, Elara Securities Estimate

(8)

(4)

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8

12

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Gross marketing margin Petrol

70

85

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130

145

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Nifty IOCL BPCL HPCL



Sifting for winners Marketing margin expansion: where is it?

Post deregulation of gasoil, it was widely believed OMC would be given the autonomy to price auto fuels and they would see expansion in marketing margin. Although there have been a periodic spike in margin, this rise was to cover incremental cost or inventory losses. We have yet to see any meaningful and consistent expansion in marketing margin. Data suggests marketing margin has barely improved, with gross marketing margin in gasoil averaging INR 2.6/litre in FY16 vs INR 2.3-2.4/liter during regulation while gross marketing margin for gasoline stood at INR 3.0/liter in FY16, the same as that in FY14.

Exhibit 1: Marketing margin trend


HPCL’s leverage to marketing margin is the highest, followed by BPCL and IOCL. For the same reason, we believe no major expansion in marketing margin may result in further downgrade of HPCL and BPCL.

IOCL marketing to contribute 31% of FY18E EBITDA

We estimate the company will sell 44.8bn liters of gasoil and 14.7bn liters of gasoline in FY18. We assume a net marketing margin of INR 1.05/liter for gasoil and INR 1.58/liter for gasoline. IOCL would further sell 26mn tonnes of other products, on which it would gain 78p/kg. We estimate a total of INR 90bn from marketing, which is 31% of total EBITDA in FY18.

Exhibit 2: Our marketing EBITDA calculation (FY18E)

Sale of gasoil

Sale of gasoline

Other products (mn tonne))

Volume sold (bn lit) 44.8 14.7 25.99

Net marketing margin (INR/lit); INR/kg for other products)

1.05 1.58 0.78

Marketing EBITDA (INR mn) 47,047 23,196 20,272


HPCL has the highest leverage to marketing

We estimate HPCL’s marketing margin will contribute 59% of total EBITDA in FY18E. Against this, marketing

accounts for only 31% and 46% for IOCL and BPCL, respectively. It also threatens HPCL if the government decides to regulate auto fuels again in a rising oil price environment.

Exhibit 3: Marketing margin contribution

Marketing as % of total EBITDA FY18E

IOCL 31

BPCL 46

HPCL 59


GRM to come under pressure

Singapore GRM stood at USD 7.5/bbl of GRM in FY16 vs USD 6.4/bbl in FY15 and USD 5.6/bbl in FY14. Increased demand for auto fuels, naphtha for gasoline blending & petrochemical feed stocks and low fuel & loss helped prop up GRM in 2015. Amid a robust refining environment, we have seen IOCL reporting a GRM of USD 5.8/bbl in 9MFY16 vs USD 0.3/bbl in FY15 and USD 4.2/bbl in FY14. BPCL reported a GRM of USD 6.7/bbl in 9MFY16 vs USD 3.6/bbl in FY15 and USD 4.3/bbl in FY14 while HPCL reported a GRM of USD 6.4/bbl in 9MFY16 vs USD 2.8/bbl in FY15 and USD 3.4/bbl in FY14.

Exhibit 4: OMCs GRM trend


However, GRM is expected to come off with global refinery net capacity addition set to outpace demand by ~0.45mnbopd. Also, tax breaks introduced in October 2015 on smaller vehicles in China are coming to an end in January 2017. In addition, China teapot refineries could potentially add ~82mn tonnes pa of petroleum products.

Despite a benign refining environment, we expect IOCL to show an improvement in GRM over FY15-18E due to successful commissioning and stabilization of 15.0-mn- tonne pa Paradip refinery with high complexity of 12.2.

Paradip coming of age

The primary concern on IOCL has been the successful commissioning of the 15mn tonne pa (INR 345bn) Paradip refinery. Our channel checks suggest the

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Gross marketing margin Gasoil Avg gross margin on Gasoil Gross marketing margin Gasoline Avg gross margin on Gasoline

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Oil

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refinery has been progressing well and may surprise us with higher-than-estimated utilization.

Logistics in place

The Paradip refinery is just 5km away from the Paradip port. The port has three single point mooring (SPM) facilities. All are functioning well. Around 3.5mn tonne pa of products are expected to be evacuated through the rail & road network ex-Paradip & Bhubaneshwar marketing terminals. Sulfur and petcoke accounting for 1.85mn tonne pa of production are expected to be consumed by nearby industries. The North and South jetty are expected to take care of 6mn tonne pa of product evacuation. The company is also constructing a 2mn tonne pa Paradip-Raipur-Ranchi pipeline. However, the pipeline passes through Naxal areas. This has been creating problems in execution despite legal approvals. We assume a 70% utilization of the refinery in FY18E. This provides adequate time to complete the pipeline. Even if the pipeline is not completed, the two jetty and rail & road networks can handle additional load. For future requirements, the company is also constructing a 4mn tonne pa Paradip-Hyderabad pipeline.

Packages and their readiness

The refinery was originally scheduled to be commissioned by March 2012. However, delay due to clearances and process modifications resulted in test run of the mother units only in April 2015. Since then, there

has been increased focus on timely execution of the project. The mother units are running at a 65% utilization as on now. All intermediate units and a few secondary units are also running. The coker unit is running at ~50%. Only VGO & alkylation units remain to be commissioned by April 2016. Post that, synchronization of all units and gradual ramp-up would commence.

Exhibit 6: Status of the project

Crude, iintermediate and product tanks

Power plant & other uutilities

Primary units Secondary units

11 crude oil storage tanks with 60,000kl capacity each; already commissioned

Three gas turbines (naphtha/gasoil/gas); each of 105MW; two STGs of 30MW each

Test run done in Apr 2015; test run done at 12-13mn tonne pa; currently operating at ~65% utilization

Intermediate and most secondary units already commissioned; indigenously developed Indmax/FCCU commissioned in Dec 2015

Intermediate & most product tanks have already been commissioned

Two GTs operational, third standby; already shifted from gasoil to naphtha; both STGs operational; total power requirement of 180-190MW

Synchronized with intermediate units in Sep-Oct 2015

Commissioning of only two units remaining- Alkylation and VGO; to be completed by April 2016


Exhibit 5: Product evacuation from Paradip


ParadipBhubaneshwarLarge marketing terminal with facility for road/rail evacuation

Haldia

Budge Budge

Kalyani

Paradip-Haldia-Budge-Budge-Kalyani-Durgapur LPG pipeline

Sambalpur

Raipur

Ranchi

Sambalpur

Haldia

BudgBudg

Kalyan

hwarketing terminal with

� 3.5mmtpa through rail/road ex-Paradip/Bhubaneshwar marketing terminals

� 2mmtpa through Paradip-Raipur-Ranchi pipeline

� 1.85mmtpa of sulfur & petcoke in nearby areas

� 6mmtpa of through jetty

� 0.5mmtpa LPG through LPG pipeline

� Constructing 4mmtpa Paradip-Hyderabad product pipeline for future



Favorable yield, even better than RIL

Strong GRM in 2015 was led by light distillates. The Paradip refinery has an excellent product slate with ~25% of gasoline yield, even higher than ~17% for RIL.

Exhibit 7: Product yield

Product Yield (%) Remarks

Propylene 1.3 Will be fed to the upcoming PPU unit

LPG 3.9

Naphtha 0

Gasoline 25.3 Highest among India’s refineries

SKO/ATF 13.1

Gasoil 37.5

Sulfur 1.8

Petcoke 8.1

Fuel & loss 9.0


Paradip to boost profit

In our base case, we assume a 30% utilization of the refinery in FY17E, followed by a gradual ramp-up to 70% in FY18E. Even at 30% utilization, we estimate the refinery will generate an EBITDA of INR 6.4bn in FY17. We estimate an EBITDA of INR 31bn in FY18 and an EBITDA of INR 45bn when the refinery runs at 100% utilization.

Exhibit 8: Economics of Paradip

FY17E FY18E FY19E

Throughput (mn tonne) 4.5 10.5 15.0 GRM (USD/bbl) 6.0 8.5 8.5

Opex (USD/bbl) 3.0 2.5 2.5

EBITDA (INR mn) 6,650 31,402 44,860

Depreciation (INR mn) 10,350 10,350 10,350

Interest cost (INR mn) 6,760 6,760 6,760

PBT (INR mn) (10,460) 14,292 27,750


IOCL refining to contribute 28% of EBITDA in FY18E

We estimate IOCL’s GRM will increase from USD 5.1/bbl in FY17 to USD 5.4/bbl in FY18, due to higher contribution of USD 8.5/bbl from the Paradip refinery. As a result, we expect refining EBITDA of INR 84bn in FY18E. On total EBITDA of INR 303bn, refining contributes 28%.

Exhibit 9: Refineries & their complexity

Capacity (mn tonne pa)) Complexity

Koyali 13.7 10.0

Panipat 15.0 10.5

Mathura 8.0 8.4

Barauni 6.0 7.8

Haldia 7.5 7.5

Bongaigaon 2.4 8.2

Guwahati 1.0 6.7

Digboi 0.7 11.0

Paradip 15.0 12.2


Concerns on Paradip misplaced

The recent commissioning of the Brownfield MRPL expansion and Greenfield Bina & Bhatinda refineries were fraught with technical glitches and financial losses.

MRPL suffered due to technical problems with its captive power plant, which lingered for more than two years. This prevented commissioning of the secondary units, which requires lots of power and steam. As a result, GRM of the company suffered.

Exhibit 10: MRPL core GRM


The other two refineries (Bina and Bhatinda) have been suffering due to high cost of debt. Bina has an outstanding debt of INR 130bn as on FY15-end and has paid INR 9.8bn (USD 3.4/bbl) as interest cost, resulting in a net loss of INR 8.0bn in FY15. We estimate its PBT breaks even at USD 7.2/bbl, excluding USD 4/bbl of coal & freight placement cost.

Similarly, the Bhatinda refinery has an outstanding debt of INR 22.5bn. Even after the recent debt restructuring, interest cost stands at USD 2.3/bbl, which takes PBT break-even to USD 6.3/bbl.

Against this, the Paradip refinery has been largely funded through internal accruals. Debt outstanding is at INR 169bn, which results in PBT breakeven of USD 4.8/bbl for the refinery.

Exhibit 11: Breakeven analysis (UUSD/bbl) Bina Bhatinda Paradip

Opex 2.5* 2.5 2.5 Depreciation 1.3 1.5 1.5

Interest cost 3.4 2.3 0.8

Total 7.2 6.3 4.8

*Excludes USD 4/bbl for coal & product placement cost


(2) 0 2 4 6 8

10 12 14

1QFY

09

3QFY

09

1QFY

10

3QFY

10

1QFY

11

3QFY

11

1QFY

12

3QFY

12

1QFY

13

3QFY

13

1QFY

14

3QFY

14

1QFY

15

3QFY

15

1QFY

16

3QFY

16

(USD

/bb

l)

Core GRM Singapore GRM

Mother unit's expansion completed; secondary units delayed, resulting in poor GRM


Oil

& G

as


Exhibit 12: Refining EBITDA calculation of IOCL


Throughput (mn tonne) 53.6 55.3 59.1 65.1

GRM (USD/bbl) 0.3 5.4 5.1 5.4

EBITDA (INR mn) (70,080) 63,922 59,387 84,573


BPCL also to show GRM improvement

With commissioning of the Kochi IREP, we expect BPCL GRM to increase from USD 4.4/bbl in FY17E to USD 5.5/bbl in FY18E. On the other hand, HPCL is not having any yield improvement program during the period. As a result, we expect a decline in HPCL GRM from USD 5.9/bbl in FY16E to USD 4.4/bbl over FY17-18E.

Exhibit 13: Refining EBITDA for BPCL & HPCL


BPCL


GRM (USD/bbl) 3.6 6.1 4.4 5.5

EBITDA (INR mn) 20,171 49,659 35,021 52,547

% of total EBITDA 24 50 39 47

HPCL


GRM (USD/bbl) 2.7 5.9 4.4 4.4

EBITDA (INR mn) 7,508 31,171 20,449 20,733

% of total EBITDA 13 45 29 28


Under-recovery rears its ugly head in Q3FY16

It was earlier decided that the government would bear upto INR 12/lit of subsidy on kerosene and the rest

would be borne by the upstream companies. Under-recovery on kerosene stood at INR 15.1/lit in Q3FY16. However, since oil prices were low in Q3FY16, the government did not levy any subsidy burden on the upstream companies and restricted itself to bearing INR 12/lit. As a result, we have seen government levy a subsidy burden of INR 3bn on OMC. Although the quantum is small compared to ~INR 21-22bn of under-recoveries borne during FY14-15, it raises concerns of subsidy being levied on OMC again if crude price start inching up.

Exhibit 15: Net under-recoveries of OMC vs crude


E&P presence of IOCL

IOCL is present in 10 domestic blocks and seven overseas. However, most blocks are in the early stages of exploration, and we do not consider any for our valuation.

0

20

40

60

80

100

120

(5,000)

0

5,000

10,000

15,000

20,000

25,000

FY12

FY13

FY14

FY15

9MFY

16

(USD

/bb

l)

(INR

mn

)

IOC BPCL HPCL Brent (RHS)

Exhibit 14: IOCL’s E&P presence

Pacific NorthWest LNG, Canada

Acquired in 2013 Potential Reserves:

52.77 Tcf 2P Reserves: 19 Tcf 1P Reserves: 4.5 Tcf

Initial IndianOil Investment:

USD 1bn

IndianOil Stake: Reserves 10% - 5.3 Tcf LNG Terminal Offtake: 1.2 MMTPA – exports

by 2020 Cumulative Revenue: USD 67.17mn as on

31.03.2015

Niobrara Shale Asset, US

Acquired in 2012

Indian Oil Share: 10% (19.4 MMboe) as

on 31.3.2015 Cumulative Production:

398,000 boe as on 31.03.2015

Cumulative Revenue: USD 20.18mn

Carabobo Project-1, Venezuela

Acquired in 2010

Indian Oil Share: 3.5% (106 MMboe)

Cumulative Production: 1,68,670 bbl as on

31.3.2015




E&P becomes albatross for BPCL

BPCL once drew pride on account of its E&P portfolio, especially in Brazil and Mozambique. However, as far as Brazil’s assets are concerned, the priority for Petrobras, the operator, has shifted to improving corporate governance. Additionally, with low oil prices, the emphasis of Petrobras, one of the highest indebted companies globally, is likely to be on assets that can be monetized sooner than those in early stages of exploration. Hence, we do not expect any production to commence from BPCL’s E&P assets in Brazil in the near term.

Additionally, the huge 50-70+ tcf of recoverable resources in Mozambique block appear to have lost their attractiveness, due to LNG prices falling sharply to USD 4.5/mmBtu. The final investment decision for the project has not yet been achieved and production also does not seem possible by FY20.

Pipeline: steady source of income for OMC

Pipeline freights are linked to railway freight. However, actual operating cost is very low, which results in INR 500-700/tonne of EBITDA from the pipeline business for OMC. The segment adds 22% to EBITDA of IOCL and 5% of BPCL and 9% of HPCL.

Exhibit 16: Pipeline EBITDA calculation for IOCL



EBITDA (INR/tonne) 724.6 724.3 760.0 798.0

EBITDA (INR mn) 54,840 57,886 62,296 65,410


Exhibit 17: Pipeline EBITDA contribution in FY18E

Pipeline as % of total EBITDA (%)

IOCL 22

BPCL 5

HPCL 9


Petrochem to add 16% of EBITDA in FY18E for IOCL

Petchemicals delta for IOCL has improved from USD 224/tonne in FY15 to USD 370/tonne in 9MFY16. We expect delta to be USD 290/tonne during FY17-18E, with an EBITDA CAGR of 13% over FY15-18E. We estimate petrochemicals to contribute 15% towards EBITDA for IOCL in FY18E.

Exhibit 18: Petchem EBITDA for IOCL


Sales (mn tonne) 2.5 2.4 2.5 2.5

EBITDA (USD/tonne) 224 347 290 290

EBITDA (INR mn) 34,200 54,068 48,720 49,300


Valuation: IOCL is the preferred pick

We value IOCL at 5.5x FY18E EBITDA. We then knock off net debt to arrive at a revised target price of INR 599 from INR 607. We reiterate our BBuy recommendation on the stock. We have assumed a conservative 30% and 70% utilization of the Paradip refinery in FY17E and FY18E, respectively. The current project status points towards much brighter prospects, and we may be surprised with higher-than-estimated utilization.

HPCL and BPCL have higher leverage to marketing. This makes them more vulnerable to marketing margin as well as any possible net under-recoveries. As a result, we decrease EV/EBITDA for HPCL and BPCL from 6.0x to 5.5x each. The prospects of BPCL’s E&P portfolio also are reduced in the current oil and LNG environment. With a revised target price of INR 909 from INR 1,006, we downgrade BPCL to RReduce from Buy. With a new target price of INR 875 from INR 1,016, we downgrade HPCL to Reduce from Buy.

Exhibit 19: Valuation of OMCs

IOCL BPCL HPCL

FY18E EBITDA (INR mn) 303,366 111,616 74,102

Target EV/EBITDA (x) 5.5 5.5 5.5

Target EV (INR mn) 1,668,513 613,889 407,563

Net debt excluding oil bonds (INR mn) 413,226 125,835 163,813

Valuation of core business (INR) 517 675 720

Value of investments (INR) 82 234 155

Total valuation (INR) 599 909 875

CMP (INR) 422 948 857

Upside (%) 42 (4) 2

Note: pricing as on 13 April 2016; Source: Elara Securities Estimate

Exhibit 20: Major assumptions for IOCL



GRM (USD/bbl) 0.3 5.4 5.1 5.4

Net under-recoveries (INR bn) 12 0 0 0


Exhibit 21: Major assumptions for BPCL



GRM (USD/bbl) 3.6 6.2 4.4 5.5

Net under-recoveries (INR bn) 4.9 0 0 0


Exhibit 22: Major assumptions for HPCL



GRM (USD/bbl) 2.8 5.9 4.4 4.4

Net under-recoveries (INR bn) 5.0 0 0 0



Oil

& G

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Standalone Financials (YE March) - BPCL Income Statement (INR mn) FY15 FY16E FY17E FY18E

Net operating income 2,335,627 1,729,311 1,577,914 1,925,477

EBITDA 83,038 100,928 89,727 111,616

Depreciation 25,160 22,042 25,667 29,292

Forex loss (2,243) 3,846 0 0

EBIT 60,121 75,040 64,060 82,324

Interest cost 5,831 6,005 7,329 8,130

Other income 19,865 17,244 21,252 22,182

PBT 74,155 86,278 77,982 96,376

Less: taxation 23,310 27,623 25,991 32,122


PAT 50,845 58,654 51,991 64,254


Equity capital 7,231 7,231 7,231 7,231

Reserves 217,444 253,453 285,371 324,817

Total borrowings 117,773 158,000 190,000 200,000

Deferred taxes 17,083 17,083 17,083 17,083

Total liabilities 359,530 435,766 499,684 549,131

Fixed assets 279,807 357,765 432,098 482,805

Investments 123,911 123,911 123,911 123,911

Inventories 144,579 102,610 93,776 114,298

Debtors 26,077 19,307 17,617 21,497

Cash 13,602 43,937 24,077 43,656

Loans & advances 48,256 34,659 31,514 38,461

Other current assets 61,057 22,215 22,215 22,215 Net current assets (44,189) (45,910) (56,325) (57,586) Total assets 359,530 435,766 499,684 549,131 Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E

Operating cash flow 203,834 112,753 68,213 114,386

Capex (83,922) (100,000) (100,000) (100,000)

Free cash flow to firm 119,913 12,753 (31,787) 14,386

Investing cash flow (89,364) (100,000) (100,000) (80,000)

Financing cash flow (102,906) 17,582 11,927 (14,807)

Net change in cash 11,564 30,335 (19,860) 19,578

Opening cash 2,038 13,602 43,937 24,077

Closing cash 13,602 43,937 24,077 43,656



Revenue growth (10.9) (26.0) (8.8) 22.0

EBITDA growth (5.3) 21.5 (11.1) 24.4

PAT growth 25.2 15.4 (11.4) 23.6

EBITDAM 3.6 5.8 5.7 5.8

Net margin 2.2 3.4 3.3 3.3

Return & Liquidity Ratios

Interest/PBIT (x) 0.1 0.1 0.0 0.0


ROE (%) 24.3 24.2 18.8 20.6

ROCE (%) 11.2 13.4 9.5 10.8

Per Share Data & Valuation Ratios

EPS (INR) 70.3 81.1 71.9 88.9

EPS growth (%) 25.2 15.4 (11.4) 23.6

BVPS (INR) 310.7 360.5 404.7 459.2

DPS (INR) 23.2 26.8 23.7 29.3

P/E (x) 13.2 11.4 12.9 10.4

EV/EBITDA (x) 9.4 7.8 8.7 7.0

Price/Book (x) 3.0 2.6 2.3 2.0

Dividend yield (%) 2.5 2.9 2.6 3.2






Return ratios


3.6

5.8 5.7 5.8

2

3

4

5

6

7

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000


(%)

(INR

mn

)

Net operating income (LHS) EBITDAM (RHS)

25.2

15.4

(11.4)

23.6

(15)

0

15

30

45

60

(20,000)

0

20,000

40,000

60,000

80,000


(%) (IN

R m

n)

PAT (LHS) YoY (RHS)

11.2 13.4

9.5 10.8

24.3 24.2

18.8 20.6

0

5

10

15

20

25

30


ROCE (%) ROE (%)



Standalone Financials (YE March) - HPCL Income Statement (INR mn) FY15 FY16E FY17E FY18E


EBITDA 56,635 71,882 71,450 74,102

Depreciation 19,712 25,087 27,087 29,087

EBIT 36,923 46,794 44,363 45,015

Interest cost 7,066 5,783 6,750 7,050

Other income 11,684 10,522 9,862 10,230

PBT 41,541 51,532 47,475 48,195

Less: taxation 14,209 17,649 15,823 16,063


PAT 27,333 33,883 31,651 32,132


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

Reserves 156,831 178,028 197,830 217,932


Deferred taxes 41,036 41,036 41,036 41,036

Total liabilities 371,813 437,455 477,256 497,358

Fixed assets 325,372 340,285 363,197 384,110

Investments 112,415 112,415 112,415 112,415

Inventories 129,723 98,860 95,312 107,182

Debtors 36,031 22,476 22,045 28,014

Cash 171 23,443 19,946 25,283

Loans & advances 67,364 65,522 58,401 68,035

Other current assets 4,432 3,593 3,952 4,347

Net current assets (65,974) (15,245) 1,644 834 Total assets 371,813 437,455 477,256 497,358 Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E Operating cash flow 209,723 31,514 38,352 67,366

Capex (40,106) (40,000) (50,000) (50,000)

Free cash flow to firm 169,617 (8,486) (11,648) 17,366


Financing cash flow (165,977) 31,758 8,150 (12,030)

Net change in cash (176) 23,273 (3,497) 5,336

Opening cash 347 171 23,443 19,946

Closing cash 171 23,443 19,946 25,283



Revenue growth (7.5) (20.6) (10.8) 16.5

EBITDA growth 5.2 26.9 (0.6) 3.7

PAT growth 57.6 24.0 (6.6) 1.5

EBITDAM 2.7 4.4 4.9 4.3

Net margin 1.3 2.1 2.2 1.9

Return & LLiquidity Ratios

Interest/PBIT (x) 0.2 0.1 0.2 0.2


ROE (%) 17.6 19.8 16.5 15.2

ROCE (%) 6.1 8.5 7.1 6.7


EPS (INR) 80.7 100.1 93.5 94.9

EPS growth (%) 57.6 24.0 (6.6) 1.5

Book Value (INR) 473.2 535.8 594.2 653.6

DPS (INR) 24.5 32.0 29.9 30.4

P/E (x) 10.6 8.6 9.2 9.0

EV/EBITDA (x) 8.5 6.7 6.7 6.5

Price/Book (x) 1.8 1.6 1.4 1.3

Dividend yield (%) 2.9 3.7 3.5 3.5






Return ratios


2.7

4.4 4.9

4.3

0

2

4

6

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

FY15 FY16 FY17E FY18E

(%)

(INR

mn

)

Net operating income (LHS) EBITDA (RHS)

57.6

24.0

(6.6) 1.5

(20)

0

20

40

60

80

(10,000)

0

10,000

20,000

30,000

40,000

FY15 FY16 FY17E FY18E

(%)

(INR

mn

) Adj PAT (LHS) Adj PAT growth (RHS)

6.1 8.5

7.1 6.7

17.6 19.8

16.5 15.2

0

5

10

15

20

25


(%)

ROCE ROE


Oil

& G

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Standalone Financials (YE March) - IOCL Income Statement (INR mn) FY15 FY16E FY17E FY18E


EBITDA 107,921 240,290 268,350 303,366

Depreciation 45,287 48,966 56,491 59,291

Forex loss (1,004) 11,210 0 0

EBIT 63,638 180,114 211,858 244,075

Interest cost 34,353 23,823 23,780 23,500

Other income 33,986 19,763 17,215 17,301

PBT 63,271 176,054 205,293 237,876

Exceptional item 16,681 13,718 0 0

Tax 27,223 51,779 68,424 79,284

Effectiva tax rate (%) 34.0 27.3 33.3 33.3

PAT 52,729 137,992 136,869 158,592

Adj PAT 36,049 124,275 136,869 158,592


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

Reserves 655,420 744,979 833,809 936,738


Deferred taxes 67,202 67,202 67,202 67,202

Total liabilities 1,244,008 1,450,461 1,500,291 1,628,219

Fixed assets 1,025,750 1,136,784 1,240,293 1,341,002

Investments 238,995 238,995 238,995 238,995

Inventories 455,439 398,164 363,444 429,430

Debtors 67,582 53,720 49,842 58,666

Cash 1,119 56,219 41,953 33,853 Other current assets 48,891 48,891 48,891 48,891 Loans & advances 360,720 325,650 301,920 355,500 Net current assets (20,737) 74,682 21,003 48,223

Total assets 1,244,008 1,450,461 1,500,291 1,628,219


Operating cash flow 422,679 146,639 232,772 182,563

Capex (102,756) (160,000) (160,000) (160,000)

Free cash flow to firm 319,923 (13,361) 72,772 22,563


Financing cash flow (341,836) 68,461 (87,039) (30,663)

Net change in cash (24,967) 55,100 (14,267) (8,100)

Opening cash 26,085 1,119 56,219 41,953

Closing cash 1,119 56,219 41,953 33,853


Income statement ratios (%)

Revenue growth (7.5) (25.3) (7.2) 17.7

EBITDA growth (42.6) 122.7 11.7 13.0

Adj PAT growth (31.6) 244.7 10.1 15.9

EBITDA margin 2.5 7.4 8.9 8.5

Adj net margin 0.8 3.8 4.5 4.4


Interest/PBIT (x) 0.5 0.1 0.1 0.1


ROE (%) 7.8 17.9 16.0 16.5

ROCE (%) 3.2 10.2 10.0 10.9


Adj EPS (INR) 14.8 51.2 56.4 65.3

Adj EPS growth (%) (31.6) 244.7 10.1 15.9

Book Value (INR) 280.0 316.8 353.4 395.8

DPS (INR) 6.6 17.1 16.9 19.6

P/E (x) 28.4 8.2 7.5 6.5

EV/EBITDA (x) 14.7 6.6 5.9 5.2

Price/Book (x) 1.5 1.3 1.2 1.1

Dividend yield (%) 1.6 4.0 4.0 4.6






Return ratios


2.5

7.4

8.9 8.5

0

2

4

6

8

10

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000


(%)

(INR

mn

)

Net sales (LHS) EBITDAM (RHS)

(31.6)

244.7

10.1 15.9

(50)

0

50

100

150

200

250

300

(50,000)

0

50,000

100,000

150,000

200,000


(%)

(INR

mn

)

Adj PAT (LHS) Adj EPS growth (RHS)

7.8

17.9 16.0 16.5

3.2

10.2 10.0 10.9

0

5

10

15

20


(%)

ROE ROCE



Coverage History - BPCL


1

24-Jan-2014 Buy INR 529 INR 343

2

13-Feb-2014 Buy INR 510 INR 355

3

16-May-2014 Accumulate INR 583 INR 552

4


5

23-June-2014 Buy INR 705 INR 553

6

25-June-2014 Reduce INR 597 INR 581

7


8

27-Aug-2014 Sell INR 637 INR 681

9

12-Nov-2014 Reduce INR 726 INR 765

10

14-Jan-2015 Accumulate INR 685 INR 652

11

16-Feb-2015 Sell INR 650 INR 725

12

7-Mar-2015 Sell INR 709 INR 776

13


14

29-May-2015 Sell INR 781 INR 850

15

14-Aug-2015 Accumulate INR 947 INR 874

16

12-Feb-2016 Buy INR 1,006 INR 773

17

13-Apr-2016 Reduce INR 909 INR 926

1 2

3 4

5

6 7

8

9

10

11 12

13 14

15

16

17

200

300

400

500

600

700

800

900

1,000

1,100 Ja

n-1

2

Mar

-12

May

-12

Jul-1

2

Sep

-12

No

v-12

Jan

-13

Mar

-13

May

-13

Jul-1

3

Sep

-13

No

v-13

Jan

-14

Mar

-14

May

-14

Jul-1

4

Sep

-14

No

v-14

Jan

-15

Mar

-15

May

-15

Jul-1

5

Sep

-15

No

v-15

Jan

-16

Mar

-16

Not Covered Covered


Oil

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Coverage History - HPCL


1

24-Jan-2014 Buy INR 310 INR 232

2


3


4

23-June-2014 Buy INR 593 INR 388

5

25-June-2014 Reduce INR 425 INR 416

6


7


8

13-Nov-2014 Sell INR 487 INR 542

9

14-Jan-2015 Sell INR 534 INR 573

10


11

28-May-2015 Reduce INR 654 INR 636

12

11-Aug-2015 Accumulate INR 1,004 INR 954

13

09-Nov-2015 Accumulate INR 943 INR 795

14

12-Feb-2016 Buy INR 1,016 INR 690

15

13-Apr-2016 Reduce INR 875 INR 850

1

2 3

4

5

6

7

8 9 10 11

12

13

14

15

100

200

300

400

500

600

700

800

900

1,000

1,100

Jan

-12

Mar

-12

May

-12

Jul-1

2

Sep

-12

No

v-12

Jan

-13

Mar

-13

May

-13

Jul-1

3

Sep

-13

No

v-13

Jan

-14

Mar

-14

May

-14

Jul-1

4

Sep

-14

No

v-14

Jan

-15

Mar

-15

May

-15

Jul-1

5

Sep

-15

No

v-15

Jan

-16

Mar

-16

Not Covered Covered



Coverage History – IOCL


1


2


3

20-June-2014 Sell INR 197 INR 322

4


5


6


7


8


9


10


11

21-Aug-2015 Accumulate INR 467 INR 396

12

3-Nov-2015 Buy INR 536 INR 401

13

8-Jan-2016 Buy INR 562 INR 446

14

12-Feb-2016 Buy INR 607 INR 365

15

13-Apr-2016 Buy INR 599 INR 416





1

2

3 4

5 6

7

8

9

10

11 12

13

14

15

150

200

250

300

350

400

450

500 Ja

n-1

2

Mar

-12

May

-12

Jul-1

2

Sep

-12

No

v-12

Jan

-13

Mar

-13

May

-13

Jul-1

3

Sep

-13

No

v-13

Jan

-14

Mar

-14

May

-14

Jul-1

4

Sep

-14

No

v-14

Jan

-15

Mar

-15

May

-15

Jul-1

5

Sep

-15

No

v-15

Jan

-16

Mar

-16

Not Covered Covered

Glo

bal

Mar

kets

Res

earc

h



GRM softening to hit CPCL the hardest GRM to decline further

Singapore GRM has averaged USD 7.5/bbl in FY16 vs USD 5.6/bbl and USD 6.4/bbl in FY14 and FY15, respectively. GRM has corrected from a high of USD 10/bbl in January 2016 to the current levels of ~USD 5/bbl. We expect it to remain subdued, given 1) refinery net capacity addition would outpace demand growth, 2) China teapot refineries will start to operate at higher utilization levels, and 3) the Middle East refineries stabilize. Fuel & loss for Chennai Petroleum (CPCL IN) stands at 9.0-9.5% vs 6.0-6.5% for other refineries in India. It is highly unlikely crude will remain at the current low levels, resulting in higher fuel & loss and lower GRM for CPCL. For 9MFY16, the company has clocked in a GRM of USD 5.4/bbl, which is unlikely to sustain structurally.

Residue upgradation project to increase distillate yield

The company is in a capex phase with residue upgradation project (INR 31.1bn) and replacement of existing crude oil pipeline (INR 2.6bn). The residue upgradation project is expected to turn around the company, says management, with improvement in distillate yield by 6-8%. However, the benefits from these projects are expected to materialize only in FY18.

Infusion of capital by Indian Oil Corporation

Due to erosion of net worth, the parent IOCL had infused INR 10bn during Q2FY16 through the issue of non-convertible cumulative redeemable preference shares, which will help CPCL pursue its capex.

Valuation: revise rating to Sell with a TP of INR 154

Although IOCL has infused funds into the company, which will help it tide over difficult times, we expect it to underperform on the operational front in a falling GRM environment. Also, the benefits from the capex phase are likely to accrue only from FY18. We revise our rating to SSell from Reduce, due to the recent uptick in the stock price. We marginally revise our TP to INR 154 from INR 149 based on 5.5x FY18E EBITDA of INR 13bn. We also note the TP is highly sensitive to GRM and a USD 0.5/bbl change in GRM could lead to INR 96 change in TP.



Chennai Petroleum

Rating: Sell Target Price: INR 154 Downside: 26% CMP: INR 202 (as on 13 April 2016)

Key data*

Bloomberg /Reuters Code MRL IN/CHPC.BO

Current /Dil. Shares O/S (mn) 149/149

Mkt Cap (INR bn/USD mn) 30/452

Daily Vol. (3M NSE Avg.) 523,139

Face Value (INR) 10

1 USD = INR 66.6


Price & volume

Source: Bloomberg

Shareholding (%) Q4FY15 Q1FY16 Q2FY16 Q3FY16

Promoter 67.3 67.3 67.3 67.3



General Public 11.6 8.6 9.9 10.0

Source: BSE


Sensex 3.1 (4.5) (11.8)

Chennai Petroleum 3.1 (12.0) 162.6

MRPL 0.3 20.0 (8.4)

Source: Bloomberg

Key Financials YE March

Reevenue ((INR mn)

YoY (%)

EBITDA (INR mn)

EBITDA margin (%)

Adj PAT (INR mn)

YoY (%)

EPS (INR)

RoE (%)

RoCE (%)

P/E (x)

EV/EBITDA (x)

FY15 418,660 (15.2) (27) NA (390) NA (2.6) (2.3) NA NA NA

FY16E 252,432 (39.7) 12,581 NA 5,487 NA 36.8 29.4 12.6 5.5 6.0

FY17E 207,006 (18.0) 9,925 (21.1) 2,763 (49.6) 18.6 12.7 6.7 11.0 7.6

FY18E 214,091 3.4 13,043 31.4 3,952 43.0 26.5 16.2 7.8 7.7 5.8


0

5

10

15

20

25

30

0

50

100

150

200

250

300


Vol. in mn (RHS) Chennai Petroleum (LHS)

Chennai Petroleum


Financials (YE March) Income Statement (INR mn) FY15 FY16E FY17E FY18E


EBITDA (27) 12,581 9,925 13,043

Depreciation 2,261 2,482 2,512 3,517

Forex loss 1,466 1,500 0 0

EBIT (3,754) 8,598 7,413 9,525

Interest cost 4,037 3,290 3,675 4,025

Other income 367 385 405 425

PBT (7,424) 5,694 4,142 5,925

Less: taxation (7,034) 207 1,379 1,973

Effective tax rate (%) NA 3.6 33.3 33.3

PAT (390) 5,487 2,763 3,952


Equity Capital 1,490 1,490 1,490 1,490

Reserves 15,061 19,264 21,381 24,408

Total Borrowings 43,991 50,000 55,000 60,000

Deferred Taxes 0 0 0 0

Total Liabilities 60,541 70,754 77,871 85,898

Fixed Assets 48,592 56,110 65,597 74,080

Investments 254 200 200 200

Inventories 38,051 21,685 16,198 16,525

Debtors 18,281 12,449 10,209 10,558

Cash 399 5,151 6,256 5,491

Loans & Advances 3,957 2,445 2,008 2,077

Other Current Assets 11 0 0 0

Net Current Assets 11,695 14,444 12,073 11,618

Total Assets 60,541 70,754 77,871 85,898


Operating Cash Flow 15,254 9,972 8,752 7,160

Capex (4,494) (10,000) (12,000) (12,000)

Free cash flow to firm 10,760 (28) (3,248) (4,840)


Financing cash flow (10,815) 4,725 4,353 4,075

Net change in cash (61) 4,752 1,105 (765)

Opening cash 460 399 5,151 6,256

Closing cash 399 5,151 6,256 5,491



Revenue growth (15.2) (39.7) (18.0) 3.4

EBITDA growth NA NA (21.1) 31.4

PAT growth NA NA (49.6) 43.0

EBITDAM (0.0) 5.0 4.8 6.1

PAT margin (0.1) 2.2 1.3 1.8

Return & liquidity ratios

Interest/PBIT (x) (1.1) 0.4 0.5 0.4


ROE (%) (2.3) 29.4 12.7 16.2

ROCE (%) NA 12.6 6.7 7.8

Per share data & valuation ratios

EPS (INR) (2.6) 36.8 18.6 26.5

EPS growth (%) NA NA (49.6) 43.0

Book Value (INR/share) 111.1 139.4 153.6 173.9

DPS (INR) 0.0 7.4 3.7 5.3

P/E (x) NA 5.5 11.0 7.7

EV/EBITDA (x) NA 6.0 7.6 5.8

Price/Book (x) 1.8 1.5 1.3 1.2

Dividend Yield (%) 0.0 3.6 1.8 2.6




Adjusted profit trend


Return ratios


(0.0)

5.0 4.8

6.1

(1.0)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

(100,000)

0

100,000

200,000

300,000

400,000

500,000

600,000


(%) (IN

R m

n)

Net sales (LHS) EBITDA margin (RHS)

(2,000)

0

2,000

4,000

6,000


(IN

R m

n)

Adj PAT

0.0 12.6 6.7 7.8

(2.3)

29.4

12.7 16.2

(10)

0

10

20

30

40


(%)

ROCE (%) ROE (%)

Chennai Petroleum

Oil

& G

as


Exhibit 1: Valuation

FY18E EBITDA (INR mn) 13,043 Target EV/EBITDA (x) 5.5 Target EV (INR mn) 71,734 FY17E net debt (INR mn) 48,744 Target market cap (INR mn) 22,991 Target price (INR) 154 Source: Elara Securities Estimate




GRM (USD/bbl) 2.0 5.0 4.0 4.8


Chennai Petroleum


Coverage History


1

07-Feb-2014 Accumulate INR 72 INR 63

2

23-May-2014 Reduce INR 107 INR 108

3


4


5


6

12-Feb-2015 Reduce INR 75 INR 75

7


8


9


10

11-Feb-2016 Reduce INR 149 INR 145

11






1

2

3 4 5

6 7

8 9

10

11

40

90

140

190

240

290 Ja

n-1

2

Mar

-12

May

-12

Jul-1

2

Sep

-12

No

v-12

Jan

-13

Mar

-13

May

-13

Jul-1

3

Sep

-13

No

v-13

Jan

-14

Mar

-14

May

-14

Jul-1

4

Sep

-14

No

v-14

Jan

-15

Mar

-15

May

-15

Jul-1

5

Sep

-15

No

v-15

Jan

-16

Mar

-16

Not Covered Covered

Glo

bal

Mar

kets

Res

earc

h



Core performance improving Improvement in core GRM

Our interaction with Mangalore Refinery (MRPL IN) management reveals the company has stabilized operations of its refinery post the phase III expansion. There has been a steady improvement in core GRM, which further underscores guidance. The company has reported a core GRM of USD 8.4/bbl in Q3FY16 vs USD 5.3/bbl in Q2FY16 and USD 6.7/bbl in Q2FY15. Even in a benign environment, we expect USD 6-6.5/bbl of GRM for the company.

Full utilization of PPU achieved

The polypropylene unit (PPU) was commissioned in June 2015. However, utilization was only gradually ramped up to 100% by FY16-end. This would end complete stabilization of INR 150bn expansion.

Scope for improvement in crude cost

The delayed coker unit (DCU) uses cheaper crude oil while maintaining a good product yield. To date, we have yet to see any major reduction in API of the crude basket. As the company achieves the same, it should see improvement in GRM. While Indian Strategic Petroleum Reserve (ISPRL) is expected to be commissioned in FY17, anchoring and unloading of very large crude carriers (VLCC) would lower freight and allow sourcing of a larger basket of crude, thereby giving a further boost to refining margin.

OMPL to stabilize in FY17

ONGC Mangalore Petrochemical (OMPL) has been running at ~75% utilization, due to unavailability of aromatic rich naphtha feedstock as per requirements. MRPL is in the process of changing its crude basket to produce aromatic rich naphtha, which will help OMPL to stabilize fully by FY17 and contribute meaningfully towards the merged entity, MRPL-OMPL.

Valuation: reiterate Buy with a TP of INR 90

Since the stabilization phase is complete, there shouldn’t be any major hiccups in its operations. Also, PPU running at full utilization will give a boost to GRM. We estimate an EBITDA (excluding OMPL) of INR 40.2bn in FY18, implying an EBITDA CAGR of 41% over FY14-18E. We arrive at a valuation of INR 82 for the standalone company on 5.5x FY18E EBITDA of INR 40.2. We value OMPL at INR 8 on 6.0x FY18E EBITDA. We reiterate BBuy with a TP of INR 90.


Thematic Report

Mangalore Refinery

Rating: Buy Target Price: INR 90 Upside: 34% CMP: INR 67 (as on 13 April 2016)

Key data*

Bloomberg /Reuters Code MRPL IN/MRPL.BO

Current /Dil. Shares O/S (mn) 1,753/1,753

Mkt Cap (INR bn/USD mn) 118/1,765

Daily Vol. (3M NSE Avg.) 558,547

Face Value (INR) 10

1 USD = INR 66.6


Price & volume

Source: Bloomberg

Share holding (%) Q1FY16 Q2FY16 Q3FY16 Q4FY16

Promoter 88.6 88.6 88.6 88.6



General Public 5.8 6.2 6.0 5.9

Source: BSE


Sensex 3.1 (4.5) (11.8)

MRPL 0.3 20.0 (8.4)

Chennai Petroleum 3.1 (12.0) 162.6

Essar Oil 1.5 35.3 134.8

Source: Bloomberg

Key Financials YE March

Revenue ((INR mn)

YoY (%)

EBITDA (INR mn)

EBITDA margin (%)

Adj PAT (INR mn)

YoY (%)

Adj. EPS (INR)

RoE (%)

RoCE (%)

P/E (x)

EV/EBITDA (x)

FY15 574,771 (20.0) (12,223) (2.1) (17,123) NA (8.9) (28.2) (13.2) NA (15.4)

FY16E 370,803 (35.5) 27,989 7.5 5,268 NA 2.7 12.7 4.5 24.9 6.7

FY17E 412,262 11.2 40,799 9.9 20,959 297.9 10.9 32.2 17.2 6.3 4.6

FY18E 488,201 18.4 40,245 8.2 20,973 0.1 10.9 25.8 17.0 6.3 4.7


0

2

4

6

8

10

12

14

16

30

40

50

60

70

80

90


Vol. in mn (RHS) MRPL (LHS)

Mangalore Refinery


Financials (YE March) Income Statement (INR mn) FY15 FY16E FY17E FY18E


EBITDA (12,223) 27,989 40,799 40,245

Depreciation 4,986 8,577 8,777 8,977

Net forex loss 6,835 11,760 0 0

EBIT (24,044) 7,652 32,022 31,269

Interest cost 4,071 4,926 3,225 2,325 Other income 6,221 7,503 1,345 1,219

PBT (21,893) 10,228 30,142 30,162

Prior period adj/Exceptional item (334) 1,753 0 0

Less: Taxation (4,437) 3,207 9,183 9,189


Adj PAT (17,123) 5,268 20,959 20,973 Exceptional item 0 0 0 0

PAT (17,457) 7,021 20,959 20,973


Equity capital 17,527 17,527 17,527 17,527

Reserves 35,523 39,558 55,613 71,679


Deferred taxes 0 0 0 0

Total liabilities 131,805 119,085 140,140 115,205 Fixed assets 154,868 151,291 147,514 143,538

Investments 13,497 13,497 13,497 13,497

Inventories 33,996 22,357 37,891 35,745

Debtors 23,588 17,048 27,002 26,499

Cash 102,687 4,760 1,866 1,609

Loans & advances 10,483 5,996 6,002 6,913 Other current assets 4,238 0 0 0

Net current assets (36,559) (45,703) (20,871) (41,829)

Total assets 131,805 119,085 140,140 115,205


Operating cash flow 34,032 (74,939) 2,010 50,651

Capex (14,424) (5,000) (5,000) (5,000)

Free cash flow to firm 19,608 (79,939) (2,990) 45,651

Investing cash flow (27,771) (5,000) (5,000) (5,000) Financing cash flow (10,297) (17,988) 96 (45,908)

Net change in cash (4,036) (97,927) (2,894) (257)

Closing cash 102,687 4,760 1,866 1,609



Revenue growth (20.0) (35.5) 11.2 18.4

EBITDA growth (220.0) (329.0) 45.8 (1.4)

Adj PAT growth NA NA 297.9 0.1 EBITDAM (2.1) 7.5 9.9 8.2

Adj net margin (3.0) 1.4 5.1 4.3


Interest/PBIT (x) (0.2) 0.6 0.1 0.0

Net debt/Equity (x) (0.5) 1.0 0.9 0.3

ROE (%) (28.2) 12.7 32.2 25.8 ROCE (%) (13.2) 4.5 17.2 17.0


Diluted Adj EPS (INR) (8.9) 2.7 10.9 10.9

Adj EPS growth NA NA 297.9 0.1

Book value (INR) 27.5 29.6 37.9 46.2

DPS (x) 0.0 0.5 2.2 2.2 P/E (x) NA 24.9 6.3 6.3

EV/EBITDA (x) (15.4) 6.7 4.6 4.7

Price/Book (x) 2.5 2.3 1.8 1.5

Dividend yield (%) 0.0 0.8 3.2 3.2




Profit trend


Return ratios


(2.1)

7.5 9.9

8.2

-5

0

5

10

15

0

200,000

400,000

600,000

800,000


(%)

(INR

mn

)

Net operating income (LHS) EBITDAM (RHS)

(20,000)

(10,000)

0

10,000

20,000

30,000


(INR

mn

) Reported PAT

(13.2) 4.5 17.2 17.0

(28.2)

12.7

32.2 25.8

(40) (30) (20) (10)

0 10 20 30 40


(%)

ROCE ROE

Mangalore Refinery

Oil

& G

as


MRPL: improvement in core performance

There has been a lot of volatility in performance of MRPL during the past few quarters, due to inventory losses as well as stabilization issues post refinery phase III expansion. However, our management interaction reveals the company has been able to stabilize its operations.

Further, there has been a steady improvement in core GRM, which further underscores guidance. The company has reported a core GRM of USD 8.4/bbl in Q3FY16 vs USD 5.3/bbl in Q2FY16 and USD 6.7/bbl in Q2FY15.

Exhibit 1: Consistent improvement in core GRM


Full utilization of PPU could be the next trigger

For PPU to run at 100% utilization, petro fluidized catalytic cracking unit (PFCCU) has to run at full utilization. However, due to technical issues, PFCCU hasn’t been able to run at high utilization levels in the past few months. However, our recent interaction with management suggests PPU is already running at full utilization, which indicates issues have been resolved. Also, polypropylene is being well received in the market, which bodes well for the company.

Commissioning of ISPRL in FY17

Although MRPL commissioned single point mooring (SPM) in 2013, it hasn’t been able to benefit from it as the infrastructure isn’t ready. ISPRL is expected to be commissioned in FY17. This would results in savings of USD 0.5/bbl on freight. It also would allow access to a larger variety of crude, which would boost refining margin.

Scope for improvement in crude cost

The DCU can use cheaper crude oil while still maintaining a good product yield. To date, we are yet to see the full impact of reduction in API of the crude basket. Once the company achieves this, it should see improvement in GRM. We note API of MRPL’s crude basket in FY15 is still slightly higher than that of Essar Oil in FY11, when Essar Oil’s complexity was just 6.1.

Exhibit 2: API of the crude basket used by MRPL


Retail marketing: new avenue for growth

MRPL already has a license to open upto 500 retail outlets. With Board approval in place, the company is planning to open upto 100 retail outlets. With refining being volatile, its presence in the marketing segment would bring about stability to the business.

OMPL to stabilize in FY17

Although OMPL was commissioned in September 2014, it has been running at ~75% utilization due to unavailability of aromatic rich naphtha feedstock as per requirements. It partly sourced feedstock from MRPL and some from imports. However, post the OMPL-MRPL merger, MRPL is changing its crude basket to produce aromatic rich naphtha. OMPL is expected to fully stabilize in FY17 and contribute meaningfully towards the merged entity, MRPL-OMPL. We expect OMPL to clock in an EBITDA of INR 12.8bn in FY17E and INR 13.2bn in FY18E with a PX delta of USD 350/tonne and USD 325/tonne in FY17E and FY18E, respectively, and Benzene delta of USD 260/tonne and USD 240/tonne in FY17E and FY18E, respectively.

Exhibit 3: OMPL key data

FY17E FY18E 5 -year average

PX – Naphtha (USD/tonne) 350 325 486

Benzene-Naphtha (USD/tonne) 260 240 286

EBITDA (INR bn) 12.8 13.2 NA


Valuation: reiterate Buy with a TP of INR 90

We estimate an EBITDA of INR 40.2bn in FY18, implying an EBITDA CAGR of 41% over FY14-18E. We arrive at a valuation of INR 82 for the standalone company on 5.5x FY18E EBITDA of INR 39.8bn. We value OMPL at INR 8 on 6.0x FY18E EV/EBITDA. We recommend BBuy with a TP of INR 90.

(8)

(6)

(4)

(2)

0

2

(2)

0

2

4

6

8

10

1QFY

11

3QFY

11

1QFY

12

3QFY

12

1QFY

13

3QFY

13

1QFY

14

3QFY

14

1QFY

15

3QFY

15

1QFY

16

3QFY

16

(USD

/bb

l)

(USD

/bb

l)

Core GRM Spread over Singapore GRM

88

90

92

94

96

98

100

102

104

106

FY11 FY12 FY13 FY14 FY15

Rela

tive

to F

Y11

API

DCU allows the use of cheaper crude as reflected by lower API, resulting in better GRM from Q3FY15; it could go down further

Mangalore Refinery


Exhibit 4: Valuation

EBITDA FY18E (INR bn) 40.22

Target EV/EBITDA (x) 5.5

EV (INR bn) 221.3

Net debt (INR bn) 65.1

Target Market cap (INR bn) 156.2

Valuation of refining business (INR/share) 82

Valuation of stake in OMPL (INR/share) 8

Target price (INR/share) 90




Throughput (mn tonnes) 14.7 14.9 15.0 15.0

Core GRM (USD/bbl) 3.4 6.4 6.8 6.7

Exchange rate (USD-INR) 61.4 64.6 67.2 68.0


Mangalore Refinery

Oil

& G

as


Coverage History


1

24-Jan-2014 Buy INR 65 INR 42

2

16-Apr-2014 Buy INR 67 INR 51

3


4

27-Aug-2014 Buy INR 79 INR 61

5

14-Nov-2014 Buy INR 76 INR 57

6

13-Feb-2015 Buy INR 101 INR 59

7

9-Mar-2015 Buy INR 103 INR 68

8

22-May-2015 Buy INR 111 INR 68

9

9-Jul-2015 Buy INR 120 INR 76

10

7-Aug-2015 Buy INR 105 INR 82

11

29-Oct-2015 Buy INR 90 INR 57





1

2

3

4 5 6

7 8

9

10

11

20

30

40

50

60

70

80

90

Jan

-12

Mar

-12

May

-12

Jul-1

2

Sep

-12

No

v-12

Jan

-13

Mar

-13

May

-13

Jul-1

3

Sep

-13

No

v-13

Jan

-14

Mar

-14

May

-14

Jul-1

4

Sep

-14

No

v-14

Jan

-15

Mar

-15

May

-15

Jul-1

5

Sep

-15

No

v-15

Jan

-16

Mar

-16

Not Covered Covered


46

Disclosures & Confidentiality for non U.S. Investors The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information purposes. The sole purpose of this Note is to provide preliminary information on the business activities of the company and the projected financial statements in order to assist the recipient in understanding / evaluating the Proposal. Nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved) and should consult its own advisors to determine the merits and risks of such an investment. Nevertheless, Elara Securities (India) Private Limited or any of its affiliates is committed to provide independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Elara Securities (India) Private Limited or any of its affiliates have not independently verified all the information given in this Note and expressly disclaim all liability for any errors and/or omissions, representations or warranties, expressed or implied as contained in this Note. The user assumes the entire risk of any use made of this information. Elara Securities (India) Private Limited or any of its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for or solicit investment banking or other business from any company referred to in this Note. Each of these entities functions as a separate, distinct and independent of each other. This Note is strictly confidential and is being furnished to you solely for your information. This Note should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This Note 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 Elara Securities (India) Private Limited or any of its affiliates to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. Upon request, the Recipient will promptly return all material received from the company and/or the Advisors without retaining any copies thereof. The Information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This Information is subject to change without any prior notice. Elara Securities (India) Private Limited or any of its affiliates reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Elara Securities (India) Private Limited is under no obligation to update or keep the information current. Neither Elara Securities (India) Private Limited nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This Note should not be deemed an indication of the state of affairs of the company nor shall it constitute an indication that there has been no change in the business or state of affairs of the company since the date of publication of this Note. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Elara Securities (India) Private Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed to Elara Securities (India) Private Limited.

Elara Securities (India) Private Limited was incorporated in July 2007 as a subsidiary of Elara Capital (India) Private Limited.

Elara Securities (India) Private Limited is a SEBI registered Stock Broker in the Capital Market and Futures & Options Segments of National Stock Exchange of India Limited (NSE) and in the Capital Market Segment of BSE Limited (BSE).

Elara Securities (India) Private Limited’s business, amongst other things, is to undertake all associated activities relating to its broking business.

The activities of Elara Securities (India) Private Limited were neither suspended nor has it defaulted with any stock exchange authority with whom it is registered in last five years. However, during the routine course of inspection and based on observations, the exchanges have issued advise letters or levied minor penalties on Elara Securities (India) Private Limited for minor operational deviations in certain cases. Elara Securities (India) Private Limited has not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has the certificate of registration been cancelled by SEBI at any point of time.

Elara Securities (India) Private Limited offers research services primarily to institutional investors and their employees, directors, fund managers, advisors who are registered or proposed to be registered.


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Details of Associates of Elara Securities (India) Private Limited are available on group company website www.elaracapital.com

Elara Securities (India) Private Limited is maintaining arms-length relationship with its associate entities.

Research Analyst or his/her relative(s) may have financial interest in the subject company. Elara Securities (India) Private Limited does not have any financial interest in the subject company, whereas its associate entities may have financial interest. Research Analyst or his/her relative does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Elara Securities (India) Private Limited does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Associate entities of Elara Securities (India) Private Limited may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relative or Elara Securities (India) Private Limited or its associate entities does not have any other material conflict of interest at the time of publication of the Research Report. Research Analyst or his/her relative(s) has not served as an officer, director or employee of the subject company.

Research analyst or Elara Securities (India) Private Limited or its associate entities have not received any compensation from the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities have not managed or co-managed public offering of securities for the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities have not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company or third party in connection with the Research Report in the past twelve months.

Disclaimer for non U.S. Investors

The information contained in this note is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


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Disclosures for U.S. Investors The research analyst did not receive compensation from Reliance Industries Limited, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited, Indian Oil Corporation Limited, Chennai Petroleum Corporation Limited and Mangalore Refinery and Petrochemicals Limited.

Elara Capital Inc.’s affiliate did not manage an offering for Reliance Industries Limited, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited, Indian Oil Corporation Limited, Chennai Petroleum Corporation Limited and Mangalore Refinery and Petrochemicals Limited.

Elara Capital Inc.’s affiliate did not receive compensation from Reliance Industries Limited, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited, Indian Oil Corporation Limited, Chennai Petroleum Corporation Limited and Mangalore Refinery and Petrochemicals Limited in the last 12 months.

Elara Capital Inc.’s affiliate does not expect to receive compensation from Reliance Industries Limited, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited, Indian Oil Corporation Limited, Chennai Petroleum Corporation Limited and Mangalore Refinery and Petrochemicals Limited in the next 3 months.

Disclaimer for U.S. Investors

This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its completeness, accuracy or adequacy and it should not be relied upon as such.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

Certain statements in this report, including any financial projections, may constitute “forward-looking statements.” These “forward-looking statements” are not guarantees of future performance and are based on numerous current assumptions that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these “forward-looking statements” and financial information.


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India Elara Securities (India) Pvt. Ltd. Indiabulls Finance Centre, Tower 3, 21st Floor, Senapati Bapat Marg, Elphinstone Road (West) Mumbai – 400 013, India Tel : +91 22 6164 8500

Europe Elara Capital Plc. 29 Marylebone Road, London NW1 5JX, United Kingdom Tel : +4420 7486 9733

USA Elara Securities Inc. 36W 44th Street, 803, New York, NY 10036, USA Tel :+1-212-430-5870

Asia / Pacific Elara Capital (Singapore) Pte.Ltd. 30 Raffles Place #20-03, Chevron House Singapore 048622 Tel : +65 6536 6267

Harendra Kumar Managing Director [email protected] +91 22 6164 8571

SSales

Deepak Sawhney India [email protected] +91 22 6164 8549

Kalpesh Parekh India [email protected] +91 22 6164 8513

Nishit Master India [email protected] +91 22 6164 8521

Prashin Lalvani India [email protected] +91 22 6164 8544

Sushil Bhojwani India [email protected] +91 22 6164 8512

Parin Vora North America [email protected] +91 22 6164 8558

Sales Trading & Dealing

Manan Joshi India [email protected] +91 22 6164 8555

Manoj Murarka India [email protected] +91 22 6164 8551

Sanjay Joshi India [email protected] +91 22 6164 8554

Vishal Thakkar India [email protected] +91 22 6164 8552

Research Aarthisundari Jayakumar Analyst Pharmaceuticals [email protected] +91 22 6164 8510

Aashish Upganlawar Analyst FMCG, Media [email protected] +91 22 6164 8546

Abhishek Karande Analyst Technical & Alternate Strategy [email protected] +91 22 6164 8562

Adhidev Chattopadhyay Analyst Infrastructure, Real Estate [email protected] +91 22 6164 8526

Aliasgar Shakir Analyst Mid caps, Telecom [email protected] +91 22 6164 8516

Ashish Kejriwal Analyst Metals & Mining, Railways [email protected] +91 22 6164 8505

Ashish Kumar Economist [email protected] +91 22 6164 8536

Deepak Agrawala Analyst Power, Capital Goods [email protected] +91 22 6164 8523

Jay Kale, CFA Analyst Auto & Auto Ancillaries [email protected] +91 22 6164 8507

Rakesh Kumar Analyst Banking & Financials [email protected] +91 22 6164 8559

Ravi Menon Analyst IT Services [email protected] +91 22 6164 8502

Ravi Sodah Analyst Cement [email protected] +91 22 6164 8517

Sumant Kumar Analyst Agri, Travel & Hospitality, Paper [email protected] +91 22 6164 8503

Swarnendu Bhushan Analyst Oil and gas [email protected] +91 22 6164 8504

Durgesh Poyekar Sr. Associate Oil and gas [email protected] +91 22 6164 8541

Manuj Oberoi Sr. Associate Banking & Financials [email protected] +91 22 6164 8535

Harshit Kapadia Associate Power, Capital Goods [email protected] +91 22 6164 8542

Priyanka Sheth Editor [email protected] +91 22 6164 8568

Gurunath Parab Production [email protected] +91 22 6164 8515

Jinesh Bhansali Production [email protected] +91 22 6164 8537

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Also available on TThomson & RReuters

Elara Securities (India) Private Limited CIN: U74992MH2007PTC172297

SEBI RA Regn. No.: INH000000933 Member (BSE, NSE)

Regn Nos: CAPITAL MARKET SEBI REGN. NO.: BSE: INB 011289833, NSE: INB231289837 DERIVATIVES SEBI REGN. NO.: NSE: INF 231289837 CLEARING CODE: M51449.

Website: www.elaracapital.com Investor Grievance Email ID: [email protected]

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