Breaking free - Motilal Oswal

Oil & Gas

Thematic | July 2014

Breaking freePart 1 of 3

Harshad Borawake ([email protected]); +91 22 3982 5432Nitish Rathi ([email protected]); +91 22 3982 5558

28 July 2014 2

Oil & Gas | Thematic

Index

From ‘incremental’ to ‘structural, big bang reforms’

USD111b tax revenue opportunity for central govt. with lowering subsidy

Page No.

Summary…………………………………………………………………………………..………………………… 3

Story in Charts…………………………………………………………………………….……………………… 5 - 6

Energy security at fore, E&P reforms inevitable……...………….……………………………. 7 - 14 India’s share in global consumption increasing and so is import dependence

Sans production increase import dependence to reach 85% in this decade NELP regime potential promising, but little results till date Diversifying energy sources an effective alternative to cut imports a) Monetizing discovered gas b) Development of unconventional hydrocarbons c) Developing renewable resources d) Overseas reserve accretion

Right policies to reverse tax drain for government………………...………………………….. 15 - 18 Subsidy burden draining Central Government resources

Policy actions could reverse the tax drain Expect net tax revenues to central govt. at USD111b in next 5 years v/s USD59 in the last 5

15% oil import savings at remunerative gas price………………………………………………. 19 - 21 Enabling policy environment to boost domestic E&P activity

Remunerative gas pricing to boost production and earnings India could add 91tcf gas v/s 18tcf produced since independence (1947)

Upstream PSUs to benefit; ONGC/OINL top picks……………………………………………… 22 - 25 Reforms a win-win for government and upstream companies

Buy ONGC/OINL: set for meaningful earnings growth in near term

Annexure 1: Under-recoveries and their sharing 26

Annexure 2: Key recommendations of oil sector expert committees 28

Annexure 3: Will ONGC/OINL profit increase in line with lower subsidy? 29

Annexure 4: Gas pricing in India 30

Company Section

ONGC 32 - 37 Oil India 38 - 42 Reliance Industries 43 - 48 Cairn India 49 - 53

28 July 2014 3


From ‘incremental’ to ‘structural, big bang reforms’ USD111b tax revenue opportunity for central govt. with lowering subsidy

The diesel reforms of January 2013 partly addressed investor skepticism, shifting the

focus from “whether” to “when?” However, these reforms were only ‘incremental’

and not ‘big bang’ due to the imminent election cycle.

Now, with a strong government in place and its growth-focused agenda, we believe

the reform dialogue will shift from “when?” to “how much and how soon?”

In a follow up to our earlier report, “Breaking free...WHEN?”, this is the first in a three

part series where we cover (1) upstream, (2) downstream, and (3) gas chain

companies, and attempt to assess the required and likely changes to achieve full

potential.

With energy security at forefront, E&P reforms inevitable India’s share in world oil consumption has grown from 1% in the 1980’s to 4.2%,

but its share in reserves and production is dismal at 0.3% and 1%, respectively. Despite efforts in domestic E&P, import dependence is up from ~30% to 76%. In

the absence of production increase, we estimate (a) imports will rise to 85% by 2024, and (b) the import bill will be 2x at ~USD200b, making domestic E&P reforms inevitable.

Policy efforts, apart from boosting domestic E&P should be towards developing (a) unconventional hydrocarbons, (b) renewable energy sources, (c) monetizing discovered gas, and (d) aggressively acquiring overseas reserves – India spent USD160b in subsidies v/s USD20b on overseas and USD45b domestic E&P investments by ONGC/OINL in the last 10 years.

Right policies could triple net central government taxes in next few years Over the last 10 years, the share of Oil & Gas in the central government’s net tax

revenue (direct + indirect) has declined from 41% to ~4%. With the (a) right retail petroleum product pricing policies cutting subsidies, and

(b) boost to domestic E&P leading to higher profit petroleum, we expect the tax contribution from the sector to treble in the next five years, leading to cumulative contribution of USD111b against USD59b in the last five years.

Remunerative pricing to add production equivalent to 15% of oil imports Energy independence for India might seem farfetched for now, but policies

should at least target to cut dependence through a domestic E&P boost by: (a) remunerative / market-linked pricing, and (b) stable fiscal regime / PSC to attract investment, coupled with fast tracking of administrative timelines.

Remunerative gas pricing could increase domestic gas reserves by 91tcf v/s 18tcf produced since independence and we estimate that this will add 50-70mmscmd gas production (~15% of FY14 oil imports) by FY19.

Upstream oil PSUs to benefit; ONGC/OINL top picks ONGC and OINL will play an important role to tackle twin challenges of (a) fiscal

deficit and (b) energy security for government; hence expect reform process to be expedited.

Oil & Gas

Please refer to our detail report “Breaking free...WHEN?”

released on 3 October 2013

Companies Covered Pg

ONGC 32

Oil India 38

Reliance Industries 43

Cairn India 49

http://Institution.motilaloswal.com/emailer/Research/OIL-20131001-MOSL-SU-PG092.pdf

28 July 2014 4


Higher earnings for ONGC/OINL through lower subsidy and higher gas prices is a win-win scenario as (a) government tax revenues will increase and (b) energy security will be addressed to a large extent by more E&P investments.

ONGC and Oil India are our top picks with SOTP-based target price of INR485 (23% upside) and INR700 (22% upside), respectively.

While RIL’s E&P assets are promising, operational upsides will be back ended (FY18/FY19). Maintain neutral given sub-12% RoE through FY16, and would keenly watch out for developments in the new businesses.

Cairn India’s Rajasthan block is expected to provide further reserve upsides in the long term, but near term earnings will be subdued with increasing government profit share and flat production. Maintain neutral.

Our Oil & Gas coverage universe: earnings and valuation summary

¹ No. of shares adj. for treasury shares; 2P/B adjusted for E&P value of INR197/sh; Dividend yield on FY15E basis

Source: Company, MOSL

M Cap CMP TP Var v/s Reco DvdUSDb (INR) (INR) TP (%) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY16E FY17E FY16E FY17E Yld %

Integrated/Upstream

RIL¹ 54.1 1,005 1,027 2 Neutral 81.6 89.9 112.8 12.3 11.2 8.9 10.2 9.6 7.2 1.2 1.1 11.5 13.2 1.0

ONGC 56.2 395 485 23 Buy 35.7 42.3 44.5 11.1 9.3 8.9 4.9 4.3 4.1 1.6 1.4 18.0 16.9 2.8

CAIRN 9.8 315 358 14 Neutral 56.4 50.6 39.5 5.6 6.2 8.0 4.0 4.0 4.0 0.8 0.8 13.9 10.0 3.1

OINL 5.8 575 700 22 Buy 64.6 71.7 75.2 8.9 8.0 7.7 6.2 5.2 4.9 1.4 1.3 18.0 17.1 4.3

OMC's

IOC 13.0 323 421 30 Buy 32.4 37.9 41.5 10.0 8.5 7.8 7.1 6.3 5.2 1.0 0.9 12.1 12.0 3.1

BPCL² 6.9 575 699 22 Buy 33.5 45.3 48.1 17.2 12.7 11.9 8.8 7.3 6.4 1.2 1.1 14.9 14.4 1.7

HPCL 2.2 383 487 27 Buy 28.3 34.7 39.5 13.5 11.0 9.7 9.4 7.5 7.0 0.8 0.8 7.4 8.0 2.2

Independent Refiners

MRPL 1.9 66 72 9 Neutral 5.1 7.3 7.5 NA 9.0 8.8 6.6 5.3 4.8 1.3 1.2 15.5 14.2 1.5

Gas Companies

GAIL 9.0 425 425 0 Neutral 38.3 33.3 37.0 11.1 12.7 11.5 4.5 4.5 4.1 1.6 1.5 13.3 13.6 2.8

GSPL 0.8 88 90 3 Neutral 8.8 10.0 9.9 9.9 8.8 8.9 5.8 5.4 5.3 1.2 1.0 14.1 12.4 1.1

PLNG 2.3 184 204 11 Buy 9.9 12.7 16.2 18.5 14.4 11.3 9.4 7.7 6.3 2.2 1.9 16.0 17.8 1.0

CGD Companies

IGL 0.9 368 342 -7 Neutral 28.2 30.9 35.3 13.0 11.9 10.4 6.0 5.2 4.2 2.2 1.9 19.5 19.3 1.6

RoE (%)EPS (INR) P/E (x) EV/EBITDA (x) P/B (x)

28 July 2014 5


Story in charts

India’s world oil consumption share up from ~1% in 1980’s to 4.2%, but share in production and reserve at 1% and 0.3%

Source: Industry, MOSL

Sans domestic production increase, oil import dependence could increase to ~85%

68%

70%

70%

72%

74%

75%

74%

74%

76%

76%

77%

78%

78%

79%

80%

81%

82%

82%

83%

84%

84%

0

1,700

3,400

5,100

6,800

20%

40%

60%

80%

100%

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

Domestic Oil Production (kbpd)Oil Imports (kbpd)Import dependence (%) - LHS


India spent USD160b in domestic subsidies; v/s USD20b on overseas acquisitions and USD45b on domestic E&P capex (ONGC/OINL) in the last 10 years


Diversifying energy sources / reforms an effective alternative to cut oil imports


Monthly diesel price hikes likely to lower under-recoveries by ~55% by FY17


With petroleum pricing reforms, we expect tax revenues from the sector to increase 3x in five years (INR b)

-1,200

-400

400

1,200

2,000

FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20

Customs Duty CessExcise Duty RoyaltyCorp. Tax DividendProfit Petr. OthersSubsidy by govt. Net revenus to government


0.3%

1.0%

4.2%

1P oil reserve share Production share Consumption share

India last 10 year

subsidies (USD160b)

ONGC/OINL cumulative domestic

capex (USD45b)

ONGC/OVL overseas

investment (USD20b)

93 201 400 494

773 1,033

461

780

1,381 1,610

1,399

918 750 691

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Petrol Diesel Kerosene LPG Total

28 July 2014 6


Story in charts

Remunerative gas pricing could bring in new domestic gas production of 50-70mmscmd (equivalent to 15% of current oil imports) in the next few years (mmscmd)

139 127 109

94 93 97 99 109

145 162

0

50

100

150

200

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

ONGC OINL KG-D6 (D1/D3 & MA)

PMT KGD6 (Satellite) KGD6 (R-series)

KGD6 (MJ1) NEC-25 GSPC KG block

ONGC KG block Others (incl. CBM) Total


ONGC has the highest sensitivity to gas price hike

39 42 45 48 51 54 68 71 74 77 81 84 85 86 88 90 92 94

4.2 5.0 6.0 7.0 8.0 9.0

ONGC cons. OINL RIL SA

Gas Price (USD/mmbtu)

Source: MOSL

ONGC FY16 Cons. EPS sensitivity to Brent and upstream share

51

5456

58 60 60

48

5051

53 54 52

44

46 47 48 4744

41

42 42 4241

37

90 95 100 105 110 115

30

40

50

60

Upstream share (%)

Brent Crude Price (USD/bbl)

ONGC Cons.

EPS (INR)

*FY16 base case Cons. EPS of INR42.3 Source: MOSL

OINL FY16 EPS (INR) sensitivity to Brent and upstream share

93

97100 103 105 103

86

8991 92

9287

78

81 81 8179

7171

72 71 7065

54

90 95 100 105 110 115

30

40

50

60

Upstream share (%)


OINL EPS (INR)

*FY16 base case EPS of INR71.7 Source: MOSL

Structural policy changes boosting earnings: ONGC’s fair value could rise to INR612 and to INR865 at nil subsidy

Source: MOSL

Structural policy changes boosting earnings: OINL’s fair value could rise to INR951 and to INR1,337 at nil subsidy

Source: MOSL

42.3 1.8 2.5 5.2 1.7

22.2 75.7

485 505 534 593 612

865 865

Bas

e EP

S

Kero

hik

e (I

NR

0.5/

ltr

per m

onth

)

LPG

hik

e (I

NR

10/c

ylpe

r mon

th)

Susi

dy s

hare

(@

50%

)

Gas

Pri

ce(@

USD

7/m

mbt

u)

Nil

subs

idy

New

like

ly

EPS

ONGC fair value in grey shade

71.7 3.9 5.1 11.1

5.7

39.5 137.0

700 738 787 896 951

1,337 1,337

Bas

e EP

S

Kero

hik

e (I

NR

0.5/

ltr

per m

onth

)

LPG

hik

e (I

NR

10/c

ylpe

r mon

th)

Susi

dy s

hare

(@

50%

)

Gas

Pri

ce(@

USD

7/m

mbt

u)

Nil

subs

idy

New

like

ly

EPS

OINL fair value in grey shade

28 July 2014 7


Energy security at fore, E&P reforms inevitable Diversifying energy sources by focusing on renewables to help India

India’s share in world oil consumption has grown from 1% in the 1980’s to 4.2%, but

its share in reserves and production is dismal at 0.3% and 1%, respectively.

However, despite efforts in domestic E&P, India’s import dependence has increased

from ~30% to 76%. In the absence of production increase, we believe (a) India’s import

dependence will further rise to 85% by 2024, and (b) the import bill will be 2x at

~USD200b, making domestic E&P reforms inevitable.

Apart from boosting domestic E&P, policy efforts should be towards (a) monetizing

discovered gas, (b) development of unconventional hydrocarbons, (c) developing

renewable energy sources, and (d) overseas reserve accretion.

India’s share in global consumption increasing and so is import dependence India’s share in world oil consumption (4th largest) increased rapidly in the last

three decades from 1% in 1980 to ~4%. However, India’s share in world oil reserves and production is dismal at just 0.3% and 1%, respectively.

The government’s efforts to reduce India’s oil import dependence during the last two decades have borne little fruit. In fact, oil import dependence has only increased from 30% in 1984 to 76% due to increasing demand and largely flat domestic oil production (1.8% CAGR in the last three decades).

India’s share in world oil consumption has grown rapidly from ~1% in the 1980’s to 4.2%

0%

1%

3%

4%

5%

0

1

3

4

5

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

India Oil Consumption (mmbbl/d) India as % of Total World Consumption

Source: BP Statistical Review, MOSL

India’s share in the world’s proven oil reserves (1P) of 1,288b bbl stands at 0.3%

Venezuela, 18%

S. Arabia, 16%

Canada, 10%

Iran, 9%Iraq, 9% Kuwait, 6%

UAE, 6%Russia, 6%

Libya, 3%

US, 3%

Nigeria, 2%

Kazakh., 2%

Qatar, 1%

India, 0.3%Others, 9%


India’s share in the world’s oil production of ~87mmbbl/d stands at ~1%

S. Arabia, 13%

Russia, 12%

US, 12% China, 5%

Canada, 5%

UAE, 4%

Iran, 4%

Iraq, 4%

Kuwait, 4%

Mexico, 3%

Venezuela, 3%

Nigeria, 3%India, 1%

Others, 28%


28 July 2014 8


Flat domestic production + increasing consumption = Increasing oil import dependence

70%

29%

77%

0

1,700

3,400

5,100

6,800

20%

40%

60%

80%

100%

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Domestic Oil Production (kbpd) Oil Imports (kbpd) Import dependence (%) - LHS

Source: MoPNG, PPAC, BP Statistical Review, MOSL

Oil import bill contributes meaningfully to current account deficit

3

-3 -6 -14

2 10 10 16 28 38 44

7888

3215 12 15 17 23 34 40 56 63 56

69

95 98 95

66% 67% 68% 68%70% 70%

72%74%

75%74% 74%

76% 76% 77%

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

CAD (USDb) Oil Import Bill (USDb) Import depedence (%)

Source: CMIE, MoPNG, PPAC, MOSL

Sans production increase import dependence to reach 85% in this decade India’s oil demand has grown at a CAGR of 4.4%/5.4% in the last 10/30 years as

against domestic oil production CAGR of 1.1%/1.8%. In the absence of oil production increase and assuming oil demand growth at 4%

CAGR, led by economic growth (last 10 year oil demand growth has shown strong correlation with GDP), import dependence could increase to 85% in the next 10 years.

Further, oil import bill could double from current level to USD200b by 2024. Petroleum product consumption has shown high correlation with GDP growth (%)

0%

3%

5%

8%

10%

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Pretoleum Product Demand Growth (%) - 1 Yr lag GDP Growth (%)


India’s oil import dependence increased

rapidly from a low of 29% in the mid-80’s to ~77%

28 July 2014 9


Sans domestic production increase, India’s oil import dependence could increase to 85%

68%

70%

70%

72%

74%

75%

74%

74%

76%

77%

77%

78%

79%

80%

81%

81%

82%

83%

83%

84%

85%

0

1,700

3,400

5,100

6,800

20%

40%

60%

80%

100%

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

Domestic Oil Production (kbpd) Oil Imports (kbpd) Import dependence (%) - LHS

Source: MoPNG, PPAC, BP Statistical Review, MOSL

NELP regime potential promising, but little results till date Indian sedimentary basins have a history of more than 100 years, with initial

E&P efforts in the North-East. However, despite this, India’s vast sedimentary basin acreage of 3.1 square kilometers remains largely under-explored with only ~22% of the total acreage moderate to well-explored.

Post independence, the Indian government (initially through national oil companies and recently through pre-NELP and NELP regime) has made significant efforts to increase E&P in India. Despite these efforts, only 10btoe (35%) of the prognostic resource base of 28btoe (~206bboe) has been established till date.

In 1993, the Indian government launched the pre-NELP (New Exploration Licensing Policy) bidding round to attract private investment in Indian E&P, followed by nine NELP rounds from 1999, in all giving out 1.7m square kilometers (2.1m square kilometers, including nomination) of E&P acreage.

The number of blocks and acreage awarded was encouraging in NELP rounds, but the actual work lags expectations and many blocks now stand relinquished.

Early NELP rounds attracted global E&P companies but the interest waned in the recent rounds due to issues like (a) non-prospectivity of blocks, (b) non-commensurate gas pricing for deepwater fields, (c) operating bottlenecks in terms of E&P permissions, and (d) non-clarity on income tax holiday.

While the NELP well success rate few years back was impressive at 33%, actual development and production has lagged.

After 20 years of work, 56% of the allotted NELP acreage stands relinquished and domestic oil & gas production in the last 10 years has grown at a CAGR of just 1.1%.

Of the 254 awarded NELP blocks, only one block (KG-D6) is currently under production and a handful are under development.

28 July 2014 10


Key timelines for Indian E&P policies


While 29% of the awarded blocks have been relinquished till date…

13 17 1911 7 9 9

2

14 7 4 1213 11

43

3932

19

2724 23 23

20 20

52

41

32

19

Pre-N I II III IV V VI VII VIII IX

Relinquished blocksCurrently operationalAwarded blocks

# of blocks

*Pre-N: Pre-NELP Source: DGH, MOSL

…relinquishment in terms of acreage stands higher at 56%

41 48 10 89 68 51

250

98 53

26

170

228 263

205 193

114

306

113

53 26

Pre-N I II III IV V VI VII VIII IX

Current AcreageRelinquished acreage Acreage awarded

In '000 sq. km

Source: DGH, MOSL

Diversifying energy sources an effective alternative to cut imports With yet-to-be-proven high oil prospectivity of Indian basins, partly due to large unexplored area, we believe diversifying the hydrocarbon would be the next best alternative for India.

Apart from boosting domestic E&P, policy efforts should be towards

a) monetizing discovered gas

b) development of unconventional hydrocarbons

c) developing renewable energy

d) overseas reserve accretion

28 July 2014 11


a) Monetizing discovered gas (refer detailed discussion on page 19) Over the last decade, India’s offshore East Coast (particularly the Krishna

Godavari Basin) had significant gas discoveries. While only one block is monetized (RIL’s KG-D6), many other discoveries are yet to be monetized.

Given the deepwater nature of these discoveries, development and production costs are higher, and here, the government should pitch in to give remunerative pricing for the developers.

b) Development of unconventional hydrocarbons Some of the unconventional hydrocarbon options for India include (1) coal bed

methane (CBM), (2) shale gas/oil, and (3) gas hydrate in sands. Indian E&P players have successfully produced natural gas from coal bed

methane, but require further clarity from the government in terms of pricing, permissions for co-producing along with coal production, and connectivity to the gas grid to tap customers.

Shale gas/oil are still in the pilot stage in India (ONGC conducting some pilots) and the government has promised to come up with a shale gas policy to monetize prospective gas resources of 600tcf (in-place, resource number under evaluation).

Gas hydrate in sands resource base is estimated at ~933tcf.

Unconventional development in India

CBM (coal bed methane) India has the world’s third largest proven coal reserves and the CBM resource

potential is estimated at 160 TCF. Of the identified 35,400 square kilometers area, India has offered 36 blocks covering

18,600 square kilometers Though development and production is underway at various CBM blocks, policy

clarity on pricing and co-production with coal would significantly help to increase CBM production.

Shale gas / oil Indian shale gas resource potential (estimated at 96tcf) is currently under

evaluation. ONGC has embarked on shale gas exploration, and plans to drill 30 wells in FY15. A favorable regulatory framework, which would incentivize companies to invest in

shale gas activities can ramp up development/production from this untapped energy source.

Gas hydrates India’s gas hydrates reserves are estimated to be 1500x its natural gas reserves,

Commercially viable methods of gas extraction from hydrates is still under research (research in advanced stage in Japan but nature of source rock is different from India).

Potential locations are: (1) KG and Mahanadi Basins, (2) Kerala-Konkan Basins and (3) Andaman Islands.

Source: DGH, USGS, Industry, MOSL

a) monetizing discovered gas

b) development of unconventional hydrocarbons

28 July 2014 12


c) Developing renewable resources India ranks 7th in the world in terms of absolute renewable energy consumption

(12mmtoe) and its renewable share in primary energy consumption at 2% is in-line with the global average. However, it is far below the inherent potential, in our view.

Government policies such as Renewable Purchase Obligations (RPO) have been instrumental in the increase in India’s renewable energy capacity.

If the total renewable energy potential/plan is achieved in a decade, it can add 40GW of power production (140GW capacity), which is equivalent to ~10% of India’s current primary energy consumption.

India ranks 7th in the world in terms of renewable consumption in absolute terms (mmtoe)

59

43

30

17 13 13 12 11 9 6 5 4 4 4 4 3 3 3 3 2 2 2 2 2 2 1 1 1 1 1

US

Chin

aG

erm

any

Spai

nB

razi

lIt

aly

Indi

aU

krai

neJa

pan

Fran

ceSw

eden

Cana

daPo

land

Den

mar

kPo

rtug

alA

ustr

alia

Net

her.

Bel

gium

Finl

and

Mex

ico

Phili

ppin

esIn

done

sia

Turk

eyN

ew Z

eala

ndA

ustr

iaCz

ech

Gre

ece

Chile

Taiw

anR

oman

ia

Source: BP Statistical review, MOSL

Renewable power constitute 2% of India’s total energy

Oil29.5%

Natural Gas7.8%

Coal54.5%

Nuclear Energy1.3%

Hydro electric

5.0%

Solar 0.02%

Wind1.3%

Bio & Geothermal

0.6%

Source: BP statistical review, MOSL

Even world average renewable share stands at ~2.2%

2.0% 1.5% 0.0% 4.7% 0.1% 2.0% 2.6% 5.4% 2.2%

0%

25%

50%

75%

100%

India China Russia Brazil South Africa

Japan US UK Total world

Oil Natural Gas CoalNuclear Energy Hydro electric Renewable Energy


India is the world 5th largest wind power producer (GW)

0

25

50

75

100

2001 2003 2005 2007 2009 2011 2013

India China BrazilJapan US UKGermany Spain


Given India’s geographical position, significant solar power potential can be achieved (GW)

0

10

20

30

40

2001 2003 2005 2007 2009 2011 2013

India China JapanUS UK GermanySpain


c) developing renewable energy

28 July 2014 13


India’s renewable energy potential at 140GW in terms of capacity and ~40GW in production, with wind power taking the leading position Type Current Status Potential Key drivers Wind Energy

Wind capacity grew at a CAGR of 18% from 7GW in FY07 to 20GW in FY14 (5th largest in world)

On-shore wind energy potential is estimated at 103GW (at 80m hub-height)

Govt. incentives and RPO's* have been the key drivers for investments in wind energy (68% of total renewable energy).

Biomass Energy

Biomass capacity grew at a CAGR of 22% since FY07 to 3.6GW now

Potential of 18GW from agro/forestry residues

Potential of 5GW from dedicated plantations on 5m hectares of land (~2% of country's total area)

Investments in transmission networks enables greater integration of biomass energy into the grid.

Solar Energy

Solar capacity grew from 0.02GW in FY09 to 2.2GW in FY14

GoI plans to increase solar capacity to 20GW by 2022

Potential is huge, as India with 300 sunny days receives ~1900KWh/m2 of radiations annually

1) GoI's launch of Jawaharlal Nehru National Solar Mission (JNNSM) in 2009 has been a catalyst in growth of solar power. 2) Technological innovations brought solar module prices down by 80% from 2009 levels.

Small Hydro Projects (SHP): Hydro projects <25MW

SHP capacity grew at a CAGR of 11% from 1.9GW in FY07 to 3.6GW in FY14

GoI estimates India's total SHP potential at 20GW

SHP, as a potential source to meet power demand of remote and hilly areas, is growing as transmission through central grid remains uneconomical.

*RPO: Renewable Purchase Obligations Source: Industry, GoI, MOSL

d) Acquire overseas hydrocarbon reserves India’s efforts to acquire overseas hydrocarbon reserves till date have been

through ONGC Videsh and Oil India. Recently, BPCL has successfully discovered substantial oil and gas reserves in Brazil and Mozambique.

However, these efforts seem half-hearted, in our view, given that India has spent USD160b in oil subsidies as against USD20b in overseas acquisitions and USD47b in domestic E&P by ONGC/OINL.

If we were to include OVL’s current oil and gas production, then India’s oil import dependence will lower down from 76% to 71%.

With under-recoveries set to reduce significantly, and yet-to-be-proven oil prospectivity of the Indian basins, there is large scope to spend on overseas reserve acquisition. With lowered under-recoveries leading to higher cash earnings, for NOC’s, they should focus more on overseas acquisitions, in our view.

While it is imperative for India to ensure energy availability to support GDP growth, economics (purchase price) should take precedence over other factors. Some of the enabling factors for overseas acquisition would be: a) Swift approval process: This reduce would timelines and help in closing

deals before competitors come into the picture, a. Dedicated diplomatic support (energy diplomacy): Most of the time,

hydrocarbon resources are contracted by the respective governments and diplomatic support becomes essential to allow tie-ups with private player.

d) overseas reserve accretion

28 July 2014 14


b. Establish international offices: India should establish its own offices in E&P hubs like London, Houston and Singapore.

c. Create sovereign wealth (energy) fund: This would be useful for long gestation projects, as listed NOC’s could be constrained to balance between energy security needs and shareholder returns.

d. Offer comprehensive package in E&P deals: Many oil rich countries are lacking in their domestic infrastructure and India can couple the hydrocarbon acquisition with support in infrastructure building or other activities like education, IT, and agriculture.

e. Tie-ups with private companies or other oil importing nations: India should encourage private participation – a win-win for the NOC’s (shared investment) and the country (energy security addressed), or tie up with other oil importing countries to get a better deal.

India has spent USD160b in domestic subsidies (government + upstream + downstream); v/s USD20b on overseas and USD45b domestic E&P investments in the last 10 years

Source: MoPNG, PPAC, ONGC, OINL, OVL, MOSL

India has spent USD160b in the last 10 years on domestic subsidies; this is 8x India’s overseas investments

1 2 2

1 4 1 1 1 2 6

4

10 11

16

23

10

14

2326

23

2 2 3 4 4 4 6 7 7 6


OVL + OINL Overseas Investment (USDb) Under recoveries/Subsidies (USDb)ONGC + OINL domestic capex (USDb)

Source: MoPNG, PPAC, ONGC, OINL, OVL, MOSL

India last 10 year subsidies

(USD160b)

ONGC/OINL cumulative

domestic capex (USD45b)

ONGC/OVL overseas

investment (USD20b)

28 July 2014 15


Right policies to reverse tax drain for government Could contribute USD111b in next five years v/s USD59b in last five

The share of Oil & Gas in the government’s net tax revenue has declined from 41% in

FY03 to ~4%. Such low levels are unsustainable, in our view.

With the right policies, we expect the net tax revenue contribution to the central

government from Oil & Gas to treble in the next five years to ~USD28b, with

cumulative contribution at USD111b v/s USD59b in the last five years.

Subsidy burden draining central government resources Despite being an oil importing country, India has seen the share of tax from oil declining in both percentage (from 41% in FY03 to ~4% in FY14) and absolute terms. On the other hand, the during the period 2008-12, OPEC earned USD4.9t from crude oil sales, while the oil importing OECD countries earned USD5.6t from oil taxes.

The Indian government’s income from the oil sector has not kept pace either with consumption volume growth or with oil prices. In absolute terms, from a peak of INR955b in FY11, India’s oil taxes had declined to a fifth in FY13 to INR174b, before resurrecting to INR526b in FY14, ~50% of the peak.

During the last 10 years central government net tax revenues (post subsidy) grew at a CAGR of only 3%: Brent price grew at a CAGR of 14% from an average of USD29/bbl in FY04 to

USD108/bbl in FY14. India’s petroleum product consumption grew at a CAGR of ~4% from 108mmt in

FY04 to 158mmt in FY14. However, gross earnings (taxes + dividend + profit petroleum) increased at a

slower pace of 6% CAGR from INR777b in FY04 to INR1.2t in FY14. Net of subsidy, the government earnings from the sector declined at a

compounded annual rate of 3% to INR526b in FY14.

Central and state government taxes grew at 10% CAGR in the last 10 years (INR b)

692 777 833 973 1,083 935 1,118 1,365 1,198 1,174 1,233 352 432 525

600 634 683 721

890 1,129 1,265 1,409

1,044 1,209 1,358

1,572 1,717 1,618 1,839

2,255 2,328 2,439 2,642

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Central Govt.Taxes State Govt. Taxes Total (INRb)

Source: PPAC, MoPNG, MOSL

…However central government taxes post subsidy payment grew only at 3% CAGR

692 777 718 732 730

222

858 955

370 174

526

115 241 353

713

260 410

829 1,000

707 692 777 833

973 1,083

935 1,118

1,365

1,198 1,174 1,233


Oil sector taxes (post subsidy) Subsidy PaymentOil sector taxes (central govt.)


28 July 2014 16


Tax share from Oil & Gas (net of subsidy) is down to ~4% in the last two years from a high of 41% in FY03 (INR b)

35%41%

37% 35%27%

21%17%

5%

19% 17%

6%2%

6%

0%

13%

25%

38%

50%

0

375

750

1,125

1,500

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

Oil sector taxes (post subsidy) Subsidy PaymentOil sector taxes (central govt.) Net oil sector tax as a % of Net govt. taxes

Source: PPAC, MoPNG, CMIE, GoI, MOSL

Policy actions could reverse the tax drain Pushed to the wall, in January 2013, the government initiated Oil & Gas reforms that have the potential to comprehensively address some of the chronic problems (under-recovery, un-remunerative gas pricing) plaguing the industry for a decade. In the pre-election period, the new ruling party, BJP had already indicated an agenda for the Oil & Gas sector, which pointed to working towards energy independence. We believe the near-term fiscal issues can be sorted out by mere continuation of the January 2013 reforms, which are set to cut under-recoveries by 50% in FY16 and share of gross under-recoveries from 1.6% of GDP to 0.5%. The indicated BJP agenda is complementary and/or incremental to the January 2013 reforms and implementation of the same will not only help in reducing import dependence but also ensure higher profitability for the oil PSUs.

BJP’s Oil & Gas sector agenda points at policy focus to reduce import dependence 1 Boost E&P spending: Will take clear policy initiative to improve deepwater and

ultra-deepwater exploration and production. 2 Boost foreign investment in the sector: Will simplify the approval process for

multinational companies operating in India. 3 Overseas acquisition: Will provide all the help required for domestic companies

to acquire overseas assets. 4 Make PSC’s adaptable to business necessities: Will look at the cost recovery

model for deepwater and ultra deepwater, which require higher investment and carry higher risk. But when it comes to shallow water and onshore, will probably have a different approach.

5 Holistic view on gas pricing: Will do whatever is necessary to make sure that the E&P sector attracts [domestic and foreign] investors.

28 July 2014 17


January 2013 reforms have potential to address major fiscal issues Ongoing reforms Required reforms Petrol Deregulated in June 2010 Status-quo

Diesel Allowed INR0.5/ltr monthly price hikes, set to be deregulated in next few months. Bulk consumers to pay market linked price

Status-quo

LPG Limit subsidized cylinders to 12/household/ year; shift to direct benefit transfer (DBT)

Hike Prices and expedite DBT

PDS Kerosene Targeted supply, shift to DBT Expedite DBT

Gas Pricing Approved new remunerative gas pricing Notify gas pricing at the earliest

Upstream (E&P) Eased procedural issues to fasten E&P development

Expedite the process and notify policies on CBM, Shale Gas, OALP

Source: MOSL

We believe there is enough scope (customs duty on crude oil imports, higher cess, etc) in the current tax structure to further boost tax revenues. However, we have not factored these in our estimates. Monthly diesel price hikes are set to cut overall under-recoveries by ~50% from INR1.4t in FY14 to INR691b by FY17.

Monthly diesel price hikes likely to lower under-recoveries by ~50% by FY17

*Assumes monthly diesel price hike of INR0.5/liter till market linked, and INR50/cylinder LPG hike in FY17 Source: PPAC, MoPNG, MOSL

Expect government share in subsidy to reduce rapidly in coming years (INR b)


- 2 27 20 73 52 52 27 - - - - - --22 188

353 523 93

348 819 915

628 186 - -

179 191

282

174 200

278 296

306

275 244 210

107

156 176

143

205

284 399

465

457 507 481

93 201

400 494

773

1,033

461

780

1,381 1,610

1,399

918 750 691

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Petrol Diesel Kerosene LPG Total

0 0 115 241 353 713

260 410 829 1,000

707 312 285 235 62 142

138 48 163

56 67

0 10

21

18 15 14 31 59

140 205

257 329

145

303

552 600

671

588 450 443

93 201

400 494

773

1,033

461

780

1,385 1,610

1,399

918 750 691

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Government OMC's Upstream Total

28 July 2014 18


Gross under-recoveries as a % of GDP set to reduce

0.6

1.1 1.2

1.5

1.8

0.7

1.0

1.5 1.6

1.2

0.80.6 0.5

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Source: CMIE, GoI, PPAC, MOSL

Gross under-recoveries as a % of oil import bill set to reduce

19.8

26.727.6

34.6 35.5

17.4

24.9

30.6 30.2

24.4

15.712.4 11.1

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Source: CMIE, GoI, PPAC, MOSL

India subsidy burden as a % of GDP set to reduce meaningfully in coming years (%)

1.3 1.4 1.7 1.7

1.4 1.3 1.3 1.4

3.4

2.3 2.2 2.4 2.5

2.3 2.0

1.6 1.3

- -0.2 0.2 0.1 0.1 0.1 0.1

1.1

0.4 0.5 0.8

1.0 0.8

0.5 0.3 0.1

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

Subsidy (Food+Fert.+Petro) as a % of GDP Petroleum subsidy (govt. share) as a % of GDP

*Petroleum subsidy as per our estimates, assumed no change in food and fertilizer subsidy **Nominal GDP growth rate assumed at 13.5% for FY15/16/17 Source: CMIE, GoI, PPAC, MOSL

Expect net tax revenues to central government at USD111b in next five years v/s USD59 in the last five With the right policy actions, even our conservative estimates suggest that the central government’s revenues from the Oil & Gas sector 1 can increase from USD20b in FY14 to USD28b by FY19 on gross basis – a CAGR of

7%, and 2 can increase from USD17b in FY14 to USD28b by FY19 on net basis (post

subsidy) – a CAGR of 26%. This would be possible even without tinkering with the current tax structure.

With petroleum pricing reforms, we expect tax revenues from the sector to increase 3x in five years (INR b)

692 777 718 732 730

222

858 955

370 174

526

1,029 1,212 1,304 1,376

1,636 1,691

-1,200

-400

400

1,200

2,000

FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20

Customs Duty Cess Excise Duty Royalty

Corp. Tax Dividend Profit Petr. Others

Source: MoPNG, PPAC, Industry, MOSL

28 July 2014 19


15% oil import savings at remunerative gas price Domestic gas reserves could increase by 91tcf v/s 18tcf since independence

Energy independence for India might seem farfetched for now, but policies should at

least target to cut dependence through a domestic E&P boost by: (a) remunerative /

market-linked pricing, (b) stable fiscal regime / PSC to attract investment, coupled

with fast tracking of administrative timelines, and (c) promoting E&P services.

Remunerative gas pricing could increase domestic gas reserves by 91tcf v/s 18tcf

produced since independence and we estimate that this will add 50-70mmscmd gas

production (~15% of FY14 oil imports) by FY19.

Enabling policy environment to boost domestic E&P activity The potential of Indian sedimentary basins to make India energy independent cannot be vouched for, given that large areas are yet to be thoroughly explored. Only 22% of the 3.14m sq. km. acreage is moderate-to-well explored. Based on the known reserve potential, incremental oil production can be questioned, but gas reserve/production potential is largely proven and monetization is waiting for the right policies.

Immediate issues that need to be sorted out by the government include (a) subsidy rationalization, (b) Gujarat royalty case against ONGC, and (c) coordination between ministries. Key policy initiatives for domestic E&P that will help to increase E&P investments and activity range from E&P licensing, fiscal stability to remunerative pricing and support for M&As.

Key areas to work on to boost domestic E&P and overseas acquisitions

E&P Acreage licensing Fiscal Stability & Development Timelines

Pricing and Acquisitions

Single Window Clearance Ensure necessary permissions of

various Ministries are in place before allotting E&P acreage

Provide fiscal stability Provide tax holiday for oil and gas

both, additional incentives for high cost deepwater E&P

Give clarity on long-term tax policies particularly for cess and royalty payments

Remunerative Pricing Ensure market linked pricing for gas

sales (oil already in place); non-remunerative pricing will not attract new investments

New age acreage allotment Move towards open acreage licensing

policy (OALP) Completion of Data repository, a

precursor for OALP launch

Cut down approval timelines Streamline approval processes Bring in transparency to avoid

unnecessary delays (exit on multinationals could have avoided from NELP)

Set domestic M&A rules in place Provide easy and transparent policies

for farm-in and farm-out agreements

Promote unconventional Development Provide clarity on CBM exploration

along with coal production Notify shale gas policy at the earliest Promote and incentivise E&P service

industry, critical for unconventional development

Empower regulator Allow decision flexibility to regulator in

implementing policies in view of uncertain nature of E&P business

Cut down excess monitoring as it leads to crucial time loss

Boost for overseas acquisition Empower NOC’s to cut decision

timelines for overseas M&A’s Explore NOC-private partnership in

overseas acquisitions A special cell in Foreign Ministry to

help in overseas acquisitions as most often companies have to deal with respective governments for E&P acquisitions

Source: MOSL

28 July 2014 20


India has sizable deepwater acreage, where E&P is capital intensive

Onland: 1.39m sq.km.

44%

Shallow Water: 0.4m

sq.km.13%

Deep Water: 1.35m sq.km.

43%

Source: DGH, MoPNG, MOSL

Despite two decades of effort to boost E&P through pre-NELP/NELP rounds, only 22% acreage is well explored

50% 41%22% 14% 12%

18% 27%37% 44% 44%

17% 17%22% 20% 22%

15% 15% 19% 22% 22%

FY96 FY99 FY05 FY08 FY12

Unexplored Exploration initiatedPoorly explored Moderate to well explored

Source: DGH, MoPNG, MOSL

Remunerative gas pricing to boost production and earnings The new government is reviewing the impending domestic natural gas price hike. While the quantum of price hike may be debated, directionally all the concerned entities seem to be aligned to higher pricing.

Further, natural gas production from new deepwater and ultra-deepwater offshore gas fields is unviable at the current gas price of USD4.2/mmbtu and a higher, remunerative gas price is necessary to promote E&P in India.

Remunerative domestic natural gas pricing could bring in new production and increase domestic gas production by 50-70mmscmd in the next few years (mmscmd)

139 127

109 94 93 97 99 109

145 162

0

50

100

150

200


ONGC OINL KG-D6 (D1/D3 & MA) PMT KGD6 (Satellite) KGD6 (R-series)KGD6 (MJ1) NEC-25 GSPC KG block ONGC KG block Others (incl. CBM) Total


A study by a global energy consultant, IHS CERA on "Yet to be Found" gas in India in the 12 basins with known reserves has brought out the significant potential of domestic gas exploration. The study implies that while USD12/mmbtu is an ideal price to fully exploit domestic reserve potential, USD8/mmbtu indicates meaningful upside in gas production. India could add 91tcf gas v/s 18tcf produced since independence (1947) Higher gas price in India could bring investments of USD412b, gas reserves of

91tcf, and incremental revenues of USD298b for the government. Over 1950-2012, 69tcf of 2P recoverable gas reserves have been discovered in

India. Of these, 42tcf have been developed and are currently under production (~ 18tcf yet to be produced), and 27tcf are yet to be developed.

28 July 2014 21


Apart from the yet to be developed 27tcf, a creaming curve analysis of the 12 major basins shows that a further 64tcf of risked recoverable resources are ‘yet to be found’, taking the total potential to 91tcf.

Finding and development (F&D) investments and government revenues increase 4x when domestic gas prices increase from USD8/mmbtu to USD12/mmbtu.

USD412b investment likely at gas price of USD12/mmbtu

36 39 392083 923939

14531

136

95

192

412

8 10 12

Onshore SW DW Ultra DW Total

Domestic Gas Price (USD/mmbtu)

Likely Investments (USD b)

Government revenues could increase to USD298b

28 41 523161

8010

24

8520

81

69

146

298

8 10 12

Onshore SW DW Ultra DW Total


Likely Govt. Revenue (USDb)

Undeveloped + ‘Yet to be Found’ potential at 91tcf

Resource / Reserve details Reserve (tcf) Discovered Gas (1950 to 2012) - A 69 Produced till 2012 - B

24

Developed & Yet to be Produced - C 18 Developed D = (B + C)

42

Undeveloped E = (A - D)

27 “Yet to be Found” - F

64

Total Potential G = (E + F)

91 Source: MOSL

India’s gas potential of 91tcf contingent on gas pricing

14 15 15 158

22 23 2388

20 2610

2227

30

55

8091

8 10 12 12+

Onshore SW DWUltra DW Total

Economically viable gas volumes (tcf)


Source: Indianpetro, Industry, MOSL

28 July 2014 22


Upstream PSUs to benefit ONGC and OINL top picks

ONGC and OINL will play an important role to tackle twin challenges of (a) fiscal deficit

and (b) energy security for government; hence expect reform process to be expedited.

Higher earnings for ONGC/OINL through lower subsidy and higher gas prices is a win-

win scenario as (a) government tax revenues will increase and (b) energy security will

be addressed to a large extent by more E&P investments.

Maintain Buy on ONGC and OINL, with an SOTP-based target price of INR485 (21%

upside) and INR700 (22% upside), respectively.

Reforms a win-win for government and upstream companies Upstream oil PSU’s earnings have been subdued (last 10-year ONGC/OINL EPS

CAGR at 11% v/s 14% for Brent price) and volatile for several years due to high and ad-hoc subsidy burden (upstream subsidy share varied from 30% to 48% and INR31b to INR671b). While international oil prices increased by USD83/bbl in the last decade,

domestic producers’ (ONGC/OINL) realization increased only by USD22/bbl, led by ad-hoc subsidy burden.

On the gas pricing front, while imported gas pricing increased from USD2.5/mmbtu to USD15/mmbtu, domestic producers’ pricing moved from USD2/mmbtu to only USD4.2/mmbtu.

While, diesel is likely to be deregulated in the coming months, and kerosene and LPG subsidy would reduce with targeting through direct cash transfer, clarity is still required on the sharing of LPG and kerosene subsidy. Despite proposals by several committees, the government is yet to rationalize subsidy sharing.

We believe that ongoing petroleum product reforms, leading to higher earnings for upstream companies, coupled with planned upstream reforms offer a significant opportunity for the government to increase its own earnings as well as satisfy energy security needs.

ONGC is net oil realization increased only by ~USD16/bbl v/s USD79/bbl increase in international crude oil prices since FY04 (USD/bbl)

20

40

60

80

100

120


Brent (USD/bbl) ONGC net realization (USD/bbl) OINL net realization (USD/bbl)


28 July 2014 23


Buy ONGC/OINL: Set for meaningful earnings growth in the near term While private sector E&P players like Reliance Industries and Cairn India will also

benefit from the upstream reforms, the benefits are likely to be over longer term; but ONGC and Oil India stand to benefit in the near term.

For ONGC and Oil India, earnings are set to increase meaningfully, with only timing being a matter of debate.

For FY15/FY16/FY17 in the base case, we conservatively model upstream sharing at 64% v/s FY10-FY14 average of 39% and gas price at USD4.2/5.3/6.3/mmbtu.

For ONGC, under a scenario of upstream sharing between 30% to 60%, FY16E consolidated EPS is likely to range between INR41-60/share v/s INR31/sh in FY14.

For Oil India, under a scenario of upstream sharing between 30% to 60%, FY16E EPS is likely to range between INR65-105/share v/s INR50/sh in FY14.

ONGC FY16E net realization (USD/bbl) sensitivity to Brent/upstream share

74

76 78 80 8078

6870 71 71 70

6663

64 63 6360

545757 56

54

50

41

90 95 100 105 110 115

30

40

50

60

Upstream share (%)


ONGC Net Realization(USD/bbl)

Source: MOSL

ONGC FY16E consolidated EPS (INR) sensitivity to Brent and upstream share

51

5456

58 60 60

48

5051

53 54 52

44

46 47 48 4744

41

42 42 4241

37

90 95 100 105 110 115

30

40

50

60

Upstream share (%)


ONGC Cons.

EPS (INR)

*FY16 base case Cons. EPS of INR42.3 Source: MOSL

OINL FY16 net realization (USD/bbl) sensitivity to Brent/upstream share

75

77 8082 83 82

70

72 73 74 7471

6566 67 67

6560

6061 60 59

56

49

90 95 100 105 110 115

30

40

50

60

Upstream share (%)


OINL Net Realization(USD/bbl)

Source: MOSL

OINL FY16 EPS (INR) sensitivity to Brent and upstream share

93

97100 103 105 103

86

8991 92

9287

78

81 81 8179

7171

72 71 7065

54

90 95 100 105 110 115

30

40

50

60

Upstream share (%)


OINL EPS (INR)

*FY16 base case EPS of INR71.7 Source: MOSL

28 July 2014 24


ONGC has the highest sensitivity to gas price hike

39.441.8

44.747.7

50.653.6

4.2 5.0 6.0 7.0 8.0 9.0Gas Price (USD/mmbtu)

ONGC FY16E Cons EPS (INR)USD1/mmbtu Chg = 6% EPS Chg

68.3 70.9 74.1 77.4 80.6 83.9

4.2 5.0 6.0 7.0 8.0 9.0Gas Price (USD/mmbtu)

OINL FY16E EPS (INR)USD1/mmbtu Chg = 4% EPS Chg

84.7 86.2 88.0 89.9 91.8 93.6

4.2 5.0 6.0 7.0 8.0 9.0


RIL FY16E EPS (INR)USD1/mmbtu Chg = 2% EPS Chg


Expected structural policy changes to boost earnings and increase ONGC’s fair value to INR612 (v/s base case of INR485); while fair value increases to INR865 at nil subsidy

*Implied core P/E of 10.7x + INR31/sh for Mozambique, +INR35/sh for KG-DWN-98/2 + INR21/sh listed investments (post 25% discount) Source: MOSL

Expected structural policy changes to boost earnings and increase Oil India’s fair value to INR951 (v/s base case of INR700); while fair value increases to INR1,337 at nil subsidy

*valued at implied core P/E of 10x Source: MOSL

42.3 1.8 2.5 5.2 1.7

22.2 75.7 485 505 534

593 612 865 865

Base EPS Kero hike (INR0.5/ltrper month)

LPG hike (INR10/cylper month)

Susidy share (@50%)

Gas Price(@USD7/mmbtu)

Nil subsidy New likely EPS

Fair value in grey shaded area

71.7 3.9 5.1 11.1 5.7

39.5 137.0

700 738 787 896 951

1,337 1,337

Base EPS Kero hike (INR0.5/ltrper month)

LPG hike (INR10/cylper month)

Susidy share (@50%)

Gas Price(@USD7/mmbtu)

Nil subsidy New likely EPS

Fair value in grey shaded area

28 July 2014 25


Expect ONGC’s valuations to improve with increasing profitability

Source: Bloomberg, Industry, MOSL

Our Oil & Gas coverage universe: earnings and valuation summary

¹ No. of shares adj. for treasury shares; 2P/B adjusted for E&P value of INR197/sh; Dividend yield on FY15E basis


ONGC

OINL

CAIRBP

Chevron

ExxonShell

Total

Anadarko Apache

Occidental

Chesapeake

Devon

EOG

MurphyNoble

SW Energy

CNRLEncana

Talisman CNOOC

Petrobras

Rosneft

0

5

10

15

20

25

0 10 20 30 40 50 60

EV/b

oe (

1P r

eser

ves)

EBITDA/boe produced (in USD)

M Cap CMP TP Var v/s Reco DvdUSDb (INR) (INR) TP (%) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY16E FY17E FY16E FY17E Yld %

Integrated/Upstream

RIL¹ 54.1 1,005 1,027 2 Neutral 81.6 89.9 112.8 12.3 11.2 8.9 10.2 9.6 7.2 1.2 1.1 11.5 13.2 1.0

ONGC 56.2 395 485 23 Buy 35.7 42.3 44.5 11.1 9.3 8.9 4.9 4.3 4.1 1.6 1.4 18.0 16.9 2.8

CAIRN 9.8 315 358 14 Neutral 56.4 50.6 39.5 5.6 6.2 8.0 4.0 4.0 4.0 0.8 0.8 13.9 10.0 3.1

OINL 5.8 575 700 22 Buy 64.6 71.7 75.2 8.9 8.0 7.7 6.2 5.2 4.9 1.4 1.3 18.0 17.1 4.3

OMC's

IOC 13.0 323 421 30 Buy 32.4 37.9 41.5 10.0 8.5 7.8 7.1 6.3 5.2 1.0 0.9 12.1 12.0 3.1

BPCL² 6.9 575 699 22 Buy 33.5 45.3 48.1 17.2 12.7 11.9 8.8 7.3 6.4 1.2 1.1 14.9 14.4 1.7

HPCL 2.2 383 487 27 Buy 28.3 34.7 39.5 13.5 11.0 9.7 9.4 7.5 7.0 0.8 0.8 7.4 8.0 2.2

Independent Refiners

MRPL 1.9 66 72 9 Neutral 5.1 7.3 7.5 NA 9.0 8.8 6.6 5.3 4.8 1.3 1.2 15.5 14.2 1.5

Gas Companies

GAIL 9.0 425 425 0 Neutral 38.3 33.3 37.0 11.1 12.7 11.5 4.5 4.5 4.1 1.6 1.5 13.3 13.6 2.8

GSPL 0.8 88 90 3 Neutral 8.8 10.0 9.9 9.9 8.8 8.9 5.8 5.4 5.3 1.2 1.0 14.1 12.4 1.1

PLNG 2.3 184 204 11 Buy 9.9 12.7 16.2 18.5 14.4 11.3 9.4 7.7 6.3 2.2 1.9 16.0 17.8 1.0

CGD Companies

IGL 0.9 368 342 -7 Neutral 28.2 30.9 35.3 13.0 11.9 10.4 6.0 5.2 4.2 2.2 1.9 19.5 19.3 1.6

RoE (%)EPS (INR) P/E (x) EV/EBITDA (x) P/B (x)

28 July 2014 26


Annexure 1: Under-recoveries and their sharing Under-recoveries: Our FY16 subsidy estimate assumes Brent at USD105/bbl

Source: MOSL

Under-recoveries: We model upstream sharing at INR588/480b for FY15/16

(INR b) FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Fx Rate (INR/USD) 44.3 45.2 40.3 46.0 47.5 45.6 47.9 54.5 60.6 59.0 58.0 58.0 Brent (USD/bbl) 58 64 82 85 70 86 114 111 108 108 105 100 Product Sales (mmt) 64 69 76 83 91 96 100 104 98 111 117 122

Product-wise Gross Under recoveries (INR b) Petrol 27 20 73 52 52 27 0 0 0 0 0 0 Diesel 126 188 353 523 93 348 812 915 628 186 0 0 Kerosene 144 179 191 282 174 200 278 296 306 275 244 210 LPG 102 107 156 176 143 205 284 399 465 457 507 481

Total 400 494 773 1,033 461 780 1,385 1,610 1,399 918 750 691 Sharing of Gross Under recoveries (INR b)

Government 115 241 353 713 260 410 829 1,000 707 312 255 235 Upstream 140 205 257 329 145 303 552 600 671 588 480 443 OMC's 138 48 163 (9) 56 67 0 10 21 18 15 14

Total 400 494 773 1033 461 780 1,385 1,610 1,399 918 750 691 Sharing of Gross Under recoveries (%)

Government 29 49 46 69 56 53 60 62 51 34 34 34 Upstream 35 42 33 32 31 39 40 37 48 64 64 64 OMC's 35 10 21 (1) 12 9 0 1 2 2 2 2

Total 100 100 100 100 100 100 100 100 100 100 100 100 Sharing within Upstream Sharing (INR b)

ONGC 120 170 220 282 116 249 445 494 564 496 405 374 OIL 10 20 23 30 15 33 74 79 88 78 63 58 GAIL 11 15 14 18 13 21 32 27 19 14 11 11

Total 140 205 257 329 144 303 550 600 671 588 480 443 Sharing within Upstream Sharing (%)

ONGC 85 83 86 86 80 82 81 82 84 84 84 84 OIL 7 10 9 9 11 11 13 13 13 13 13 13 GAIL 8 7 5 5 9 7 6 4 3 2 2 2

Total 100 100 100 100 100 100 100 100 100 100 100 100 Source: MOSL

LPGINR493/cyl

KeroseneINR31.2/ltr

MSnil

Dieselnil

INR531b

Upstream Oil bonds OMCs

INR480b INR255b INR15b

INR244b nil nil

ONGC (84.4%): INR405b

GAIL (2.4%): INR11b

OIL (13.2%): INR11b

64% 34% 2%

Marketing Losses

Subsidy

Sharing

HPCL (~24%): INR181b BPCL (~23%): INR170bIOC (~53%): INR399b

Gross under-recovery: INR751b

HPCL: INR61b

BPCL: INR58b

IOC: INR135b

HPCL: nil

BPCL: nil

IOC: nil

28 July 2014 27


Under recoveries: Sensitivity analysis For every USD1/bbl variation in oil price Gross under recovery (U/R) changes by INR41b. Diesel U/R changes by INR27b (~65% of gross change). Kerosene U/R changes by INR3b (~8% of gross change); LPG U/R changes by

INR11b (~27% of gross change).

Every INR1/USD variation in exchange rate changes U/R by INR98b (oil at USD110-120/bbl). Impact of INR1/ltr price hike on U/R: Diesel – INR81b; Kero – INR12b, and LPG hike of INR25/cyl – INR24b.

Under-recoveries: Sensitivity analysis

Source: MOSL

Gross Under recoveries (INRb) Gross U/R without Diesel (INRb) Brent (USD/bbl) 90 100 105 110 115 120 90 100 105 110 115 120

56 510 641 707 811 1,007 1,203 510 641 707 772 838 90358 547 683 750 870 1,111 1,352 547 683 750 818 886 95460 583 787 906 1,064 1,313 1,562 583 724 794 865 935 1,00662 710 964 1,092 1,258 1,515 1,773 620 766 838 911 984 1,05764 871 1,142 1,278 1,452 1,718 1,984 657 807 882 958 1,033 1,108

Diesel (INRb) Diesel (INR/ltr)Brent (USD/bbl) 90 100 105 110 115 120 90 100 105 110 115 120

56 0 0 0 38 169 299 0.0 0.0 0.0 0.0 0.8 2.958 0 0 0 51 224 397 0.0 0.0 0.0 0.6 2.7 4.860 0 63 112 199 378 557 0.0 0.0 0.3 2.4 4.6 6.862 90 199 253 346 531 716 0.0 0.0 2.0 4.2 6.5 8.764 214 335 395 494 685 876 0.0 1.4 3.7 6.0 8.4 10.766 338 470 537 642 839 1,035 0.0 3.1 5.5 7.8 10.2 12.6

Kerosene (INRb) Kerosene (INR/ltr)Brent (USD/bbl) 90 100 105 110 115 120 90 100 105 110 115 120

56 188 217 231 246 260 275 24.2 27.9 29.7 31.5 33.3 35.1 58 199 229 244 259 274 289 25.6 29.4 31.2 33.1 35.0 36.960 210 241 256 272 287 303 27.0 30.9 32.8 34.7 36.7 38.662 220 253 269 285 301 317 28.3 32.3 34.4 36.4 38.4 40.464 231 265 281 298 315 331 29.7 33.8 35.9 38.0 40.1 42.166 242 277 294 311 328 345 31.1 35.3 37.5 39.6 41.8 43.9

LPG (INRb) LPG (INR/cylinder)Brent (USD/bbl) 90 100 105 110 115 120 90 100 105 110 115 120

56 322 424 475 526 577 629 322 417 464 512 559 607 58 348 454 507 560 613 666 346 444 493 542 591 64060 374 483 538 593 648 703 369 471 522 572 623 67462 400 513 570 626 683 740 393 498 550 603 655 70864 426 543 601 660 718 777 416 525 579 633 687 74166 451 572 633 693 753 814 440 552 608 663 719 775

Fx r

ate

(Rs/

USD

)Fx

rat

e (R

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Fx r

ate

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28 July 2014 28


Annexure 2: Key recommendations of oil sector expert committees

Recomm-endations on

Pricing methodology for Petroleum products

Petrol and diesel pricing and subsidy

Kerosene pricing and subsidy

LPG pricing and subsidy

Subsidy sharing recommendations

Rangarajan Committee (Feb-06)

Pricing of Petroleum products should be on trade parity pricing (TPP) - weighted avg of import (IPP) and export (EPP) parity price in 80:20 ratio.

OMC's should be allowed to fix retail prices of petrol and diesel, subject to ceiling.

Subsidy in kerosene to be given only to BPL families.

Increase LPG price by INR75/cyl, and gradually deregulate LPG.

Subsidies from ONGC, OINL and GAIL should be discontinued

OIDB cess collected from ONGC/OINL to be increased from INR1,800/MT to INR4,800/MT.

Chaturvedi Committee (2008)

Pricing of petroleum products should be EPP, as the IPP prices are higher than the International/FOB prices.

Shift retail prices from incl. of state taxes to before state tax prices (to avoid inter-state tax differences.

Diesel prices to be adjusted in 24 months by small gradual price hikes.

Petrol and diesel prices to be deregulated by March 2009.

Restrict subsidized kerosene supply only to BPL families through issuing smart cards.

Subsidy on LPG to be phased out in three years.

Retail prices to be brought in-line with market, under-recoveries should be financed temporarily through special oil tax:

1. 100% tax on realization above USD75/bbl for ONGC/OINL; 40% tax for private players/JVs prior to NELP.

2. Cut-off price of USD75/bbl be reviewed periodically in view of investment needs of E&P companies.

3. Subsidy contribution from GAIL to be fixed at INR5b.

Kirit Parikh Committee (Feb-10)

Deregulate Petrol & diesel

Well-off people use vehicles, hence no need for subsidy.

Impact on agriculture can be compensated by higher MSP.

Increase kerosene price by INR6/ltr and revise it in steps with growth in per capita agricultural GDP at nominal prices.

LPG price increase by at least INR100/cyl and to revise based on increase in per capita income

ONGC and OINL subsidy on slab-based taxes at different oil prices

ONGC's formula: Tax nil till USD60/bbl; incremental tax-slabs of 20/40/60/80% on incremental revenue for USD60-70-80-90/bbl crude price respectively.

Rest to be shared by GoI.

Kirit Parikh Committee (Oct-13)

Petrol prices to be adjusted by March 2009.

Increase kerosene price by INR6/ltr and revise it in steps with growth in per capita agricultural GDP at nominal prices.

LPG price increase by at least INR100/cyl and to revise based on increase in per capita income.

Subsidy to be shared by ONGC and OINL to bear tax on slab-based on rates at different crude oil prices

ONGC's formula): Nil tax till USD60/bbl crude; incremental tax-slabs of 20/40/60/80% on incremental revenue for USD60-70-80-90/bbl crude price respectively.

Rest to be shared by GoI.

*TPP - Trade Parity Price; EPP - Export Parity Price; IPP - Import Parity Price; OIDB - Oil Industry Development Board Source: MoPNG, PPAC, MOSL

28 July 2014 29


Annexure 3: Will ONGC/OINL profit increase inline with lower subsidy?

Under recoveries are set to fall by ~50% by FY16 and will further reduce with expected price hikes and shift to

cash transfer in domestic LPG and PDS kerosene. But will lower under recoveries result in proportionate reduction in ONGC/OINL subsidy and increase in the profitability?

We believe there will be no direct correlation between lower under recoveries and upstream subsidy, particularly in a situation where under recoveries become negligible in the longer term. We expect the government to increase the statutory levies for nomination block and make the net realizations to ONGC/OINL in-line with the NELP blocks.

Government take from E&P companies across the world varies between 33 to 87%

33 41

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Currently, the Indian government's share from the nomination blocks (including subsidy sharing) stands at ~75% v/s ~55% for NELP blocks.

If subsidy sharing were to be lowered to nil, the government's share will decline to ~39%, which in our view will be likely negated by the government by increasing taxes to bring its share to at least in-line with NELP, i.e. at ~55%.

Nil oil subsidy will reduce nomination block taxes to from ~USD80/bbl to ~USD40/bbl, but we expect government to increase taxes to bring average taxes at ~55% - online with the NELP blocks

62 62 62 31 31 31 31 31 31

81 79 78

45 40 37

56 54 51

32

54 54 51

0

25

50

75

100

Onland SW DW Onland SW DW Onland SW DW Onland SW DW

NominationCrude Oil

Nomination Crude Oil (w/o subsidy)

NELPCrude Oil

Nomin.Gas

NELP Gas

Subsidy Govt. Profit share @50% Royalty Cess NCCD Tax Total govt. taxes


28 July 2014 30


Annexure 4: Gas pricing in India

Expect decision on domestic natural gas prices soon RIL’s KG-D6 block gas price was set to be revised originally from April 1, 2014. Earlier government had approved the new gas price formula proposed by the Rangarajan committee, but the

decision was postponed due to general elections in April-May, 2014. Post elections when the new central government arrived, Cabinet Committee on Economic Affairs on June 25,

2014 decided that comprehensive discussions were necessary on the issue, and the decision on the gas pricing was postponed by ‘up to’ three more months.

We await clarity on the same and in the mean time RIL has filed arbitration for the same along with its earlier arbitration case against government for disallowing capex due to lower production.

The gas price arrived as per the Rangarajan formula is ~USD8/mmbtu. We model current gas price for FY15, i.e. USD4.2/mmbtu, but model FY16 gas price at USD5.3/mmbtu for

ONGC/OINL, and USD7/mmbtu for RIL in our estimates.

Rangarajan committee formula: PAV = {PIAV + PWAV} / 2 PAV = Sales price for domestic natural gas sales in India PIAV = Netback FOB price of Indian LNG term imports (excluding spot imports) PWAV = Weighted average of prevailing gas prices in global markets, based on: Henry Hub gas price in the US and total volume consumed in North America, National balancing point gas price in the UK and total volume consumed in Europe and Eurasia, and Netback price of Japanese LNG imports and total volume imported by Japan.

Applicability of the formula of Rangarajan committee The formula was supposed to be effective from 1 April 2014 for five years and would be revised quarterly. The price for each quarter will be the trailing 12-month average price, with a lag of one quarter (the price for

April to June 2014 will be calculated based on the averages for the 12 months ended December 2013). Netback price = A-B-C, where; A = Imported LNG price on netback FOB available from World

Energy Intelligence; B = Liquefaction costs at the respective loading port (source) and C = Transport cost.

Key Timelines for Gas Pricing in India

Source: Industry, Rangarajan Committee report, MOSL

Prevailing gas prices in India (USD/mmbtu)

Source: Industry, Rangarajan Committee report, MOSL

Date DetailsJun-05 Tariff Commission (TC) set up to look in to Gas Pricing Issues. ONGC ’s

producer price increased on ad-hoc basis Tariff Commission recommendation from INR2,850 to Rs 3,200 wef 1st July 2005 (from 1st April 06 in NE). ONGC was seeking prices in line with market related pricing

2006 Initial Report of TC - Recommended price of INR3,450/mscm, Escalation of INR50/MCM for each 10 point increase in WPI Index, Both MoPNG /ONGC had reservations on this formula

May-07 Tariff commission revised its pricing recommendation Revised normative producer price of INR3,600/mscmINR50/mscm increase for each 10 point increase in WPI Index

Jun-07 To avoid further delay ONGC accepted revised price.ONGC requested 20% annual increase on price of Rs3600/MCM fixed by TC for FY06, to bring APM prices in line with market prices. ONGC also asked for market pricing for additional and new gas abovecurrent APM

Jun-07 CCEA decision for revision of producer pricing based on TC recommendation

Sep-07 RIL’s KG-D6 gas price fixed at USD4.2/mmbtuSep-09 Revised pricing not yet implemented pending notificationMay-10 Govt. revised APM gas price to USD4.2/mmbtu Rangarajan committee

submits its report on Gas pricingFY15 KG-D6 gas price is slated for change in FY15

PMT5.8

LNG: long-term11.0

LNG: Spot11.0

KG-D6 (current)

4.2

APM (current)

4.2

28 July 2014 31


Companies BSE Sensex: 25,991 S&P CNX: 7,749 July 2014

Companies Covered Pg

ONGC 32

Oil India 38

Reliance Industries 43

Cairn India 49

28 July 2014 32

28 July 2014

Update | Sector: Oil & Gas

ONGC CMP: INR395 TP: INR485 Buy

Direct play on policies aimed to cut India’s oil imports Lower subsidy, likely higher gas price to boost earnings

ONGC, a national oil company, is the government’s key vehicle to pursue its energy security goals. It is imperative to boost ONGC’s finances to fund huge investments in domestic E&P as well as for acquiring overseas reserves.

Key positives include (a) higher net realization, led by diesel reforms, which are set to halve under-recoveries by FY16, (b) proposed gas price hike, and (c) >4% CAGR (FY14-16E) in group production over the next two years.

Maintain Buy, with a target price of INR485, implying 23% upside.

Set to benefit from government policies to cut oil import dependence We expect policies to increase domestic production and cut oil/gas import

dependence from the current 76%. The largest domestic E&P player, ONGC, would be a key beneficiary.

The new policies are likely to target aspects that had impacted performance and would include (a) remunerative pricing, (b) fast tracking of reserve monetization, and (c) timely monitoring of large projects.

A mere normalization of profits through adequate oil/gas realizations would boost ONGC’s finances, which in turn would enable it to incur higher E&P spends.

Multiple growth drivers to boost earnings in medium to long term Near-term earnings are likely to be driven by (a) higher net realization

(USD1/bbl increases EPS by 2%), and (b) higher gas price (USD1/mmbtu hike increases EPS by 6%).

Long-term earnings growth drivers include (a) 4% production CAGR through FY16, (b) monetization of KG-DWN-98/2 and marginal fields, and (c) overseas production.

What is the underlying potential? The last decade’s subsidy payout of USD55b (ONGC share), if reinvested,

could have resulted in additional production of 100mmt (4.5x the current annual production).

Mere profitability normalization through market determined oil and gas realizations would add USD6.5b to ONGC’s PAT. This should translate into USD65b increase in market cap (at a P/E of ~10x) against the current market cap of USD57b.

Valuation and view Key risks include delay in new project execution, continued ad-hoc subsidy

sharing, and sub-par returns in non-core investments. Likely doubling of gas price, lowering of subsidy to give remunerative oil

realization would help drive earnings growth of ONGC. The stock trades at 9.3x FY16E EPS of INR42.3. Buy.

BSE Sensex S&P CNX 25,991 7,749

Stock Info Bloomberg ONGC IN

Equity Shares (m) 8,555.5

52-Week Range (INR) 472/234

1, 6, 12 Rel. Per (%) -7/18/-2

M.Cap. (INR b) 3,381.6

M.Cap. (USD b) 56.2

Financial Snapshot (INR Billion) Y/E March 2015E 2016E 2017E

Net Sales 1,906 2,015 2,088

EBITDA 656 756 793

Net Profit 306 362 381

EPS (INR) 35.7 42.3 44.5

EPS Gr. (%) 13.8 18.5 5.1

BV/Sh. (INR) 221.4 248.5 276.6

RoE (%) 17.0 18.0 16.9

RoCE (%) 14.6 15.6 14.9

P/E (x) 11.1 9.3 8.9

P/BV (x) 1.8 1.6 1.4

Shareholding pattern % (Mar-14)

Mar-14 Dec-13 Mar-13

Promoter 68.9 69.2 69.2

DII 10.9 10.5 10.8

FII 6.7 6.7 6.3

Others 13.5 13.5 13.7

Note: FII Includes depository receipts

Stock Performance (1-year)

200

275

350

425

500

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

ONGC Sensex - Rebased

ONGC

28 July 2014 33

Valuation and view We remain positive on ONGC due to (1) likely increase in net realization due to

lower subsidy, driven by continued diesel price hikes, (2) Decision on gas price hike in FY15, and (c) attractive valuations.

Key things to watch are: (1) continuance of diesel reforms, (2) clarity on benefit of gas price hike, (3) subsidy sharing, and (4) visibility on production growth.

Upside potential to our gas price assumption: we model higher gas price only from FY16 (USD5.3/mmbtu in FY16).

Timely execution of diesel reforms and passing on of benefits of gas price hike could lead to a re-rating.

We value ONGC at DCF-based target price of INR485, factoring in long-term net realization of INR65/bbl from FY18 against USD50.1/bbl in FY15 and USD58.5/bbl in FY16.

Implied FY15E dividend yield stands at ~3%. The stock trades at 9.3x FY16E EPS of INR42.3. Our SOTP-based target price for ONGC is INR485. Buy.

We value ONGC at INR485 USDB INRB INR/sh Valuation method

ONGC Domestic 42 2,619 306 DCF Based, WACC of 12.1% OVL 17 1,068 125 2P reserves @ USD5.8/boe (same as ONGC) Cairn India 2 131 15 DCF based

Less: Net (Debt) / Cash -7 -450 -53 Investments

Mozambique Block 4 269 31 At investment value KG-DWN-98/2 5 300 35 Valuing @USD4.5/boe; gas 4.9tcf (~60% recovery), oil 100mmt

(20% recovery)

Listed Investments 3 201 24 MRPL, IOC, GAIL & Petronet LNG; 25% discount to our target/market price

Target Price 67 4,138 485

Source: MOSL

ONGC: Key assumptions Year End: March 31 (INRm) FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Exchange Rate (INR/USD) 45.8 47.5 45.7 47.9 54.5 60.6 59.0 58.0 58.0 APM Gas Price (USD/mmbtu) 2.0 1.9 3.9 4.2 4.2 4.2 4.2 5.3 6.3 Brent crude price (USD/bbl) 84.8 69.7 86.5 114.5 110.6 107.8 108.0 105.0 100.0

Production Details (mmtoe) Domestic Oil Production (mmt) 27.1 26.5 27.3 27.0 26.1 26.0 26.8 27.8 29.0 Domestic Gas Production (bcm) 25.4 25.6 25.3 25.5 25.3 24.9 25.6 26.3 27.1

Domestic Production (mmtoe) 52.6 52.1 52.6 52.5 51.5 50.9 52.4 54.2 56.1 OVL Production (mmtoe) 8.8 8.9 9.4 8.8 7.3 8.3 8.9 10.0 10.0 Group Production (mmtoe) 61.3 60.9 62.1 61.2 58.7 59.3 61.4 64.2 66.2 Subsidy Sharing (INRb) 282 116 249 445 494 564 496 405 374 Oil Price Realization (USD/bbl)

Gross 88.0 71.7 89.4 117.4 110.5 106.7 108.0 105.0 100.0 Upstream Discount 39.6 15.7 35.6 62.4 62.9 65.8 57.9 46.5 40.9 Net 48.5 56.0 53.8 55.0 47.6 41.0 50.1 58.5 59.1

Cons EPS Break-up (INR/sh) EPS (Standalone) 18.9 19.6 20.4 26.8 24.5 25.8 28.8 34.7 37.3 EPS (OVL) 3.3 2.4 3.0 3.2 4.6 5.2 5.8 6.2 5.7 EPS (MRPL & Others) 0.9 0.6 1.1 0.4 -0.8 0.0 1.1 1.4 1.4

EPS (Consolidated) 23.1 22.7 24.5 30.4 28.3 31.0 35.7 42.3 44.5

Source: MOSL, Company

ONGC

28 July 2014 34

Story in charts

Despite ad-hoc subsidy, last 10 yr EPS CAGR at ~10% (INR)

18.9 19.6 20.4 26.8 24.5 25.8 28.8

34.7 3.3 2.4 3.0

3.2 4.6 5.2 5.8

6.2

23.1 22.7 24.5 30.4 28.3 31.0

35.7 42.3

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

EPS (Standalone) EPS (OVL)EPS (MRPL & Others) EPS (Consolidated)


Impressive RRR of >1 in last eight years

15 15 15 16 16 16 16 16 17 15

1.0 1.1

1.4 1.3 1.4

1.7 1.8 1.8 1.8 1.7


Reserves/ Production (Years) RRR (x) - Actual


Expect Production increase in FY15 led by development projects


Expect Production increase in FY15 led by IOR / redevelopment projects


Expect domestic production uptick in coming years (mmt)

27.1 26.5 27.3 27.0 26.1 26.0 26.8 27.8

25.4 25.6 25.3 25.5 25.3 24.9 25.6 26.3

52.6 52.1 52.6 52.5 51.5 50.9 52.4 54.2


Oil Prodn (mmt) Gas Prodn (bcm) Total (mmtoe)


Recent acquisitions to lead OVL to next growth phase (mmt)

3.95.1

6.3

8.08.8 8.8 8.9

9.48.8

7.28.2

9.210.3

FY04 FY06 FY08 FY10 FY12 FY14 FY16E

VietnamSakhalin-1GNOP, Sudan5A SudanAFPC, SyriaColombiaVenezuelaImperial Brazil BC-10MyanmarCaraboboAzerbaijanMozambique


ONGC

28 July 2014 35

Story in charts Expect under recoveries to halve by FY16E (INRb)

773 1,033

461

780

1,385

1,610 1,399

918 750

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E

Auto Fuels Domestic Fuels TotalUnder recoveries in INR b


Leading to increase in net realization (USD/bbl)

48 56 54 55 48 41 50 59

40 16 36

62 63 66 58 46

88 72

89

117 111 107 108 105


Net Upstream Discount Gross


Domestic gas price sensitivity to FY16E EPS and SOTP


ONGC’s 3P reserves stand at 2,004 mmtoe; ONGC group R/P at 16 years on 1P basis

724 1,033

1,331 31

33

36

207

601

637

962

1,667

2,004

1P 2P 3P

ONGC JV OVL Totalin mmtoe


ONGC 1 year forward P/E chart


ONGC 1 year forward P/B chart


39.4 41.8 44.747.7 50.6

53.6

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PE (x) Peak(x) Avg(x) Min(x)

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ONGC

28 July 2014 36

Financials and valuations Consoliated Income Statement

(INR Billion) Y/E March 2012 2013 2014 2015E 2016E 2017E Net Sales 1,464 1,624 1,732 1,906 2,015 2,088 Growth (%) 24.4 11.0 6.7 10.0 5.7 3.6 Government Levies 231 257 262 280 306 319 Other Operating Costs 655 818 901 969 953 976 Total Operating Costs 886 1,075 1,163 1,249 1,259 1,295 EBITDA 578 549 570 656 756 793 % of Net Sales 39.5 33.8 32.9 34.4 37.5 38.0 Interest 4 5 7 8 5 5 D,D&A 234 231 251 251 260 275 Other Income 58 55 82 55 52 56 Prov, wrtie-offs prior period -31 0 0 0 0 0 PBT 428 367 394 453 542 568 Tax 144 128 128 144 177 184 Rate (%) 34 35 32 32 33 32 PAT 284 240 267 308 366 384 Adj PAT 263 240 264 308 366 384 Growth (%) 23.3 -8.8 9.9 17.0 18.6 5.1 Minority int., assoc profits 3 -2 -2 3 4 4 Net Profit post MI 260 242 266 306 362 381

2831% Balance Sheet

(INR Billion) Y/E March 2012 2013 2014 2015E 2016E 2017E Share Capital 43 43 43 43 43 43 Reserves 1,322 1,483 1,656 1,851 2,083 2,324 Net Worth 1,364 1,525 1,699 1,894 2,126 2,366 Debt 152 205 348 349 349 349 Deferred Tax 122 142 180 183 186 189 Liability for Abandonment 204 207 210 213 216 219 Minority Interest 22 19 18 21 25 29 Capital Employed 1,865 2,099 2,455 2,660 2,903 3,154

Net Fixed Assets 688 805 787 841 909 991 Producing Properties 608 705 841 982 1,140 1,321 Pre-producing Properties 117 136 161 181 202 207 Investments (incl. mkt. sec.) 29 21 370 381 391 401 Goodwill 78 83 79 75 71 67 Cash & Bank Balances 374 303 136 125 102 77 Inventories 132 128 107 110 113 116 Sundry debtors 117 154 149 147 163 165 Loans & Advances 130 142 134 135 137 139 Other Current Assets 44 51 43 43 43 43 Total Curr. Assets 797 777 568 559 557 539 Current Liabilities 390 373 297 303 311 316 Provisions 61 56 55 55 56 57 Total current liabilities 452 430 352 359 367 373 Net Curr. Assets 345 347 217 200 190 166 Total assets 1,865 2,099 2,455 2,660 2,903 3,154 E: MOSL Estimates

ONGC

28 July 2014 37

Financials and valuations Ratios

Y/E March 2012 2013 2014 2015E 2016E 2017E Basic (INR)

EPS 30.4 28.3 31.0 35.7 42.3 44.5 Cash EPS 58.2 57.2 65.1 65.3 73.1 77.0 Book Value 159.5 178.3 198.5 221.4 248.5 276.6 DPS 9.8 9.5 9.5 11.0 13.0 14.0 Payout (incl. div tax) 32.8 45.4 35.4 36.0 35.9 36.8

Valuation (x)

P/E

12.7 11.1 9.3 8.9

Cash P/E

6.1 6.1 5.4 5.1 EV / EBITDA

5.7 4.9 4.3 4.1

EV / Sales

1.9 1.7 1.6 1.6 Price / Book Value

2.0 1.8 1.6 1.4

Dividend Yield (%)

2.4 2.8 3.3 3.5 EV/BOE (USD, 1P basis)

7.7 7.9 8.1 8.1

Profitability Ratios (%)

RoE 20.7 16.8 16.6 17.0 18.0 16.9 RoCE 19.4 15.2 14.6 14.6 15.6 14.9

Turnover Ratios

Debtors (No. of Days) 26.8 30.5 32.0 28.4 28.0 28.7 Fixed Asset Turnover (x) 2.4 2.2 2.2 2.3 2.3 2.2

Leverage Ratio

Net Debt / Equity (x) -0.2 -0.1 -0.1 -0.1 -0.1 -0.1

Cash Flow Statement

(INR Billion) Y/E March 2012 2013 2014 2015E 2016E 2017E OP/(Loss) before Tax 428 367 394 453 543 568 DD & A 129 121 216 212 213 198 Other op. expenses 107 95 0 0 0 0 Direct Taxes Paid -119 -124 -90 -141 -173 -180 (Inc)/Dec in Wkg. Capital -71 -12 -37 6 -12 -1 CF from Op. Activity 475 447 483 529 569 584

(Inc)/Dec in FA & CWIP -393 -423 -349 -420 -452 -459 (Pur)/Sale of Investments 3 11 -349 -10 -10 -10 CF from Inv. Activity -390 -412 -698 -431 -463 -469

Issue of Shares 0 2 0 0 0 0 Inc / (Dec) in Debt 92 -3 144 0 0 0 Dividends Paid (incl.tax) -85 -110 -95 -110 -130 -140 Interest paid -4 -7 0 0 0 0 CF from Fin. Activity 2 -118 49 -110 -130 -140

Inc / ( Dec) in Cash 86 -83 -166 -11 -23 -25 Add: Opening Balance 287 373 302 135 125 102 Closing Balance 373 302 135 125 102 77

228 July 2014 38

28 July 2014


Oil India CMP: INR575 TP: INR700 Buy

Steady growth; likely policy reforms not factored Lower subsidy, likely higher gas price to boost earnings Oil India (OINL), a low cost onshore E&P player, with production yet to peak out

despite older fields, would be a key beneficiary of government policies to curb oil imports.

Key positives include (a) higher net realization, led by diesel reforms, which are set to halve under-recoveries by FY16, (b) proposed gas price hike, and (c) promising 1P/2P reserve ratio.

Maintain Buy with a target price of INR700, implying 22% upside.

Set to benefit from government policies to cut oil import dependence We expect policies to increase domestic production and cut oil/gas import

dependence from the current 76%. A major E&P player, OINL would be a key beneficiary.

The new policies are likely to target aspects that had impacted performance and would include (a) remunerative pricing, (b) fast tracking of reserve monetization, and (c) timely monitoring of large projects.

A mere normalization of profits through adequate oil/gas realizations would boost OINL’s finances, which in turn would enable it to incur higher E&P spends.

Promising reserve base, steady production growth Healthy oil/gas reserve ratio; RRR>1 consistently: OINL's reserve mix is

favorable, with oil contributing 62% of its 2P reserves. 1P reserves are just 50% of 2P reserves, indicating huge scope for increase in 1P.

With production yet to peak, and ~100% of it from on-land, OINL’s production costs remain low.

While oil production growth would be steady, we expect gas production to increase rapidly, with connectivity to new customers.

What is the underlying potential? The last decade’s subsidy payout of USD5.5b (OINL share), if reinvested,

could have resulted in additional production of 10mmt (3x the current annual production).

Market determined oil and gas realizations would add USD1.5b to OINL’s PAT. This should translate into a USD13.5b increase in market cap (at a P/E of 9x) against the current market cap of USD6.2b.

Valuation and view Key risks include delays in new project execution, continued ad-hoc

subsidy sharing and royalty issue overhang. Likely arms-length gas price and lower subsidy would boost OINL’s earnings. The stock trades at 8x FY16E EPS of INR71.7. Buy.


Stock Info Bloomberg OINL IN

Equity Shares (m) 601.1


1, 6, 12 Rel. Per (%) -3/1/-24

M.Cap. (INR b) 345.9

M.Cap. (USD b) 5.8

Financial Snapshot (INR Million) Y/E March 2015E 2016E 2017E Net Sales 107.9 120.2 123.5

EBITDA 49.0 57.9 59.5

Net Profit 38.8 43.1 45.2

EPS (INR) 64.6 71.7 75.2

EPS Gr. (%) 30.3 11.0 4.8

BV/Sh. (INR) 379.4 418.6 459.6

P/E (x) 8.9 8.0 7.6

P/BV (x) 1.5 1.4 1.2

EV/EBITDA (x) 6.4 5.4 5.0

EV/Sales (x) 2.9 2.6 2.4

RoE (%) 17.9 18.0 17.1

RoCE (%) 18.6 19.6 19.0



Promoter 18.5 18.5 18.5

Dom. Inst 16.6 15.0 13.0

Foreign 19.4 19.0 21.3

Others 45.6 47.6 47.3



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Oil IndiaSensex - Rebased

Oil India

28 July 2014 39

Valuation and view We remain positive on OINL due to: (1) steady production, (2) high share of oil

(55% in 1P and 62% in 2P) in its reserves, and (3) attractive valuations. The stock trades at >40% discount to its global peers on EV/BOE (1P basis).

Key things to watch are: (1) implementation of diesel reforms, (2) subsidy sharing, and (3) visibility on production growth.

Upside potential to our FY15 gas price assumption: We model gas price of USD4.2/5.3mmbtu in FY15/16. However, if higher gas price benefits are passed to OINL, the FY15/16E EPS would increase further.

The stock trades at 8x FY16E EPS of INR72 and has an implied dividend yield of 4-5%. We value OINL at INR700/share based on average of three methodologies: (1) P/E of 9.5x FY16E, (2) EV/EBITDA of 4.5x FY16E, and (3) DCF (WACC of 12%). Maintain Buy.

Valuation Summary Methodology Fair Value Remarks

DCF 725 12% WACC

EV/EBITDA 695 4.5x FY16 EBITDA

P/E 681 9.5x FY16E EPS

Average 700 Source: Company, MOSL

Oil India: Key assumptions Year End: March 31 (INRm) FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Exchange Rate (USD/bbl) 46.0 47.6 45.6 47.9 54.5 60.6 59.0 58.0 58.00 APM Gas Price (USD/mmbtu) 1.8 1.8 3.9 4.2 4.2 4.2 4.2 5.3 6.3 Brent Crude Price (USD/bbl) 84.7 69.7 86.7 114.5 110.6 107.8 108.0 105.0 100.0

Taxes & Duties Royalty rate - Oil (%) 20% 20% 20% 20% 20% 20% 20% 20% 20% Royalty rate - Gas (%) 10% 10% 10% 10% 10% 10% 10% 10% 10% Cess (INR/MT) 2,500 2,500 2,500 2,500 4,500 4,500 4,500 4,500 4,500

Production Details Oil (mmt) 3.47 3.57 3.59 3.88 3.70 3.50 3.62 3.66 3.70 Gas (bcm) 2.27 2.42 2.35 2.63 2.64 2.63 2.76 2.90 3.04

Total (mmtoe) 5.74 5.99 5.94 6.52 6.34 6.13 6.38 6.55 6.74 Subsidy Sharing (INRb) 3.0 1.6 32.9 73.5 78.9 87.4 77.6 63.4 58.4 Oil Price Realization (USD/bbl)

Gross 81.7 68.5 86.1 114.7 109.6 106.4 107.0 104.0 99.0 Upstream Discount 26.1 12.3 27.6 54.8 56.0 59.3 49.7 40.9 37.3 Net 55.6 56.2 58.5 59.8 53.6 47.1 57.3 63.1 61.7

EPS (INR/sh.) 37.1 43.4 48.0 57.3 59.7 49.6 64.6 71.7 75.2


Oil India

28 July 2014 40

Story in charts

Annual oil prodn. grew at a CAGR of 1% in 8 years (FY06-14)

3.2 3.1 3.1 3.5 3.6 3.6 3.9 3.7 3.5 3.6 3.7

1

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Annual gas prodn. grew at a CAGR of 2% in 8 years (FY06-14)

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Expect under-recoveries to decrease from here…

126 523

93 348

819 915 628

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Diesel Kerosene LPG Petrol TotalINR b


Upstream discount at its peak in FY13/14 (USD/bbl)

50 47 58 56 56 59 60 54 47 57 63

9 19 25 26

12 28

55 56 59 50 41 60 66 83 82

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Net Realization Upstream Discount Gross Realization


Return ratios to increase in coming years

30%

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RoE RoCE Cash as a % of total assets - RHS


Oil account for 59% of OINL’s 442mmtoe 1P reserves

261598

850181

318

463

442

916

1,31359%

65% 65%

Proved (1P) Proved + Probable (2P)

Proved + Probable + Possible (3P)

Oil Gas Total Oil as % of total


Oil India

28 July 2014 41

Financials and valuations Income Statement

(INR million)

Y/E March 2012 2013 2014 2015E 2016E 2017E Net Sales 97,741 95,252 91,267 107,928 120,250 123,535 Change (%) 17.7 -2.5 -4.2 18.3 11.4 2.7

Change in Stocks -88 -274 79 0 0 0 Production Costs 23,074 22,598 26,922 26,514 28,086 29,581 Statutory Levies 27,904 30,439 28,789 32,447 34,221 34,440 EBITDA 46,851 42,489 35,478 48,967 57,943 59,514 % of Net Sales 47.9 44.6 38.9 45.4 48.2 48.2 D,D&A 15,263 9,201 11,770 12,033 13,500 13,606 Interest 105 26 688 1,098 925 925 Other Income 19,536 19,570 21,084 22,123 19,852 21,455 PBT 51,019 52,832 44,105 57,959 63,370 66,438 Tax 16,550 16,939 14,291 19,126 20,278 21,260 Rate (%) 32.4 32.1 32.4 33.0 32.0 32.0 PAT 34,469 35,893 29,813 38,833 43,092 45,178 Adj. PAT 34,469 35,893 29,813 38,833 43,092 45,178 Change (%) 19.4 4.1 -16.9 30.3 11.0 4.8 Balance Sheet

Y/E March 2012 2013 2014E 2015E 2016E 2017E Share Cap. (incl sh. suspense) 6,011 6,011 6,011 6,011 6,011 6,011 Reserves 171,202 186,103 200,872 222,074 245,603 270,270 Net Worth 177,213 192,115 206,883 228,086 251,614 276,282 Total Loans 101 10,578 97,827 71,127 71,127 71,127 Deferred Tax 10,767 12,186 13,142 14,881 16,148 17,477 Well Abandonment 2,031 2,127 2,127 2,127 2,127 2,127 Capital Employed 190,113 217,006 319,979 316,221 341,017 367,013

Gross Fixed Assets 35,340 40,437 45,533 50,629 55,725 60,821 Less: Depreciation 24,757 26,331 28,931 31,520 34,448 37,669 Net Fixed Assets 10,584 14,105 16,602 19,109 21,277 23,152 Capital WIP 5,106 7,210 7,210 7,210 7,210 7,210 Producing/pre-producing 40,560 46,323 51,210 69,869 89,407 99,138 Investments 26,142 18,571 114,567 115,676 118,211 120,746

Curr. Assets, L & Adv.

Inventory 5,333 6,443 9,488 6,461 6,828 7,016 Debtors 10,518 9,027 4,531 11,236 12,519 12,861 Cash & Bank Balance 109,355 121,329 118,193 102,672 103,543 116,036 Loans & Adv. and Other CA 19,214 28,800 28,839 28,839 28,839 28,839

Current Liab. & Prov.

Liabilities 23,188 17,096 15,195 29,077 30,726 31,572 Provisions 13,511 17,706 15,466 15,776 16,091 16,413 Net Current Assets 107,721 130,797 130,391 104,357 104,912 116,767 Application of Funds 190,113 217,006 319,979 316,221 341,016 367,013 E: MOSL Estimates

Oil India

28 July 2014 42

Financials and valuations Ratios

Y/E March 2012 2013 2014E 2015E 2016E 2017E

Basic (INR)

EPS (Adj) 57.3 59.7 49.6 64.6 71.7 75.2 Cash EPS 65.9 69.1 61.5 75.5 83.3 87.5 Book Value 294.8 319.6 344.2 379.4 418.6 459.6 DPS 19.0 30.0 21.5 25.0 28.0 29.0 Payout (incl. Div. Tax.) 38.5 58.2 50.5 45.4 45.4 45.4 Valuation (x)

P/E 10.0

11.6 8.9 8.0 7.6 Cash P/E 8.7

9.3 7.6 6.9 6.6

EV / EBITDA 5.0

9.1 6.4 5.4 5.0 EV/Sales 2.5

3.5 2.9 2.6 2.4

EV / BOE (1P Reserves) 9.7

10.6 10.5 10.7 10.2 Price / Book Value 1.9

1.7 1.5 1.4 1.2

Dividend Yield (%) 3.3

3.8 4.4 4.9 5.1 Profitability Ratios (%)

RoE 20.7 19.4 14.9 17.9 18.0 17.1 RoCE 27.7 26.0 16.7 18.6 19.6 19.0 Turnover Ratios

Debtors (No. of Days) 38 37 18 38 38 38 Fixed Asset Turnover (x) 3 3 2 2 2 2 Leverage Ratio

Net Debt / Equity (x) -0.6 -0.6 -0.1 -0.1 -0.1 -0.2

Cash Flow Statement (INR Million) Y/E March 2012 2013 2014E 2015E 2016E 2017E OP/(Loss) before Tax 51,019 52,832 44,105 57,959 63,370 66,438 Adjustments 0 0 0 0 0 0 Depreciation 5,142 5,671 7,158 6,553 6,994 7,394 Interest /Other Income -13,509 -14,678 -12,721 -9,433 -8,543 -9,355 Direct Taxes Paid -18,968 -24,588 -13,336 -17,388 -19,011 -19,931 (Inc)/Dec in Wkg. Capital 3,125 -8,808 -2,729 10,512 316 638 Other op activities 4,163 616 1,899 5,280 6,300 6,000 CF from Op. Activity 30,972 11,045 24,376 53,484 49,427 51,183

(Inc)/Dec in FA & CWIP -8,599 -12,515 -79,814 -33,000 -35,000 -25,000 (Pur)/Sale of Investments -16,688 7,571 -32,622 -1,109 -2,535 -2,535 Other In activities 11,335 14,768 13,408 10,531 9,467 10,280 CF from Inv. Activity -13,951 9,824 -99,028 -23,578 -28,068 -17,255

Change in Equity 0 0 0 0 0 0 Inc / (Dec) in Debt -10,042 10,694 87,249 -26,700 0 0 Interest paid -68 -26 -688 -1,098 -925 -925 Dividends Paid -15,231 -19,562 -15,045 -17,630 -19,563 -20,510 CF from Fin. Activity -25,340 -8,895 71,516 -45,428 -20,488 -21,435

Inc / ( Dec) in Cash -8,320 11,975 -3,136 -15,522 871 12,493 Add: Opening Balance 117,675 109,355 121,329 118,193 102,672 103,543 Closing Balance 109,355 121,329 118,193 102,672 103,543 116,036

28 July 2014 43

28 July 2014


Reliance Industries CMP: INR1,007 TP: INR1,027 Neutral

Promising E&P assets; upsides back ended though Production increase 3-4 years away; gas price hike a near-term respite

The share of RIL’s E&P business in its EBIT declined from a high of 27% to <10%,

led by geological issues in KG-D6, which was earlier developed in record time.

With majority of RIL’s established reserves in deepwater acreages, remunerative

gas pricing is a necessity for future development, which could add 40mmscmd

(8% of India oil imports) to domestic production.

We maintain Neutral, given sub-12% RoE through FY16, and would keenly watch

developments in new businesses. Our SOTP value stands at INR1,027/share.

RIL’s E&P business an indication of NELP potential RIL, the largest domestic E&P acreage holder after ONGC has many firsts to

its credit (a) first NELP block (KG-D6) to start production, (b) fastest deepwater development, and (b) largest FDI in Indian E&P by stake sale to BP.

Led by KG-D6 development, RIL and its JV partners have spent >USD12.5b till date in Indian E&P basins (60% of total NELP investments till date).

While KG-D6 production has declined to 13mmscmd now, its peak production of 60mmscmd was equivalent to 12% of India’s oil imports.

E&P potential promising, but contingent on remunerative gas pricing Despite a good start, RIL’s E&P business is under pressure, led by issues in

KG-D6. E&P EBIT is INR16b (v/s peak of INR67b) and the division’s share in RIL’s overall EBIT is 7% v/s a high of 27%.

RIL’s domestic E&P blocks are now down to 5 (excluding KG-D6, PMT) from a high of 23 in 2011 and work program was near halt, led by various controversies coupled with prospectivity issues.

RIL’s remaining blocks have high gas potential, but this is contingent on (a) remunerative gas pricing, and (b) faster E&P approvals. RIL has the potential to add 40mmscmd (8% of India oil imports) to domestic production by FY18/FY19.

Core capex benefit back-ended; earnings surprise unlikely in near term Non-core new business capex numbers are largely known, but there is

limited visibility on earnings from these businesses. Expect next big earnings growth only in FY17/18, when RIL’s new projects

(petcoke gasification/off-gas cracker) commission and gas volumes increase.

Near-term earnings growth is likely to be driven by gas price hike in FY15 and polyester expansion. Any other earnings surprise seems unlikely.

Valuation and view Large non-core investments could be accretive over the long term; gains

would be back-ended, diluting the overall return ratio profile in the interim. The stock trades at 11.2x FY16E adjusted EPS of INR89.9 and at an EV of 10x

FY16E EBITDA. Our SOTP-based target price stands at INR1027/share. Neutral.


Stock Info Bloomberg RIL IN


52-Week Range (INR) 1,143/765

1, 6, 12 Rel. Per (%) -4/-7/-19

M.Cap. (INR b) 3,250.8

M.Cap. (USD b) 54.1

Financial Snapshot (INR Billion) Y/E March 2015E 2016E 2017E Net Sales 3,888 3,783 3,688

EBITDA 323.2 361.6 489.4

Adj PAT 239.0 263.4 334.7

Adj. EPS (INR) 81.6 89.9 112.8

Gr. (%) 8.5 10.2 25.5

BV/Sh. (INR) 741.9 818.5 906.7

RoE (%) 11.5 11.5 13.2

RoCE (%) 7.9 8.6 10.9

Adj. P/E (x) 12.3 11.2 8.9

P/BV (x) 1.4 1.2 1.1



Promoter 45.3 45.3 45.3

DII 11.3 11.5 11.0

FII 22.1 21.8 21.3

Others 21.4 21.5 22.4



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Reliance Inds.Sensex - Rebased

Reliance Industries

28 July 2014 44

Valuation and view Key things to watch for: (1) Gas price hike and E&P approvals by DGH, (2)

Update on core capex plan of USD13b, and (3) Update on Retail and Telecom forays.

Large non-core investments could be accretive over the long term; gains would be back-ended, diluting the overall return ratio profile in the interim.

We model exchange rate at INR59/58/58/USD, and GRM at USD8.9/9/11/bbl for FY15/16/17. On FY16E basis, the stock trades at 11.2x adj. EPS of INR89.9 and EV/EBITDA of 10x. Our SOTP-based target price stands at INR1,027/share. Neutral

RIL: Key assumptions Key Metrics FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Exchange Rate (INR/USD) 45.8 47.6 45.6 47.9 54.5 60.5 59.0 58.0 58.0 Refining

Capacity (mmt) 33.0 62.0 62.0 62.0 62.0 62.0 62.0 62.0 62.0 Production (mmt) 32.0 60.6 66.5 67.6 69.1 68.0 67.7 68.0 68.0 Capacity Utilization (%) 97% 98% 107% 109% 111% 110% 109% 110% 110%

GRM (USD/bbl) Blended GRM 12.3 6.9 8.4 8.6 9.2 8.2 8.8 9.0 11.0 Singapore GRM 5.8 3.6 5.2 8.3 7.9 5.6 6.1 6.5 6.5 Premium to Singapore 6.5 3.3 3.2 0.3 1.4 2.6 2.7 2.5 4.5

E&P Gas Production (mmscmd) 39.8 56.2 42.6 26.5 13.8 13.0 15.0 16.0 Oil Production (kbd) 10.7 18.9 10.9 9.1 6.4 6.7 6.1 6.1

Pricing Brent Oil (USD/bbl) 84.8 69.7 86.5 114.5 110.6 108.5 108.0 105.0 100.0 Wellhead Gas Price (USD/mmbtu)

4.2 4.2 4.2 4.2 4.2 4.2 7.1 7.1

Source: MOSL

RIL: Sum-of-the-parts valuation

Business USD b INR b Adj.

INR/sh Remarks/Methodology

Core business 34 2,061 706

Refining 19 1,129 386 EV @6x EBITDA, implied USD1125/Nelson complexity bpd

Petchem 16 932 319 Core business EV @6.5x EBITDA

E&P Initiatives 7 436 149 Includes KG-D6, NEC-25, CBM, KG-III-6 and Yemen block KG - D6 Gas (KG Basin) 3 173 59 DCF; 60% stake; Plateau of 40mmscmd in FY18; 6tcf cumulative; model 4tcf

yet to recover

KG - D6 MA1 Oil (KG Basin) 0 9 3 DCF; 60% stake; 43mmbbls recovery; (LT Brent - USD100/bbl) NEC - 25 (Mahanadi basin) 0 25 9 DCF; 60% stake; OGIP of 3tcf, prodn likely in 2019 KG-DWN-2003/1 (D3) 0 15 5 Prospective resources of 695mmboe as per Hardy; RIL (60%) Sohagpur East & West (CBM) 1 31 11 DCF; 100% stake; OGIP of 3.65 TCF, assumed 50% recovery PMT 1 69 24 Currently producing; EV @3x EBITDA Investment in Shale Gas 2 113 39 JV with Atlas, Pioneer & Carrizo; valued at 2x equity investment

Investments 9 549 188 Includes Reliance Retail, RGTIL, RIIL and SEZ Investments in RGTIL, RIIL 0 24 8 At book value Investments in fuel Retailing 1 40 14 At 1x investment value Investments in BWA 4 227 78 BWA Foray Investment in SEZ 0 13 4 Valued at 0.3x equity investment Reliance Retail 4 245 84 100% subsidiary of RIL; 1x sales

Less: Net Debt/ (Cash) 1 47 16 Total base value 50 2,998 1,027 Based on fully diluted equity shares of 2,921m (excl 309m treasury shares)

Source: MOSL

Reliance Industries

28 July 2014 45

Story in charts

RIL’s earnings growth momentum has slowed down

-3%

9%

21%

33%

45%

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EFY

16E

FY17

E

PAT (INRb) Rolling 3 Yr PAT CAGR (%)


Also return ratio’s declined significantly

0

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16E

RoE (%) RoCE (%)


FY14 Cons. Capital Employed: Higher share of non-core long gestation capex impacting RIL’s overall return ratios


While core business RoCE would be healthy, subdues/nil returns in non-core businesses would drag overall profitability (%)

0%

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30%

40%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Cash & Equiv. RIL Cons. RoCE Petchem Refining Dom. E&P Retail Shale Gas


22 22 19 16 13 14 14 15 17 16

42 35 35 29 27 22 19 22 22 20

18 22 23 22

10 9 6 6 8 10

2

4 7 12 13 14 13

5

6 6 12 14 16 15

5 12 10 18 26 28 25 18 12 14

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Petchem Refining Dom. E&P Shale Gas Telecom SEZ Retail Cash Unalloc.

Reliance Industries

28 July 2014 46

Story in charts

E&P has been a dampener - despite cyclical downturn Refining & Petchem benefited by INR depreciation

0%

25%

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FY09

FY10

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Refining Petchem E&P


Expect E&P production revival in FY18 when its new development projects start commissioning (mmscmd)

0

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60



RIL refining margins have been largely flat in recent years (USD/bbl)

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Singapore GRM Premium/(disc) RIL GRM


While, recent petchem EBIT margins are low, we expect some recovery led by polymer chain (%)

4%

7%

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16%

FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16E


Dividend Payout continues to remain low (%)


RIL 1 year forward P/E chart (last 15 years)


13.0

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14P/E (x) 15 Yrs Avg(x)

5 Yrs Avg(x) 10 Yrs Avg(x)

Reliance Industries

28 July 2014 47

Financials and valuations Income statement (INR Billion) Y/E March 2012 2013 2014 2015E 2016E 2017E Net Sales 3,299.0 3,602.9 3,901.2 3,887.7 3,783.2 3,687.9 Change (%) 32.9 9.2 8.3 -0.3 -2.7 -2.5 EBITDA 336.2 307.9 308.8 323.2 361.6 489.4 EBITDA Margin (%) 10.2 8.5 7.9 8.3 9.6 13.3 Depreciation 113.9 94.7 87.9 81.4 81.2 106.9 EBIT 222.3 213.2 220.9 241.9 280.3 382.5 Interest 26.7 30.4 32.1 23.3 20.8 23.7 Other Income 61.9 80.0 89.4 82.8 74.2 87.8 Extraordinary items 0.0 0.0 0.0 0.0 0.0 0.0 PBT 257.5 262.8 278.2 301.3 333.7 446.6 Tax 57.1 52.8 58.3 62.3 70.3 112.0 Tax Rate (%) 22.2 20.1 21.0 20.7 21.1 25.1 Reported PAT 200.4 210.0 219.8 239.0 263.4 334.7 Adjusted PAT 200.4 210.0 219.8 239.0 263.4 334.7 Change (%) -1.2 4.8 4.7 8.7 10.2 27.1 Min. Int. & Assoc. Share 0.0 0.0 0.0 0.0 0.0 0.0 Adj Cons PAT 200.4 210.0 219.8 239.0 263.4 334.7

Balance sheet (INR Billion) Y/E March 2012 2013 2014 2015E 2016E 2017E Share Capital 32.7 32.3 32.3 32.4 32.4 32.8 Reserves 1,628.3 1,767.7 1,938.6 2,141.6 2,365.9 2,657.4 Net Worth 1,661.0 1,800.0 1,970.9 2,174.0 2,398.3 2,690.2 Debt 684.3 724.1 854.8 851.3 847.9 844.8 Deferred Tax 121.2 121.9 122.2 125.2 128.5 133.0 Total Capital Employed 2,466.4 2,645.9 2,947.9 3,150.4 3,374.8 3,667.9 Gross Fixed Assets 2,054.9 2,131.5 2,225.7 2,343.5 2,477.6 3,169.4 Less: Acc Depreciation 917.7 1,034.1 1,131.6 1,212.9 1,294.2 1,401.1 Net Fixed Assets 1,137.2 1,097.5 1,094.1 1,130.6 1,183.4 1,768.3 Capital WIP 77.5 191.2 417.2 620.1 781.6 319.8 Investments 540.1 525.1 860.6 906.1 935.7 965.0 Current Assets 1,196.5 1,371.4 1,304.0 1,145.5 1,127.5 1,271.5 Inventory 359.6 427.3 429.3 431.8 419.3 401.8 Debtors 184.2 118.8 106.6 112.4 109.4 106.7 Cash & Bank 396.0 495.5 366.2 185.3 167.8 316.5 Loans & Adv, Others 256.8 329.8 401.8 416.0 430.9 446.6 Curr Liabs & Provns 485.0 538.9 728.0 651.9 653.4 657.1 Curr. Liabilities 442.4 495.5 686.3 603.3 599.9 591.3 Provisions 42.6 43.5 41.7 48.6 53.5 65.9 Net Current Assets 711.6 832.4 576.0 493.6 474.1 614.4 Total Assets 2,466.5 2,646.2 2,947.9 3,150.4 3,374.7 3,667.5

E: MOSL Estimates

Reliance Industries

28 July 2014 48

Financials and valuations

Ratios Y/E March 2012 2013 2014 2015E 2016E 2017E Basic (INR) EPS 67.7 71.9 75.2 81.6 89.9 112.8 Adj. EPS 67.7 71.9 75.2 81.6 89.9 112.8 Cash EPS 106.1 104.3 105.3 109.3 117.6 148.8 Book Value 550.2 612.8 674.2 741.9 818.5 906.7 DPS 8.5 9.0 9.5 10.3 11.4 14.3 Payout (incl. Div. Tax.) 14.7 14.6 16.4 16.3 16.4 16.4 Valuation(x) P/E

13.4 12.3 11.2 8.9

Adj. P/E

13.4 12.3 11.2 8.9 Cash P/E

9.6 9.2 8.6 6.8

Price / Book Value

1.5 1.4 1.2 1.1 EV/Sales

0.9 0.9 1.0 1.0

EV/EBITDA

11.1 11.2 10.0 7.2 Dividend Yield (%)

0.9 1.0 1.1 1.4

Profitability Ratios (%) RoE 13.0 12.3 11.7 11.5 11.5 13.2 RoCE 9.5 8.4 7.9 7.9 8.6 10.9 Turnover Ratios (%) Asset Turnover (x) 1.4 1.4 1.4 1.3 1.2 1.0 Debtors (No. of Days) 20.4 12.0 10.0 10.6 10.6 10.6 Leverage Ratios (%) Net Debt/Equity (x) 0.4 0.4 0.4 0.4 0.4 0.3

Cash flow statement (INR Billion) Y/E March 2012 2013 2014 2015E 2016E 2017E OP/(Loss) before Tax 257.5 262.8 278.2 301.3 333.7 446.6 Depreciation 113.9 94.7 87.9 81.4 81.2 106.9 Others 0.0 0.0 0.0 0.0 0.0 0.0 Interest 26.7 30.4 32.1 23.3 20.8 23.7 Direct Taxes Paid -48.3 -46.7 -60.7 -59.3 -66.9 -107.5 (Inc)/Dec in Wkg Cap -27.7 57.8 145.2 -98.5 2.0 8.3 CF from Op. Activity 313.9 392.4 486.3 248.2 370.8 478.0 (Inc)/Dec in FA & CWIP -80.1 -159.4 -324.6 -320.9 -295.5 -230.0 (Pur)/Sale of Invt 62.0 21.7 -312.3 -45.5 -29.6 -29.3 Others -12.3 -10.2 30.2 63.7 52.2 58.2 CF from Inv. Activity -30.5 -148.0 -606.7 -302.6 -272.9 -201.2 Inc/(Dec) in Net Worth -1.9 -30.8 1.8 0.0 0.0 0.0 Inc / (Dec) in Debt -85.0 -22.8 84.2 -26.8 -24.2 -26.9 Interest Paid 0.0 0.0 0.0 0.0 0.0 0.0 Divd Paid (incl Tax) -27.7 -29.2 -30.9 -36.0 -39.0 -43.2 CF from Fin. Activity -114.7 -82.7 55.1 -62.8 -63.2 -70.1 Inc/(Dec) in Cash 168.8 161.7 -65.3 -117.3 34.7 206.8 Add: Opening Balance 271.3 396.0 495.2 365.2 184.5 167.0 Closing Balance 440.1 557.6 429.9 248.0 219.2 373.8

E: MOSL Estimates

28 July 2014 49

28 July 2014


Cairn India CMP: INR314 TP: INR358 Neutral

Operationally strong; cash utilization concern emerge Enabling E&P policies could help reach 300kbpd vision for Rajasthan

CAIR is set to meaningfully increase the recovery factor from its Rajasthan block, with gross resource base of 10bboe through ongoing and future programs.

While the enabling domestic E&P policies are unlikely to benefit its near term production trend, but would benefit in long term to maximize the recovery and reach its production vision of 300kbpd v/s current run rate of ~200kbpd.

While we are positive on the operational outlook, we believe that cash utilization through loan at LIBOR + 3% rate is below optimum and there is a scope for higher dividend. We maintain Neutral with a target price of INR358.

Efforts on to sustain production, expect policy reforms to lend support CAIR’s Rajasthan block reached exit production of 200kbpd (gross) in FY14,

but expects production to be lower in FY15 at 181kbpd (flat YoY), led by natural decline in Mangala and low well deliverability in Bhagyam.

Its three-year production CAGR target of 7-10% looks challenging, as it would have to add additional production of 50-60kbpd to achieve it.

Management has guided for doubling of gas production from current 8mmscfd to 16mmscfd by end-FY15 and further likely increase to 100mmscfd by FY17 subject to regulatory approvals.

We expect production to increase by end-FY15, led by implementation of IOR/EOR and government permissions to (a) drill additional wells, and (b) start production from Barmer Hill.

Capital allocation, PSC extension clarity to drive stock performance CAIR’s cash utilization concerns which were allayed to some extent by its

dividend policy have come back with USD1.25b loan to parent (Vedanta) group company Sesa Sterlite at LIBOR + 3% interest rate.

CAIR’s Rajasthan contract (PSC) expires in May 2020, and we await clarity on extension and the terms, which could be adverse.

What is the underlying potential? CAIR’s current recovery guidance of 18% (1.8b of 10b in-place) leaves

meaningful scope for upsides, as recovery in MBARS fields is 47%. However, recovery is just 9% in new discovery area and 17% in unexplored area.

While production is likely to decline in the near term and the medium term guidance looks challenging, CAIR is working towards its vision of 300kbpd.

Exploration assets in India, Srilanka and South Africa could add value in the long term.

Valuation and view Key risks include delays in E&P approvals, clarity on PSC extension and to

watchout cash utilization. The stock trades at 6.2x FY16E EPS of INR50.6. Maintain Neutral.


Stock Info Bloomberg CAIR IN



1, 6, 12 Rel. Per (%) -17/-28/-28

M.Cap. (INR b) 589.4

M.Cap. (USD b) 9.8

Financial Snapshot (INR Billion) Y/E March 2015E 2016E 2017E Net Sales 183.7 184.4 179.3

EBITDA 134.4 123.9 111.3

Adj PAT 105.8 94.8 74.0

EPS (INR) 56.4 50.6 39.5

Gr. (%) -13.4 -10.4 -21.9

BV/Sh. (INR) 382.1 409.1 441.7

RoE (%) 17.4 13.9 10.0

RoCE (%) 15.7 12.1 9.4

P/E (x) 5.6 6.2 8.0

P/BV (x) 0.8 0.8 0.7



Promoter 58.9 58.8 58.8

DII 9.9 10.4 11.1

FII 17.8 16.3 14.6

Others 13.5 14.6 15.5



250

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410

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Cairn IndiaSensex - Rebased

Cairn India

28 July 2014 50

Valuation and view Near-term events to watch out are (1) Rajasthan production trend, (2) Updates

on reserves and (3) Update on other exploration blocks and (4) clarity on Rajasthan PSC extension.

After Mar-14 exit of 200kbpd, Rajasthan production is down to ~183kbpd and hence long-term guidance 7-10% CAGR now looks challenging. We model FY15/FY16 Rajasthan gross production at 181/204 kbpd.

The stock trades at 6.2x FY16E EPS of INR50.6 and has dividend yield of ~3%. Our SOTP based fair value stands at INR358. Maintain Neutral.

Cairn India: Key Assumptions Y End: March 31 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Exchange Rate (USD/INR) 45.6 47.9 54.5 60.6 59.0 58.0 58.0 Brent Crude Price (USD/bbl) 86.7 114.5 110.5 107.6 108.0 105.0 100.0 Discount for Rajasthan Crude (USD/bbl) 12.0% 9.4% 11.0% 11.4% 11.5% 12.5% 12.5% Rajasthan net realization (USD/bbl) 76.3 103.7 98.3 95.3 95.6 91.9 87.5 Rajasthan Production incl EOR (kbpd) Rajasthan gross production (kbpd) 99 128 170 181 181 200 216 Rajasthan Cess (INR/MT) 2,625 2,625 4,635 4,635 4,635 4,635 4,635 Govt. sharing (%) 20% 30% 40% 50% 50%


Cairn has continually upgraded in-place resource base

1,859

3,660 3,751

6,500 7,278 7,297

10,000

Pre-IPO IPO Apr-08 Mar-10 Apr-12 Mar-13 Jun-14

Stock Tank Oil Initially in place (mmboe)


…as well as estimated ultimate recovery (mmboe)


Cairn India

28 July 2014 51

…however, led by Mangala decline and slower Bhagyam ramp-up, Rajasthan Production ramp-up halted in FY15


Management vision to produce 300kbpd at Rajasthan


Cairn’s Rajasthan block has reported 30 discoveries till date

1

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Gud

a Raag

eshw

ari

Man

gala

Bhag

yam


Correlation between Cairn stock price and Brent Crude Price


We value Cairn on SOTP basis at INR358


1 year forward Cairn India P/B chart


9

99 128

170 181 181 200

216

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

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170 181 181 200 216

300

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 …… Vision

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Cairn stock price (INR) - LHS Brent Price (USD/bbl) - RHS

USDb INR/shRajasthan (incl . Barmer Hi l l ) 6.5 205Ravva 0.1 4Cambay 0.1 3Investments (10% discount) 2.5 77Less : Net Debt / Add (Cash) (10% disc) (1.5) (48)Base Value 10.7 337Potential UpsidesRajasthan resources (Prospective) 0.0 0KG-Onland (Discovered) 0.3 8

Other exploration assets (Prospective) 0.4 13

Target Price 11.4 358

1.0

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PB (x) Peak(x) Avg(x) Min(x)

Cairn India

28 July 2014 52

Financials and valuations Income statement (INR Billion) Y/E March 2012 2013 2014 2015E 2016E 2017E Net Sales 131.1 175.2 187.6 183.7 184.4 179.3 Change (%) 33.6 7.1 -2.1 0.4 -2.8 3.1 EBITDA 108.1 134.9 140.8 134.4 123.9 111.3 EBITDA Margin (%) 82.4 77.0 75.0 73.2 67.2 62.1 Depreciation 17.4 23.0 27.1 38.0 40.8 41.2 EBIT 90.7 111.9 113.7 96.4 83.1 70.1 Interest 2.2 0.7 0.4 0.1 0.0 0.0 Other Income 3.2 7.2 7.8 15.7 17.2 23.0 Extraordinary items -7.4 5.0 7.4 1.0 0.0 0.0 PBT 84.2 123.4 128.5 113.1 100.4 93.1 Tax 4.9 2.4 4.2 7.2 5.6 19.1 Tax Rate (%) 5.8 1.9 3.3 6.4 5.5 20.5 Reported PAT 79.4 121.1 124.3 105.8 94.8 74.0 Adjusted PAT 92.9 119.2 124.3 105.8 94.8 74.0 Change (%) 28.3 4.3 -14.9 -10.4 -21.9 7.0 Min. Int. & Assoc. Share 0.0 0.0 0.0 0.0 0.0 0.0 Adj Cons PAT 79.4 121.1 124.3 105.8 94.8 74.0

Balance sheet (INR Billion) Y/E March 2012 2013 2014 2015E 2016E 2017E Share Capital 19.1 19.1 19.1 18.7 18.7 18.7 Reserves 463.8 457.9 555.3 624.7 697.5 748.2 Net Worth 482.9 477.0 574.4 643.4 716.2 767.0 Debt 0.0 0.0 0.0 0.0 0.0 0.0 Deferred Tax 6.8 4.6 7.4 6.8 6.3 5.8 Total Capital Employed 489.8 481.6 581.7 650.2 722.5 772.8 Gross Fixed Assets 73.6 82.5 91.3 97.3 103.4 109.4 Less: Acc Depreciation 14.3 21.9 31.1 41.0 51.5 62.5 Net Fixed Assets 59.3 60.6 60.2 56.3 51.9 46.8 Capital WIP 45.0 43.8 57.0 96.6 135.5 141.1 Investments 18.4 103.8 163.6 163.6 163.6 163.6 Current Assets 128.4 146.4 185.5 214.0 259.8 312.0 Inventory 8.3 6.4 56.8 27.7 27.8 27.0 Debtors 15.0 22.9 25.1 25.2 25.3 24.6 Cash & Bank 70.1 55.6 17.6 65.0 101.5 155.2 Loans & Adv, Others 35.0 61.6 86.0 96.2 105.2 105.2 Curr Liabs & Provns 44.8 58.4 75.2 67.6 70.8 67.0 Curr. Liabilities 24.8 17.4 27.2 21.6 21.7 21.1 Provisions 19.9 41.0 48.0 46.0 49.1 45.9 Net Current Assets 83.6 88.1 110.4 146.3 189.0 245.0 Total Assets 489.8 481.6 581.7 650.2 722.5 772.8

E: MOSL Estimates

Cairn India

28 July 2014 53

Financials and valuations

Ratios Y/E March 2012 2013 2014 2015E 2016E 2017E Basic (INR) EPS 48.7 62.4 65.2 56.4 50.6 39.5 Cash EPS 50.7 75.4 79.4 76.7 72.3 61.5 Book Value 250.1 300.7 337.3 382.1 409.1 441.7 DPS 0.0 11.5 12.5 9.8 10.4 8.1 Payout (incl. Div. Tax.) 0.0 21.2 22.5 20.8 24.6 24.6 Valuation(x) P/E

4.8 5.6 6.2 8.0

Cash P/E

4.0 4.1 4.3 5.1 Price / Book Value

0.9 0.8 0.8 0.7

EV/Sales

2.7 2.5 2.2 1.9 EV/EBITDA

3.7 3.4 3.3 3.0

Dividend Yield (%)

4.0 3.1 3.3 2.6 Profitability Ratios (%) RoE 17.9 25.2 23.6 17.4 13.9 10.0 RoCE 19.6 23.0 21.4 15.7 12.1 9.4 Turnover Ratios (%) Asset Turnover (x) 0.3 0.4 0.4 0.3 0.3 0.2 Debtors (No. of Days) 41.7 47.6 48.9 50.0 50.0 50.0 Inventory (No. of Days) 23.0 13.4 110.5 55.0 55.0 55.0 Creditors (No. of Days) 0.0 0.0 0.0 0.0 0.0 0.0 Leverage Ratios (%) Net Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0 0.0

Cash flow statement (INR Billion) Y/E March 2012 2013 2014 2015E 2016E 2017E OP/(Loss) before Tax 84.2 121.5 128.5 113.1 100.4 93.1 Depreciation 14.7 18.9 23.5 28.1 30.2 32.4 Others 0.0 0.0 0.0 0.0 0.0 0.0 Interest 0.0 0.0 0.0 0.0 0.0 0.0 Direct Taxes Paid -21.3 -22.7 -26.2 -7.8 -6.1 -19.5 (Inc)/Dec in Wkg Cap 0.0 -5.7 -14.1 11.4 -6.1 -2.4 CF from Op. Activity 70.7 110.6 110.9 151.4 123.5 105.0 (Inc)/Dec in FA & CWIP -29.6 -16.3 -28.7 -70.5 -70.5 -35.5 (Pur)/Sale of Invt -0.2 -117.5 -55.7 0.0 0.0 0.0 Others 2.4 3.2 3.1 3.2 5.5 7.5 CF from Inv. Activity -27.3 -130.6 -81.3 -67.2 -64.9 -28.0 Inc/(Dec) in Net Worth 0.0 0.0 0.0 0.0 0.0 0.0 Inc / (Dec) in Debt -14.4 -12.5 0.0 0.0 0.0 0.0 Interest Paid 0.0 0.0 0.0 0.0 0.0 0.0 Divd Paid (incl Tax) 0.0 -11.1 -27.9 -25.7 -22.0 -23.3 CF from Fin. Activity -15.2 -24.0 -29.2 -36.8 -22.0 -23.3 Inc/(Dec) in Cash 28.2 -44.0 0.4 47.4 36.6 53.7 Add: Opening Balance 11.5 44.5 0.5 17.6 65.0 101.5 Closing Balance 39.7 0.5 0.9 65.0 101.5 155.2

E: MOSL Estimates

23 July 2014 4

Financials | Sector Update

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Breaking free - Motilal Oswal

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