Company Rating Share price Target Price Return Previous TP

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1 SECTOR UPDATE GEOJIT BNP PARIBAS Research RETAIL EQUITY RESEARCH Oil & Gas Sector SENSEX :25,776 Nifty: 7,832 POSITIVE Rating as per Large Cap 12 month period 17 th October, 2015 Oil & Gas Sector update Decline in crude prices had led to mixed fortunes for Indian Oil & Gas space. The upstream companies poor performance started when the GoI, in spite of declining under-recoveries, continued to direct the upstream companies to pay higher under recoveries, keeping a large portion of benefits for themselves. At this point, under-recoveries have declined substantially; however, the benefit is no longer applicable to the upstream companies due to the sheer decline in crude price, which has impacted realisations and hence the sharp decline in share prices. However, from here on, the downside seems limited and we expect ONGC & OIL India to perform in line with crude. We remain positive on the Oil & Gas sector. On the other hand, downstream companies continue its strong performance due to resilient refining performance and petroleum product consumption, which benefits the marketing business. Oil marketing companies still look the best positioned after recent correction: 2QFY16 earnings, in-spite of inventory losses, hinted at the steady state profitability of BPCL and HPCL. BPCL in particular continues to demonstrate superior operations in both refining and marketing. For 3QFY16, refining is already up on a QoQ basis and product volume growth remains strong, benefitting the marketing business. Less volatile crude prices, at least on the downside, bode well for the earnings of downstream companies. We view the increase in excise duty on diesel & gasoline as a negative, as it negates the free rein ideology of the OMCs. Upstream may only see interest once crude prices show a steady uptrend: While we completely misinterpreted the impact of lower oil prices when viewed in light of reducing subsidies, the downside from hereon seems limited as current crude prices make the upstream companies almost pure plays on crude while under-recoveries remain low. We expect that in the event of a steady uptick in crude prices, shares will react positively until USD55/bbl, post which the incremental benefit from a share price perspective will be limited as realisations begin to peak. Production performance is key, as it has consistently disappointed. Remaining Positive on PSU Oil &Gas companies, preference staying with the downstream: Downstream companies should benefit given continued strength in refining and gasoline demand. Diesel demand grew 16.5% YoY in October, which would boost earnings of downstream companies. List of stocks in our Oil & Gas coverage with TP Change: Company Rating Share price Target Price Return Previous TP Implied Target EV/EBITDA FY16E HPCL BUY % BPCL BUY 905 1,045 15% Oil India BUY % FY17E

2 Oil India Ltd (Rating: BUY CMP: Rs372 TP: Rs505) Oil India s Q2FY16 EBITDA/PAT was below our estimates due to lower than expected net realisation and higher operating expenses. The standalone oil production declined 2.9% QoQ to 0.818mmt while the gas production was up 9.3% QoQ to 0.702bcm. The net realisation stood at USD46.4/bbl V/s USD57.4/bbl in Q1FY16. The upstream paid total subsidy of Rs6.8bn in Q2FY16 and Oil India s share stood at Rs0.85bn. We maintain our BUY rating on Oil India with a Target Price of Rs505 (from Rs507). We expect Oil India stock to be range-bound until we see more clarity on subsidy sharing for FY17 and beyond, as well as signs of potential growth in both crude oil and natural gas production. Our TP implies FY16E/17E EV/EBITDAs of 5.3x/5.0x. Key risks: Decline in oil & gas production and continued weakness in crude prices impacting realisations. BPCL (Rating: BUY CMP: Rs905 TP: Rs1,045) BPCL reported EBITDA of Rs12.8bn and PAT Rs10.2bn, despite an inventory loss of Rs7.41bn and forex losses of Rs2.4bn. Adjusting for the same, the earnings were significantly above our estimates, reflecting strong earnings from both refining and marketing segments. The reported GRM stood at USD3.8/bbl V/s our estimate of USD4.3/bbl. BPCL management highlighted that the Kochi refinery expansion from 9.5mmt to 15.5mmt is scheduled to be completed by May-2016, after which it will require a few months for stabilisation and commissioning. Out of the total capex of Rs52bn in 2HFY16, BPCL has spent around Rs25bn on Kochi expansion, and the majority of the planned capex of Rs48bn for 2HFY16 will be spent here. Post the expansion, management expects the refinery to make a GRM of around USD8/bbl. We maintain our BUY rating with a target price of Rs1,045 ( From Rs1,067). The slight decline is largely on account of adjusting for depreciation and slight change in GRM assumptions. We continue to find BPCL very well positioned as refining is expected to remain strong, and combined with the operational strength in the marketing business, should result in sustainable earnings growth for the company. Our TP implies FY16E/17E EV/EBITDA of 9.1x and 8.2x. Key risks: Continued decline in diesel prices and lack of upside in the marketing business.

3 HPCL (Rating: BUY CMP: Rs810 TP: Rs931) HPCL s 2QFY16 results were impacted by inventory loss of Rs14bn. However, adjusting for the same, EBITDA stood at Rs14,095mn, which is substantially higher than our estimate. On the positive side, market sales volume was up 7.7% YoY. The refining GRM stood at USD2.74/bbl V/s our estimate of USD4.7/bbl for the quarter. Due to negligible inventory losses as crude has already corrected significantly, re-bound in GRM, and stable earnings from marketing business, the earnings trajectory should improve for HPCL. The increase in contributions from stable marketing business and resilient refining margins should result in sustainable RoE of 17-19% over FY17E-18E. Hence, we maintain our BUY rating on HPCL with a Target Price of Rs931 (From Rs967). Key Risks: Sharp decline in refining margins and also petroleum product demand. Geojit Research Team

4 Recommendation Summary (last 3 years)-hpcl Dates Rating Target Source: Bloomberg, Geojit BNP Paribas Research 30 May 2013 BUY November 2013 BUY April 2014 BUY May 2014 BUY June 2014 BUY August 2014 BUY January 2015 BUY May 2015 BUY June 2015 BUY June 2015 BUY August 2015 BUY October 2015 BUY November 2015 BUY 931 Recommendation Summary (last 3 years) - BPCL Dates Rating Target Source: Bloomberg, Geojit BNP Paribas Research 15-May-13 BUY Nov-13 BUY Apr-14 BUY May-14 BUY Jun-14 BUY Aug-14 BUY Dec-14 BUY Jan-15 BUY May-15 BUY Jun-15 HOLD Aug-15 BUY Oct-15 BUY Nov-15 BUY 1045 Recommendation Summary (last 3 years) Oil India Dates Rating Target Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Source: Bloomberg, Geojit BNP Paribas Research 10 September 2013 HOLD May 2014 HOLD June 2014 HOLD August 2014 HOLD January 2015 HOLD May 2015 BUY June 2015 BUY July 2015 BUY July 2015 BUY August 2015 BUY October 2015 BUY November 2015 BUY September 2013 HOLD 454 Investment Rating Criteria Large Cap Stocks; Mid Cap and Small Cap; Buy - Upside is 10% or more. Buy - Upside is 15% or more. Hold - Upside or downside is less than 10%. Accumulate* - Upside between 10% - 15%. Reduce - Downside is 10% or more. Hold - Absolute returns between 0% - 10%. Reduce/Sell - Absolute returns less than 0%. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. * For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. General Disclosures and Disclaimers CERTIFICATION We, Anil R and Vincent K A, author of this Report, hereby certify that all the views expressed in this research report reflect my personal views about any or all of the subject issuer or securities. This report has been prepared by the Research Team of Geojit BNP Paribas Financial Services Limited, hereinafter referred to as GBNPP. COMPANY OVERVIEW Geojit BNP Paribas Financial Services Limited (hereinafter GBNPP), a publically listed company, is engaged in services of retail broking, depository services, portfolio management and marketing investment products including mutual funds, insurance and properties. GBNPP is a SEBI registered Research Entity and as such prepares and shares research data and reports periodically with clients, investors, stake holders and general public in compliance with Securities and Exchange Board of India Act, 1992, Securities And Exchange Board Of India (Research Analysts) Regulations, 2014 and/or any other applicable directives, instructions or guidelines issued by the Regulators from time to time. DISTRIBUTION OF REPORTS

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