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1 December 12, 2011 SECTOR UPDATE Oil & Gas Crude strength, rupee weakness and high UR: Impact Analysis Brent crude oil price has remained over US$100/bbl from past ten months owing to disruption in supply from MENA countries due to political unrest and strong demand growth from Asian countries. Further, OPEC s weighted fiscal break-even cost has increased by 15% over the past one year to US$88/bbl, which is also putting upward pressure on crude oil price. We are revising our crude oil price assumption upwards by US$5/bbl for FY12/FY13E to US$110/95/bbl, respectively. Further, keeping in view economic slowdown and incremental refinery capacity, we are expecting Singapore refining margin to remain stable at US$6.2/bbl in FY12E and US$6.5/bbl in FY13E. Also, rupee depreciated almost 17% in the span of just four months and is now averaging at Rs50.1/US$ in till date Q3FY12 due to a) persistent higher inflation, b) strengthening dollar due to euro-zone debt trouble and c) mounting import bill due to persistent strength in crude oil prices. Further, as Euro lost its shine, US dollar emerged strongly as reserve currency. We are thus revising our exchange rate assumption to Rs47.5/US$ for both FY12 and FY13 from Rs46/45 earlier. With the change in crude oil price and exchange rate assumption, our industry s under-recovery estimate is set to increase to Rs1,029/950 bn for FY12/FY13 from earlier Rs1,061/725 bn. Also, we are changing subsidy sharing ratio between the government/upstream/omcs to 43/42/15 from earlier 47/38/15 owing to rising fiscal deficit and reluctance of government to allow upstream to report higher net realization. Again, we are expecting natural gas demand-supply gap to increase to over 70mmscmd by FY15 due to constrained domestic supply growth. Further, most of the incremental growth in natural gas supply in India is likely to be met through LNG import with incremental capacity. Based on these changes in assumptions, Cairn India would have the most positive impact, while HPCL is likely to be the worst hit company. We are revising estimates upwards for Cairn India and Petronet LNG, maintaining estimates for GSPL and revising downwards for rest of the coverage universe. Since our recent downgrade of PSU oil companies, stock prices have fallen by 5-15%. We are maintaining our ratings in Petronet LNG (BUY), GSPL (ACCUMULATE), ONGC (ACCUMULATE), IOCL (HOLD) and GAIL (HOLD), while upgrading BPCL (BUY from ACCUMULATE), Cairn India (ACCUMULATE from HOLD) and HPCL (ACCUMULATE from HOLD) and downgrading RIL (ACCUMULATE from BUY) and Oil India (ACCUMULATE from BUY). We keep Petronet LNG and BPCL as our top picks. Expected drop in crude oil prices, GRM expansion on full utilization of Bina refinery and huge resource potential in E&P assets in both Mozambique and Brazil are likely to drive BPCL s valuation. Further, long-term growth visibility, strong business model, capacity expansion, higher marketing margin for spot cargoes due to huge demand-supply gap in natural gas, expected long-term contracts from Gazprom and other sources for Kochi terminal and Dahej expansion are key growth triggers for the company s valuation. Key risks to our assumptions are a) sudden spike in crude oil prices due to rising tension over Iran and western countries over Iran s nuclear programme, and b) delay in approvals from the government for E&P exploration and development plan. Table: Valuation snapshot Company MCap (Rs bn) CMP (Rs) Target (Rs) Upside (%) Reco P/E (x) P/B (x) EV/EBITDA (x) FY12E FY13E FY12E FY13E FY12E FY13E BPCL BUY Cairn India ACCUMULATE GAIL India HOLD GSPL ACCUMULATE HPCL ACCUMULATE IOCL HOLD Oil India 286 1,181 1, ACCUMULATE ONGC 2, ACCUMULATE Petronet LNG BUY RIL 2, ACCUMULATE Source: Bloomberg; IDBI Capital Research Sudeep Anand sudeep.anand@idbicapital.com

2 (US$/bbl) Sector Update Oil & Gas Summary Brent Crude has averaged US$114/bbl in YTDFY12 against US$86.7/bbl in FY11 and currently trading at ~US$108/bbl. However, with continuous worsening global economic condition and increasing European debt woes, we have witnessed regular downgrading in global crude oil demand forecast by IEA and OPEC. Global oil demand is once again revised downwards by International Energy Agency (IEA) in November 2011 by 70 kbopd for 2011 and by 20 kbopd for 2012 to 89.2 mbopd in 2011 (+0.9 mbopd y o y) and 90.5 mbopd (+1.3 mbopd) in The downward revision was primarily driven by lower demand expected from US, China and Japan. Further, global economic forecast has also been revised downwards by 0.3%/0.5% for CY11/CY12 to 4% each in September Keeping in view deteriorated economic condition of Euro-zone and Asian countries like India and China, further downward revision is likely. Figure: Crude oil price over US$100/bbl from past 9 months Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avg ( ) Source: Bloomberg; IDBI Capital Research Table: Global oil demand-supply E 2012E Demand OECD Demand Non-OECD demand Total demand YoY growth (%) (0.6) (1.2) Supply Non-OPEC supply YoY growth (%) OPEC supply Crude NGLs Total OPEC Total supply Total stock change (0.8) OPEC crude capacity Implied OPEC spare capacity Source: IEA; IDBI Capital Research 2

3 (mbpd) Sector Update Oil & Gas Figure: Global GDP forecast World GDP Source: IMF Brazil India China MENA Russia Japan UK Euro region US (2)% 0% 2% 4% 6% 8% 10% However supply scenario improving; pressure on OPEC spare capacity easing On supply front, Libyan crude oil supply also improved during November Crude oil production in Libya increased to 500kbopd against 75kbpd in September Further, IEA expects Libya production to increase to 1.2mbpd by CY12 against its normal production level of 1.6mbpd before the unrest, which is likely to improve OPEC s spare capacity. OPEC s spare capacity is likely to come back to its 2010 average of 5mbpd by end-cy11, which had fallen to 4mbpd in Q2-Q3CY11. Further, IMF expects global production capacity to rise by 6.8mbpd by 2016, with about 2.6mbpd of capacity expansion to come from non-opec countries. Therefore, balance 4.2mbpd of capacity increase is expected to come from OPEC countries, primarily driven by Iraq as its oil facilities continue to come back online. Consequently, we expect OPEC s spare capacity to stabilize at ~8mbpd in medium term. Figure: Expanding OPEC spare capacity E 2012E 2013E Source: IEA; Industry; IDBI Capital Research Expect crude oil price to fall below US$100/bbl in near term. OPEC is investing in about 132 projects and spending over US$300 bn during CY11-CY15. This is likely to increase the spare capacity to 8mbpd by CY15 from current ~4.5mbpd, showing incremental supply growth over demand growth during the period. Further, with rising non-opec production growth and higher US shale gas output, contribution from OPEC crude over world oil basket would fall over the long term. OPEC expects crude oil demand to grow at a CAGR of 1.3% during CY11-CY15 to 92.9mbpd, lower than supply CAGR of 1.5%. Therefore, we expect crude oil price to soften in near to medium term to US$90-US$95/bbl from current ~US$108/bbl. 3

4 Sector Update Oil & Gas but OPEC s break-even cost has increased; steep fall in crude oil price like 2008 looks unlikely In order to ensure macroeconomic stability, few countries under OPEC like Saudi Arabia and UAE have taken significant populist measures and investing heavily in infrastructure projects, higher government salaries, subsidies and housing allowances. Therefore, their fiscal break-even costs have increased sharply to ~US$90/bbl from earlier US$76/bbl in CY09-CY10. Though Kuwait and Qatar remain amongst few who can easily manage in lower crude oil price, Saudi Arabia and UAE may find it suitable to join the voices of Venezuela and Iran for higher crude oil prices. OPEC s weighted average break-even costs have increased to ~US$88/bbl from earlier US$77/bbl in Therefore, we may not see such a sharp correction in crude oil prices as we had witnessed in late However, still we are hopeful of correction in crude oil prices to the levels of US$90/bbl by early Figure: Change in fiscal break-even crude oil price for different OPEC countries Iran Iraq Kuwait Oman Saudi Arabia UAE Algeria Qatar Source: IMF; Industry; IDBI Capital Research Figure: Percentage increase in total Government expenditure in 2011 over 2010 for OPEC countries 35% 30% 25% 20% OPEC s weighted average break-even price at US$88/bbl 15% 10% 5% 0% Algeria UAE Iran Kuwait Qatar Oman Iraq Saudi Arabia Source: IMF; IDBI Capital Research Crude oil price assumption revising upwards by US$5/bbl Crude oil prices have remained above US$110/bbl on most days of this fiscal despite economic difficulties around the world. Driven by the above hypothesis, we are increasing our crude oil price assumption by US$5/bbl for FY12E/FY13E to US$110/US$95/bbl respectively. Correction in GRMs driven by sharp fall in gasoline crack spreads Singapore complex refinery margins have contracted sharply to US$6.8/bbl in November 2011 compared to US$10.3/bbl in October 2011 and are currently hovering at US$3-4/bbl. This is primarily driven by sharp correction in gasoline spread owing to restarting of refineries in Singapore and weaker demand growth for gasoline in Asian countries. Gasoline crack spread fell to US$2.5/bbl in November 2011 from US$16.8/bbl in October However, Diesel crack and SKO crack spreads over Dubai crude remain robust. 4

5 (US$/bbl) (US$/bbl) (US$/bbl) (US$/bbl) (US$/bbl) Sector Update Oil & Gas Figure: Sharp fall in Singapore refining margins in November Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avg ( ) Source: Bloomberg; IDBI Capital Research Figure: Gasoline spread plunges (10) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg; IDBI Capital Research Avg ( ) Figure: Gasoil spread remains strong Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg; IDBI Capital Research Avg ( ) Figure: Jet-Kero spread stable Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg; IDBI Capital Research Avg ( ) Figure: FO spread volatile but remained strong 10 0 (10) (20) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg; IDBI Capital Research Avg ( ) L-H differential also under pressure with higher Libyan sweet-light crude production L-H differentials made a high of US$5.3/bbl in June 2011 since January 2009 due to steep cut in Libyan sweet-light crude oil production. However, as the production is resuming post Gaddaffi in Libya (now producing at over 500kbopd), L-H differential is continuously coming down and is now at ~3.2/bbl. We expect it to further fall to ~US$2/bbl levels due to a) further uptrend in Libyan production volume and b) improvement in higher-complex refinery capacity. 5

6 (kbpd) (US$/bbl) Sector Update Oil & Gas Figure: Contracting L-H differntials Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avg ( ) Source: Bloomberg; IDBI Capital Research Figure: Improvement in Libyan light-sweet crude oil production volume 2,000 1,600 1, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg; IDBI Capital Research Modest refinery capacity addition over crude oil demand growth; GRMs to remain stable We expect modest refinery capacity addition till 2013 of ~2.3mbpd from 2011, which is slightly lower than the crude oil demand growth of 2.4mbpd during the period. According to Oil & Gas Journal, total capacity addition in 2012 is likely to be 1.2mbpd, primarily in China and other Asian countries. Further, about 1.1mbpd of additional capacity is expected to come on stream in 2013, primarily in China and Latin American countries. However, as we have witnessed significant delays in projects in the past, actual capacity addition may come on the lower side. In H1FY12, Singapore complex refining margins stood at US$8.7/bbl which is now corrected to ~US$4/bbl. We are expecting Singapore refining margins to remain in a narrow range of US$5-7/bbl. We are modeling Singapore complex refining margin of US$6.2/bbl in H2FY12 making it US$7.4/bbl for FY12E and US$6.5/bbl for FY13E. Table: Refinery capacity addition E 2012E 2013E OECD countries (445) (250) China Other Asia MENA Rest of the world (220) Total ,349 1,150 1,010 Source: Oil and Gas Journal; Industry; IDBI Capital Research Avg ( )

7 Jan-03 Jul-03 Feb-04 Aug-04 Mar-05 Oct-05 Apr-06 Nov-06 Jun-07 Dec-07 Jul-08 Jan-09 Aug-09 Mar-10 Sep-10 Apr-11 Nov-11 Sector Update Oil & Gas Rupee depreciation in line with global phenomenon; revising estimates upwards Rupee depreciated almost 17% in the span of just four months and is now averaging at Rs50.1/US$ in till date Q3FY12. This is driven by many reasons like a) widening fiscal deficit due to persistent strength in crude oil price, b) strengthening dollar due to euro-zone debt trouble and c) higher inflation level. Rupee depreciation is generally positive for upstream and negative for downstream. However, with higher crude oil prices and depreciating rupee, under-recoveries are mounting and are now expected to touch Rs1,300 bn in FY12. Further, looking at the weak fiscal health, more burden is likely to come to upstream. With every Re1 depreciation against dollar, under-recoveries go up by Rs84 bn and net import bill goes up by Rs90 bn. We are revising our exchange rate assumption from Rs46 and Rs45 per US dollar for to Rs47.5 in both FY12E and FY13E. Figure: Sharp fall in rupee in recent months Source: Bloomberg Revising under-recovery assumption upwards and changing sharing ratio too Driven by the upward revision in crude oil prices and exchange rate, total under-recoveries for oil marketing companies are increasing to Rs1,030 bn for FY12E and Rs876 bn for FY13E Further, we are changing our subsidy sharing arrangement between Government/upstream/OMCs to 43/42/15 from earlier 47/38/15. This is primarily driven by rising fiscal deficit and higher net realization for upstream companies compared to its historical average realization of past three years. Table: Total share of under-recovery burden FY10 FY11 Q1FY12 Q2FY12 FY12E FY13E Auto fuel 144, , ,337 86, , ,912 Cooking fuel 316, , , , , ,602 Total 460, , , ,133 1,291, ,513 Shared by: Government bonds 260, , , , ,291 % share Upstream discount 144, , ,088 71, , ,796 % share OMC s share 56,355 68, , , , ,427 % share Total 460, , , ,133 1,291, ,513 Upstream distribution ONGC 115, , ,463 57, , ,405 % of upstream OIL India 15,488 32,930 17,807 8,444 64,557 47,457 % of upstream GAIL 13,267 21,110 6, ,666 29,837 21,934 % of upstream Source: Bloomberg; Industry; IDBI Capital Research 7

8 (mmscmd) Sector Update Oil & Gas Table: Sensitivity analysis of under-recoveries based on crude oil and exchange rate assumptions , , , ,370 1,070, , , ,703 1,010,180 1,093, , , ,513 1,032,990 1,116, , , ,323 1,055,800 1,139, , , ,133 1,078,610 1,162,086 Source: IDBI Capital Research Utilisation of piling cash balance growing worries for PSU upstream ONGC and Oil India combine hold almost Rs410 bn (ONGC Rs274 bn and OIL Rs136 bn) and are earning a return of 7-9% on that. There are apprehensions amongst investor group about investment in cross companies stake. Currently, net cash balance values Rs26/share for ONGC (10.5% of total m-cap), and Rs552/share for Oil India (47% of total m-cap). Therefore, it is clearly reflecting that market is concerned on the higher cash balance of Oil India and not factoring in the complete value of its cash balance on cross holding fears. Natural Gas supply growth dependent on LNG We are expecting natural gas supply to grow at a CAGR of 7.9% during FY11-FY15E to 244mmscmd in India primarily driven by higher LNG imports. During the period, we expect domestic gas supply to grow at a CAGR of 1.9%, while LNG volumes are likely to grow at 24.4%. Consequently, of the total natural gas supply, we expect LNG contribution to grow from 21% in FY11 to 37% in FY15E. In domestic front, most of the growth is coming from ramp up in KG-D6 in FY15 to 55mmscmd from current 43mmscmd. On imported LNG front, Dahej capacity is increasing from 10mtpa to 15mtpa by FY15 and Shell, Kochi and Dabhol capacity would be increasing to 5mtpa during FY13-FY14. Further, Adani, IOCL and ONGC are setting up LNG terminals with capacities ranging from 2.5mtpa to 5mtpa, which would come on stream post FY15. Additionally, RIL and BP JV company India Gas Solutions and Petronet LNG have already disclosed their intention to set up LNG terminals, which would increase LNG contribution to total domestic gas supply significantly over the next five years. Figure: Natural gas supply growth in India FY08 FY09 FY10 FY11 FY12E FY13E FY14E FY15E Mumbai high Other Eastern Offshore RIL (KG-D6) Other Western Offshore PMT and others PLNG Other LNG Source: Industry; IDBI Capital Research Natural Gas demand-supply gap to widen with time till FY15 Natural gas demand in India is continuously increasing driven by strong demand growth from refinery/petchem, power and city gas distribution sector. Demand from refinery/petchem is likely to grow at a CAGR of 24% during FY11-FY15E, while power sector is likely to grow at According to the government report, total natural gas demand is likely to grow at 15% CAGR to 314mmscmd in FY15E. Conservatively, gap between demand and supply is likely to reach ~ 70mmscmd by FY15, which provides huge opportunity for LNG importers. 8

9 Sector Update Oil & Gas Table: Widening natural gas demand-supply gap (mmscmd) FY10 FY11 FY12E FY13E FY14E FY15E Power Fertilizer City Gas Petchem/ Refinery Sponge Iron Total Source: Industry; IDBI Capital Research Key Risks Growing tension between West-Iran to remain a big overhang on crude oil prices With the tension between US (Western countries as a whole) and Iran refusing to die down owing to latter s nuclear programme, risk on potential upside for crude oil price is getting higher. Further, recent western countries sanctions on trades with Iran have aggravated the conflict. Currently, Iran is producing about 3.7mbpd of crude oil, which is about 12% of OPEC production and 4% of global crude oil production. In our view, volatility in crude oil market would be very high on further increase in stress in between these two nations and we may see sharp spike in crude oil price. Delay in approvals impacting outputs Few companies are facing delay in approvals from the government for their projects. Cairn India is awaiting the government and partner company s approval to ramp up its production level in Mangala and start-up of production in Bhagyam from the past couple of quarters. Further, RIL seeks government s approval in many of its cases related to KGbasin. The government is also seeking strict adherence of code and conduct primarily after the CAG report on RIL s KG- D6. Such delays may impact the company s operating performances. Conclusion In the medium term we expect crude oil price to cool-off from current levels to close to US$90/bbl, just above the weighted average of OPEC fiscal break-even level. However, with the upward revision in crude oil price and rupee-us dollar exchange rate, Cairn India is set to benefit the most, while HPCL the worst in our coverage universe. However, Oil PSUs stocks have corrected in between 5%-13% since our last downgrades. We are upgrading BPCL (BUY from ACCUMULATE), Cairn India (ACCUMULATE from HOLD) and HPCL (ACCUMULATE from HOLD), while maintaining our ratings in Petronet LNG (BUY), GSPL (ACCUMULATE), ONGC (ACCUMULATE), IOCL (HOLD) and GAIL (HOLD) and downgrading RIL (ACCUMULATE from BUY) and Oil India (ACCUMULATE from BUY). We keep Petronet LNG and BPCL as our top picks. Expected drop in crude oil prices, GRM expansion on full utilization of Bina refinery and huge resource potential in E&P assets in both Mozambique and Brazil are key growth triggers for BPCL. For Petronet, long-term growth visibility, strong business model, capacity expansion, higher marketing margin for spot cargoes due to huge demand-supply gap in natural gas, expected long-term contracts from Gazprom and other sources for Kochi terminal and Dahej expansion are key positives. 9

10 Sector Update Oil & Gas Valuation Snapshot Table: Recommendation snapshot Company MCap (Rs bn) CMP (Rs) Target (Rs) Upside (%) Reco P/E (x) P/B (x) EV/EBITDA (x) FY12E FY13E FY12E FY13E FY12E FY13E BPCL BUY Cairn India ACCUMULATE GAIL India HOLD GSPL ACCUMULATE HPCL ACCUMULATE IOCL HOLD Oil India 286 1,181 1, ACCUMULATE ONGC 2, ACCUMULATE Petronet LNG BUY RIL 2, ACCUMULATE Source: Bloomberg; IDBI Capital Research Table: Financial summary Company Sales EBITDA PAT FDEPS (Rs) EBITDA Mrgn (%) PAT Mrgn (%) RoE (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E BPCL 1,879,454 1,688,198 24,267 30,569 5,678 10, Cairn India 131, ,038 93, ,449 73,301 84, GAIL India 367, ,153 65,878 74,416 40,659 45, GSPL 11,276 11,939 10,383 10,976 5,184 5, HPCL 1,955,952 1,928,519 20,415 26,461 8,076 12, IOCL 3,944,958 3,679, , ,462 41,117 49, Oil India 101, ,454 45,807 49,855 30,815 36, ONGC 1,312,620 1,269, , , , , Petronet LNG 212, ,606 17,803 20,675 10,367 11, RIL 3,404,430 2,852, , , , , Source: IDBI Capital Research Table: How we compare with consensus IDBI EPS (Rs) Bloomberg EPS (Rs) % Difference FY12E FY13E FY12E FY13E FY12E FY13E Bharat Petroleum Corp Ltd (62.4) (48.2) Cairn India Ltd (1.3) 0.6 GAIL India Ltd (1.0) 2.8 Gujarat State Petronet Ltd (0.1) (2.5) Hindustan Petroleum Corp Ltd (37.3) (25.3) Indian Oil Corp Ltd (52.7) (55.6) Oil & Natural Gas Corp Ltd (11.5) (12.6) Oil India Ltd (14.2) (3.1) Petronet LNG Ltd Reliance Industries Ltd (8.5) (12.5) Source: IDBI Capital Research 10

11 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 December 12, 2011 COMPANY REPORT UPDATE Bharat Petroleum Corporation Ltd. Mozambique adds shine BUY Nifty: 4,867; Sensex: 16,213 CMP Target Price Rs553 Rs631 Potential Upside/Downside +14% Key Stock Data Sector Bloomberg / Reuters Relative to Sensex Oil and Gas BPCL IN / BPCL.BO Shares o/s (mn) Market cap. 199,987 Market cap. (US$ mn) 3,829 3-m daily average vol. 43,565 Price Performance 52-week high/low Rs722/487-1m -3m -12m Absolute (%) (3) (16) (18) Rel to Sensex (%) (5) (16) (13) Shareholding Pattern (%) Promoters 54.9 FIIs/NRIs/OCBs/GDR 7.5 MFs/Banks/FIs 19.5 Govt. 0.9 Non Promoter Corporate 4.8 Public & Others Analyst Sudeep Anand sudeep.anand@idbicapital.com Summary BPCL s recent guidance on recoverable reserve base of ~15-30tcf in Mozambique is quite encouraging, which we value at Rs73/share. Further, Bina refinery operating at ~75% utilization, is likely to touch 100% utilization by end-fy12 which would help in expanding refining margin. However, sharp rupee depreciation vs US dollar and high crude oil prices are likely to increase the company s net under-recoveries to Rs43/33 bn in FY12/FY13E. Further, the company s rising debt level and absence of government s support is adding to woes. We maintain our P/BV multiple of 1.4x and revise our TP downwards to Rs631 from earlier Rs670 due to downward revision in book value. The stock has been corrected 13% since our recent downgrade (note dated October ), and looks attractive at current levels. We are upgrading the stock to BUY from ACCUMULATE. Mozambique reserve base valued Rs73/share: With recent gas discovery in an appraisal well drilling in Mozambique, BPCL (10% stake) disclosed the probable recoverable reserve base of ~15-30tcf of natural gas equivalents. Even if we consider conservatively ~15tcf of reserve base, the company s valuation comes at Rs73/share on US$2/boe of valuation multiple for its reserve base. Further, the company has a plan to drill two more appraisal well in Mozambique by FY13. Also, BPCL completed appraisal well drilling in Wahoo South and North in Brazil, where final outcome is likely to come soon. We expect first production from Mozambique likely to start from CY16. Also, the company is likely to set up two trains of LNG terminal in Mozambique which is currently in planning phase. Bina refinery operating at 70% utilization level: Currently Bina refinery is operating at 70% utilisation levels and is expected to reach 100% utilisation by end of FY12. Also, the company expects GRM of US$4/bbl premium over Singapore complex refining margin for Bina refinery post completion of full utilization. Our assumption is conservative at US$2/bbl expansion in FY13E. Sharp rupee depreciation and higher crude oil prices to swell UR: With the change in crude oil price and exchange rate assumption, BPCL s under-recovery is likely to touch Rs43/33 bn in FY12/FY13E against our earlier assumption of Rs37/28 bn. Mounting debt level enhances liquidity concern: The company s gross debt increased to Rs250 bn from Rs225 bn at the end of Q2FY12. The company expects liquidity crisis if the government does not provide any subsidy share in next couple of months. Out of the total subsidy burden of Rs300 bn announced by the government as its share in FY12, the company expects to receive half in January 2012 while rest is expected by April 2012 only. Stock has corrected 13% since last downgrade; upgrading to BUY: BPCL is currently trading at a P/BV of 1.3x on FY13E. We maintain our P/BV multiple of 1.4x and revise our TP downwards to Rs631 from earlier Rs670 due to downward revision in book value. However, the stock has corrected 13% since last downgrade, and looks attractive at current levels. We believe expected fall in crude oil prices and regular positive news flow in E&P business would act as a trigger for potential upside. Therefore, we are upgrading the stock to BUY from ACCUMULATE Source: Capitaline BPCL Sensex Financial snapshot Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) PE (x) EV/EBITDA (x) RoE (%) RoCE (%) FY10 1,238,167 30, , FY11 1,536,450 42, , FY12E 1,879,454 24, , FY13E 1,688,198 30, ,

12 Company Update Bharat Petroleum Corporation Ltd. Financial Summary Profit & Loss Account Cash Flow Statement Revenues 1,238,167 1,536,450 1,879,454 1,688,198 Growth (%) (9.3) (10.2) EBITDA 30,539 42,762 24,267 30,569 Growth (%) (9.5) 40.0 (43.3) 26.0 Depreciation & amortisation 14,446 18,914 20,347 20,623 EBIT 16,093 23,849 3,920 9,946 Growth (%) (23.8) 48.2 (83.6) Interest 11,247 12,468 13,721 13,607 Other income 22,875 17,103 18,828 20,725 EBT 27,721 28,483 9,027 17,065 Income taxes 10,522 11,062 3,159 5,973 Effective tax rate (%) Reported net income 16,324 16,350 5,528 10,450 Adjusted net income 17,101 16,499 5,678 10,600 Growth (%) (3.5) (65.6) 86.7 Shares outstanding (mn) Adjusted EPS (Rs) Growth (%) (3.5) (65.6) 86.7 Net income + Depreciation 30,769 35,263 25,875 31,073 Non-cash adjustments (12,007) (14,276) (7,791) (18,967) Changes in working capital (42,307) 13,489 7,794 5,437 Cashflow from operations (23,544) 34,476 25,877 17,543 Capital expenditure (51,650) (43,007) (24,000) (5,000) Change in investments 43,845 41,512 (19,121) (12,956) Cashflow from investing (7,974) (4,967) (43,121) (17,956) Issue of equity 2,350 3, Issue/repay debt 28,080 4,137 15,000 (2,000) Other financing cashflow (1,605) (577) - - Change in cash & cash eq (6,201) 30,475 (1,480) (4,797) Closing cash & cash eq 7,284 7,970 6,490 1,694 Balance Sheet Financial Ratios Cash and cash eq 7,284 7,971 6,490 1,694 Accounts receivable 26,009 28,779 35,203 31,621 Inventories 141, , , ,123 Others current assets 74,480 86,421 85,409 86,129 Investments 119,323 84, , ,677 Gross fixed assets 300, , , ,311 Net fixed assets 166, , , ,548 Intangible assets 4,446 4,605 4,605 4,605 Deferred tax assets, net (11,477) (13,074) (13,530) (14,393) Other assets Total assets 606, , , ,901 Accounts payable 90, , , ,741 Other current liabilities 69,948 83,314 90,987 88,080 Provisions 27,652 34,462 37,260 37,727 Debt funds 266, , , ,855 Equity capital 3,615 3,615 3,615 3,615 Reserves & surplus 137, , , ,884 Shareholder's funds 141, , , ,499 Total liabilities 606, , , ,901 BVPS (Rs) Profitability & Return ratios EBITDA margin (%) EBIT margin (%) Net profit margin (%) ROE (%) ROCE (%) Working capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios Gross asset turnover (x) Total asset turnover (x) Interest coverage ratio (x) Adjusted debt/equity (x) Valuation ratios EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x)

13 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 WACC (%) COMPANY REPORT UPDATE December 12, 2011 Cairn India Ltd. Best play on higher crude oil prices ACCUMULATE Nifty: 4,867; Sensex: 16,213 CMP Target Price Rs308 Rs329 Potential Upside/Downside +7% Key Stock Data Sector Bloomberg / Reuters Relative to Sensex Source: Capitaline Oil and Gas CAIR IN / CAIL.BO Shares o/s (mn) 1,902.6 Market cap. 585,425 Market cap. (US$ mn) 11,209 3-m daily average vol. 205,541 Price Performance 52-week high/low Rs372/250-1m -3m -12m Absolute (%) (1) 8 (5) Rel to Sensex (%) (5) (16) (13) Shareholding Pattern (%) Promoters 52.1 FIIs/NRIs/OCBs/GDR 16.8 MFs/Banks/FIs 7.7 Non Promoter Corporate 20.7 Public & Others Analyst Sudeep Anand sudeep.anand@idbicapital.com Cairn India Sensex Summary Cairn India is most sensitive to crude price and exchange rate variation in India, where its earnings are positively co-related with crude price and inversely co-related with rupee-us dollar exchange rate. As rupee depreciated 10% in till date Q3FY12 compared to Q2FY12 and is currently hovering at ~Rs52.3/US$, Cairn India is the major beneficiary in Oil and Gas space. Further, out of the total cash balance of US$1.7 bn at the end of Q2FY12, the company has cash balance of US$1.12 bn in dollar terms, which portends significant gain if converted. With crude oil price continuously over US$100/bbl in past 9 months and with rising tension between US-Iran, there is an upside risk to our estimates. The delay in approval from government and ONGC for ramp-up of Mangala field production to 150kbopd from current 125kbopd and start-up of Bhagyam field is restricting the company s growth. However, as the deal between Vedanta and Cairn Energy Plc has now completed, we expect fast track approvals for ramp of production. Earlier the company had guided for FY12 exit rate of production to be 175kbopd, which we think difficult to achieve due to delay in approvals. However, we are maintaining our crude oil production assumption of 136kbopd/187kbopd for FY12E/FY13E. We are revising our EPS estimates upwards by 12.1/12.9% to Rs38.4/44.4 for FY12/FY13E due to upward revision in crude oil prices and exchange rate. We are revising our TP upwards to Rs329 from earlier Rs304. Upgrading the stock to ACCUMULATE from HOLD. Table: TP sensitivity over crude oil prices and WACC Source: IDBI Capital Research Brent oil price (US$/bbl) % % % % % Table: Change in estimates Key parameters FY12E FY13E Old New % Chg Old New % Chg Revenue 122, , , , EBITDA 84,902 93, , , EBITDA margin (%) bps bps Net profit 65,587 73, ,291 84, FDEPS (Rs) Source: IDBI Capital Research Financial snapshot Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) PE (x) EV/EBITDA (x) RoE (%) RoCE (%) FY10 16,230 7, , FY11 102,779 82, , FY12E 131,888 93, , FY13E 141, , ,

14 Company Update Cairn India Ltd. Financial Summary Profit & Loss Account Cash Flow Statement Revenues 16, , , ,038 Growth (%) EBITDA 7,720 82,451 93, ,449 Growth (%) Depreciation & amortisation 1,485 11,930 12,823 15,285 EBIT 6,235 70,521 81,034 90,164 Growth (%) , Interest 148 2,909 2, Other income 4,077 1,288 3,232 4,554 EBT 10,163 68,900 81,446 94,111 Income taxes (348) 5,556 8,145 9,411 Effective tax rate (%) (3.4) Reported net income 10,511 63,344 73,301 84,700 Adjusted net income 10,511 63,344 73,301 84,700 Growth (%) Shares outstanding (mn) 1,897 1,902 1,909 1,909 Adjusted EPS (Rs) Growth (%) Year-end: March FY10 FY11E FY12E FY13E Net income + Depreciation 12,291 75,570 87, ,002 Non-cash adjustments (3,430) (3,264) (10,507) (14,386) Changes in working capital (7,082) (10,088) 14,913 (3,992) Cashflow from operations 1,779 62,218 92,363 83,625 Capital expenditure (33,662) (25,648) (28,312) (13,853) Change in investments 25,194 (24,004) 2,189 - Cashflow from investing (8,468) (49,652) (26,123) (13,853) Issue of equity (185) 0 Issue/repay debt (6,887) (7,098) (13,282) (6,782) Other financing cashflow (1,908) (236) - - Change in cash & cash eq (15,464) 5,902 52,773 62,989 Closing cash & cash eq 9,294 44,847 97, ,610 Balance Sheet Financial Ratios Cash and cash eq 9,294 44,847 97, ,610 Accounts receivable 3,067 14,829 18,224 20,489 Inventories 2,909 3,277 4,437 4,988 Others current assets 8,462 16,655 23,321 26,219 Investments 17,124 10,944 8,756 8,756 Gross fixed assets 98, , , ,765 Net fixed assets 97, , , ,069 Intangible assets 253, , , ,193 Deferred tax assets, net (4,453) (5,612) (7,310) (9,273) Other assets Total assets 387, , , ,051 Accounts payable 8,652 10,507 17,750 19,956 Other current liabilities 1,216 2,130 2,983 3,354 Provisions 4,937 16,628 36,728 36,828 Debt funds 34,007 26,782 13,500 6,718 Equity capital 18,970 19,019 19,086 19,086 Reserves & surplus 319, , , ,108 Shareholder's funds 338, , , ,194 Total liabilities 387, , , ,051 BVPS (Rs) Year-end: March FY10 FY11E FY12E FY13E Profitability & Return ratios EBITDA margin (%) EBIT margin (%) Net profit margin (%) ROE (%) ROCE (%) Working capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios Gross asset turnover (x) Total asset turnover (x) Interest coverage ratio (x) Adjusted debt/equity (x) Valuation ratios EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x)

15 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Transmission volume (mmscmd) COMPANY REPORT UPDATE December 12, 2011 Gail (India) Ltd. Gas supply constraint impacts return ratios HOLD Nifty: 4,867; Sensex: 16,213 CMP Target Price Rs394 Rs415 Potential Upside/Downside +5% Key Stock Data Sector Bloomberg / Reuters Relative to Sensex Source: Capitaline Oil and Gas GAIL IN / GAIL.BO Shares o/s (mn) 1,268.5 Market cap. 497,370 Market cap. (US$ mn) 9,523 3-m daily average vol. 64,328 Price Performance 52-week high/low Rs536/367-1m -3m -12m Absolute (%) (6) (5) (21) Rel to Sensex (%) (5) (16) (13) Shareholding Pattern (%) Promoters 57.4 FIIs/NRIs/OCBs/GDR 14.3 MFs/Banks/FIs 17.9 Govt. 7.2 Non Promoter Corporate 1.2 Public & Others Analyst Sudeep Anand sudeep.anand@idbicapital.com GAIL Sensex Summary The company s transmission throughput has shown a reduction of 2% in H1FY12 compared to H2FY11 and averaged 118.1mmscmd. Further, with further decline expected in KG-D6 production level, we expect GAIL s transmission volume to be negatively impacted. We are factoring 119.5/123.4mmscmd of transmission volume in FY12/FY13, down from earlier assumption of 122/126.4mmscmd. Further, we have revised our subsidy share assumption upwards to Rs30 bn from earlier Rs25 bn due to higher share of upstream burden to 42% from earlier 38%. However, petrochemical margins in India have improved 5.3% QoQ in TD Q3FY12 to average ~Rs80/kg, while its margins over naphtha have also shown an improvement of 10.6% QoQ to Rs35/kg due to strong domestic consumption. Further, the company s pipeline expansion plan is going on schedule and likely to add about ~5,000kms of pipeline over the next three years with a total investment of Rs286 bn. However, with the poor outlook on domestic gas supply, the company s pipeline utilization levels are expected to decline from 60% in FY11 to 37% in FY14. Consequently, we expect GAIL s ROCE to come down to 13.6% in FY13E from 16.7% in FY11. We are revising our PAT estimates downwards by 6% for FY12E, and only 0.9% for FY13E. We are revising our SOTP-based target price downwards to Rs415 from earlier Rs445. We maintain HOLD rating on the stock. Table: EPS sensitivity analysis transmission volume v/s exchange rate Source: IDBI Capital Research Exchange rate (Rs/US$) Table: Change in estimates Key parameters FY12E FY13E Old New % Chg Old New % Chg Revenue 370, ,302 (0.9) 377, , EBITDA 69,722 65,878 (5.5) 73,861 74, EBITDA margin (%) (87) Net profit 43,325 40,659 (6.2) 45,177 45, FDEPS (Rs) (6.2) Source: IDBI Capital Research Financial snapshot Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) PE (x) EV/EBITDA (x) RoE (%) RoCE (%) FY10 270,353 54, , FY11 351,067 64, , FY12E 367,302 65, , FY13E 380,153 74, ,

16 Company Update Gail (India) Ltd. Financial Summary Profit & Loss Account Cash Flow Statement Revenues 270, , , ,153 Growth (%) EBITDA 54,718 64,970 65,878 74,416 Growth (%) Depreciation & amortisation 8,234 8,880 9,288 10,849 EBIT 46,483 56,090 56,589 63,567 Growth (%) Interest 3,853 3,779 4,187 4,707 Other income 5,797 5,574 6,132 6,745 EBT 48,236 57,990 58,637 65,709 Income taxes 15,313 18,181 18,384 20,601 Effective tax rate (%) Reported net income 33,278 40,210 40,659 45,562 Adjusted net income 33,278 40,210 40,659 45,562 Growth (%) Shares outstanding (mn) 1, , , ,268.5 Adjusted EPS (Rs) Growth (%) DPS (Rs) Balance Sheet Cash and cash eq 45,486 25,844 18,121 10,392 Accounts receivable 15,108 21,023 21,995 22,764 Inventories 8,578 10,586 11,076 11,463 Others current assets 76,973 65,716 68,755 71,160 Investments 10,651 12,363 12,363 12,363 Gross fixed assets 249, , , ,304 Net fixed assets 151, , , ,211 Intangible assets 1,991 2,273 1,737 1,566 Deferred tax assets, net (14,650) (17,151) (17,343) (19,434) Other assets Total assets 344, , , ,853 Accounts payable 24,056 31,039 32,475 33,611 Other current liabilities 35,145 24,374 25,502 26,394 Provisions 50,535 42,304 44,260 45,809 Debt funds 54,132 69,041 94, ,041 Equity capital 12,685 12,685 12,685 12,685 Reserves & surplus 165, , , ,843 Shareholder's funds 178, , , ,527 Total liabilities 344, , , ,854 BVPS (Rs) Year-end: March FY10 FY11E FY12E FY13E Net income + Depreciation 41,571 48,453 49,947 56,412 Non-cash adjustments 810 3,293 (565) 1,239 Changes in working capital 14,632 (5,950) 1,311 1,038 Cashflow from operations 57,014 45,796 50,693 58,688 Capital expenditure (59,389) (72,426) (72,000) (70,000) Change in investments (395) (1,711) - - Cashflow from investing (59,784) (74,137) (72,000) (70,000) Issue of equity Issue/repay debt 15,890 14,909 25,000 15,000 Other financing cashflow 2,214 5, Change in cash & cash eq 7,911 (18,862) (7,723) (7,728) Closing cash & cash eq 45,486 25,844 18,121 10,392 Financial Ratios Year-end: March FY10 FY11E FY12E FY13E Profitability & Return ratios EBITDA margin (%) EBIT margin (%) Net profit margin (%) ROE (%) ROCE (%) Working capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios Gross asset turnover (x) Total asset turnover (x) Interest coverage ratio (x) Adjusted debt/equity (x) Valuation ratios EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x)

17 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 (mmscmd) Volume (mmscmd) December 12, 2011 COMPANY REPORT UPDATE Nifty: 4,867; Sensex: 16,213 CMP Target Price Rs84 Rs95 Potential Upside/Downside +13% Key Stock Data Sector Oil and Gas Bloomberg / Reuters GUJS IN / GSPT.BO Shares o/s (mn) Market cap. 47,320 Market cap. (US$ mn) m daily average vol. 183, week high/low Analyst Sudeep Anand sudeep.anand@idbicapital.com Price Performance Rs122/77-1m -3m -12m Absolute (%) (15) (23) (22) Rel to Sensex (%) (5) (16) (13) Shareholding Pattern (%) Promoters 37.7 FIIs/NRIs/OCBs/GDR 11.1 MFs/Banks/FIs 23.9 Govt Non Promoter Corporate 5.5 Public & Others 10.8 Gujarat State Petronet Ltd. Gasping for gas Summary Gujarat State Petronet Ltd. (GSPL) is immune to the exchange rate variation and crude oil fluctuation as it is only present in pipeline business. However, with diminishing outlook on domestic natural gas supply in India, the company s return ratio is expected to fall going forward. We expect the company s volume to grow to 38mmscmd in FY13E from 35.6mmscmd in FY11. Also, we expect the company s tariff to remain stable at Rs820/mscm during FY12-FY13E. In H1FY12, the company s average volume stood at 36mmscmd. We expect this to decline to 35.6msmcmd in H2FY12 due to fall in RIL s production volume from H2FY12. However, we expect its tariff to remain stable at Rs824/mscm in H1FY12. Further, the company has guided for a capex of Rs120 bn for three of its pipelines namely Mallavaram- Bhilwara, Mehsana-Bhatinda and Bhatinda-Srinagar. Capex/km/mmscmd for these pipelines comes at a range of Rs mn/km/mmscmd. This is lower than Rs1.54 for East-West pipeline, which raises risk of upward revision in capex guidance. Driven by the lower utilization of its pipeline capacity, we expect the company s ROCE to fall to 13.9% in FY13E from 18.5% in FY11. Further, we have not factored in the impact of these three new pipelines in our model due to uncertainty on gas supply front, which may further dent the return ratio. The stock is trading at a P/E multiple of 8.8x, P/BV of 1.6x and EV/EBITDA multiple of 5.3x on FY13E. We have revised our target price downwards to Rs95 from Rs109 on back of falling RIL gas output. Maintain ACCUMULATE. Table: EPS Sensitivity based on tariff and volume Source: IDBI Capital Research Tariff (Rs/mscm) Figure: Volume and tariff trend FY10 FY11 FY12E FY13E ACCUMULATE (Rs/mscm) Relative to Sensex Volume Tariff 120 Source: IDBI Capital Research Financial snapshot Year Revenue EBITDA EBITDA (%) Adj. PAT EPS (Rs) PE (x) EV/EBITDA (x) RoE (%) RoCE (%) Source: Capitaline GSPL Sensex FY10 9,920 9, , FY11 10,391 9, , FY12E 11,276 10, , FY13E 11,939 10, ,

18 Company Update Gujarat State Petronet Ltd. Financial Summary Profit & Loss Account Cash Flow Statement Revenues 9,920 10,391 11,276 11,939 Growth (%) EBITDA 9,297 9,619 10,383 10,976 Growth (%) Depreciation & amortization 2,365 1,299 1,865 2,164 EBIT 6,933 8,320 8,518 8,813 Growth (%) Interest ,006 1,031 Other income EBT 6,269 7,650 7,832 8,133 Income taxes 2,131 2,586 2,648 2,749 Effective tax rate (%) Reported net income 4,138 5,064 5,184 5,383 Adjustments Adjusted net income 4,110 5,064 5,184 5,383 Growth (%) Shares outstanding (mn) Adjusted EPS (Rs) Growth (%) DPS (Rs) Balance Sheet Cash and cash eq 1,742 2,390 5,185 4,886 Accounts receivable Inventories 1, Others current assets 3,728 5,286 5,736 6,074 Investments ,842 Gross fixed assets 33,255 42,003 50,003 58,003 Net fixed assets 24,368 31,817 37,952 43,788 CWIP 5,387 3,546 3,546 4,546 Deferred tax assets, net (1,405) (2,641) (3,202) (3,851) Other assets Total assets 36,568 42,487 51,492 59,801 Accounts payable 4,765 2,845 3,309 3,503 Other current liabilities Provisions 3,486 4,692 6,715 8,098 Debt funds 12,595 14,835 16,835 18,835 Equity capital 5,624 5,626 5,626 5,626 Reserves & surplus 10,014 14,440 18,951 23,679 Shareholder's funds 15,638 20,066 24,577 29,305 Total liabilities 36,568 42,487 51,492 59,801 BVPS (Rs) Net income + Depreciation 6,531 6,363 7,049 7,547 Non-cash adjustments (7) 2,273 1,710 1,846 Changes in working capital 1,420 (2,753) 581 (224) Cashflow from operations 7,944 5,883 9,340 9,170 Capital expenditure (7,774) (6,907) (8,000) (9,000) Change in investments - (100) (77) (2,000) Cashflow from investing (7,774) (7,007) (8,077) (11,000) Issue of equity Issue/repay debt 1,086 2,239 2,000 2,000 Dividends paid (493) (469) (469) (469) Change in cash & cash eq ,795 (299) Closing cash & cash eq 1,742 2,390 5,185 4,886 Financial Ratios Profitability & Return ratios EBITDA margin (%) EBIT margin (%) Net profit margin (%) ROE (%) ROCE (%) Working capital & Liquidity ratios Receivables (days) Inventory (days) Payables (days) Current ratio (x) Quick ratio (x) Turnover & Leverage ratios Gross asset turnover (x) Total asset turnover (x) Interest coverage ratio (x) Adjusted debt/equity (x) Valuation ratios EV/Sales (x) EV/EBITDA (x) P/E (x) P/BV (x)