Largest OMC; diversification offers earnings stability

Transcription

1 BSE Sensex S&P CNX 26,032 7,881 Stock Info Bloomberg IOCL IN Equity Shares (m) 2, Week Range (INR) 465/307 1, 6, 12 Rel. Per (%) -6/31/12 M.Cap.(INR b)/(usd b) 962.3/14.7 AvgVal(INRm)/Vol /1357 Free float (%) 31.4 Financial Snapshot (INR Billion) Y/E Mar E 2017E Sales 4,483 3,057 3,374 EBITDA Adj. PAT Adj. EPS (INR) EPS Gr. (%) BV/Sh.(INR) RoE (%) RoCE (%) P/E (x) P/BV (x) EV/EBITDA (x) Div. Yield (%) Shareholding pattern (%) Jun-15 Mar-15 Jun-14 Promoter DII FII Others Notes: FII includes depository receipts Stock Performance (1-year) Aug-14 Oct-14 I O C L Sensex - Rebased Dec-14 Feb-15 Apr-15 Jun-15 Aug August 2015 Update Sector: Oil & Gas IOC CMP: INR395 TP: INR570 (+44%) Buy Largest OMC; diversification offers earnings stability Marketing margins and Paradip to drive earnings; valuations attractive with 4% dividend yield Ongoing sector reforms reduced IOCL s debt and we expect marketing margins to improve over the next months owing to pricing freedom. We believe IOCL s large asset base in refining and marketing is non-replicable and its well-diversified earnings provide stability to earnings. While refining margins would be governed by global demand-supply; likely higher marketing margins provide predictability to its earnings and should lead to rerating, in our view. The stock trades at 7.2x FY17E EPS of INR55. Our SOTP-based fair value stands at INR570, implying 44% upside. Valuations attractive with 4% dividend yield. Buy. Reforms beneficiary; debt reduced, now on to marketing margins Indian oil sector witnessed unprecedented reforms (such as auto fuel deregulation) in the last two years, leading to more than 80% reduction in under-recoveries. IOCL s debt reduced ~45% and the company is expected to benefit from higher marketing margins owing to pricing power. We model marketing margins at INR1.6/2.0/liter in FY16/FY17 v/s regulated margins of INR1.4/liter in auto fuels. Diversified earnings give stability; large non-replicable asset base Of the three OMCs, IOCL s earnings are the most diversified share of refining at ~40%, marketing at ~30%, pipeline at 24% and petchem at 6%. We believe IOCL s asset base in non-replicable, with control over 11 of India s 22 refineries (35% capacity share), 71% of downstream pipelines and 46% (24,400) of retail outlets. Paradip refinery nearing commissioning, full benefit in 2HFY17 IOCL s 15mmt (INR350b capex, 12.2 Nelson complexity) Paradip refinery is nearing commissioning, with all units expected to start in 2HFY16. We expect the refinery to stabilize by 2HFY17 and estimate break-even GRM of USD7-8/bbl, with distillate yield of 81%. 700KTA planned downstream propylene will boost refinery complexity and project IRR. The medium-term refinery capacity additions will be brownfield (hence cost effective) in nature and include expansion at Gujarat (13.7 to 18mmt), Mathura (8 to 11mmt) and Panipat (15 to 20mmt). Valuation and view Key risks include crude price (inventory losses) and INR/USD volatility and any delay in the commissioning of Paradip refinery. We value IOCL at 5.5x for refining/petchem and 8x for marketing to arrive at a fair value of INR570, implying a 44% upside. The stock trades at 7.2x (lowest among the three OMCs) FY17E EPS of INR55 and 1.1x FY17E BV.Buy. Harshad Borawake (HarshadBorawake@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Pricing reforms lead to significant debt reduction Expect marketing margins to move up Indian oil sector witnessed unprecedented reforms (such as auto fuel de-regulation) in the last two years, leading more than 80% reduction of in under-recoveries. IOCL s debt reduced ~45% and the company is expected to benefit from higher marketing margins owing to pricing power. We model marketing margins at INR1.6/2.0/liter in FY16/FY17 v/s regulated margins of INR1.4/liter in auto fuels. Oil sectors reforms in the final leg Background: Indian oil sector has historically been heavily regulated, led by controlled pricing in auto (diesel, gasoline) and domestic fuels (LPG, kerosene). Consequently, retail prices continued to be lower than the required pricing; this resulted in under-recoveries, which in turn were to be shared by the government, upstream and downstream companies. As a result, the government and oil companies faced financial stress leading to high debt, and lower profitability and shareholder returns. What has changed? Having suffered from the above approach, the government decided to commence policy reforms in June 2010 with gasoline de-regulation as this was the easiest reform, given the lower volume and gasoline being largely considered as urban fuel. In FY12 and FY13, owing to rising underrecoveries (peaked at INR1.6t in FY13) and adverse remarks from global rating agencies, the government finally began reforms in the diesel and LPG segment. The government initiated monthly diesel price hike of INR0.5/liter in Jan-13 and finally de-regulated it completely in Oct-14. Also, in Jan-13, the government de-regulated diesel for bulk consumers. On the LPG front, the government initially limited the subsidized cylinders to 12 per household per year and recently transferred the LPG subsidy disbursal through direct cash transfer with a view to curtail the practice of having multiple connections and ensure that only true beneficiary receives the subsidy. What is the impact? Policy reforms reduced under-recoveries and debt levels of oil marketing companies, leading to improvement in profitability. What s the current status? While gasoline and diesel are fully de-regulated, LPG subsidy is now disbursed through direct cash transfer; kerosene is expected to follow LPG and we expect kerosene direct cash transfer pilot projects to be launched soon. Subsidy sharing: On the subsidy sharing front, OMCs were sharing ~3% for the last few years; but with LPG subsidy now being given by the government through budget (INR18/kg) and kerosene subsidy at INR12/liter and rest to be borne by upstream, we do not model any subsidy sharing for OMCs. 25 August

3 Exhibit 1: Gross under-recoveries have reduced >85% from the peak in FY13; LPG now part of the government budget Petrol Diesel Kerosene LPG Total 1,610 1,385 1,399 1, FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E LPG Kerosene Diesel Petrol Total , ,385 1,610 1, Source: PPAC, MoPNG, MOSL Exhibit 2: We model nil subsidy sharing for OMCs from FY16 (INR b) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Fx Rate (INR/USD) Brent (USD/bbl) Product-wise gross under-recoveries (INR b) Petrol Diesel Kerosene LPG Total , ,385 1,610 1, Sharing of gross under-recoveries (INR b) Government , Upstream OMC's (9) Total ,385 1,610 1, Sharing of gross under-recoveries (%) Government Upstream OMC's (1) Total Source: PPAC, MoPNG, MOSL IOCL s debt reduced meaningfully, balance sheet strengthened During the controlled price regime, OMCs (HPCL, BPCL and IOCL) had to bear the losses in case of rising international prices till the time government compensated through subsidy (which was typically delayed by 3-5 months). Delayed government support led OMCs to use debt to fund working capital requirement, thus straining their balance sheets and income statements. Interest on under-recovery-related debt was not compensated by the government. However, diesel de-regulation and lowering of crude prices have reduced OMCs debt significantly and thereby interest outgo. 25 August

4 Combined net debt of all the three OMCs reduced ~45%, with similar decline seen in all. Exhibit 3: OMCs net debt reduced ~45%, led by policy reforms and lower oil price (INRb) 1,500 HPCL BPCL IOC Total 1,479 1,476 1,376 1, , FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E *BPCL and IOCL on consolidated basis Exhibit 4: IOCL debt profile: Meaningful reduction seen in FY15 INR Billion FY11 FY12 FY13 FY14 FY15 Long term debt Forex Domestic Sub-total % Forex 26% 23% 52% 63% 78% Short term debt Forex Domestic Sub-total % Forex 41% 40% 52% 60% 46% Total debt Forex Domestic Total % Forex 55% 35% 52% 61% 66% Marketing margins improvement to drive next earnings growth Post the interest cost reduction, the next meaningful earnings growth is expected from improvement in the marketing margins on auto fuels, pricing for which is now market determined. IOCL s (OMCs ) auto fuel marketing margins were fixed in November 2006 at INR1.4/liter and, in later years, were not increased in line with the actual costs or global trends. Global comparison shows that the controlled marketing margin of INR1.4/liter is ~60% below the global average. Also, private competitors operating costs will be higher than OMCs that have well-entrenched logistics network and would require higher profitability to make decent returns. 25 August

5 In the de-regulated scenario, we expect OMCs marketing division profitability to increase meaningfully. However, we do not expect this increase to happen suddenly but gradually over the next months. We model marketing margins at INR1.6/2.0/liter in FY16/FY17 v/s regulated margins of INR1.4/liter in auto fuels. Exhibit 5: Global diesel marketing margins well above India s regulated margins level (INR/liter) India (regulated) India (4QFY15) India (1QFY16) India (FY16E) Chevron (New Zealand) CST (US) Parkland Fuel (Canada) Thailand S.Africa - Petrol S. Africa - Diesel Australia Source: Industry, MOSL 25 August

6 Diversified earnings give stability Large un-replicable asset base a big advantage Of the three OMCs, IOCL s earnings are the most diversified share of refining at ~40%, marketing at ~30%, pipeline at 24% and petchem at 6%. We believe IOCL s asset base in non-replicable, with control over 11 of India s 22 refineries (35% capacity share), 71% of downsteam pipelines and 46% (24,400) of retail outlets. IOCL has well-diversified earnings IOCL has the most diversified earnings profile among the three OMCs, with meaningful contribution (apart from refining and marketing) from pipeline and petrochemicals. While HPCL is the most levered to increase in marketing margins, IOCL s diversification provides earnings support in times of crude price and exchange rate volatility. Its large pipeline network provide annuity like earnings (~24% of total) and ongoing capex on new pipelines would further increase these stable earnings. Exhibit 6: EBITDA break-up in %: IOCL is the most diversified among the three OMCs Marketing Petchem Pipelines Refining HPCL BPCL IOCL *Average of FY11-FY15 EBITDA, FY11-FY14 for IOCL to normalize refining share which was impacted by huge inventory loss in FY15 Huge unreplicable asset base IOCL will be the largest refiner in India post the commissioning of Paradip refinery, with control over 35% of the refining capacity with its 11 refineries. The company has a pipeline (crude + product) network of 11,000+km, with overall capacity of 80.5mmtpa. In the petroleum market, IOCL it ~47% market share in volume terms and ~43,000 touch points (include 24,400 auto fuel retail outlets). IOCL has diversified crude sourcing avenues, with majority of the imports coming from Middle East (~64%) and Africa (~28%). 25 August

7 Exhibit 7: IOCL is the largest refining and marketing company in India *Includes Paradip in IOCL refining capacity Exhibit 8: IOCL refinery locations are well diversified, giving it a logistical advantage 25 August

8 Exhibit 9: IOCL s pipeline network covers 11,000km, with overall capacity of ~80mmtpa Exhibit 10: Retail petroleum stations: IOCL has ~24,400 retail fuel stations, giving it a dominant share of 46% Retail outlets ('000) HPCL BPCL IOCL Private Total IOCL outlet share (%) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 25 August

9 Paradip refinery to fully commission in 2HFY16 Full benefit expected in 2HFY17 IOCL is in the midst of commissioning its 15mmt (INR350b capex, Nelson complexity at 12.2) greenfield Paradip refinery with expected start of all units in 2HFY16. We expect refinery to stabilize by 2HFY17 and estimate break-even GRM of USD7-8/bbl with distillate yield of 81%. 700KTA planned downstream propylene will further boost its complexity and project IRR. Its medium-long term refinery capacity additions will be brownfield (hence cost effective) in nature and include expansion at Gujarat (13.7 to 18mmt), Mathura (8 to 11mmt) and Panipat (15 to 20mmt). Paradip refinery complexity will be highest comparable with RIL s Jamnagar refinery complex Refinery Index Digboi 11.0 Panipat 10.5 Haldia 10.4 Gujarat 10.0 Mathura 8.4 Bogaigaon 8.2 Barauni 7.8 Guwahati 6.7 Current avg 9.6 Paradip 12.2 Paradip refinery to fully commission in 2HFY16 IOCL s first port-based 15mmtpa (largest on India s east coast) refinery at Paradip is nearing commissioning. It will be the most complex refinery, with Nelson Complexity index of 12.2, distillate yield of 81% and an estimated capex of INR330b. While the recent greenfield refineries of HPCL (Bhatinda 9mmtpa) and BPCL (Bina 6mmtpa) witnessed teething issues in stabilization, we believe IOCL s refinery has an advantage of lower capex which minimizes the asking rate for break-even GRM. We estimate a break-even GRM of USD7-8/bbl and expect it to stabilize by 2HFY17. Addition of the INR36b downstream 700KTA polypropylene unit will boost overall complex IRR. We expect Paradip refinery to be a medium-term earnings driver for IOCL. Assuming a GRM of USD10/bbl and opex of USD2/bbl, it could add INR6/sh to IOCL s earnings on a normalized basis (i.e. from FY18). Exhibit 11: Paradip refinery to boost IOCL group refinery capacity by 23% Digboi Guwahati Koyali Barauni Haldia Mathura Panipat Bongaigaon CPCL Paradip Total FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Medium-term New capex plans diversified, but focused on core business IOCL s medium- to long-term capex plans include brownfield refinery capacity additions, new pipelines and LNG terminal at Ennore. 25 August

10 Refinery capacity expansion projects include expansion at Gujarat (13.7 to 18mmt), Mathura (8 to 11mmt) and Panipat (15 to 20mmt). While we believe the brownfield expansions and pipeline projects will go ahead, Ennore LNG terminal could get delayed due to LNG economics and new pipeline issues (as witnessed in Petronet LNG s Kochi-Mangalore-Bangalore pipeline connectivity). On the E&P front, IOCL has stakes in 17 blocks of which 10 are overseas. The company s recent investment was USD1.1b for 10% stake purchase in Canadabased Progress Energy for its proposed LNG export facility. Going forward, IOCL expects to invest additional USD3b for development. As against the capex of USD2.3b in FY15, IOCL expects a capex of USD1.7b in FY16; this includes USD660m for refining, USD200m for pipeline, USD508m for marketing and the rest toward Petchem, E&P and others. Exhibit 12: Paradip refinery project is nearing completion Project / description Capex (USDm) Completion date 15mmtpa Paradip Refinery 5,528 Oct-15 Pipelines Paradip Raipur Ranchi 287 Mar-15 Paradip Haldia Durgapur LPG 146 Jun-15 Other key capex Polypropylene unit at Paradip 504 Sep-15 Distillate Yield Improvement at Haldia 492 Sep-15 Ennore LNG Terminal 824 4Q Total 7, August

11 Please refer our recent detailed update on OMCs Valuation and view We believe the ongoing reforms have the potential to transform OMCs into a structural investment play, led by (a) higher earnings predictability and (b) increase in profitability leading to higher RoE s. OMCs profitability is set to improve owing to pricing freedom post the diesel deregulation, led by (a) lower interest cost diesel de-regulation and lower oil prices to reduce working capital loans; (b) higher auto fuel marketing margins parity with international peers and relatively high cost for private marketers provide ample room for improvement. We believe OMCs economic moat is widening, led by (1) scope for meaningful increase in marketing margin and, hence, profitability; (2) slower ramp-up by private marketers; (3) high volume growth aided by expected GDP boost; (4) improving balance sheet with increasing cash flow. Likely increase in diesel marketing margins: The next big earnings jump for OMCs would come from likely higher marketing margins in diesel. We believe OMCs will earn additional marketing margins of at least INR0.5-1/liter; even if private players take market share as high as 15%, on OMCs will benefit on a net basis. An INR0.5/liter increase in diesel marketing margins raises IOCL s EPS by ~12%. We model gross per liter diesel margins of INR1.6/2.0 in FY16/FY17. We value IOCL at 5.5x for refining/petchem and 8x for marketing to arrive at a fair value of INR570, implying a 44% upside. The stock trades at 7.2x FY17E EPS of INR55 and 1.1x FY17E BV. Maintain Buy. Exhibit 13: IOCL Key Assumptions FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Exchange Rate (INR/USD) Brent Crude (USD/bbl) Market Sales Volume (MMT) GRM (USD/bbl) IOCL GRM (USD/bbl) Reuters Singapore GRM Prem/(disc) (2.1) (4.5) (5.4) (1.4) (6.1) (0.9) (1.5) (1.3) Refining capacity Refining capacity utilization (%) 103% 99% 98% 103% 101% 98% 99% 82% 100% 95% Refinery throughput (mmt) Under recoveries Sharing (INRb) Gross under recoveries Net sharing (0) Net sharing (%) 0% 12% 9% 0% 1% 1% 3% 3% 0% 0% Exhibit 14: OMCs: Comparative valuations M Cap (INR) Var. EPS (INR) P/E (x) P/B (x) RoE (%) Dvd USDb CMP TP TP (%) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Yld % HPCL , BPCL* , IOCL *P/B, P/E adj. for E&P valueof INR115/sh; Dividend yield on FY16E basis 25 August

12 Exhibit 15: We value IOCL at INR570/sh EV/EBITDA Valuation Investment valuation FY17 EBITDA Multiple (x) INRb INR/sh Investments INRb INR/sh Refining CPCL 10 4 Post 25% discount Marketing & others Gail (India) 7 3 Post 25% discount Petchem ONGC Post 25% discount Pipeline Petronet LNG 13 5 Post 25% discount EV 1, Oil India 10 4 Post 25% discount Less: Net Debt Treasury Shares Equity Value 1, Treasury Sh (BRPL) 10 4 Post 25% discount Investment value Treasury Sh (IBP) 8 3 Post 25% discount Fair value 1, Total CMP 395 % upside/(downside) 44% Exhibit 16: IOCL: Fair value sensitivity to GRM (USD/bbl) and marketing margins (INR/KL) Marketing Margins (INR/KL) ,400 1,900 2,400 2,900 3,400 3,900 GRM (USD/bbl) ,029 Exhibit 17: IOCL: FY17E PES Sensitivity to GRM (USD/bbl) and marketing margins on diesel Marketing Margins (INR/KL) ,400 1,900 2,400 2,900 3,400 3,900 GRM (USD/bbl) Please refer to our recent 1QFY16 result updates for OMCs BPCL: 14 August 2015 HPCL: 11 August 2015 IOC: 13 August August

13 Exhibit 18: OMCs: One-year relative performance IOC has underperformed partly due to OFS overhang 240 HPCL BPCL IOC Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Source: Bloomberg, MOSL Exhibit 19: Government holding in OMCs (%) B P C L H P C L I O C L FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Aug-15* *Post 10% stake sale by the Government Exhibit 20: FII holding in OMCs (%) FII as a % of total B P C L H P C L I O C L Exhibit 21: FII holding in OMCs as a % of free float (%) FII as a % of free B P C L H P C L I O C L float FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Jun-15 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Jun August

14 Story in charts Exhibit 22: IOCL s GRM is hovering at a discount to Singapore GRM since FY12 (USD/bbl) Prem/(Disc) to Singapore IOCL GRM Singapore GRM Exhibit 23: Marketing sales grew at a 3% CAGR, whereas refinery throughput at a CAGR of 2% in the last six years (FY08-14) Marketing Sales (mmt) Refinery Throughput (mmt) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Exhibit 24: Diesel de-regulation to reduce working capital, leading to lower interest costs Total Debt (INRb) Interest Cost (INRb) Exhibit 25: Expect D/E to decline as earnings increase (x) D/E Ratio FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Exhibit 26: Expect return ratios to improve in coming years (%) RoE (%) RoCE (%) Exhibit 27: IOCL: One-year forward P/E chart 28 P/E (x) 15 Yrs Avg(x) FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Aug-00 Oct-01 Dec-02 Feb-04 Apr-05 Jun-06 Jul-07 Sep-08 Nov-09 Jan-11 Mar-12 Apr-13 Jun-14 Aug August

15 Financials and valuations Income Statement (Consolidated) (INR Million) Y/E March E 2017E 2018E Net Sales 2,501,053 3,081,315 4,072,314 4,607,497 4,872,595 4,483,152 3,057,185 3,373,577 3,744,213 Change (%) Finished Gds Pur. 1,007,775 1,275,911 1,572,508 1,555,286 1,560,457 1,408,174 1,224,966 1,045,748 1,148,493 Raw Materials Cons 1,158,063 1,445,071 2,041,610 2,590,820 2,767,619 2,583,039 1,255,663 1,745,272 2,089,025 Other Operating Costs 206, , , , , , , , ,842 EBITDA 128, , , , ,711 93, , , ,853 % of Net Sales Depreciation 35,552 49,326 53,093 56,915 63,600 52,190 51,897 63,730 74,222 Interest 17,262 29,803 58,947 70,835 59,079 41,746 29,880 36,584 32,984 Other Income 74,547 54,964 48,797 45,416 45,278 53,975 32,487 37,676 40,501 Excep/Prior period items , ,468 16,681 16, PBT 150, ,140 39,953 45,042 99,778 70, , , ,149 Tax 40,499 20,284-2,700 8,770 30,113 21,426 76,163 67,511 77,148 Rate (%) PAT 109,987 80,856 42,653 36,273 69,666 48, , , ,001 Minority interest -2,855-2, ,217 1, , Group net profit 107,132 78,307 42,260 44,490 70,856 49, , , ,153 Adj. net profit 107,132 78, ,338 44,490 53,388 32, , , ,153 Change (%) ,911 Balance Sheet (INR Million) Y/E March E 2017E 2018E Share Capital 24,280 24,280 24,280 24,280 24,280 24,280 24,280 24,280 24,280 Reserves 500, , , , , , , , ,509 Net Worth 524, , , , , , , , ,789 Minority interest 18,330 19,930 19,437 12,618 11,706 10,733 11,755 12,647 13,494 Loans 494, , , , , , , , ,071 Deferred Tax 54,170 70,282 59,696 63,323 64,228 68, , , ,064 Capital Employed 1,091,849 1,244,341 1,483,020 1,574,207 1,644,389 1,348,952 1,500,209 1,588,606 1,619,419 Gross Fixed Assets 788,886 1,008,694 1,076,256 1,151,002 1,269,522 1,375,223 1,478,123 1,911,023 2,003,923 Less: Depreciation 334, , , , , , , , ,967 Net Fixed Assets 454, , , , , , ,107 1,187,277 1,205,956 Capital WIP 227, , , , , , ,781 73,781 73,781 Investments 214, , , , , , , , ,687 Goodwill Cash & Bank Balance 15,984 15,374 8,220 12,198 37,045 12,211 80, , ,053 Inventory 410, , , , , , , , ,754 Debtors 56,062 76, , , ,517 76,448 79,988 86,852 94,197 Loans & Advances 152, , , , , , , , ,128 Other assets 15,264 15,060 23,387 44,148 44,484 31,487 31,802 32,120 32,441 Curr. Assets, L & Adv. Liabilities 351, , , , , , , , ,693 Provisions 103,612 69, , , , , , , ,590 Net Current Assets 194, , , , ,287 16, , , ,291 Application of Funds 1,091,849 1,244,341 1,483,020 1,574,207 1,644,389 1,348,952 1,500,209 1,588,606 1,619,419 E: MOSL Estimates 25 August

16 Financials and valuations Ratios Y/E March E 2017E 2018E Basic (INR) Adj. EPS Reported EPS Cash EPS Book Value Dividend Payout (incl. Div. Tax.) Valuation (x) P/E Cash P/E EV / EBITDA EV / Sales Price / Book Value Dividend Yield (%) Profitability Ratios (%) RoE RoCE Turnover Ratios Debtors (No. of Days) Asset Turnover (x) Leverage Ratio Debt / Equity (x) Cash Flow Statement (INR Million) Y/E March E 2017E 2018E OP/(Loss) before Tax 150, ,140 39,953 45,042 99,779 70, , , ,149 Depreciation 35,677 49,529 49,839 57,103 63,691 51,904 51,897 63,730 74,222 Interest Paid 17,263 29,832 59,016 71,184 59,101 41,746 29,880 36,584 32,984 Direct Taxes Paid -27,296-40,032-4,066-11,690-18,956-23,442-43,694-65,538-74,882 (Inc)/Dec in WC -182,446-50, ,204-44,530 54, ,952-32,452 5,098 9,582 Other op activities -9,774-19,684-20,192-23,715-16,081-29, CF from Op. Activity -16,090 70,592-7,654 93, , , , , ,054 (Inc)/Dec in FA & CWIP -138, , , , , , , ,900-92,900 Free Cash Flow -154,325-66, ,838-34,600 23, , , , ,154 (Pur)/Sale of Investments 174,184 53,856 39,652 1,153-1,889-1, CF from Inv. Activity 35,948-83, ,532-92, , , , ,900-92,900 Inc / (Dec) in Debt 21,257 83, ,728 96,681 55, ,857 20, ,480 Dividends Paid -10,907-38,124-28,057-14,922-18,501-26,090-45,451-48,292-53,973 Interest Paid -24,276-33,418-63,643-78,240-68,722-51,879-29,880-36,584-32,984 CF from Fin. Activity -13,925 12, ,028 3,519-31, ,827-55,321-84, ,437 Inc / ( Dec) in Cash 5, ,158 3,978 24,847-24,835 67,801 54,324 21,717 Add: Opening Balance 10,052 15,985 15,379 8,221 12,199 37,046 12,212 80, ,337 Closing Balance 15,985 15,379 8,221 12,199 37,046 12,212 80, , ,054 E: MOSL Estimates 25 August

17 N O T E S 25 August

18 Disclosures This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company(ies) and/sector(s), if any, covered in the report and may be distributed IOC by it and/or its affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your general information and should not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. MOSt and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We and our affiliates have investment banking and other business relationships with a some companies covered by our Research Department. Our research professionals may provide input into our investment banking and other business selection processes. Investors should assume that MOSt and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may educate investors on investments in such business. The research professionals responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting information. Our research professionals are paid on the profitability of MOSt which may include earnings from investment banking and other business. MOSt generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, MOSt generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing among other things, may give rise to real or potential conflicts of interest. MOSt and its affiliated company(ies), their directors and employees and their relatives may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the affiliates of MOSt even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report Reports based on technical and derivative analysis center on studying charts company's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamental analysis. In addition MOST has different business segments / Divisions with independent research separated by Chinese walls catering to different set of customers having various objectives, risk profiles, investment horizon, etc, and therefore may at times have different contrary views on stocks sectors and markets. Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. Any statements contained in this report attributed to a third party represent MOSt s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. This Report is not intended to be a complete statement or summary of the securities, markets or developments referred to in the document. While we would endeavor to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. Most and it s associates may have managed or co-managed public offering of securities, may have received compensation for investment banking or merchant banking or brokerage services, may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Most and it s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report. Subject Company may have been a client of Most or its associates during twelve months preceding the date of distribution of the research report MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise of over 1 % at the end of the month immediately preceding the date of publication of the research in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Motilal Oswal Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, SEBI Reg. No. INH There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues Disclosure of Interest Statement IOCL Analyst ownership of the stock No Served as an officer, director or employee No A graph of daily closing prices of securities is available at and Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions. For U.S. Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons. This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement. The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account. For Singapore Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Kadambari Balachandran kadambari.balachandran@motilaloswal.com Contact : (+65) / Office Address : 21 (Suite 31),16 Collyer Quay,Singapore Motilal Oswal Securities Ltd Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai August Phone: reports@motilaloswal.com