October 7, 2013

Oil & Gas Sector

Q2FY14E Results Preview

Company Name Cairn India GAIL OIL ONGC Reliance

Source: IndiaNivesh Research

Price Target Rs. 404 390 672 390 1053

Current Rating Buy Buy Buy Buy Buy

Profitability expected to improve due to increase in crude price coupled with significant INR depreciation, slightly offset by higher under-recovery

In Q2FY14, Brent average crude price stood at USD110/bbl (up 7% QoQ, Flat YoY) led by geo-political concerns in Syria. Upstream companies revenue would be boosted by increase in crude prices coupled with significant INR depreciation (average at INR62.2/USD, +12% YoY and 11 QoQ) offset by higher under recovery Q2FY14. We estimate total subsidy of Rs.360 bn in Q2FY14 vs. Rs. 256 bn in Q1FY14. We assume upstream sharing would be 43% of total subsidy. We expect upstream sharing similar to Q1FY14 (subsidy at USD56/bbl). Refiners earning would be impacted by fall in GRM. Singapore GRM witnessed 15% QoQ fall to USD5.5/bbl in Q2FY14 primarily driven by lower gasonile cracks, and lower fuel oil cracks and resumption of facilities post maintenance shutdowns in the US. Petchem margins would be strong driven by INR weakness and expansion in polymer cracks. Increase in Polymer Customs Duty by 2.5% to 7.5% from May 9, 2013 also supported this trend. We expect natural gas transmission volume of GAIL to decline to 99 mmscmd due to declining trend of KG-D6 volume. Profitability of OMCs (BPCL, HPCL, IOCL) would depend more on subsidy sharing.

Daljeet S. Kohli Head of Research Mobile: +91 77383 93371, 99205 94087 Tel: +91 22 66188826 daljeet.kohli@indianivesh.in Abhishek Jain Research Analyst Mobile: +91 77383 93433 Tel: +91 22 66188832 abhishek.jain@indianivesh.in

Under-recovery and subsidy sharing by upstream companies

Particulars Brent (USD/bbl) Rs/USD exchange rate Total under-recoveries (Rs bn) Subsidy sharing Upstream share (Rs bn) share of ONGC (Rs bn) share of OIL (Rs bn) share of GAIL (Rs bn) OMCs (Rs bn) GoI share (Rs bn) % share Upstream share share of ONGC share of OIL share of GAIL
Source: Company Filings; IndiaNivesh Research

FY12 113.0 49.5 1,385.0 550.0 444.7 73.5 31.8 0.0 835.0 39.7% 80.8% 13.4% 5.8%

FY13 111.0 54.8 1,610.3 600.0 494.2 78.9 26.9 0.0 1,010.3 37.3% 82.4% 13.2% 4.5%

Q1FY14 102.0 55.9 255.8 153.0 126.2 19.8 7.0 0.0 102.8 59.8% 82.5% 13.0% 4.6%

Q2FY14E 110.0 62.2 360.0 155.0 127.5 20.5 7.0 0.0 205.0 43.1% 82.5% 13.0% 4.6%

FY14E 108.0 58.0 1,234.9 494.0 406.9 65.0 22.1 0.0 741.0 40.0% 82.4% 13.2% 4.5%

FY15E 105.0 55.0 823.4 329.4 406.9 65.0 22.1 0.0 494.0 40.0% 82.4% 13.2% 4.5%

IndiaNivesh Research

IndiaNivesh Securities Private Limited

601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007. Tel: (022) 66188800 IndiaNivesh Research is also available on Bloomberg INNS, Thomson First Call, Reuters and Factiva INDNIV.

Q2FY14E Results Preview (contd...) Outlook and Valuation

We continue our positive stance on the sector on the back of ongoing reforms like rationalization of subsidy, increase in natural gas prices and potential reserve accretion from its large E&P acreage. ONGC and Oil India is expected to outperform due to reduction in subsidy burden and hike in natural gas prices from FY15. We believe GAIL would be able to overcome constrains of gas supply shortages and maintain growth due to dominant market position in gas transmission as well as diversified business model. We expect Cairn to deliver strong production growth from Rajasthan field at a ~20% CAGR over FY2013-15e that will enable Cairn to generate strong free cash flows. We believe that hike in natural gas price is a big trigger in medium term for RIL.
Company Name Cairn India GAIL OIL ONGC Reliance Sales (Rs. mn) FY15e 196,159 541,034 127,422 1,828,949 4,011,000 EBITDA PAT(Rs. mn) (Rs. mn) FY15e FY15e 134,886 94,059 73,712 47,286 63,558 43,911 692,361 328,339 408,637 252,211 Mcap P/E(x) Mcap/Sales(x) EBITDA% NPM(%) FY15e FY15e 619,400 5.85 425,380 9.20 279,520 6.10 2,275,760 6.60 2,725,040 10.35 FY15e 3.16 0.79 2.19 1.24 0.68 FY15e 68.76 13.62 49.88 37.86 10.19 FY15e 47.95 8.74 34.46 17.95 6.29 EV/ PBV(x) ROE % EBITDA(x) FY15e FY15e FY15e 2.34 0.90 12.40 7.50 1.30 13.60 2.40 1.09 16.00 3.11 1.15 17.85 7.40 1.14 11.90 CMP Rs. 324 335 461 266 843 Price Current Target Rating Rs. Rs. 404 Buy 390 Buy 672 Buy 390 Buy 1053 Buy

Source: Company Filings; IndiaNivesh Research

Cairn India
Rs. Mn Revenue EBIDTA PAT Adjusted PAT(Exc forex gain/loss) EPS (RS.) EBITDA % Adjusted PAT % Q2 FY14e 43,987 32,169 32,169 28,169 16.86 Margin % 73.1 64.0 Q1 FY14 40,629 29,098 31,272 24,452 16.39 Margin % 71.6 60.2 Q2FY13 Q-o-Q % 44,431 8.3 34,254 10.6 23,222 2.9 31,080 12.17 Margin % 77.1 70.0 15.2 2.9 bps 151 386 y-o-y% 1.0 6.1 38.5 9.4 38.5 bps -396 -591

Source: Company Filings; IndiaNivesh Research

We expect Cairn India to report net sales of Rs. 43.98 bn (up 8.33 % Q-o-Q) Q2FY14 led by higher realization due to higher Brent crude prices coupled with Rupee depreciation. Profit petroleum from Rajashthan field expected to be 30% in Q2FY13. We estimate realization at USD 100/bbl vs. USD 93.3/bbl in Q2FY14. We estimate gross oil sales of 180 kbpd from the Rajasthan field and total net sales of 126 kboepd (v/s 121kboepd in Q1FY14 and 120 kboepd in Q2FY13). We expect other income to increase, led by higher cash balance. We estimate forex gain of Rs, 4 bn v/s gain of Rs. 6.8b in 1QFY14 due to ~4% INR depreciation during the quarter on closing basis.

Key points to watch out for:

(a) Net realization, (b) Forex fluctuations (c) Management commentary on (1) debottlenecking of its pipeline, (2) production ramp-up, (3) approvals on further exploration in Rajasthan,

Valuation
Cairn India is a play on crude price and INR/USD exchange rate. Its flagship Rajasthan block is a quality asset with potential for significant upgrades in 2P reserves. Key catalysts for upside in the stocks are 1) high production; 2) increasing reserve base; 3) strong free cash flow; and 4) being a key gainer from a weaker INR and exchange rate. At CMP of Rs. 324 the stock trades at 5.85x FY15E EPS. We maintain buy rating on Cairn India with target price of Rs. 404.

IndiaNivesh Research

Oil & Gas Sector

October 7, 2013 | 2

Q2FY14E Results Preview (contd...) GAIL

Rs. Mn Revenue EBITDA PAT EPS (RS.) Q2 FY14e 127,424 15,320 8,638 6.63 Margin 12.02 6.8 Q1FY14 128,998 15,084 8,082 6.37 Margin 11.69 6.3 Q2FY13 113,929 14,120 9,854 7.77 Margin 12.39 8.6 Q-o-Q % 1.22 1.57 6.88 4.06 bps 33 51 y-o-y% 11.84 8.50 12.34 14.65 bps -37 -187

EBITDA Margin% PAT Margin %

Source: Company Filings; IndiaNivesh Research

Transmission business is likely to show subdued performance due to lower volume which is partially offset by better petchem margin. Petchem margins would be strong helped by higher international prices and increase in Polymer Customs Duty by 2.5% to 7.5% from May 9, 2013. Trading margin would be subdued due to higher LNG prices in Asia slightly offset by weakness in Rupee. We expect natural gas transmission volume (99 mmscmd v/s 106 in Q2FY13 and 99.5 in Q1 Y14) Subsidy burden is expected to be ~Rs. 7 bn v/s similar to Q1FY14

Key points to watch out for:

a) Subsidy sharing, b) transmission volume) Petchem and trading business margin

Valuation
We believe that GAIL would be able to overcome constraints on gas supply shortages and maintain growth due to dominant market position in gas transmission as well as diversified business model. We expect the growth to resume post 2HFY14, with new supplies from the LNG terminals at Kochi, Dahej and incremental gas in the KG basin from RIL and ONGC. Further cap on of subsidized LPG cylinders and hike in diesel prices are positive for the stock. At CMP Rs. 335, GAIL trades at a P/E of 9.2x FY15e earnings estimates, which is lower than its historical PE of 14x. We maintain our BUY rating with SOTP based target price of Rs. 390.

Oil India
(Rs. Mn) Revenue EBIDTA PAT EPS (RS.) EBITDA % PAT %

Q2FY14e 26,779 12,299 8,911 14.82 45.9 35.4

Q1FY14 20,977 8,139 6,090 10.13 38.8 29.0

Q2FY13 25,194 12,649 9,546 15.88 50.2 37.9

Q-o-Q % 27.7 51.1 46.3 46.3 bps 713 634

Y-o-Y % 6.3 2.8 6.7 6.7 bps -428 -252

Source: Company Filings; IndiaNivesh Research

We expect top line to increase by 6.3 % Y-o-Y due to increase in crude prices coupled with significant INR depreciation, slightly offset by higher under recoveries. QoQ margin would improve due to higher net realization.

IndiaNivesh Research

Oil & Gas Sector

October 7, 2013 | 3

Q2FY14E Results Preview (contd...)

We estimate gross realization at USD110/bbl v/s USD109 in Q2FY13 and USD102 in Q1FY14 and net realization at USD 54/bbl v/s USD53/bbl in Q2FY13 and USD46/bbl in Q1FY14. Oil India would share subsidy burden of Rs ~ 20.5 bn vs. Rs. 19.8 bn Q1FY14. Subsidy burden & Net realization USD/ bbl Volume growth DD&A charges

Key points to watch out

Valuation
Though the Indian govt. continued on its promised path of increasing diesel retail prices and also proposed to increase in natural gas prices as expected, announcement of higher subsidy sharing by upstream companies in Q1FY14 is a concern for investors. However, we believe that the recent reforms undertaken by the Indian government in pricing of petroleum products is expected to be positive for OIL and significant benefits to accrue in FY15. At the CMP of Rs 461, the stock is trading at 6.1x FY15E EPS OILs cash rich balance sheet and compelling valuation makes this a good value buying. We maintain our Buy rating on the stock with target price of Rs. 672.

ONGC
(Rs. Mn) Revenue EBIDTA PAT EPS (RS.) EBITDA % PAT %

Q2FY14E 228,086 100,543 59,717 7.96 Margin % 44.1 26.2

Q1FY14 193,089 84,884 40,159 5.35 Margin % 44.0 20.8

Q2FY13 201,778 111,305 60,777 8.10 Margin % 55.2 30.1

Q-o-Q % 18.12 18.45 48.70 48.70 (BPS) 12 538

y-o-y% 13.04 9.67 1.74 1.74

-1108 -394

Source: Company Filings; IndiaNivesh Research

We expect top line to increase by 13% YoY and 18.12% QoQ due to increase in crude prices coupled with significant INR depreciation, slightly offset by higher under recoveries. QoQ margin would improve due to higher net realization We estimate gross realization at USD110/bbl v/s USD110 in Q2FY13 and USD103 in Q1FY14, and net realization at USD 48/bbl v/s USD 46.8/ bbl in Q2FY13 and USD 40.2/bbl in Q1FY14 ONGC would share subsidy burden of Rs. 127.5 bn vs. Rs. 126.2 bn in Q1FY14. Subsidy burden & Net realization USD/ bbl Volume growth DD&A charges

Key points to watch out

Valuation
We believe that the recent reforms undertaken by the Indian government in pricing of petroleum products is expected to be significantly value-accretive for ONGC and significant benefits will accrue in FY15. ONGC trades at a ~45% discount to its global peers on EV/BOE (6.5x EV/BOE of 1P reserves vs. global average of above 12x). At CMP of Rs 266 ONGC is trading 6.6x FY15E EPS. We maintain Buy rating on the stock with target price of Rs. 390.

IndiaNivesh Research

Oil & Gas Sector

October 7, 2013 | 4

Q2FY14E Results Preview (contd...)

IndiaNivesh Securities Private Limited

601 & 602, Sukh Sagar, N. S. Patkar Marg, Girgaum Chowpatty, Mumbai 400 007. Tel: (022) 66188800 / Fax: (022) 66188899 e-mail: research@indianivesh.in | Website: www.indianivesh.in
Disclaimer: This document has been prepared by IndiaNivesh Securities Private Limited (IndiaNivesh), for use by the recipient as information only and is not for circulation or public distribution. This document is not to be reproduced, copied, redistributed or published or made available to others, in whole or in part without prior permission from us. This document is not to be construed as an offer to sell or the solicitation of an offer to buy any security. Recipients of this document should be aware that past performance is not necessarily a guide for future performance and price and value of investments can go up or down. The suitability or otherwise of any investments will depend upon the recipients particular circumstances. The information contained in this document has been obtained from sources that are considered as reliable though its accuracy or completeness has not been verified by IndiaNivesh independently and cannot be guaranteed. Neither IndiaNivesh nor any of its affiliates, its directors or its employees accepts any responsibility or whatever nature for the information, statements and opinion given, made available or expressed herein or for any omission or for any liability arising from the use of this document. Opinions expressed are our current opinions as of the date appearing on this material only. IndiaNivesh directors and its clients may have holdings in the stocks mentioned in the report. To unsubscribe please send a mail to mail@indianivesh.in

IndiaNivesh Research

Oil & Gas Sector

October 7, 2013 | 5