Natural Gas - Update

SECTOR UPDATE 11 JUL 2014

Natural Gas

At the cusp of change The Oil & Gas Index has rallied ~25% YTD in CY14. We feel further upsides are possible given a series of pending policy decisions which will revive sentiment. Companies across the value chain are set for good times.

Currently the O&G sector is beset with numerous uncertainties (1) ambiguity on the new gas price (2) huge oil under-recovery (3) no transparency in UR sharing (4) uncertainty on future NELP guidelines (5) no incentives for transmission/CGD players to enter new areas. Industry’s morale has fallen further due to sporadic retrospective decisions by the govt.

Rising energy needs and oil imports will lead to higher focus on energy security in India. Gas is cheaper, cleaner and offers higher upstream potential in India as compared to oil. We feel that gas will be the prime focus of the new govt. We are confident that a revised gas price will be applicable from 1st Oct 2014 and will be below the much debated price of US$ 8.4/mmbtu. In our base case we

have assumed gas price rising from $ 4.2/mmbtu to $ 7.2/mmbtu.

Upstream : Adequate returns will lead to higher investments. Upstream gas players, ONGC and RIL will be the biggest beneficiaries of a gas price hike. Other drivers include higher net oil realisation for ONGC and returns from huge investments in core biz for RIL. Maintain BUY.

RLNG : Concerns over Kochi volumes and muted growth at Dahej for next 2-years will keep Petronet LNG under pressure. Maintain NEUTRAL.

Gas Transmission : GAIL and GSPL will benefit post the increase in gas supply (domestic + RLNG) by FY16 end. We don’t see significant earnings upgrade for them till FY16. Maintain NEUTRAL.

City Gas Distribution : IGL and GGAS will remain in focus. However, increase in retail price and muted volume growth will be an overhang. Maintain NEUTRAL.

SECTOR PERSPECTIVE

COMPANY FY12-14 PAT CAGR (%)

FY15-17 PAT CAGR (%) Rating

FY15E FY16E

RoE (%) P/E (x) P/BV (x) RoE (%) P/E (X) P/BV (X) ONGC 5.3 13.8 BUY 17.0 14.1 2.3 18.7 11.5 2.0 RIL 2.7 16.0 BUY 11.4 13.6 1.5 11.3 12.5 1.4 Petronet LNG 4.7 18.9 NEU 13.5 18.8 2.4 15.2 14.9 2.1 GAIL 4.8 8.8 NEU 14.6 14.3 2.0 15.0 12.7 1.8 GSPL * (6.1) NA NR 19.9 9.2 1.7 13.4 11.8 1.5 IGL 11.2 8.5 NEU 19.2 13.8 2.5 18.1 12.8 2.2 Source: Company, HDFC sec Inst Research, * Data for GSPL is for FY13 and FY14

Absolute Stock Returns (%) 1M 3M 1Y

ONGC (8.5) 25.6 36.4

RIL (11.4) 2.9 16.5

Petronet LNG 12.7 24.5 39.8

GAIL 7.6 22.7 47.2

GSPL 6.5 26.5 50.8

IGL 3.7 24.8 28.8 Target Upside

CMP (Rs/sh)

TP (Rs/sh)

Upside (%)

ONGC 404 471 16.5

RIL 998 1,100 10.2

Petronet LNG 177 180 1.7

GAIL 466 470 1.0

GSPL* 88 NR NR

IGL 360 380 5.5 * Not rated

Satish Mishra [email protected] +91-22-6171-7334

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

NATURAL GAS : SECTOR UPDATE

Summary

Ups

trea

m

ONGC

• Biggest beneficiary of increase in gas price. Change in gas price from $ 4.2/mmbtu to $ 7.2/mmbtu changes FY16 standalone EPS from Rs 27/sh to Rs 35/sh

• Increase in net oil realization from $ 41/bbl in FY14 to $ 45/50/bbl in FY15/16 is another key driver • Trading at 11.5/2.0 x FY16E EPS/BV. FY16E RoE/RoCE is 18.7/14.7%. Maintain BUY, TP Rs 471/sh

RIL • ~70% increase in gas price will lead to higher investments in exploration. Gas volumes will increase • Capex in core business (petchem and refining) is key. EBITDA in FY17 will be ~70% more than EBITDA in FY14 • Trading at 12.5/1.4 x FY16E EPS/BV. FY16E RoE/RoCE is 11.3/8.3%. Maintain BUY, TP Rs 1,100/sh

RLN

G

PLNG

• No direct impact of increase in domestic gas price. No clarity on usage of gas by power segment may negatively impact Petronet LNG

• Robust demand and expanded capacity at Dahej will double volumes over five years, but near term growth will drag • Trading at 9.8/2.1 x FY16E CEPS/BV. FY16E RoE/RoCE is 15.2/10.4%. Maintain NEUTRAL, TP Rs 180/sh

Tran

spor

tatio

n GAIL

• Direct impact of gas price hike is negative. RM cost for petchem and LPG will increase • We expect no oil subsidy sharing by GAIL post gas price hike • Co will be the biggest beneficiary of rise in gas supply. We expect profits from transmission biz to double in 5 years • Trading at 12.7/1.8 x FY16E EPS/BV. FY16E RoE/RoCE is 15.0/11.4%. Maintain NEUTRAL, TP Rs 470/sh

GSPL • No direct impact of gas price hike. We see no significant trigger for next two years • Higher investments by upstream players will lead to increase in gas volumes from FY17 • Trading at 11.8/1.5 x FY14 EPS/BV. FY14 RoE/RoCE is 13.4/10.8%. NOT RATED

CGD IGL

• Increase in gas price will lead to increase in selling price of CNG/PNG to maintain margins. Price advantage with alternative fuels will reduce. However, govt’s decision for 100% domestic gas allocation for CNG and domestic PNG will keep retail prices below previous peak

• Tender for new buses by Delhi Transport is +ve. Volume growth should pickup from FY16 • Trading at 12.8/2.2 x FY16E EPS/BV. FY16E RoE/RoCE is 18.1/16.6%. NEUTRAL, TP Rs 380/sh

Source: HDFC sec Inst Research

Page | 2


Current scenario : Indian Natural Gas Natural Gas Supply in India India’s domestic natural gas story suffered a setback due to continuous decline in volumes from KG-D6. Supply from RIL came down from the peak of ~60mmscmd during FY11 to ~13mmscmd currently. Part of the shortfall was compensated with RLNG. Still many sectors operated at low capacity utilisation due to shortage of gas.

Domestic sources contributed ~70% of total gas requirement in India in FY14. Increase in APM/KG-D6 gas price from US$ 4.2/mmbtu to US$ 7.2/mmbtu will change the dynamics for sensitive sectors like fertilisers, power and CGD (City Gas Distribution).

Refineries, petrochemical and other industries will also be negatively impacted. However, these industries are better placed as (1) Even at higher price, gas is competitive compared to alternatives (liquid fuels) (2) These are completely deregulated industries with no restraint on pricing.

For clearer impact of gas price hike, we have analysed the impact on different industries. We have used the gas usage proportions of FY13 for our analysis. Major difference in FY14 was owing to a further fall in KG-D6 volumes from ~26mmscmd to ~14mmscmd.

Gas net supply from different sources, excl internal usage (mmscmd)

Source: MOPNG, PNGRB, Govt reports, HDFC sec Inst Research

52 51 51 51 55 56 55 54 54

- - - -

42 56

43 26

14 19 26 31 30

35

39 50

50

48 93 98

105 104

147 165 163

144

130

-

20

40

60

80

100

120

140

160

180

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14

ONGC OIL Pvt/JV KG-D6 RLNG Total

mmscmd

Page | 3


Industry-wise consumption of Natural Gas in India (FY13)

(mmscmd) APM Non APM PMT KG-D6 Other

Domestic Total

Domestic R-LNG Total Usage

% of total Gas

Domestic Mix (%)

RLNG Mix (%)

Fertilisers 13.0 1.9 1.9 14.4 0.3 31.5 8.7 40.2 30% 78% 22% Power 20.9 3.8 2.5 8.4 1.9 37.5 5.0 42.5 32% 88% 12% LPG 2.7 - 0.8 2.5 - 5.9 0.5 6.4 5% 92% 8% CGD 5.4 0.0 1.2 - 0.3 6.9 8.7 15.6 12% 44% 56% Refineries 1.1 0.7 - - - 1.9 7.3 9.2 7% 20% 80% Petrochemical 1.1 0.1 1.7 - - 2.9 2.0 4.9 4% 60% 40% Steel 1.1 - - - - 1.1 3.5 4.5 3% 24% 76% Others 4.4 0.4 0.9 0.5 0.3 6.5 4.4 10.9 8% 59% 41% Total 49.6 7.0 9.0 25.7 2.8 94.2 40.1 134.3 100% 70% 30% PRICE (US$/mmbtu) 4.2 4.0

to 5.5 5.5

to 5.7 4.2 4.0 to 5.5 4.0 to 5.7 14.0 to 18.0

Source: MOPNG, PNGRB, Govt reports, HDFC sec Inst Research Key findings from above table :

~75% of the total gas goes to sensitive sectors i.e. fertilisers 30%, power 32%, CGD (CNG/PNG) 7% and LPG 5%.

~85% of the total gas used in sensitive sectors is catered from domestic sources

CGD (12% of total consumption) has two parts

1. CNG/PNG : ~62%, sensitive, from Mar-14 govt directed 100% domestic gas supply to this segment

2. Industrial : ~38% non-sensitive, ~100% LNG can be used

Page | 4


Impact of higher gas price Fertilisers

Currently ~40mmscmd of gas is supplied to the fertiliser sector of which ~80% is met through domestic sources.

Out of the total urea produced in India (~22mtpa), ~18mtpa uses natural gas as feed material.

From the current base (~80% domestic gas and ~18mtpa gas based production), every US$ 1/mmbtu increase in gas price will lead to additional cost burden of ~Rs 22bn.

Total increase in subsidy due to increase in domestic gas price from US$ 4.2/mmbtu to US$ 7.2/mmbtu is ~Rs 66bn. Total fertilisers subsidy for FY14 was ~Rs 670bn.

Every 5% increase in farmgate price of urea (from Rs 5.4/kg) will reduce govt’s subsidy bill by ~Rs 9bn but till date there is no clarity on urea price hike.

At our estimated gas price of US$ 7.2/mmbtu, all inclusive cost of urea produced from new plants (assuming previous policy) will be US$ 300 – 325/t. Current international urea price is ~US$ 300/t.

Our View

No major impact on players. Additional burden will be borne by the govt. We may see a small increase in urea farmgate price.

A new urea investment policy (with some modifications) is on the cards. We may see new 6-7 new plants in the next 5 years. Each plant requires ~2mmscmd gas for 1.2mtpa capacity.

Fertilisers : Gas demand (mmscmd)

Source: MOPNG, PNGRB, FAI, Govt reports, HDFC sec Inst Research

COST OF PRODUCTION OF UREA FROM DIFFERENT FEEDS

Feed Feed cost

(US$/mmbtu) Urea realisation

(Rs/t)

Natural Gas 4.2 9,000

Natural Gas 8.0 14,500

RLNG 14.0 23,500

Naphtha (US$/t) 1,000 35,000

LSHS (US$/t) 700 27,000 Source: FAI, Govt reports, HDFC sec Inst Research, * Urea realisation = farmgate price + subsidy

43

15

14

43

58

72

0

10

20

30

40

50

60

70

80

FY15 FY16 FY19

Additional demand due to

switch from Naphtha/LSHS

Additional demand from

new urea plants (7 x 1.2 mtpa)

mmscmd

Page | 5


Power

Current capacity of gas based power plants is ~21,800 MW. Due to unavailability of natural gas they are operating at sub 30% PLF.

~10,000 MW gas based capacity additions are halted due to lack of gas supplies.

More than 75% of India’s power generation is from coal. Variable cost of generation from domestic coal is ~Rs 1.5/kwh and from imported coal (US$ 90/t) is ~Rs 2.3/kwh.

Variable cost of generation from natural gas at US$ 4.2/mmbtu is Rs 2.7/kwh.

Our View

Every 1 dollar increase in gas price increases cost of generation by ~Rs 0.5/kwh.

Gas price increase from US$ 4.2/mmbtu to US$ 7.2/mmbtu will increase the variable cost of generation to Rs 3.9/kwh (vs Rs 2.3/1.5 per kwh using imported/domestic coal).

Unless government policy neutralises higher generation cost vs coal, gas based power plants are not feasible.

We think PLFs will further decline for gas based power plants. Some portion of the domestic gas currently used by power plants may be freed for other sectors.

o Short term negative for Petronet LNG

o Short term positive for GAIL

Power : Rising gas demand-supply gap

Source: CEA, Govt reports, HDFC sec Inst Research

Variable cost of power generation with different feeds

Source: Govt reports, HDFC sec Inst Research

-

50

100

150

200

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

FY13 FY15 FY18

Capacity (MW) Requirement (mmscmd)Supply (mmscmd)

mmscmd

Halted

MW

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Coal (domestic)

Coal (Imported)

Fuel oil Naphtha

Rs/kwh

7.3 : LNG@$15/mmbtu

3.9 : NG@$7.2/mmbtu

2.7 : NG@$4.2/mmbtu

Page | 6


City Gas Distribution (CGD)

CNG

Increase in gas price from US$ 4.2/mmbtu to US$ 7.2/mmbtu will lead to ~30% increase in CNG prices to ~Rs 48/kg in Delhi.

Even at increased price, operating cost/km with CNG will be only ~55% of that of petrol.

If 100% domestic gas is allocated to CNG players, we see robust demand to continue for this segment.

PNG

Increase in gas price may slightly reduce the pace of switch from LPG to PNG.

However, with 100% domestic allocation and likely hike in LPG prices in coming years, difference will be marginal and urban customers will prefer PNG.

Industrial

Shortage of coal for power has resulted in liquid fuels being used as the only alternative for small industrial players.

Cost of power generation from fuel oil and naphtha is higher as compared to even RLNG.

Equivalent pricing :

o Naphtha @ $ 1k/t = RLNG @ US$ 22/mmbtu o Fuel Oil @ $ 0.7k/t = RLNG @ US$ 17/mmbtu

No impact in demand. Regular supply of gas will ensure robust demand.

CNG : Running cost with different fuels

Source: Govt reports, HDFC sec Inst Research, Assum : Travel 30 km/day, conversion cost Rs 40k/50k for petrol/diesel

PNG : Slightly unattractive proposition

Old

scenario New

scenario With 10%

hike in LPG Avg. LPG usage (kg/month) 10.0 10.0 10.0 Price of subsidised LPG (Rs/cyl.) 414 414 455 LPG monthly expenses (Rs) 292 292 321 Equiv. NG usage (scm/month) 12.3 12.3 12.3 Gas Price (US$/mmbtu) 4.2 7.2 7.2 Price of PNG (Rs/scm) 25.5 32.0 32.0 PNG monthly expenses (Rs) 313 393 393 PNG over LPG (% difference) 7.4% 35.0% 22.7%

Source: Govt reports, HDFC sec Research Assumption : PNG connection charges Rs 5k, LPG connection charges Rs 2k

4.3

3.3

1.9 2.4

3.7

-1.0 2.0 3.0 4.0 5.0 6.0 7.0

-0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Petr

ol

Dies

el

NG

@$

4.2

/ m

mbt

u

NG

@$

7.2

/ m

mbt

u

NG

@$

15.0

/ m

mbt

u

Cost (Rs/km) Breakeven Petrol (Years)Breakeven Diesel (Years)

YearsRs/km

Page | 7


Other Industries

LPG

~6mmscmd of gas is supplied to LPG sector. LPG is a subsidised product and burden of additional gas cost will be borne by the government.

Every 1 dollar increase in gas price increases subsidy burden by ~Rs 4.5bn.

Government might reduce burden by capping cylinder supply to 6 or 9/year from 12/year.

GAIL is the only player in our coverage universe which will be negatively impacted by a gas price hike. However, we believe that it will be compensated by reducing GAIL’s subsidy contribution for oil under recovery.

No major impact to LPG sector dynamics.

Petrochemicals

Increase in gas price will negatively impact the petrochemical sector as it consumes ~4% of total gas. GAIL is the only player in our coverage universe which will be impacted.

However, ~50% of the current demand is met through RLNG. So the impact will be only to the extent of ~50%.

We don’t see further gas based petrochemical capacity coming up in India.

Refining, steel and other sectors

Currently ~30mmscmd of gas is supplied to these sectors. All these industries are fully decontrolled with full pricing power.

Alternative fuels for these industries are naphtha and fuel oil.

Equivalent pricing :

o Naphtha @ $ 1k/t = RLNG @ US$ 22/mmbtu

o Fuel Oil @ $ 0.7k/t = RLNG @ US$ 17/mmbtu

We see no impact in demand from these sectors due to increase in gas price. We believe that demand will increase if regular gas supply is ensured.

Page | 8


Future Energy ScenarioRising Energy Demand

Over the last decade India’s GDP has grown at 2-3x that of the global growth rate. India’s share in the global energy consumption has increased from 3.2% in CY01 to 4.5% in CY12. Average energy multiplier for India over the last decade has been ~0.74x of GDP growth. Hence to sustain an average GDP growth

rate of 6.7% over the next decade, India’s energy demand will grow at a CAGR of 5%. India ranks 4th in the world in terms of energy consumption (after China, USA and Russia). However, in terms of per capita and per area consumption in India is one of the lowest among the top-20 energy consumers.

INDIA’S ENERGY NEED

CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 World Energy Usage (mtoe) 9,419 9,598 9,934 10,410 10,708 11,006 11,287 11,439 11,310 11,943 12,225 12,477 India Energy Usage (mtoe) 297 311 321 345 367 390 420 447 484 512 535 563

India's share in usage (%) 3.2 3.2% 3.2% 3.3% 3.4% 3.5% 3.7% 3.9% 4.3% 4.3% 4.4% 4.5% Energy Growth - World (%) 3.2 3.2 3.2 3.3 3.4 3.5 3.7 3.9 4.3 4.3 4.4 4.5 Energy Growth - India (%) 0.9 1.9 3.5 4.8 2.9 2.8 2.6 1.3 (1.1) 5.6 2.4 2.1 GDP Growth - World (%) 0.5 4.5 3.2 7.6 6.3 6.3 7.7 6.3 8.4 5.7 4.5 5.4 GDP Growth - India (%) 1.7 2.1 2.8 4.2 3.6 4.1 4.0 1.4 (2.1) 4.1 2.9 2.4

Energy Multiplier - India 0.10 1.15 0.41 1.07 0.66 0.66 0.83 0.93 0.98 0.64 0.68 0.80 Sources : BP, World bank, Govt reports, HDFC sec Research

Energy Consumption : toe per capita (X axis) and per 1,000 sqkm (Y axis)

Sources : BP, World bank, Govt reports, HDFC sec Inst Research

China USA

India

Russia

Japan

Germany

Brazil

France

Canada Iran Indonesia

UK

Saudi Arabia Mexico

Italy

South Africa

Ukraine Spain

Australia

(0.2)

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

- 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0

• Size of bubble represents Energy usage • Emerging countries are green • OECD countries are orange

Page | 9


Changing Global Energy Mix

Over the last two decades oil’s contribution in the global energy mix has reduced from 39% to 33%. This gap was filled by natural gas and renewable/hydro energy.

Fuel wise Energy Mix

Source: BP, HDFC sec Inst Research

BP predicts a fall in coal and oil proportions in future years. This gaps will be compensated by natural gas, renewable source and hydroelectric. Discovery of large gas reserves/shale gas and focus on cleaner energy are the driving force behind it.

Asia Pacific : skewed towards coal

Global energy mix is well distributed between oil, natural gas and coal. Coal caters to ~30% of the world’s energy needs. However, the mix is skewed towards coal (52% contribution) in the Asia Pacific region. China (ranked 1st globally in energy consumption) and India (ranked 4th) use coal to the extent of 68% and 53% respectively.

Fuel wise Energy Mix (CY13)

Source: BP, HDFC sec Inst Research

With limited availability of indigenous oil and natural gas in the Asia Pacific region, we expect coal to remain the major source of energy.

39 38 34 33 30 29

22 23 24 24 25 26

27 25 29 30 30 28

6 7 8 9 10 12

0%

20%

40%

60%

80%

100%

CY90 CY00 CY10 CY12 CY20E CY30E

Oil Natural Gas Coal Nuclear Others

33 37 37 27 29 18

24 26 30

11 8

5

30 19 20 52 55

67

9 9 5 8 7 9

0%

20%

40%

60%

80%

100%

World OECD US Asia Pacific

India China

Oil Gas Coal Nuclear Energy Others

Page | 10


Future Energy Scenario : India Based on an energy multiplier of 0.74x, India’s energy need will rise at a CAGR of 5% to sustain the average GDP growth of 6.7% over the next decade. We have analysed the potential of existing energy sources to meet the future demand.

COAL

Coal will remain the major energy source with more than 50% contribution. Currently domestic/import forms 80/20% of the total requirement

Coal India contributes ~80% of the domestic supply. Supply from Coal India has grown at a CAGR of 3% over the last 5 years. Even with removal of railway bottlenecks and environmental clearance we anticipate production growth of no more than 5-7% in the near future.

Imports will continue to rise. However, port limitations will keep growth in the range of ~10%. Coal contribution will remain at 53-55%. No major change expected.

OIL

Oil consumption (~3.8 bbl/d) has increased at a CAGR of ~4.2% over the last decade. Domestic oil production growth was muted at ~1.2%. Domestic sources contribute ~24% of total

need. We expect govt to incentivise domestic producers to increase domestic production. However, with domestic product growth remaining at 1-3%, proportion of imports is set to rise. Oil contribution can remain at 28-29% with rising imports. Govt will incentivise gas usage. Even

imported LNG is cheaper (and cleaner) than crude.

OTHERS incl RENEWABLE

Nuclear (1%), renewable (2%) and hydroelectric (5%) contribute 8% of total requirement. Nuclear, wind and solar are small and even if they grow at a faster pace India’s energy dynamics will

not change. India has huge opportunity with regard to hydroelectric power (just ~25% is tapped so far). However,

long gestation period (~10 years for large projects) restricts any major near term additions. Contribution will remain at 8-10%. No major change expected.

NATURAL GAS

Gas is cleaner (vs coal/oil), cheaper (vs oil) and easy to use. As against global share of 24%, gas accounts for just 9% of India’s energy needs.

Even high cost RLNG is cheaper than Naphtha/Fuel Oil (lowest cost crude product). ~75% of oil is imported i.e. ~22% of energy demand can be replaced with low cost gas. We expect both domestic (driven by favourable govt policies) and imported gas supply to increase. Contribution will cross 10% and will keep on rising (govt predicts it to double by 2030).

Our View : Natural Gas proportion will increase and oil’s share will reduce.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Coal 55%

Oil 29%

Others 8%

Natural Gas 8%

India’s Energy Mix CY13

(Source: BP, HDFC sec Inst Research)

Page | 11


Future Natural Gas Scenario : India Ample demand at higher gas price

As seen earlier, even RLNG (costs US$ 15-18/mmbtu) is cheaper than the cheapest petroleum product (naphtha and fuel oil). Theoretically, ~22% of India’s energy requirement which is met through imported oil can be replaced with natural gas. Hence there is a potential to take gas proportion from 9% to 30% subject to associated infrastructure.

Possible switching at different gas price

Source: Gail, Govt reports, HDFC sec Inst Research

Additional customers at different gas price (Source - Gail)

Upto US$ 10/mmbtu : Power (CCGT), Fertiliser (Gas), Steel

Upto US$ 14/mmbtu : Fertilisers (Naphtha/FO), Industrial, CGD, Power (CCHP), Power (Peaking), Petrochemicals, Refining

Upto US$ 18/mmbtu : Power (Naphtha), Captive Power, Refining (Naphtha)

Future gas demand projection Strong GDP growth suggests rising energy demand for

India. Energy consumption will increase at ~5% CAGR to sustain the GDP growth rate of 6.7%. Even with coal contributing 53-55% of the total requirement there is need for oil and gas supply to increase at ~5% CAGR.

Demand of natural gas in India

Source: PNGRB, MOPNG, HDFC sec Inst Research

Natural gas being cheaper and cleaner as compared to oil will get priority in the future. Due to shortage of the gas at right price, just 50-55% of gas demand is met. Total demand is likely to increase by more than double in the next 10 years. Hence there is a potential for gas consumption to quadruple from current levels subject to attractive pricing and associated infrastructure.

Out of the total incremental demand projected by govt, around 50% is comes from fertilisers, CGD, refiners and others. We are confident of this demand. The remaining ~50% comes from power sector, which is subject to change in govt policies to absorb high cost power.

-

50

100

150

200

250

300

Upto US$ 10/mmbtu

Upto US$ 14/mmbtu

Upto US$ 18/mmbtu

mmscmd

150 - 160

60 - 70

60

134

243

378

522

655

746

-

100

200

300

400

500

600

700

800

FY13A FY13D FY17D FY22D FY27D FY30D

Power Fertilisers CGDRefineries Others Total

Page | 12


Indian gas supply outlook

Govt reports (Planning Commission, PNGRB, Rangarajan report) are talking about optimistic gas supply scenario.

Gas supply projection from government reports

Source: PNGRB, Govt reports, HDFC sec Inst Research We see a significant miss from govt projections.

Adequate returns to producers and clarity on gas usage for power sector will actually decide the extent of supply and usage.

Realistic gas supply projection

Source: Companies, Govt reports, HDFC sec Inst Research

Supporting distribution infrastructure

Transmission netowrk : Gail (~70%), GSPL (~12%) and RGTIL (~10%) are key players present in the regulated transmission pipeline business. Total pipeline capacity in India is ~3x that of current supply. Planned capex by Gail and GSPL suggests that pipelines are unlikely to be a bottleneck in India.


Source: PNGRB, Govt reports, HDFC sec Inst Research

Distribution network : City gas distribution will be one of the key growth drivers in the future. CGD model is a win-win situation for all stake holders. Consumers get cheaper alternate fuel, govt saves on forex and pollution reduces. Currently there are ~16 CGD players operating in more than 20 cities. Many new entrants have shown their interest in different rounds of bidding. PNGRB expects cities under CGD coverage to increase to ~80 over the next decade.

103 111 120 157 161

64 85 124

143 188

167 196

244

300

349

-

50

100

150

200

250

300

350

400

FY14P FY15P FY16P FY17P FY18P

Domestic RLNG Total

mmscmd

61 60 62 64 67 69

26 14 15 17 21 35 50

48 55 61 67 91 144 130 139 150

164

208

-

50

100

150

200

250

FY13 FY14 FY15E FY16E FY17E FY18E

ONGC/OIL Pvt/JV RIL RLNG Total

mmscmd

-

500

1,000

FY13 FY14 FY15 FY20 FY25 FY30

Gas demand Gas supplyPipelines Design Capacity Pipelines Capacity at sources

mmscmd

Page | 13


RLNG – no more a filler

Rising energy demand and decline in domestic supply led to increase in LNG contribution from 20% in FY06 to 37% in FY14. LNG consumption declined marginally in FY14 due to higher spot LNG price.

Gas supply in India


Currently we have two RLNG pricing regimes in India :

(1) Long term pricing : Linked to crude price (at US$ 105/bbl this translates to a gas price of ~$ 14.3/mmbtu). This is applicable for 7.5 MMTPA (~28 mmsmcd) supply from Ras Gas, Qatar.

(2) Spot pricing : It is based on demand supply. However, this price is usually higher than LT prices.

GAIL has signed a 20-year gas supply agreement with Cheniere and Dominion, USA to supply 5.8 MMTPA of LNG. Pricing will be linked to Henry Hub prices and supply is expected to start from FY18.

• Equivalent pricing (crude at ~US$ 105-110/bbl) : o Naphtha @ $ 1k/t = RLNG @ US$ 22/mmbtu o Fuel Oil @ $ 0.7k/t = RLNG @ US$ 17/mmbtu

Upcoming RLNG facility in India

Price advantage with crude and shortfall in domestic gas output has led to spurt in RLNG projects in India. LNG re-gasification capacity is likely to triple from ~20 MMTPA to ~60 MMTPA in the next five years.



All industries (except fertilisers and power) are ready markets for RLNG. To ensure supply, Indian companies are entering into long term supply agreement with global players.

Signed LT agreements

From Supplier Quantity (MMTPA) Starting

GAIL USA Cheniere & Dominion 5.8 FY18

GAIL Russia Gazprom 2.5 FY20 GAIL Australia Gorgon ~1 FY16 GSPC BG 2.5 FY15 Petronet Australia Exxon Mobile 1.4 FY16 Petronet Australia Gazprom 2.5 FY18 IOC Canada Process Energy 1.2 FY19

Source: Companies, Govt. reports, HDFC sec Inst Research

57 56 56 56 60 61 62 61 60

17 16 18 18 10 9 8 7 8

42 56 43 26 14 19 26 31 30

35 39 50

50 48 93 98 105 104

147 165 163 144

130

-

50

100

150

200

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

ONGC/OIL Pvt/JV KG-D6 RLNG Total

mmscmd

-

75

150

225

300

-

25

50

75

100

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

PLNG-Dahej Shell-HaziraGail-Dabhol PLNG-KochiIOC-Ennore GSPC-MundraRIL-Kakinada PLNG-GangavaramEast Coast West Coast

mtpa mmscmd

Page | 14


Global Natural Gas Scenario Top natural gas producers

Natural gas contributes ~24% of the total global energy requirement vs 8% in india. Total global supply in CY13 was ~9k mmscmd.

Gas consumption has increased at a CAGR of ~2.8% over the last decade as against the total energy CAGR of ~2.4%.

Region wise gas production

Source: Gail, Govt reports, HDFC sec Inst Research

The Middle East, Africa and Asia Pacific have seen the fastest growth over the last decade. Production from these three geographies has increased from 16% in 1990 to 37% in 2012.

India and China accounted for 1.0% and 3.5% of global gas production respectively in CY13.

Top natural gas consumers

Energy consumption growth is fastest in the emerging countries. Proportion of North America, Europe and Eurasia has declined from 83% in 1990 to 60% in 2012.

Region wise gas consumption

Source: PNGRB, MOPNG, HDFC sec Inst Research

New discoveries with low extraction challenges in the Middle East made it the largest LNG supplier in the world.

Rising energy demand and lower domestic availability made Asia Pacific the largest market for RLNG.

Africa is emerging as another gas surplus region with newer discoveries in Mozambique and Tanzania.

33 34 32 27 26 27

48 41 39 37 32 31

5 7 9 11 15 17

8 10 11 13 15 14

0%

20%

40%

60%

80%

100%

1990 1995 2000 2005 2010 2013

North America S. & Cent. America Europe & EurasiaMiddle East Africa Asia Pacific

33 35 33 28 27 28

50 43 41 40 35 32

5 7 8 10 12 13

8 10 12 14 18 19

0%

20%

40%

60%

80%

100%

1990 1995 2000 2005 2010 2013

North America S & C America Europe & Eurasia

Middle East Africa Asia Pacific

Page | 15


LNG trade movement (CY13)

E X P O R T E R S

(BCM) Trinidad & Tobago

Brazil/ Peru Europe Russia Qatar Other

Middle East Algeria Nigeria Other Africa Australia Indonesia Malaysia Total

Imports

I M P O R T E R S

North America 3 3 1 - 3 1 - 2 - - 0 - 12 S. & Cent. America 13 0 3 - 1 0 0 1 0 - - - 20 Europe and Eurasia 2 1 3 - 23 - 14 7 0 - - - 51 Middle East 0 - 0 - 3 - 0 0 0 0 - - 5 Asia Pacific 2 2 11 14 75 27 1 12 8 30 22 34 238

China 0 - 0 - 9 2 0 0 1 5 3 4 24 India - - 0 - 15 1 0 1 0 - - - 18 Japan 0 1 8 12 22 14 1 5 4 24 9 20 119 Taiwan 1 1 2 3 18 11 0 4 1 1 8 6 54 South Korea 0 - 0 0 9 0 - 1 1 0 3 4 17

Total exports 20 6 18 14 106 29 15 22 9 30 22 34 325 Source: BP, HDFC sec Inst Research

Key findings from above table :

As seen in global demand-supply chart, the Middle East leads in LNG exports. Middle Eastern countries contribute ~41% of total Exports. Qatar leads the pack with ~1/3rd of global supply.

Asia Pacific countries accounts for ~73% of global imports. Japan leads with ~37% of global LNG imports. There are mainly three pricing regimes for LNG :

o America : Linked to Henry Hub o Europe and Eurasia : Linked to oil index and UK Heren NBP index o Asia Pacific : Linked to Japan crude cocktail

There is a large difference between the local price and exported price to other countries o America : Local Henry Hub price is $4- 4.5/mmbtu, however delivered price to India (including liquefaction,

transportation and re-gasification) will be $ 10-12/mmbtu. o Middle East : Petronet LNG receives gas from Qatar at ~$ 14/mmbtu. However gas price to urea plants in Oman is

less than $ 2/mmbtu.

Page | 16


Conversion factors Weight to Volume Conversion Volume Conversion

Product Weight (MT) Volume (KL) Barrel (bbl) From To

LPG 1 1.844 11.60 1 bbl (British Barrel) 159 litres

Petrol (MS) 1 1.411 8.50 1 bbl (British Barrel) 42 US Gallons

Diesel (HSD) 1 1.210 7.45 1 US Gallon 3.78 litres

Kerosene (SKO) 1 1.285 7.90 1 Kilo litre (KL) 6.29 bbl

ATF 1 1.288 7.90 1 million barrels per day 49.8 MMTPA

Light Diesel Oil (LDO) 1 1.072 6.75 Furnace Oil (FO) 1 1.042 6.55 Energy Conversion

Crude Oil 1 1.170 7.33 From To

1 Kilocalorie (kcal) 4.187 kJ

1 Kilocalorie (kcal) 3.968 Btu

1 Kilowatt-hour (kWh) 860 kcal

1 Kilowatt-hour (kWh) 3,412 Btu

Natural Gas Conversions

From To From To

1 Standard Cubic Meter 35.3 Cubic Feet 1 mmbtu 25.2 scm @10,000 kcal/scm

1 BCM/year of Gas 2.74 mmscmd 1 US$/mmbtu (INR-US$ @ 60, NCV @ 9k) Rs 2.14/scm, Rs 2.8/kg

1 tcf of Gas Reserve (100% recoverable)

3.9 mmscmd for 20 years

GCV (Gross Calorific Value) 10,000 kcal/scm

NCV (Net Calorific Value) 90% of GCV

1 mmtpa of LNG 3.7 mmscmd Urea produced from 1 mmscmd of gas 0.6 mtpa

1 MT of LNG 1,314 scm Power generation from 1 mmscmd of gas 242 MW

Source: Gail, PPAC, Govt Reports, HDFC sec Inst Research

Page | 17

COMPANY UPDATE 11 JUL 2014

ONGC BUY

Proxy to India’s O&G growth We believe that ONGC will be the biggest beneficiary of oil & gas sector revamp in India. Government has clarified its intent to provide higher benefits to domestic upstream players to encourage investments. Rising imports of oil & gas and subsequently higher forex outgo further emphasise the need for higher domestic production.

We see multiple triggers ahead for ONGC (1) Govt’s focus on energy will lead to stable policy regime (2) Gas price hike. We have built-in new gas prices at $ 7.2/mmbtu from 1st Oct 2014 (3) Increase in production (4) Lower UR sharing due to regular diesel price hike (5) Volumes growth at OVL

We remain upbeat on ONGC even with conservative assumptions (1) In current tight fiscal condition, we believe that Govt would like to keep maximum benefits of declining UR. We have modelled ONGC’s share to increase from 40% in FY14 to 55% in FY16. (2) New gas price at $ 7.2/mmbtu, 14% below the debated price of $ 8.4/mmbtu.

Our SOTP TP for ONGC is Rs 471/sh (11x FY16E standalone EPS + Rs 64/sh for OVL at 10x FY16E EPS of Rs 6.4/sh and Rs 22/sh for other investments). We maintain our estimates and have increased our TP by assigning higher multiple (11x vs 10x) to standalone business. Maintain BUY.

Earnings sensitivity : Our base case is based on net crude realisation at $ 50/bbl and gas price at $ 7.2/mmbtu.

ONGC: standalone EPS sensitivity (FY16)

Net

cru

de

Real

isat

ion

($

/bbl

)

Gas price ($/mmbtu) 35 6.0 6.5 7.2 8.0 8.4 45 28.9 30.2 32.1 34.2 35.3 47 30.3 31.7 33.5 35.7 36.7 50 31.8 33.1 35.0 37.2 38.2 52 33.3 34.6 36.5 38.6 39.7 55 34.9 36.2 38.1 40.2 41.3

Source : HDFC sec Inst Research

Under recovery overhang to subside : Regular price hikes in diesel will lead to decline in oil UR from Rs 1.4tn in FY14 to Rs 1.0tn/0.9tn in FY15/16.

Benefits to Government : Govt’s share will decrease from Rs 708bn in FY14 to Rs 371/312bn in FY15/16.

Benefits to ONGC : Despite rise in ONGC’s share from 40% to 55%. We expect that Rs/bbl realisation will rise from Rs 2.5k/bbl in FY14 to Rs 2.7k/3.0k in FY15/16.

FINANCIAL SUMMARY (Rs bn) FY12 FY13 FY14 FY15E FY16E Net Sales 765.15 830.05 838.89 926.32 1,053.68 EBITDA 459.04 436.05 444.90 498.12 580.94 PAT 251.23 209.26 220.95 244.57 299.56 Diluted EPS (Rs) 26.8 24.5 25.8 28.6 35.0 P/E (x) 15.1 16.5 15.6 14.1 11.5 EV/EBITDA (x) 7.4 7.8 7.7 6.9 5.9 RoE (%) 21.8 17.7 16.9 17.0 18.7 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS

CMP (as on 10 Jul 2014) Rs 404

Target Price Rs 471 Nifty 7,568

Sensex 25,373

KEY STOCK DATA Bloomberg/Reuters ONGC IN/ONGC.BO

No. of Shares (mn) 8,555

MCap (Rs bn) / ($ mn) 3,456/57,679

6m avg traded value (Rs mn) 2,123

STOCK PERFORMANCE (%)

52 Week high / low Rs 472/234

3M 6M 12M

Absolute (%) 25.6 42.2 36.4

Relative (%) 13.8 20.0 4.9

SHAREHOLDING PATTERN (%)

Promoters 68.94

FIs & Local MFs 10.86

FIIs 6.66

Public & Others 13.54 Source : BSE



ONGC : COMPANY UPDATE

ASSUMPTIONS Particulars FY11 FY12 FY13 FY14 FY15E FY16E FY17E ONGC Standalone Sales Volumes Crude - nominated (mnT) 20.4 19.7 19.2 18.9 19.5 20.1 20.5 Crude - JV (mnT) 2.5 3.4 4.5 4.7 4.7 5.1 5.2 Gas - nominated (BCM) 18.2 18.2 18.4 18.3 18.8 19.4 20.0 Gas - JV (BCM) 2.0 2.0 1.8 1.3 1.5 1.5 1.5 Value added product (mnT) 3.2 3.1 3.1 3.0 2.9 2.9 2.9 Nominated block Gross oil realisation (US$/bbl) 89 117 111 107 105 105 105 Subsidy sharing (US$/bbl) 36 63 63 66 60 55 50 Net oil realisation (US$/bbl) 54 55 48 41 45 50 55 Net oil realisation (Rs/bbl) 2,451 2,623 2,605 2,478 2,718 2,982 3,271 UR Subsidy sharing by ONGC (Rs bn) 249 445 494 564 524 500 466 Gross capex (Rs bn) 273 278 283 356 350 350 350 Gas realisation (US$/mmbtu) 3.9 4.2 4.2 4.2 5.7 7.2 7.2 INR-USD 45.6 48.0 54.4 60.5 60.0 60.0 60.0 Source: Company, HDFC sec Inst Research

CHANGE IN ESTIMATES (Standalone) (Rs bn)

FY14 FY15 Old New % Change Old New % Change

Revenues 926.32 926.32 0.0 1,053.68 1,053.68 0.0 EBITDA 498.12 498.12 0.0 580.94 580.94 0.0 PAT 244.57 244.57 0.0 299.56 299.56 0.0 EPS (Rs/sh) 28.6 28.6 0.0 35.0 35.0 0.0 Source: HDFC sec Inst Research VALUATION

FY16E EPS (Rs/sh)

Target Multiple

Value (Rs/sh) Basis

ONGC standalone 35.0 11.0 385 x EPS OVL 6.4 10.0 64 x EPS Traded investment 80% 22 at 20% discount to CMP Target Price 471 Source: Company, HDFC sec Inst Research

Building increase in volumes Even with higher proportion of UR sharing, Rs/bbl realization will increase by ~10%/yr We have assumed $3/mmbtu increase in gas price for ONGC No change in estimates Increasing standalone biz multiple from 10 to 11x FY16E EPS.

Page | 19


STANDALONE INCOME STATEMENT (Rs bn) FY12 FY13 FY14 FY15E FY16E Revenues 765.15 830.05 838.89 926.32 1,053.68 Growth % 16.2 8.5 1.1 10.4 13.7 Raw material (0.89) (0.20) 7.92 - - Operating and other expenses 306.11 394.00 393.99 428.20 472.74 EBITDA 459.04 436.05 444.90 498.12 580.94 EBITDA Margin % 60.0 52.5 53.0 53.8 55.1 EBITDA growth % 21.8 (5.0) 2.0 12.0 16.6 Depreciation, Depletion, Impairment 168.29 184.17 187.71 191.46 195.29

Other income 44.53 54.37 67.13 53.01 54.89 EBIT 335.27 306.25 324.32 359.66 440.53 Finance charges 0.35 0.28 0.00 - - PBT 334.92 305.97 324.32 359.66 440.53 Provision for taxes 115.20 96.19 103.37 115.09 140.97 PP/EO/Minority/Associate interest (31.50) 0.53 - - - PAT 251.23 209.26 220.95 244.57 299.56 EPS 26.8 24.5 25.8 28.6 35.0 EPS Growth % 21.2 (8.7) 5.4 10.7 22.5

Source: Company, HDFC sec Inst Research

STANDALONE BALANCE SHEET (Rs bn) FY12 FY13 FY14 FY15E FY16E SOURCES OF FUNDS Share Capital 42.78 42.78 42.78 42.78 42.78 Reserves and Surplus 1,086.79 1,201.75 1,324.47 1,470.69 1,647.31 Total Shareholders Funds 1,129.57 1,244.53 1,367.25 1,513.47 1,690.09 Total Debt 45.00 - - - - Deferred Taxes 111.98 128.88 165.79 165.79 165.79 Other Long Term Liabilities 5.62 11.24 11.85 11.85 11.85 Long Term Provisions 213.13 221.87 257.20 257.20 257.20 Capital Employed 1,505.30 1,606.53 1,802.09 1,948.30 2,124.93 APPLICATION OF FUNDS Net fixed assets and producing assets 679.45 798.44 960.12 1,058.66 1,164.97

Capital WIP/Development well in progress 268.79 248.91 255.58 315.58 363.97

Long term loans and advances 254.50 219.98 181.78 181.78 181.78 Other non-current assets 105.05 116.18 124.92 124.92 124.92 Investments 52.16 91.73 172.04 172.04 172.04 Inventory 51.65 57.04 58.83 65.98 75.06 Debtors 61.95 68.64 81.66 88.82 101.04 Cash and bank balance 201.25 132.19 107.99 88.61 98.95 Loans and advances 31.24 38.77 43.67 43.67 43.67 Other current assets 11.24 9.38 6.29 6.36 6.42 Total current assets 357.33 306.01 298.43 293.45 325.14 Trade creditors 47.60 53.41 63.72 71.06 80.83 Other current liabilities 141.95 112.23 119.26 119.26 119.26 Provisions 22.43 9.10 7.81 7.81 7.81 Total Current Liabilities 211.98 174.74 190.80 198.13 207.90 Net current assets 145.35 131.27 107.64 95.32 117.23 Capital Employed 1,505.30 1,606.53 1,802.09 1,948.30 2,124.93


Page | 20


STANDALONE CASH FLOW (Rs bn) FY12 FY13 FY14 FY15E FY16E PAT 251.23 209.26 220.95 244.57 299.56 Non Operating Income 31.17 38.06 46.99 37.10 38.42 PAT from Operations 220.06 171.20 173.96 207.46 261.14 Depreciation 168.29 184.17 187.71 191.46 195.29 Interest 0.35 0.28 0.00 - - Working capital change 46.61 21.70 113.95 (7.06) (11.58) OPERATING CASH FLOW 435.31 377.34 475.62 391.87 444.85 Capex (278.26) (282.96) (355.76) (350.00) (350.00) Free Cash Flow 143.69 78.07 99.72 25.97 78.39 Investments (92.16) (49.07) (92.08) - - Other Income (31.17) (38.06) (46.99) (37.10) (38.42) INVESTING CASH FLOW (401.59) (370.09) (494.83) (387.10) (388.42) Capital issuance (9.69) (0.86) - - - Debt issuance 45.00 (45.00) - - - Dividend (74.59) (106.29) (94.16) (98.35) (122.94) Interest and Others (10.04) (1.13) (4.80) - - FINANCING CASH FLOW (39.63) (152.42) (98.96) (98.35) (122.94) NET CASH FLOW 56.44 (69.06) (24.20) (19.37) 10.34 Closing cash 201.25 132.19 107.99 88.61 98.95


STANDALONE KEY RATIOS FY12 FY13 FY14 FY15E FY16E PROFITABILITY % EBITDA margin 60.0 52.5 53.0 53.8 55.1 EBIT margin 43.8 36.9 38.7 38.8 41.8 APAT margin 30.0 25.3 26.3 26.4 28.4 RoE 21.8 17.7 16.9 17.0 18.7 RoCE 16.5 13.5 13.0 13.0 14.7 RoIC 17.0 13.1 12.1 13.0 14.8 EFFICIENCY Tax rate % 31.4 31.5 31.9 32.0 32.0 Total Asset turnover (x) 0.7 0.7 0.6 0.6 0.7 Inventory (days) 24.6 25.1 25.6 26.0 26.0 Debtor (days) 29.6 30.2 35.5 35.0 35.0 Payables (days) 22.7 23.5 27.7 28.0 28.0 Cash conversion cycle (days) 31.5 31.8 33.4 33.0 33.0 Net Debt/EBITDA (x) (0.4) (0.3) (0.2) (0.2) (0.2) Net D/E (0.1) (0.1) (0.1) (0.1) (0.1) Interest coverage 962.6 - - - - PER SHARE DATA EPS (Rs) 26.8 24.5 25.8 28.6 35.0 CEPS (Rs) 49.0 46.0 47.8 51.0 57.8 BV (Rs) 132.0 145.5 159.8 176.9 197.5 DPS (Rs) 8.8 9.5 9.5 10.0 12.5 VALUATION P/E (x) 15.1 16.5 15.6 14.1 11.5 P/Cash EPS (x) 8.2 8.8 8.5 7.9 7.0 P/BV (x) 3.1 2.8 2.5 2.3 2.0 EV/EBITDA (x) 7.4 7.8 7.7 6.9 5.9 EV/Revenue (x) 4.3 4.0 4.0 3.6 3.2 OCF/EV (%) 12.8 10.9 13.6 11.2 12.8 FCF/EV (%) 4.4 2.3 3.0 0.8 2.3 FCFE/M Cap (%) 2.8 3.6 2.9 0.8 2.3 Dividend Yield 2.2 2.4 2.4 2.5 3.1


Page | 21


Reliance Industries BUY

Enough steam from core biz E&P business contributed 11% of PBIT for RIL in FY14 (peak of 27% in FY11). However, most of the news for RIL over the last three years was from this segment. Decline in KG-D6 volumes (from peak of 60mmscmd in FY11 to 15mmscmd), Govt’s denial for part capex in KG-D6 and demand for higher gas price led to various controversies/news. In our base case we have cut revised gas price from US$ 8.4/mmbtu to $ 7.2/mmbtu. However, we feel that it will have more of sentimental impact and RIL’s story remains intact.

Though our assumed gas price is 14% below the debated price of $ 8.4/mmbtu, it is still 71% higher than the current price. Further, there are multiple growth drivers for RIL. Strong GRM, output from MA fields and incremental capacity in polyesters will be the growth drivers for FY15/16. Quantum jump in EBITDA (~70% increase over FY14 to Rs 520bn) will take place in FY17 post full impact of the capex of US$ 13bn in core business (refining and chemicals). Other encouraging triggers are (1) Retail biz has achieved critical mass and turned PAT positive (2) Positive outlook for domestic upstream assets (R-series/Satellite fields) (3) Ramp up in shale gas volumes (4) Strong balance sheet

The key risk for the stock is increasing capex in telecom business ($ 6bn spent till FY14 and Co has guided for additional capex of ~$ 6bn). However, we remain positive on RIL on the back of huge capex in

the core business. We raise our SOTP target to Rs 1,100/sh. Maintain BUY.

Capex on track : Ongoing US$ 13bn capex (~$ 5bn spent till FY14) is broadly on track. All projects will be commissioned by FY16 end. We expect EBITDA to jump to Rs 520bn in FY17 (~70% over FY14 EBITDA).

Cut in estimates due to lower gas price : We have cut our EBITDA estimates for FY15/16 by 1.5/3.7% factoring lower gas price.

Encouraging outlook for Retail biz : FY14 was an encouraging year for the retail biz. Company turned PAT positive in this biz and has achieved critical mass to gain from operating leverage. Co is operating across 146 cities and retail area has increased to 11.7 mn sqft.

Rising debt in consolidated balance sheet : RIL was a zero net debt co till last year. However, rising capex in telecom and shale gas has resulted in net debt of Rs 614bn (FY14 net D/E 0.3x) in the consolidated books. Standalone co’s net D/E is 0.1x.

FINANCIAL SUMMARY (Rs bn) FY12 FY13 FY14 FY15E FY16E Net Sales 3,299.04 3,602.97 3,901.18 4,093.52 4,307.51 EBITDA 336.19 307.87 308.78 353.69 394.11 PAT 200.40 210.03 219.85 236.69 257.05 Diluted EPS

62.0 65.0 68.0 73.2 79.5

P/E (x) 16.1 15.4 14.7 13.6 12.5 EV/EBITDA (x) 9.6 10.5 10.4 9.1 8.2 RoE (%) 12.6 12.1 11.7 11.4 11.3 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS


Target Price Rs 1,100 Nifty 7,568

Sensex 25,373

KEY STOCK DATA

Bloomberg/Reuters RIL IN/RELI.BO


MCap (Rs bn) / ($ mn) 3,224/53,797

6m avg traded value (Rs mn) 3,743


52 Week high / low Rs 1,145/764

3M 6M 12M

Absolute (%) 2.9 16.2 16.5

Relative (%) (8.8) (6.0) (15.0)


Promoters 45.30


FIIs 18.61




RELIANCE INDUSTRIES : COMPANY UPDATE

ASSUMPTIONS FY12 FY13 FY14 FY15E FY16E FY17E Crude price (US$/bbl) 109.9 107.1 107.0 105.0 105.0 105.0 INR-USD 47.9 54.4 60.5 60.0 60.0 60.0 Refining business GRM (US$/bbl) 8.6 9.2 8.1 8.5 8.5 11.1 Crude thruput (mmt) 67.7 68.5 68.0 68.5 68.5 68.5 Upstream business PMT Gas (BCF) 145 115 93 87 83 79 KG Gas (mmscmd) 43 26 14 15 17 21 Gas price (US$/mmbtu) 4.2 4.2 4.2 5.7 7.2 7.2 Petrochemicals Sales volume (mmt) 9.0 8.9 9.0 10.2 12.0 14.0 Source : Company, HDFC sec Inst Research CHANGE IN ESTIMATES (Rs bn) FY15 Old FY15 New % ch FY16 Old FY16 New % ch Revenue 4,062.6 4,093.5 0.8 4,265.0 4,307.5 1.0 EBITDA 359.1 353.7 (1.5) 409.4 394.1 (3.7) PAT 238.4 236.7 (0.7) 272.2 257.0 (5.6) EPS (Rs/sh) 73.8 73.2 (0.7) 84.2 79.5 (5.6) SOTP VALUATION BASED ON FY16

Business EBITDA (Rs bn) Multiple Value

(Rs bn) Value* (Rs/sh) Valuation Basis

Petrochemicals 162 6.5 1,054 361 EV/EBITDA on FY16E Refining 189 6.5 1,227 420 EV/EBITDA on FY16E E & P PMT 17 4.0 69 24 EV/EBITDA on FY16E KG D6 gas 245 84 NPV NEC 46 16 NPV CBM 87 30 NPV Shale gas 1.0 420 144 x Investments Investments in Retail 1.0 100 34 x Investments Investments in Telecom 0.7 252 86 x Investments CWIP 1.0 327 112 As on Mar-14 Consolidated Net Debt 614 (210) As on Mar-14 Value per share 1,100 Source : Company, HDFC sec Inst Research, * Valuation is based on 2.923 bn shares (net of treasury shares)

Strong GRM due to higher global additional demand (1.4mbpd in 2014 vs 1.2 YoY) and delay in new capacities KG-D6 gas volumes decline is arrested and major boost will come from FY17 Change in estimates factoring gas price at $ 7.2/mmbtu vs 8.2 earlier Rising capex in telecom biz is a major overhang; hence we are valuing it at 30% discount

Page | 23

RELIANCE INDUSTRIES : UPDATE

STANDALONE INCOME STATEMENT (Rs bn) FY12 FY13 FY14 FY15E FY16E Revenues 3,299.04 3,602.97 3,901.18 4,093.52 4,307.51 Growth % 32.9 9.2 8.3 4.9 5.2 Raw material 2,753.83 3,082.27 3,375.61 3,518.90 3,688.16 Employee cost 28.62 30.62 32.77 35.06 37.51 Other expenses 180.40 182.20 184.03 185.87 187.72 EBITDA 336.19 307.87 308.78 353.69 394.11 EBIDTA margin (%) 10.2 8.5 7.9 8.6 9.1 EBITDA growth % (11.8) (8.4) 0.3 14.5 11.4 Depreciation, Depletion, Impairment 113.94 94.65 87.89 92.20 98.91

Other income 61.92 79.98 89.36 82.89 86.38 EBIT 284.17 293.20 310.25 344.38 381.58 Finance charges 26.67 30.36 32.06 44.87 56.32 PBT 257.50 262.84 278.19 299.50 325.26 Provision for taxes 57.10 52.81 58.34 62.81 68.21 PAT 200.40 210.03 219.85 236.69 257.05 EPS 62.0 65.0 68.0 73.2 79.5 EPS Growth % (1.2) 4.8 4.7 7.7 8.6


STANDALONE BALANCE SHEET (Rs bn) FY12 FY13 FY14 FY15E FY16E SOURCES OF FUNDS Share Capital (including suspense/warrant) 32.71 32.29 32.32 32.32 32.32

Reserves and surplus 1,628.25 1,767.91 1,938.59 2,135.58 2,347.25 Total Equity 1,660.96 1,800.20 1,970.91 2,167.90 2,379.57 Short Term debt 105.93 115.11 227.70 277.70 327.70 Long Term debt 480.34 430.12 627.11 827.11 1,027.11 Total Debt 586.27 545.23 854.81 1,104.81 1,354.81 Deferred tax liability 121.22 121.93 122.15 122.15 122.15 TOTAL SOURCES OF FUNDS 2,368.45 2,467.36 2,947.87 3,394.86 3,856.53 APPLICATION OF FUNDS Net fixed assets 1,137.23 829.62 804.24 983.67 1,064.76 Intangible assets 40.59 267.86 289.82 289.82 289.82 Capital WIP 36.95 135.25 326.73 456.73 666.73 Intangibles WIP - 55.91 90.43 90.43 90.43 Long Term Loans and Advances 143.40 215.28 284.36 284.36 284.36 Investments 261.64 241.43 526.92 586.92 646.92 Inventories 359.55 427.29 429.32 448.60 472.06 Debtors 184.24 118.80 106.64 111.90 117.75 Cash and Cash equivalent 674.42 779.13 665.94 644.42 752.08 ST Loans and Advances 110.89 109.74 146.77 146.77 146.77 Other Current Assets 2.49 4.80 4.66 4.66 4.66 Total Current Assets 1,331.59 1,439.76 1,353.33 1,356.35 1,493.31 Creditors 403.24 457.87 578.62 504.68 531.06 Other Current Liabilities 137.13 216.40 107.67 107.67 107.67 Provisions 42.58 43.48 41.67 41.07 41.07 Total Current Liabilities 582.95 717.75 727.96 653.42 679.80 Net Current Assets 748.64 722.01 625.37 702.93 813.51 TOTAL APPLICATION OF FUNDS 2,368.45 2,467.36 2,947.87 3,394.86 3,856.53


Page | 24

RELIANCE INDUSTRIES : UPDATE

STANDALONE CASH FLOW (Rs bn) FY12 FY13 FY14 FY15E FY16E Reported PAT 200.40 210.03 219.85 236.69 257.05 Other income (net of tax) (61.88) (79.93) (89.31) (82.84) (86.33) PAT FROM OPERATIONS 138.52 130.10 130.54 153.85 170.72 Depreciation 113.94 94.65 87.89 92.20 98.91 Interest 26.67 30.36 32.06 44.87 56.32 Working capital change (107.89) 59.46 (83.10) (99.08) (2.92) OPERATING CASH FLOW 171.24 314.57 167.39 191.85 323.03 Capex 220.65 (168.52) (310.47) (401.63) (390.00) Free Cash Flow to Firm 391.89 146.05 (143.08) (209.78) (66.97) Investments (285.35) (85.84) (169.68) (60.00) (60.00) Other income (net of tax) 61.88 79.93 89.31 82.84 86.33 INVESTING CASH FLOW (2.82) (174.43) (390.84) (378.79) (363.67) Capital issuance - - - (0.00) - Debt issuance (89.58) (41.04) 309.58 250.00 250.00 Interest (26.67) (30.36) (32.06) (44.87) (56.32) Dividend (30.65) (32.61) (34.16) (39.71) (45.38) FINANCING CASH FLOW (146.90) (104.01) 243.36 165.42 148.30 NET CASH FLOW 21.52 36.13 19.91 (21.52) 107.66 Closing cash 674.42 779.13 665.94 644.42 752.08


STANDALONE KEY RATIOS FY12 FY13 FY14 FY15E FY16E PROFITABILITY % EBITDA Margin 10.2 8.5 7.9 8.6 9.1 EBIT Margin 8.6 8.1 8.0 8.4 8.9 APAT Margin 6.1 5.8 5.6 5.8 6.0 RoE 12.6 12.1 11.7 11.4 11.3 Core RoCE 9.6 10.1 8.8 8.2 8.0 RoCE 9.5 9.7 9.1 8.6 8.3 EFFICIENCY Tax rate % 22.2 20.1 21.0 21.0 21.0 Total Asset turnover (x) 1.5 1.6 1.5 1.3 1.2 Inventory (days) 40 43 40 40 40 Debtor (days) 20 12 10 10 10 Payables (days) 45 46 54 45 45 Cash conversion cycle (days) 16 9 (4) 5 5 Net Debt/EBITDA (x) (0.2) (0.8) 0.6 1.3 1.5 Net D/E (0.0) (0.1) 0.1 0.2 0.3 Interest coverage 10.7 9.7 9.7 7.7 6.8 PER SHARE DATA EPS (Rs) 62.0 65.0 68.0 73.2 79.5 CEPS (Rs) 96.0 94.0 95.2 101.8 110.1 DPS (Rs) 8.5 9.0 9.5 10.5 12.0 BV (Rs) 507.3 555.6 609.8 670.8 736.3 VALUATION P/E (x) 16.1 15.4 14.7 13.6 12.5 P/Cash EPS (x) 10.4 10.6 10.5 9.8 9.1 P/BV (x) 2.0 1.8 1.6 1.5 1.4 EV/EBITDA (x) 9.6 10.5 10.4 9.1 8.2 EV/Revenue (x) 1.0 0.8 0.9 0.9 0.9 Dividend Yield (%) 0.9 0.9 1.0 1.1 1.2 CFO/EV (%) 5.5 10.5 4.9 5.2 8.4 FCFF/EV (%) 12.5 4.9 (4.2) (5.7) (1.7) FCFE/M Cap (%) 8.5 2.3 4.2 (0.1) 3.9


Page | 25


Petronet LNG NEUTRAL

Volumes at the bottom Petronet LNG (PLNG) had a tough time in FY14. EBITDA declined by 23% YoY led by (1) Weaker demand owing to muted GDP growth. Volumes declined by 10% from its peak in FY12 (2) 11% YoY fall in INR vs USD increased gas prices (3) Tight global LNG market led to higher spot LNG prices.

However, with rising optimism on economic recovery, we see good days ahead for LNG players. Despite RLNG costing 2-3x (RLNG price is US$ 15-18/mmbtu) that of domestic gas price there is ample demand. RLNG is cheaper than the cheapest petroleum products (naphtha and fuel oil). Theoretically, ~22% of India’s energy requirement which is met through imported oil can be replaced with RLNG. LNG re-gasification capacity is likely to triple from ~20 mtpa to ~60 mtpa in the next five years.

There are multiple triggers for PLNG (1) Additional tolling volumes of 1.25 mtpa for GSPC from FY15 onwards as 2nd jetty was commissioned (2) Complete off-take agreement for upcoming 5 mtpa capacity at Dahej in FY17 (3) Increase in global supply will keep spot prices under check (5) Stable Govt will lead to higher economic activities and stable currency.

Stock has moved by ~21% in the last 3-months and is trading at 14.4x FY16E EPS. There are some short term concerns (1) higher depreciation and interest cost at Kochi will keep PAT growth muted (2)

Increase in domestic gas price may lead to non usage of domestic gas by power sector (unless government policy neutralises higher generation cost vs coal). In such scenario there might be replacement of some LNG volumes by domestic gas. Maintain NEUTRAL, TP Rs 180/sh (10/15x FY16E CEPS/EPS).

LNG price comparison with petroleum products

Equivalent pricing for crude at ~US$ 105-110/bbl : Naphtha @ $ 1k/t = RLNG @ US$ 22/mmbtu Fuel Oil @ $ 0.7k/t = RLNG @ US$ 17/mmbtu

Risks and Challenges

Volumes from Kochi will be low until Mangalore/Bangalore pipelines are ready. Bangalore pipeline matter is in SC (hearing in July). Mangalore pipeline issue, if resolved (expected sooner) may add ~1 mtpa demand.

Softer INR and higher spot LNG prices are the key risks.

FINANCIAL SUMMARY (Rs mn) FY12 FY13 FY14 FY15E FY16E Net Sales 226,959 314,674 377,476 407,388 435,392 EBITDA 18,672 19,366 14,985 16,587 19,437 PAT 10,575 11,493 7,119 7,078 8,945 EPS (Rs) 14.1 15.3 9.5 9.4 11.9 P/E (x) 12.6 11.6 18.7 18.8 14.9 P/CEPS (x) 10.7 10.0 13.0 11.6 9.8 RoE (%) 34.1 28.8 15.1 13.5 15.2 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS



Sensex 25,373

KEY STOCK DATA

Bloomberg PLNG IN/PLNG.BO

No. of Shares (mn) 750

MCap (Rs bn) / (US$ mn) 133/2,217

6m avg traded value (Rs mn) 251



3M 6M 12M

Absolute (%) 24.5 51.5 39.8

Relative (%) 12.8 29.3 8.3


Promoters 50.00


FIIs 22.13




PETRONET LNG : COMPANY UPDATE

ASSUMPTIONS FY11 FY12 FY13 FY14 FY15E FY16E FY17E Volumes (mmt) Dahej 8.5 10.7 10.3 9.6 10.7 11.1 12.2 Long/Medium Term 7.5 7.3 7.4 7.3 7.4 7.6 8.6 Spot 0.5 2.0 2.0 1.2 1.1 1.2 1.3 Tolling 0.5 1.4 0.9 1.0 2.2 2.3 2.3 Kochi - - - 0.1 0.3 0.7 1.6 Spot + Tolling - - - 0.1 0.3 0.7 1.6 Grand Total 8.5 10.7 10.3 9.7 10.9 11.8 13.8 Margins (Rs/mmbtu) Dahej Regasification 32.1 33.8 35.4 37.2 39.1 41.0 43.1 Marketing 14.8 33.0 49.4 34.0 25.0 23.8 22.6 Spot Total 47.0 66.7 84.8 71.2 64.1 64.8 65.6 Kochi Regasification - - - 63.0 65.1 68.4 68.4 Average Prices ($/mmbtu) Gas Cost 6.2 9.0 11.1 13.4 14.5 14.6 14.6 INR-US$ 45.6 47.9 54.4 60.5 60.0 60.0 60.0

CAPACITY BUILD-UP PLAN


1.25 mtpa tolling volumes for GSPC started from Apr-14 We see no risk to 5% increase in re-gas margins for next 2-3 years

10.0 10.0 10.0 11.5 11.5 12.5 16.5

- -5.0

5.0 5.0 5.0

5.0

-

5.0

10.0

15.0

20.0

25.0

FY12 FY13 FY14 FY15E FY16E FY17E FY18E

Dahej Kochimmtpa

5 mtpa capacity at Dahej, Nov -16

2nd jetty at Dahej, Apr-14

1.5

mtp

a

1.0

mtp

a

4.0

mtp

a

Page | 27


STANDALONE INCOME STATEMENT (Rs mn) FY12 FY13 FY14 FY15E FY16E Revenues 226,959 314,674 377,476 407,388 435,392 Growth (%) 72.0 38.6 20.0 7.9 6.9 Raw material 205,867 292,119 358,495 386,121 410,740 Employee Expenses 298 370 466 536 617 Other Operating Expenses 2,122 2,819 3,530 4,145 4,598 EBIDTA 18,672 19,366 14,985 16,587 19,437 Growth (%) 53.5 3.7 (22.6) 10.7 17.2 EBIDTA Margin (%) 8.2 6.2 4.0 4.1 4.5 Depreciation 1,842 1,866 3,081 4,371 4,587 Other income 469 887 838 877 899 EBIT 17,299 18,387 12,741 13,093 15,749 Finance charges 1,774 1,184 2,196 2,607 2,496 PBT 15,525 17,203 10,545 10,486 13,252 Provision for taxes 4,950 5,710 3,426 3,408 4,307 PP/EO - - - - - PAT 10,575 11,493 7,119 7,078 8,945 EPS 14.1 15.3 9.5 9.4 11.9 EPS Growth % 70.7 8.7 (38.1) (0.6) 26.4


STANDALONE BALANCE SHEET (Rs mn) FY12 FY13 FY14 FY15E FY16E SOURCES OF FUNDS Share capital 7,500 7,500 7,500 7,500 7,500 Reserves and surplus 27,698 36,997 42,361 47,684 54,655 Net Worth 35,198 44,497 49,861 55,184 62,155 LT Debt 29,342 27,182 26,477 25,977 27,277 ST Debt 998 - 2,487 2,487 2,487 Total Debt 30,340 27,182 28,965 28,465 29,765 Interest Free Advances - - 3,000 6,000 9,000 Long term provisions 46 34 38 38 38 Deferred tax liability 3,630 3,910 5,530 6,579 7,904 Total liabilities 69,213 75,623 87,394 96,265 108,861 APPLICATION OF FUNDS Net fixed assets 25,215 23,579 62,650 64,278 61,691 Capital WIP 32,900 43,305 8,800 14,800 28,800 Investments 1,399 1,399 900 1,900 2,900 Long term loan and advance 1,535 1,173 2,520 2,520 2,520 Inventory 7,124 10,366 9,557 11,161 11,929 Debtors 12,859 16,898 20,157 22,323 23,857 Cash and Cash Equivalent 9,839 12,685 12,826 12,753 12,169 Loans and advances 1,154 1,397 1,578 1,578 1,578 Other current assets 86 26 140 140 140 Total Current Assets 31,062 41,373 44,257 47,954 49,672 Creditors 12,686 22,974 18,868 22,323 23,857 Other Current Liabilities 7,972 9,966 10,174 10,174 10,174 Provisions 2,240 2,266 2,691 2,691 2,691 Total current Liabilities 22,897 35,205 31,733 35,187 36,722 Net current assets 8,164 6,167 12,524 12,767 12,950 Total Assets 69,213 75,623 87,394 96,265 108,861


Page | 28


STANDALONE CASH FLOW (Rs mn) FY12 FY13 FY14 FY15E FY16E Reported PAT 10,575 11,493 7,119 7,078 8,945 Other Income (Net of Taxes) (314) (594) (561) (588) (602) PAT From Operations 10,261 10,899 6,558 6,490 8,343 Depreciation 1,842 1,866 3,081 4,371 4,587 Interest 1,774 1,184 2,196 2,607 2,496 Working capital change 3,506 5,097 (5,127) 732 558 OPERATING CASH FLOW 17,382 19,046 6,708 14,201 15,985 Capex (12,810) (10,635) (7,647) (12,000) (16,000) Free Cash Flow to Firm 4,572 8,411 (939) 2,201 (15) Other Income (Net of Taxes) 314 594 561 588 602 Investments & Others (1,266) 376 (313) (1,000) (1,000) INVESTING CASH FLOW (13,762) (9,664) (7,399) (12,412) (16,398) Capital issuance - - - - - Debt issuance (1,820) (3,157) 1,782 (500) 1,300 Dividend (2,179) (2,179) (1,755) (1,755) (1,974) Interest (1,774) (1,184) (2,196) (2,607) (2,496) Interest Free Advances - - 3,000 3,000 3,000 FINANCING CASH FLOW (5,773) (6,521) 832 (1,862) (171) NET CASH FLOW (2,153) 2,861 140 (73) (584) Closing cash 9,839 12,685 12,826 12,753 12,169


STANDALONE KEY RATIOS FY12 FY13 FY14 FY15E FY16E PROFITABILITY % EBIDTA Margin 8.2 6.2 4.0 4.1 4.5 EBIT Margin 7.6 5.8 3.4 3.2 3.6 APAT Margin 4.7 3.7 1.9 1.7 2.1 RoE 34.1 28.8 15.1 13.5 15.2 RoCE 17.9 17.0 10.6 9.6 10.4 Core RoCE 21.4 19.6 11.9 10.6 11.4 EFFICIENCY Tax Rate % 31.9 33.2 32.5 32.5 32.5 Total Asset Turnover (x) 3.4 4.3 4.6 4.4 4.2 Inventory (days) 11 12 9 10 10 Debtor (days) 21 20 19 20 20 Payables (days) 20 27 18 20 20 Cash Conversion Cycle (days) 12 5 10 10 10 Net Debt/EBIDTA (x) 1.1 0.7 1.1 0.9 0.9 Net D/E 0.6 0.3 0.3 0.3 0.3 Interest Coverage 9.8 15.5 5.8 5.0 6.3 PER SHARE EPS (Rs) 14.1 15.3 9.5 9.4 11.9 CEPS (Rs) 16.6 17.8 13.6 15.3 18.0 BV (Rs) 46.9 59.3 66.5 73.6 82.9 DPS (Rs) 2.5 2.5 2.0 2.0 2.3 VALUATION P/E (x) 12.6 11.6 18.7 18.8 14.9 P/Cash EPS (x) 10.7 10.0 13.0 11.6 9.8 P/BV (x) 3.8 3.0 2.7 2.4 2.1 EV/EBIDTA (x) 8.2 7.6 10.0 9.0 7.7 EV/Revenue (x) 0.7 0.5 0.4 0.4 0.3 Dividend Yield (%) 1.4 1.4 1.1 1.1 1.3 OCF/EV 11.0 12.7 4.3 9.4 10.4 FCFF/EV 2.6 5.5 (0.8) 1.3 (0.2) FCFE/M CAP 0.3 2.9 (1.2) (0.9) (1.1)


Page | 29


GAIL NEUTRAL

To benefit from rising gas supply There will be three pronged impact of rise in domestic gas price on GAIL (1) Profitability of LPG segment will decline (2) Viability of new petchem plant will be at risk (3) Higher domestic gas price will lead to higher production and hence better prospects for transmission business.

Impact on LPG segment will be compensated by lower/no oil under recovery sharing by GAIL, which shared Rs 19bn (-29% YoY) as UR in FY14. We have built-in UR of Rs 5/0bn for FY15/16. We expect no contribution post gas price hike.

Returns from new petchem plant will be sub-nominal. However, operating leverage within existing unit will keep it EBITDA accretive. Further, gas price at $ 7.2/mmbtu against earlier discussed price of $ 8.4/mmbtu will be sentimentally positive.

GAIL is the largest gas transmission company in India with a market share of more than 70%. EBITDA contribution from this segment is down from ~50% in FY11 to ~30% in FY15E. It was led by 20% decline in gas volumes. Surge in gas prices will lead to higher domestic output. Rising LNG (we expect LNG volumes to double in five years) and domestic gas volumes will result in higher contribution from this segment. We expect EBITDA share from this segment to rise to ~45% in the next five years. There is an upside risk to our assumption, as we are not building upward revision in pipeline tariff.

Increase in gas volumes, no subsidy sharing and no major capex will improve returns and FCF. We revise our SOTP TP for GAIL to Rs 470/sh (~6.2x FY16E EV/EBITDA and Rs 126/sh from investments). Maintain NEUTRAL.

Upward revision in estimates : We have changed our base case gas price assumption from $ 8.4/mmbtu to $ 7.2/mmbtu. However, we have increased contribution of LNG in feed mix to ~46% from ~33% in FY14. Subsequently our EPS estimates for FY15/16 are revised upward by 3.4/4.1%.

Return ratios to bottom-out in FY15 : Sub-nominal returns from new capex (pipelines and petchem) are reducing profitability. RoE/RoCE are expected to bottom out at ~14%/10% in FY15E vs ~20%/17% in FY11. Return ratios should improve post higher gas volumes/no subsidy sharing and should move higher to 15%/12% by FY17E.

FINANCIAL SUMMARY (Rs bn) FY12 FY13 FY14 FY15E FY16E Net Sales 404.41 475.23 575.08 787.16 999.85 EBITDA 55.99 64.69 67.01 72.47 81.00 APAT 36.54 40.22 40.99 41.40 46.68 Diluted EPS (Rs) 28.8 31.7 32.3 32.6 36.8 P/E (x) 16.2 14.7 14.4 14.3 12.7 EV / EBITDA (x) 10.0 8.7 8.4 7.7 6.9 RoE (%) 17.9 17.5 16.0 14.6 15.0 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS



Sensex 25,373

KEY STOCK DATA

Bloomberg/Reuters GAIL IN/GAIL.BO


MCap (Rs bn) / ($ mn) 587/9,801




3M 6M 12M

Absolute (%) 22.7 34.1 47.2

Relative (%) 11.0 11.9 15.7


Promoters 56.11


FIIs 18.77




GAIL : COMPANY UPDATE

ASSUMPTIONS FY12 FY13 FY14 FY15E FY16E FY17E TRANSMISSION Gas Volumes (mmscmd) 118 105 96 103 114 134 Tariff (Rs/scm) 0.8 0.9 1.1 0.9 1.0 1.1 LPG Volumes (kT)/ Tariff (Rs/kg) 3,362/1.4 3,136/1.3 3,145/1.3 3,161/1.3 3,177/1.3 3,177/1.3 SALES Natural Gas (mmscmd) 84 82 79 85 94 110 Realisation (US$/mmbtu) 5.1 5.5 6.4 8.4 9.7 10.2 EBITDA Margin (Rs/scm) 0.36 0.47 0.55 0.54 0.52 0.50 Petrochemicals (kT) 448 427 445 540 810 855 Realisation (US$/t) 1,573 1,611 1,685 1,685 1,685 1,685 Feed Gas Cost (US$/mmbtu) 5.4 5.5 8.1 9.3 10.5 10.7 OTHERS INR-US$ 48.0 54.4 60.5 60.0 60.0 60.0 Subsidy Contribution (Rs bn) 31.8 26.9 19.0 5.0 - -

CHANGE IN ESTIMATES (Standalone) (Rs bn)

FY14 FY15 Old New % Change Old New % Change

Revenues 807.1 787.2 (2.5) 1,031.1 999.9 (3.0) EBITDA 72.0 72.5 0.7 79.8 81.0 1.6 PAT 40.0 41.4 3.4 44.8 46.7 4.1 EPS (Rs/sh) 31.6 32.6 3.3 35.3 36.8 4.2

SOTP VALUATION (BASED ON FY16E) EBITDA (Rs bn) Multiple EV (Rs bn) Value/sh Basis Gas Transmission 28.7 8.0 229 181 x FY16E EBITDA LPG Transmission 2.6 6.0 16 12 x FY16E EBITDA Gas Trading 17.8 4.5 80 63 x FY16E EBITDA Petchem 17.6 4.5 79 62 x FY16E EBITDA LPG & Other Hydrocarbons 22.4 4.5 101 80 x FY16E EBITDA Standalone wt avg 6.2 Less : Net Debt (Mar-14) 68.8 69 54 Standalone Value 344 Investments ONGC 1.0 97 76 At our TP Petronet LNG & IGL 1.0 29 23 At our TP Others 1.0 34 27 1x BV Value per share 470 Source : HDFC sec Inst Research

Key events for GAIL (1) Increase in gas

transmission volumes (2) Increase in gas cost (3) No subsidy sharing Reduction in domestic gas price assumption from $ 8.4/mmbtu to $ 7.2/mmbtu and other marginal changes led to change in estimates Lower multiple to petchem & LPG/Trading due to gas cost/regulatory risk

Page | 31


STANDALONE INCOME STATEMENT (Rs bn) FY12 FY13 FY14 FY15E FY16E Revenues 404.41 475.23 575.08 787.16 999.85 Growth % 24.6 17.5 21.0 36.9 27.0 Raw Material 25.86 36.47 42.17 56.87 83.38 Gas Trading 284.40 333.97 412.34 599.76 771.84 Employee Cost 6.50 7.85 8.48 9.16 9.89 Other expenses 31.65 32.24 45.08 48.90 53.74 EBITDA 55.99 64.69 67.01 72.47 81.00 EBITDA growth % 2.3 15.5 3.6 8.1 11.8 EBITDA Margin % 13.8 13.6 11.7 9.2 8.1 Depreciation 7.91 9.81 11.76 15.75 16.86 Other income 6.48 7.65 8.99 8.67 9.02 EBIT 54.56 62.53 64.24 65.39 73.16 Interest Cost 1.16 1.95 3.66 4.06 4.01 Exceptional items - - 3.45 - - PBT 53.40 60.58 64.02 61.33 69.15 Taxes 16.86 20.36 20.27 19.93 22.47 RPAT 36.54 40.22 43.75 41.40 46.68 APAT 36.54 40.22 40.99 41.40 46.68 APAT Growth % 2.6 10.1 1.9 1.0 12.8 AEPS 28.8 31.7 32.3 32.6 36.8 EPS Growth % 2.6 10.1 1.9 1.0 12.8


STANDALONE BALANCE SHEET (Rs bn) FY12 FY13 FY14 FY15E FY16E SOURCES OF FUNDS Share capital 12.68 12.68 12.68 12.68 12.68 Reserves and surplus 203.57 229.59 258.04 283.90 314.29 Net Worth 216.26 242.28 270.72 296.58 326.98 LT Loans 48.89 81.41 95.26 85.26 75.26 ST Loans - 2.24 - - - Total Debt 48.89 83.65 95.26 85.26 75.26 Deferred tax liability 17.69 23.00 25.66 28.12 28.12 Other LT Liabilities 2.77 6.85 7.71 7.71 7.71 Long term provisions 3.38 3.60 4.04 4.04 4.04 Total liabilities 288.98 359.37 403.40 421.71 442.11 APPLICATION OF FUNDS Net fixed assets 158.58 197.07 205.29 278.09 285.93 Capital WIP 79.42 89.78 106.75 53.64 58.94 LT Investments 26.72 36.80 41.03 41.03 41.03 LT Loans and Advances 31.75 25.91 25.35 25.35 25.35 Other non current assets 2.72 6.73 7.18 7.18 7.18 Inventory 14.20 15.35 22.55 29.55 37.55 Debtors 19.04 25.51 28.12 37.69 47.90 Cash and Cash Equivalent 9.41 23.97 26.51 31.61 35.02 Loans and advances 19.66 25.56 35.14 26.07 26.33 Other current assets 0.01 0.15 0.18 0.18 0.18 Total current assets 62.33 90.54 112.50 125.10 146.99 Trade Payables 25.10 31.04 39.75 53.68 68.22 Other Current Liabiliites 36.55 42.08 40.48 40.48 40.48 Provisions 10.88 14.35 14.49 14.53 14.62 Total current Liabilities 72.53 87.47 94.71 108.68 123.32 Net current assets (10.20) 3.07 17.79 16.42 23.67 Total Assets 288.98 359.37 403.40 421.71 442.11


Page | 32


STANDALONE CASH FLOW (Rs bn) FY12 FY13 FY14 FY15E FY16E Reported PAT 36.54 40.22 40.99 41.40 46.68 Non-operating income 4.31 5.22 6.07 5.85 6.09 PAT from Operations 32.23 35.00 34.93 35.55 40.59 Interest 1.16 1.95 3.66 4.06 4.01 Depreciation 7.91 9.81 11.76 15.75 16.86 Working Capital Change (8.69) 12.64 (8.18) 8.84 (3.93) OPERATING CASH FLOW ( a ) 32.61 59.40 42.17 64.19 57.53 Capex (63.41) (58.66) (34.11) (35.43) (30.00) Free cash flow (FCF) (30.80) 0.73 8.06 28.76 27.53 Non-operating income 4.31 5.22 6.07 5.85 6.09 Investments (0.99) (10.38) (3.84) - - INVESTING CASH FLOW ( b ) (60.10) (63.81) (31.88) (29.58) (23.91) Share capital Issuance - - - - - Debt Issuance 29.28 35.14 11.62 (10.00) (10.00) Dividend (12.54) (14.12) (15.31) (15.45) (16.19) Interest (1.16) (1.95) (3.66) (4.06) (4.01) FINANCING CASH FLOW ( c ) 15.58 19.07 (7.35) (29.52) (30.21) NET CASH FLOW (a+b+c) (11.90) 14.66 2.93 5.10 3.41 Closing Cash & Equivalents 9.41 23.97 26.51 31.61 35.02


STANDALONE KEY RATIOS FY12 FY13 FY14 FY15E FY16E PROFITABILITY % EBITDA margin 13.8 13.6 11.7 9.2 8.1 EBIT margin 13.5 13.2 11.2 8.3 7.3 APAT margin 9.0 8.5 7.1 5.3 4.7 RoE 17.9 17.5 16.0 14.6 15.0 Core RoCE 15.0 13.2 11.8 11.2 12.1 RoCE 14.3 12.8 11.4 10.7 11.4 EFFICIENCY Tax rate % 31.6 33.6 31.7 32.5 32.5 Total Asset turnover (x) 1.7 1.6 1.7 2.1 2.6 Inventory (days) 13 12 14 14 14 Debtor (days) 17 20 18 17 17 Payables (days) 23 24 25 25 25 Cash conversion cycle (days) 7 8 7 6 6 Net Debt/EBITDA (x) 0.7 0.9 1.0 0.7 0.5 Net D/E 0.2 0.2 0.3 0.2 0.1 Interest coverage 46.9 32.1 17.5 16.1 18.2 PER SHARE DATA EPS (Rs) 28.8 31.7 32.3 32.6 36.8 CEPS (Rs) 35.0 39.4 41.6 45.0 50.1 DPS (Rs) 8.7 9.6 10.4 10.5 11.0 BV (Rs) 170.5 191.0 213.4 233.8 257.8 VALUATION P/E (x) 16.2 14.7 14.4 14.3 12.7 P/Cash EPS (x) 13.3 11.8 11.2 10.3 9.3 P/BV (x) 2.7 2.4 2.2 2.0 1.8 EV/EBITDA (x) 10.0 8.7 8.4 7.7 6.9 EV/Revenue (x) 1.6 1.4 1.1 0.8 0.6 OCF/EV (%) 4.8 8.8 6.0 9.5 8.7 FCFF /EV (%) (5.2) (0.2) 0.8 4.0 3.9 FCFE/M CAP (%) (0.8) 5.4 2.2 2.0 1.8 Dividend Yield (%) 1.9 2.1 2.2 2.3 2.4


Page | 33


Gujarat State Petronet NOT RATED

No near term trigger GSPL is the 2nd largest natural gas transmission company in India with ~2,300 kms pipeline network. It forms the backbone of Gujarat’s gas infrastructure and is a proxy to Gujarat’s industrial growth. State accounts for ~1/3rd of India’s natural gas consumption and ~60% of that flows through GSPL.

Company faced difficult times over the last couple of years due to fall in KG-D6 volumes. GSPL’s transmission volumes declined from 36 mmscmd in FY11 to 21 in FY14. It was in sync with fall in RIL’s production from 56 to 14 mmscmd. Subsequently, RIL’s proportion in GSPL’s volume declined from 21 to 2 mmscmd.

Transmission tariff was another overhang for the stock. However, recent notification by PNGRB on 19th Feb 2014 has removed this overhang. PNGRB has revised upwards its previous notified tariff for high pressure pipelines by 11% to Rs 26.58/mmbtu.

Though the worst is behind GSPL, we don’t see any near term positive trigger. Increase in transmission volume is a key trigger for GSPL. Significant increase in GSPL’s volumes is not possible before the pickup in KG-D6 production. Another risk for GSPL is that ~30% of current volumes go to RIL refineries. This supply will stop post the commissioning of RIL’s petcoke gasification project in FY17. Gas freed from refinery will be RLNG (at ~$ 15/mmbtu) and hence can only be absorbed by industrial players.

Investment in Cross Country pipelines : GSPL is laying three cross country pipelines under two of its subsidiaries (59% and 62% stake). Total ~4,000 km pipelines will be laid with a capex of ~Rs 140bn. Three OMCs are the other partners in the subsidiaries. Returns from these pipelines will be muted in the initial phase due to lower volumes and lower tariff (GSPL own through aggressive bidding). Projects have received environmental clearances.

Investment in CGD business : GSPL owns 29.1% stake in GSPC Gas, 13.8% in Sabarmati Gas (as per FY13 AR) and 38.9% stake in GSPC Distribution Networks (GDNL). GSPC Gas and Gujarat Gas will be merged into GDNL. Total volumes of the combined entity will be ~8 mmscmd and it will be Asia’s largest CGD player.

Valuation : GSPL is trading at 11.3/1.4 x FY14 EPS/BV. RoE/RoCE of the company has decreased from 28/17% in FY11 to 13/11% in FY14.

FINANCIAL SUMMARY (Rs mn) FY12 FY13 FY14 FY15E FY16E Net Sales 9,920 10,465 11,233 11,732 10,507 EBITDA 9,288 9,691 10,332 10,720 9,288 PAT 4,083 5,065 5,223 5,381 4,193 EPS (Rs) 7.3 9.0 9.3 9.6 7.5 P/E (x) 12.1 9.8 9.5 9.2 11.8 P/BV (x) 3.2 2.5 2.0 1.7 1.5 RoE (%) 29.4 28.4 23.3 19.9 13.4 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS


Target Price NA Nifty 7,568

Sensex 25,373

KEY STOCK DATA

Bloomberg/Reuters GUJS IN/GSPT.BO


MCap (Rs bn) / ($ mn) 50/825




3M 6M 12M

Absolute (%) 25.3 51.6 51.6

Relative (%) 13.2 29.4 22.6


Promoters 37.73


FIIs 5.11




GSPL : COMPANY UPDATE

Details of Cross Country Pipelines Assumptions Length (km) Capacity (mmscmd) Tariff (Rs/mmbtu)

Mallavaram - Bhilwara 1,688 52 29.9

Mehsana - Bhatinda 1,611 42 32.6

Bhatinda - Jammu - Srinagar 740 31 9.0


Transmission volumes fell in sync with RIL output


Transmission tariff partly compensated for volume


0.90 0.85 0.79

0.87

1.12

1.31

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40


Rs/scm

-

10

20

30

40

50

60


GSPL transmission RIL KGD6 production

mmscmd

Page | 35


STANDALONE INCOME STATEMENT (Rs mn) FY10 FY11 FY12 FY13 FY14 Revenues 9,920 10,465 11,233 11,732 10,507 Growth (%) 103.5 5.5 7.3 4.4 (10.4) Material Expenses 4 - - - - Employee Expenses 99 149 197 247 287 Other Operating Expenses 529 625 704 765 932 EBIDTA 9,288 9,691 10,332 10,720 9,288 EBIDTA Margin (%) 93.6 92.6 92.0 91.4 88.4 Growth (%) 118.8 4.3 6.6 3.8 (13.4) Other Income 247 216 513 660 569 Depreciation 2,365 1,533 1,819 1,861 1,839 EBIT 7,170 8,375 9,027 9,519 8,018 Interest 929 991 1,302 1,263 1,418 PBT 6,241 7,384 7,725 8,257 6,600 Excep 27 (237) 32 (1) - Tax 2,131 2,556 2,470 2,876 2,407 PAT 4,083 5,065 5,223 5,381 4,193 Growth (%) 230.8 24.0 3.1 3.1 (22.1) EPS 7.3 9.0 9.3 9.6 7.5


STANDALONE BALANCE SHEET (Rs mn) FY10 FY11 FY12 FY13 FY14 SOURCES OF FUNDS Share Capital 5,624 5,626 5,627 5,627 5,627 Reserves 10,014 14,440 19,040 23,779 27,321 Total Shareholders Funds 15,638 20,066 24,667 29,406 32,948 Total Debt 12,595 12,182 10,951 13,389 10,365 Deferred Taxes 1,405 2,641 3,244 3,867 4,202 Long Term Provisions & Others - 84 163 220 281 TOTAL SOURCES OF FUNDS 29,639 34,972 39,024 46,882 47,797 APPLICATION OF FUNDS Net Block 24,368 31,817 31,402 32,515 32,894 CWIP 6,491 3,344 4,182 5,260 5,260 LT Investments 666 766 1,164 1,740 5,850 LT Loans & Advances 3 952 926 816 1,362 Inventories 223 623 662 772 694 Debtors 753 677 814 2,541 2,490 Cash & Equivalents 1,742 2,390 5,148 8,531 4,992 ST Loans & Advances, Others 3,728 574 390 359 485 Total Current Assets 6,445 4,264 7,014 12,202 8,661 Creditors 4,848 236 70 110 152 Other Current Liabilities & Provns 3,486 5,934 5,594 5,543 6,079

Total Current Liabilities 8,334 6,169 5,664 5,653 6,231 Net Current Assets -1,889 -1,906 1,350 6,550 2,431 TOTAL APPLICATION OF FUNDS 29,639 34,972 39,024 46,882 47,797


Page | 36


STANDALONE CASH FLOW (Rs mn) FY10 FY11 FY12 FY13 FY14 Reported PAT 4,083 5,064 5,221 5,381 4,193 Non-operating & EO items 163 144 349 430 361 PAT from Operations 3,920 4,920 4,872 4,951 3,832 Interest expenses 929 991 1,302 1,263 1,418 Depreciation 2,365 1,533 1,819 1,861 1,839 Working Capital Change 3,287 748 133 (1,012) 439 OPERATING CASH FLOW ( a ) 10,501 8,191 8,126 7,062 7,528 Capex (9,091) (5,530) (2,128) (4,051) (2,218) Free cash flow (FCF) 1,410 2,661 5,998 3,012 5,310 Investments (310) (100) (398) (576) (4,109) Other Income 163 144 349 430 361 INVESTING CASH FLOW ( b ) (9,239) (5,486) (2,178) (4,196) (5,966) Debt Issuance 1,086 (414) (1,231) 2,438 (3,024) Interest expenses (929) (991) (1,302) (1,263) (1,418) FCFE 1,567 1,257 3,466 4,187 868 Share capital Issuance 3 1 1 0 0 Dividend (656) (654) (658) (658) (658) FINANCING CASH FLOW ( c ) (495) (2,057) (3,190) 517 (5,100) NET CASH FLOW (a+b+c) 767 648 2,759 3,383 (3,538) Closing Cash & Equivalents 1,742 2,390 5,148 8,531 4,992


STANDALONE KEY RATIOS

FY10 FY11 FY12 FY13 FY14 PROFITABILITY % Tariff (Rs/scm) 0.8 0.8 0.9 1.1 1.3 EBITDA margin 93.6 92.6 92.0 91.4 88.4 EBIT margin 72.3 80.0 80.4 81.1 76.3 APAT margin 41.2 48.4 46.5 45.9 39.9 RoE 29.4 28.4 23.3 19.9 13.4 RoCE 17.2 17.7 16.5 14.4 10.8 Core RoCE 17.9 18.9 17.8 16.7 12.9 EFFICIENCY Tax rate % 34.3 33.5 32.1 34.8 36.5 Total Asset turnover (x) 0.4 0.3 0.3 0.3 0.2 Inventory (days) 8.2 21.7 21.5 24.0 24.1 Debtor (days) 28 24 26 79 87 Payables (days) 178 8 2 3 5 Cash conversion cycle (days) (143) 37 46 100 105 Net Debt/EBITDA (x) 1.2 1.0 0.6 0.5 0.6 Net D/E 0.7 0.5 0.2 0.2 0.2 Interest coverage 7.7 8.5 6.9 7.5 5.7 PER SHARE DATA EPS (Rs) 7.3 9.0 9.3 9.6 7.5 CEPS (Rs) 11.5 11.7 12.5 12.9 10.7 DPS (Rs) 1.0 1.0 1.0 1.0 1.0 BV (Rs) 27.8 35.7 43.8 52.3 58.5 VALUATION P/E (x) 12.1 9.8 9.5 9.2 11.8 P/Cash EPS (x) 7.7 7.5 7.0 6.8 8.2 P/BV (x) 3.2 2.5 2.0 1.7 1.5 EV/EBITDA (x) 6.5 6.1 5.4 5.1 5.9 EV/Revenue (x) 6.1 5.7 4.9 4.6 5.2 OCF/EV (%) 17.4 13.8 14.7 13.0 13.7 FCFF/EV (%) 2.3 4.5 10.8 5.5 9.7 FCFE/ M CAP (%) 3.2 2.5 7.0 8.5 1.8 Dividend Yield (%) 1.1 1.1 1.1 1.1 1.1


Page | 37


Indraprastha Gas NEUTRAL

Recovery on the cards IGL had its golden period from FY09 to FY12 when volumes increased at a CAGR of 22% led by (1) Impetus during Commonwealth Games 2010 (2) Significantly lower running cost/km with CNG vs petrol/diesel.

Co faced multiple challenges starting FY13 (1) PNGRB directed to cut network tariff and compression charges by ~60%, matter is sub-judice (2) Fall in domestic gas led to rise in RLNG proportion and consequently CNG prices increased by ~60% between Dec 11 (Rs 32/kg) to Dec 13 (Rs 50/kg). Reducing advantage vs competitive fuels and no new bus addition by Delhi transport resulted in muted volume growth of 3.5% YoY in FY14.

However, we believe that worst is behind and there are multiple triggers ahead. Govt’s decision for 100% allocation of domestic gas for CNG (~75% for IGL) and domestic PNG (~5% for IGL) in Feb 14 was the biggest positive. It led to fall in CNG prices by 30% to Rs 35.2/kg and PNG prices by 17% to Rs 24.5/scm in Delhi. Now even with the increase in domestic gas price from US$ 4.2/mmbtu to $ 7.2/mmbtu, CNG price will be below its previous peak at ~Rs 48/kg. On 30th Jun 2014, Delhi Transport Corporation issued a tender for ~1,400 CNG busses (currently ~19.5k CNG busses are running in Delhi).

Increase in gas price from 1st Oct 2014 will lead to increase in CNG/PNG prices by ~30%. Despite the

hike in CNG/PNG prices, they continue to be the competitive vs alternative fuels.

The dispute with PNGRB is sub-judice. With rising focus on CGD we see rare chances of any unfavourable decision. Our TP for IGL is Rs 380/sh at 13.5/2.3x FY16E EPS/BV, NEUTRAL.

Price comparison with competitive fuels

CNG : At new gas price of $ 7.2/mmbtu, running cost with CNG will be ~Rs 2.2/km vs ~Rs 4.3/3.8/km for petrol/diesel. Conversion breakeven time for a normal user (30km/day) will be 1.7/2.7 years.

Industrial fuels : crude at $ 105-110/bbl Naphtha @ $ 1k/t = RLNG @ $ 22/mmbtu Fuel Oil @ $ 0.7k/t = RLNG @ $ 17/mmbtu

Margins to remain stable : IGL has maintained margins even at the peak of gas cost. We expect Gross/EBITDA margin to remain in the range of Rs 9/5.5/kg. We have built-in 5.1% CAGR in volumes over FY14-16E.

FINANCIAL SUMMARY (Rs mn) FY12 FY13 FY14 FY15E FY16E Net Sales 25,173 33,670 39,222 42,180 49,441 EBITDA 6,331 7,581 7,824 7,930 8,364 APAT 3,064 3,541 3,603 3,658 3,950 EPS (Rs) 21.9 25.3 25.7 26.1 28.2 P/E (x) 16.4 14.2 14.0 13.8 12.8 P/BV (x) 4.1 3.4 2.9 2.5 2.2 RoE (%) 27.4 26.0 22.1 19.2 18.1 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS



Sensex 25,373

KEY STOCK DATA

Bloomberg/Reuters IGL IN/IGAS.BO


MCap (Rs bn) / ($ mn) 50 / 843




3M 6M 12M

Absolute (%) 24.8 33.2 28.8

Relative (%) 13.1 10.9 (2.7)


Promoters 45.00


FIIs 15.52




INDRAPRASTHA GAS : UPDATE

ASSUMPTIONS

FY12 FY13 FY14 FY15E FY16E FY17E Total Volumes (mmscmd) 3.3 3.7 3.8 3.9 4.2 4.6 Growth (%) 22.0 10.0 3.5 3.9 6.3 10.0 CNG 2.6 2.8 2.8 2.9 3.1 3.4 Growth (%) 14.3 7.5 2.3 3.5 6.0 10.0 PNG 0.8 0.9 1.0 1.0 1.1 1.2 Growth (%) 56.6 18.2 7.0 5.0 7.0 10.0 Avg Realisation (Rs/scm) 22.9 27.8 31.3 32.4 35.6 35.9 Growth (%) 16.9 21.7 12.3 3.5 10.0 1.0 CNG (Rs/scm) 23.2 28.3 31.7 32.8 36.0 36.4 CNG (Rs/kg) 31.1 37.6 42.1 43.5 47.9 48.4 Growth (%) 17.3 20.9 11.8 3.5 10.0 1.0 PNG (Domestic+Industrial) (Rs/scm) 21.8 26.4 30.2 31.2 34.4 34.7 Growth (%) 17.3 21.0 14.3 3.5 10.0 0.8 Avg Gas Cost (Rs/scm) 12.1 15.8 18.6 19.6 22.4 22.7 Growth (%) 29.0 30.2 17.9 5.0 14.5 1.3 Domestic Gas Price (US$/mmbtu) 4.2 5.7 7.2 7.2 LNG Price (US$/mmbtu) 14.0 15.0 15.5 16.0 INR-US$ 47.9 54.0 60.5 60.0 60.0 60.0 Source: Company, HDFC sec Inst Research

Gas Volumes to pickup


Margins to remain stable


-5.0

10.0 15.0 20.0 25.0 30.0 35.0 40.0

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

Gross Margin (Rs/scm) EBITDA Margin (Rs/scm)

Rs/scm

1.3 1.5 1.8

2.1 2.7

3.3 3.7 3.8 3.9 4.2 4.6

0%

5%

10%

15%

20%

25%

30%

-

1.0

2.0

3.0

4.0

5.0

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

E

FY16

E

FY17

E

CNG Vol (mmscmd) PNG Vol (mmscmd)Total Vol (mmscmd) Growth RHS (%)

Page | 39


STANDALONE INCOME STATEMENT (Rs mn) FY12 FY13 FY14 FY15E FY16E Revenues 25,173 33,670 39,222 42,180 49,441 Growth (%) 44.2 33.8 16.5 7.5 17.2 Material Expenses 15,392 21,970 26,813 29,218 35,555 Employee Expenses 437 567 596 643 695 Other Operating Expenses 3,013 3,551 3,990 4,388 4,827 EBIDTA 6,331 7,581 7,824 7,930 8,364 EBIDTA Margin (%) 25.1 22.5 19.9 18.8 16.9 Growth (%) 28.1 19.8 3.2 1.4 5.5 Other Income 81 129 211 306 428 Depreciation 1,432 1,867 2,195 2,414 2,645 EBIT 4,980 5,844 5,839 5,822 6,147 Interest 479 562 441 362 252 PBT 4,501 5,282 5,398 5,460 5,895 Tax 1,437 1,741 1,795 1,802 1,945 PAT 3,064 3,541 3,603 3,658 3,950 Minority Interest/EO - - - - - APAT 3,064 3,541 3,603 3,658 3,950 Growth (%) 17.0 15.6 1.7 1.5 8.0 EPS 21.9 25.3 25.7 26.1 28.2 Growth (%) 17.0 15.6 1.7 1.5 8.0


STANDALONE BALANCE SHEET (Rs mn) FY12 FY13 FY14 FY15E FY16E SOURCES OF FUNDS Share Capital 1,400 1,400 1,400 1,400 1,400 Reserves 10,889 13,530 16,232 18,989 21,956 Total Shareholders Funds 12,289 14,930 17,632 20,389 23,356 Long Term Debt 3,375 3,031 2,875 2,075 1,275 Short Term Debt 515 460 337 287 237 Total Debt 3,890 3,491 3,212 2,362 1,512 Deferred Taxes 627 843 963 963 963 Long Term Provisions & Others 54 80 81 81 81 TOTAL SOURCES OF FUNDS 16,861 19,345 21,888 23,795 25,913 APPLICATION OF FUNDS Net Block 15,796 18,474 18,953 19,539 19,894 CWIP 3,751 2,913 2,623 2,623 2,623 LT Investments - - 692 692 692 LT Loans & Advances 54 58 110 110 110 Inventories 374 397 371 399 468 Debtors 1,298 1,789 2,196 2,362 2,768 Cash & Equivalents 1,304 1,936 2,996 4,265 5,901 ST Loans & Advances, Others 651 715 581 581 581 Total Current Assets 3,626 4,836 6,143 7,606 9,717 Creditors 1,793 2,115 1,887 2,029 2,379 Other Current Liab & Provns 4,574 4,821 4,745 4,745 4,745 Total Current Liabilities 6,367 6,936 6,632 6,774 7,124 Net Current Assets (2,740) (2,101) (489) 832 2,593 TOTAL APPLICATION OF FUNDS 16,861 19,345 21,888 23,795 25,913


Page | 40


STANDALONE CASH FLOW (Rs mn) FY12 FY13 FY14 FY15E FY16E Reported PAT 3,064 3,541 3,603 3,658 3,950 Non-operating & EO items 55 86 141 205 287 PAT from Operations 3,009 3,455 3,462 3,453 3,663 Interest expenses 479 562 441 362 252 Depreciation 1,432 1,867 2,195 2,414 2,645 Working Capital Change 1,952 199 (483) (51) (126) OPERATING CASH FLOW ( a ) 6,872 6,083 5,616 6,178 6,434 Capex (5,991) (3,676) (2,384) (3,000) (3,000) Free cash flow (FCF) 880 2,407 3,232 3,178 3,434 Investments 0 0 (692) 0 0 Other Income 55 86 141 205 287 INVESTING CASH FLOW ( b ) (5,936) (3,590) (2,935) (2,795) (2,713) Debt Issuance 1,072 (399) (279) (850) (850) Interest expenses (479) (562) (441) (362) (252) FCFE 1,473 1,446 2,512 1,966 2,332 Share capital Issuance 0 0 0 0 0 Dividend (814) (901) (901) (901) (983) FINANCING CASH FLOW ( c ) (221) (1,862) (1,621) (2,113) (2,085) NET CASH FLOW (a+b+c) 715 631 1,060 1,270 1,636 Closing Cash & Equivalents 1,304 1,935 2,996 4,265 5,901


STANDALONE KEY RATIOS

FY12 FY13 FY14 FY15E FY16E PROFITABILITY (%) GPM 38.9 34.7 31.6 30.7 28.1 GPM (Rs/scm) 8.0 8.7 9.0 9.0 9.1 EBITDA Margin 25.1 22.5 19.9 18.8 16.9 EBITDA Margin (Rs/scm) 5.2 5.7 5.7 5.5 5.5 EBIT Margin 19.8 17.4 14.9 13.8 12.4 APAT Margin 12.2 10.5 9.2 8.7 8.0 RoE 27.4 26.0 22.1 19.2 18.1 RoCE 21.6 21.6 18.9 17.1 16.6 Core RoCE 22.7 23.2 21.1 20.0 20.1 EFFICIENCY Tax Rate (%) 31.9 33.0 33.3 33.0 33.0 Asset Turnover (x) 1.6 1.9 1.9 1.8 2.0 Inventory (days) 5 4 3 3 3 Debtors (days) 19 19 20 20 20 Payables (days) 26 23 18 18 18 Cash Conversion Cycle (days) (2) 1 6 6 6 Debt/EBITDA (x) 0.4 0.2 0.0 (0.2) (0.5) Net D/E 0.2 0.1 0.0 (0.1) (0.2) Interest Coverage 10.4 10.4 13.2 16.1 24.4 PER SHARE DATA EPS (Rs/sh) 21.9 25.3 25.7 26.1 28.2 CEPS (Rs/sh) 32.1 38.6 41.4 43.4 47.1 DPS (Rs/sh) 5.0 5.0 5.5 5.5 5.5 BV (Rs/sh) 87.8 106.6 125.9 145.6 166.8 VALUATION P/E (x) 16.4 14.2 14.0 13.8 12.8 P/Cash EPS (x) 11.2 9.3 8.7 8.3 7.6 P/BV (x) 4.1 3.4 2.9 2.5 2.2 EV/EBITDA (x) 7.6 6.4 6.4 6.6 6.6 EV/Revenue (x) 1.9 1.5 1.3 1.2 1.1 OCF/EV (%) 14.4 12.5 11.2 11.8 11.7 FCFF/EV (%) 1.8 4.9 6.4 6.1 6.3 FCFE/ M CAP (%) 2.9 2.9 5.0 3.9 4.6 Dividend Yield (%) 1.4 1.4 1.5 1.5 1.5


Page | 41


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Rating Definitions

BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period

SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171 7330 www.hdfcsec.com

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Natural Gas - Update

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new gas price

revised gas price

gas price hike

gas transmission

oil gas index

upstream gas players

city gas distribution

gas supply domestic