HDFC Bank Investment Advisory Oil & Gas Sector Sector Update

June 8, 2012

Oil & Gas Industry Background Background: India is the fifth largest consumer of energy in the world, and is likely to surpass Japan and Russia to become the world's third biggest energy consumer by 2030. According to the International Energy Agency (IEA), hydrocarbons satisfy major energy demand in India where coal and oil, together, represent about two-thirds of total energy use. Natural gas accounts for about 7% share. According to Oil & Gas Journal (OGJ), India has about 5.7 bn barrels of proven oil reserves. Trend in Indias crude oil production, import and consumption (figures in mn tonne):

Source: Ministry of Petroleum

Indias large dependence on crude imports: India has a very large dependency on crude imports. It imports crude oil from various countries. About 65-70% crude oil is imported from Middle East countries like Saudi Arabia Iraq, Iran etc. About 15-20% crude oil is imported from Nigeria and 10-15% from rest of the countries like Libya, Egypt, Turkey, Yemen, and Russia etc. However, import bill has also been rising with rise in oil import and consumption. The INR/USD rate plays a vital role in overall import bill. Weakness in INR against USD would impact overall import bill negatively and vice-versa. Trend in imports as %age of total crude oil consumption and Indias crude import bill

Source: Ministry of Petroleum

This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable, HDFC Bank Limited("HDFC Bank") does not warrant its completeness and accuracy. Whilst we are not soliciting any action based upon this information, all care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument Recipients of this information should rely on their own investigations and take their own professional advice. Neither HDFC Bank nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. HDFC Bank and its affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies) mentioned herein. HDFC Bank may at any time solicit or provide commercial banking, credit, advisory or other services to the issuer of any security referred to herein. Accordingly, information may be available to HDFC Bank, which is not reflected in this material, and HDFC Bank may have acted upon or used the information prior to, or immediately following its publication. HDFC Bank House, Senapati Bapat Marg, Lower Parel, Mumbai 400 013. Phone: (91)-22-66521000, Fax: (91)-22-24900983

June 8, 2012 Crude oil price movement: The crude oil prices remained volatile with upward bias during April 2010 to March 2012 (as shown in the chart below). It touched high of $125.8/bbl during March 2012. The rise in prices was largely on the back of unrest in the Middle East & North Africa and tensions with Iran. India, being importer, would be highly impacted as it will lead to significant rise in overall import bill of India. Also, rupee depreciation against USD has worsened the situation, putting more strain on the on the Current Account Deficit (CAD). However, there has been sharp decline in the crude oil prices since April 2012 on the back of softness in demand in global countries like China, Europe and USA. We believe this will be significantly positive for India as it will east out pressure on the CAD as $1 decline in crude price impacts the overall import bill of the country by $900 mn. Crude Oil Prices (USD/bbl) INR/USD

Source: Bloomberg

Rising subsidy bill: Currently petrol has been de-regulated however diesel, kerosene and LPG are regulated. The regulated petroleum products are sold at subsidized rate. This has led to sharp rise in under-recoveries (as shown in the table) to Rs1385 bn in FY12 from Rs445 bn in FY10. As per latest notification by the Government, the subsidy burden will be shared between upstream oil companies and Government in the ratio of 40% and 60%. The oil marketing companies will have no share in subsidy burden. Year-wise subsidy burden: Rs bn FY10 Under recoveries 445 Upstream sharing 144 GoI support 260 OMCs burden 56
Source: MoPNG

FY11 784 303 410 69

FY12 1385 483 835 1

Sectoral view: Oil & Gas Index (O&G) underperformed the BSE Sensex by 11% over last one year (April 2011 March 2012) due to several deleterious reasons like rising crude prices, weakening rupee, lack of clarity on the subsidy sharing mechanism, falling GRMs and decline in gas throughput. Currently, crude prices have come off sharply to $100/bbl from $125/bbl. which we believe is a significant positive for the Indian Oil & Gas sector and whole Indian economy. The Govt. has already come out with clarity on subsidy sharing mechanism with 40% Upstream Oil companies and 60% Govt. We expect rupee to appreciate in the medium to long term on the back of improvement in CAD and foreign fund flows in India. Going ahead, we believe that the sector has huge potential with consistent rise in demand for and lower supply of Hydrocarbons. We remain long term positive on the sector.
This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable, HDFC Bank Limited("HDFC Bank") does not warrant its completeness and accuracy. Whilst we are not soliciting any action based upon this information, all care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument Recipients of this information should rely on their own investigations and take their own professional advice. Neither HDFC Bank nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. HDFC Bank and its affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies) mentioned herein. HDFC Bank may at any time solicit or provide commercial banking, credit, advisory or other services to the issuer of any security referred to herein. Accordingly, information may be available to HDFC Bank, which is not reflected in this material, and HDFC Bank may have acted upon or used the information prior to, or immediately following its publication. HDFC Bank House, Senapati Bapat Marg, Lower Parel, Mumbai 400 013. Phone: (91)-22-66521000, Fax: (91)-22-24900983

June 8, 2012 Reliance Industries Ltd Reliance Industries Limited (RIL) has interest in the energy and materials value chain. The Company operates in three segments: petrochemicals, refining and oil & gas. The petrochemicals segment includes production and marketing operations of petrochemical products namely, polyethylene, polypropylene, polyvinyl chloride, poly butadiene rubber, polyester yarn, polyester fibre, purified terephthalic acid, paraxylene, ethylene glycol, olefins, aromatics, linear alkyl benzene, butadiene, acrylonitrile, caustic soda and polyethylene terephthalate. The refining segment includes production and marketing operations of the petroleum products. The oil and gas segment includes exploration, development and production of crude oil and natural gas. Its others segment includes textile, retail business, special economic zone (SEZ) development and telecom / broadband business. Falling gas production from KG Basin D6: The gas production from KG basin D6 has been consistently falling. Management indicated that the fall in production is due to unforeseen technical problems in the initial round of exploration. Currently it is in the range of 32-35 mmscmd compared to initial targets of 60 mmscmd. There are expectations that it may decline to 20 mmscmd over the next few quarters. However during Q4FY12 results, RIL management sounded confident on augmenting gas production from KG basin once integrated FDP (field development plan) is in place. This may take three years; however, company is working on stopping production decline in the near term. Management remains cautious on the GRM outlook on the back of increased supplies globally. Trend in KG basis D6 gas production (units in mmscmd):

Source: Company

Falling GRMs remains a major concern: Gross Refining margins of Refining (GRM) and marketing business has been falling (see chart below). During Q4FY12, GRM de-grew by 17.4%YoY at $7.6/bbl due to narrowing light-heavy crude differential on the back of increase in light crude supply from Libya and complex refining capacity additions globally. However, on QoQ basis, GRMs improved by 11.8% on the back of improved gasoline and naphtha cracks. We expect GRM to stabilize at these levels.

Source: Company
This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable, HDFC Bank Limited("HDFC Bank") does not warrant its completeness and accuracy. Whilst we are not soliciting any action based upon this information, all care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument Recipients of this information should rely on their own investigations and take their own professional advice. Neither HDFC Bank nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. HDFC Bank and its affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies) mentioned herein. HDFC Bank may at any time solicit or provide commercial banking, credit, advisory or other services to the issuer of any security referred to herein. Accordingly, information may be available to HDFC Bank, which is not reflected in this material, and HDFC Bank may have acted upon or used the information prior to, or immediately following its publication. HDFC Bank House, Senapati Bapat Marg, Lower Parel, Mumbai 400 013. Phone: (91)-22-66521000, Fax: (91)-22-24900983

June 8, 2012 Buy Back to boost the investor confidence: RIL has announced share buy-back of Rs.10,440 crore (Upto 12 crore shares at a price not exceeding Rs.870/share). According to Q4FY12 press release, company has bought 36.6 lac equity shares (3.05% of the total shares planned) as on 31st March 2012. We believe that buy back will be a confidence booster amongst the investors and may give up-move to the stock from the current levels. View: The stock has been under pressure for quite some time due to various reasons like lower gas output, falling margins and continuous deadlock on the capex spent in D6 block by the company. However, we believe that all the issues are in price. Further, management has indicated that they are working on stopping fall in gas output KG basin in the short-term which will stem any fall in earnings. Also utilization of strong cash reserves and any new discovery can lead to re-rating of stock. Other ventures like Telecom and media could also add visibility to the revenue growth. We believe that Govt. stance of phasing out of subsidy could prove beneficial to the fuel retailing business of the company. We remain positive on the long term fundamentals of the company and reiterate BUY with target price of Rs.1131 @15x FY13E EPS of Rs75.4. ONGC Ltd ONGC dominates Indias oil & gas production with more than two third share of the countrys production of oil and oil equivalent gas. It contributes ~78% and ~73% to total oil and gas production, respectively, in India. ONGC has 962.9 mtoe (million tonne of oil equivalent) barrels of proved (1P) reserves, as on FY10 end. ONGCs total domestic hydrocarbon production for FY10 aggregated 52.1MMT.
23 New Discoveries in FY12: During FY12, ONGC made 23 new discoveries which include 15 New

Prospects (9 offshore and 6 onshore), and 8 New Pools (1 offshore and 7 onshore). Targeting to raise production 2x and market cap 4x by 2030: By 2030, the company foresees to raise production 2x from 62mtoe to 130mtoe (4 5%CAGR vs. 2% CAGR in past 56 years), revenue 3x and market cap 4x (implies 8% CAGR price appreciation). Of the 68 mtoe production increase, it expects 52 mtoe from OVL (75%), implying a spate of acquisitions ahead. OVLs blocks in Syria and Sudan are facing disruptions, while growth in Sakhalin and Imperial is more than two years away. View: The Government has clarified that upstream oil companies will have to bear ~40% of the subsidies while balance 60% will be borne by Government. Industry under-recoveries during the Q4FY12 stood at Rs410bn, out of which upstream had to share Rs181bn, with ONGCs share at Rs141.7bn. For F12, total under recoveries stood at Rs1385bn, with upstream and ONGC share at Rs550bn and Rs444.6bn respectively, implying 39.7% burden on upstream companies compared to 38.8% burden in FY11. We believe this is positive for ONGC as there were expectations of much higher share of subsidy burden on upstream oil companies. We remain positive on the company with its strong oil and gas reserves along with huge unexplored blocks ONGC is likely to continue to post strong numbers and generate strong cash flows in the long term. We continue to maintain our Buy recommendation on the stock and the target price of Rs.363.

This document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable, HDFC Bank Limited("HDFC Bank") does not warrant its completeness and accuracy. Whilst we are not soliciting any action based upon this information, all care has been taken to ensure that the facts are accurate and opinions given fair and reasonable. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument Recipients of this information should rely on their own investigations and take their own professional advice. Neither HDFC Bank nor any of its employees shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this material. HDFC Bank and its affiliates, officers, directors, and employees, including persons involved in the preparation or issuance of this material may from time to time, have long or short positions in, and buy or sell the securities thereof, of company(ies) mentioned herein. HDFC Bank may at any time solicit or provide commercial banking, credit, advisory or other services to the issuer of any security referred to herein. Accordingly, information may be available to HDFC Bank, which is not reflected in this material, and HDFC Bank may have acted upon or used the information prior to, or immediately following its publication. HDFC Bank House, Senapati Bapat Marg, Lower Parel, Mumbai 400 013. Phone: (91)-22-66521000, Fax: (91)-22-24900983