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. Industrys 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 1
st
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 dont 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
satish.mishra@hdfcsec.com
+91-22-6171-7334

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

NATURAL GAS : SECTOR UPDATE

Summary
U
p
s
t
r
e
a
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
R
L
N
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
T
r
a
n
s
p
o
r
t
a
t
i
o
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
C
G
D

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, govts 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
Indias 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 govts 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 Indias 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
P
e
t
r
o
l
D
i
e
s
e
l
N
G
@
$

4
.
2

/

m
m
b
t
u
N
G
@
$

7
.
2

/

m
m
b
t
u
N
G
@
$

1
5
.
0

/

m
m
b
t
u
Cost (Rs/km) Breakeven Petrol (Years)
Breakeven Diesel (Years)
Years
Rs/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 GAILs 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 dont 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 :
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 Scenario
Rising Energy Demand
Over the last decade Indias GDP has grown at 2-3x
that of the global growth rate. Indias 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, Indias energy
demand will grow at a CAGR of 5%. India ranks 4
th
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.

INDIAS 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 oils 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
worlds energy needs. However, the mix is skewed
towards coal (52% contribution) in the Asia Pacific
region. China (ranked 1
st
globally in energy
consumption) and India (ranked 4
th
) use coal to the
extent of 68% and 53% respectively.
Fuel wise Energy Mix (CY13)

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, Indias 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 Indias 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 Indias 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 oils share will reduce.

0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Coal 55%
Oil 29%
Others 8%
Natural Gas 8%
Indias 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 Indias
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 CGD
Refineries 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.

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 supply
Pipelines 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) :
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
F
Y
0
6

F
Y
0
7

F
Y
0
8

F
Y
0
9

F
Y
1
0

F
Y
1
1

F
Y
1
2

F
Y
1
3

F
Y
1
4

ONGC/OIL Pvt/JV KG-D6
RLNG Total
mmscmd
-
75
150
225
300
-
25
50
75
100
F
Y
1
3
F
Y
1
4
F
Y
1
5
F
Y
1
6
F
Y
1
7
F
Y
1
8
F
Y
1
9
F
Y
2
0
F
Y
2
1
F
Y
2
2
PLNG-Dahej Shell-Hazira
Gail-Dabhol PLNG-Kochi
IOC-Ennore GSPC-Mundra
RIL-Kakinada PLNG-Gangavaram
East 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 & Eurasia
Middle 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

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 ~1/3
rd
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 Indias 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) Govts
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 1
st
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 ONGCs
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)
N
e
t

c
r
u
d
e

R
e
a
l
i
s
a
t
i
o
n

(
$
/
b
b
l
)

Gas price ($/mmbtu)
35 6.0 6.5 7.2 8.0 8.4
45 28.9 30.2 32.1 34.2 35.3
47 30.3 31.7 33.5 35.7 36.7
50 31.8 33.1 35.0 37.2 38.2
52 33.3 34.6 36.5 38.6 39.7
55 34.9 36.2 38.1 40.2 41.3
Source : HDFC sec Inst Research
Under recovery overhang to subside : Regular price
hikes in diesel will lead to decline in oil UR from Rs 1.4tn in
FY14 to Rs 1.0tn/0.9tn in FY15/16.
Benefits to Government : Govts share will decrease
from Rs 708bn in FY14 to Rs 371/312bn in FY15/16.
Benefits to ONGC : Despite rise in ONGCs share from
40% to 55%. We expect that Rs/bbl realisation will rise
from Rs 2.5k/bbl in FY14 to Rs 2.7k/3.0k in FY15/16.
FINANCIAL SUMMARY
(Rs bn) FY12 FY13 FY14 FY15E FY16E
Net Sales 765.15 830.05 838.89 926.32 1,053.68
EBITDA 459.04 436.05 444.90 498.12 580.94
PAT 251.23 209.26 220.95 244.57 299.56
Diluted EPS (Rs) 26.8 24.5 25.8 28.6 35.0
P/E (x) 15.1 16.5 15.6 14.1 11.5
EV/EBITDA (x) 7.4 7.8 7.7 6.9 5.9
RoE (%) 21.8 17.7 16.9 17.0 18.7
Source: Company, HDFC sec Inst Research
INDUSTRY OIL & GAS
CMP (as on 10 Jul 2014) Rs 404
Target Price Rs 471
Nifty 7,568
Sensex 25,373
KEY STOCK DATA
Bloomberg/Reuters ONGC IN/ONGC.BO
No. of Shares (mn) 8,555
MCap (Rs bn) / ($ 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

Satish Mishra
+91-22-6171-7334


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
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

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
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

STANDALONE BALANCE SHEET
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
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), Govts 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 RILs 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 cos net D/E is 0.1x.
FINANCIAL SUMMARY
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
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
Source : BSE

Satish Mishra
+91-22-6171-7334

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

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
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
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

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

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
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 Indias 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
INDUSTRY OIL & GAS
Target Price Rs 180
Nifty 7,568
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
Source : BSE

Satish Mishra
+91-22-6171-7334


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 Kochi
mmtpa
5 mtpa capacity at
Dahej, Nov -16
2nd jetty at
Dahej, Apr-14
1
.
5

m
t
p
a
1
.
0

m
t
p
a
4
.
0

m
t
p
a
Page | 27


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

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
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


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

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
Debtor (days) 21 20 19 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
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
INDUSTRY OIL & GAS
Target Price Rs 470
Nifty 7,568
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
Source : BSE

Satish Mishra
+91-22-6171-7334


GAIL : COMPANY UPDATE

ASSUMPTIONS
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


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
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
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


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
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
Debtor (days) 17 20 18 17 17
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
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 2
nd
largest natural gas transmission
company in India with ~2,300 kms pipeline network.
It forms the backbone of Gujarats gas infrastructure
and is a proxy to Gujarats industrial growth. State
accounts for ~1/3
rd
of Indias 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. GSPLs
transmission volumes declined from 36 mmscmd in
FY11 to 21 in FY14. It was in sync with fall in RILs
production from 56 to 14 mmscmd. Subsequently,
RILs proportion in GSPLs volume declined from 21 to
2 mmscmd.
Transmission tariff was another overhang for the
stock. However, recent notification by PNGRB on 19
th

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 dont see any
near term positive trigger. Increase in transmission
volume is a key trigger for GSPL. Significant increase
in GSPLs 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 RILs 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 Asias 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
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
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
Source : BSE

Satish Mishra
+91-22-6171-7334


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


(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 - - - -
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
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

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
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


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


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
Inventory (days) 8.2 21.7 21.5 24.0 24.1
Debtor (days) 28 24 26 79 87
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
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. Govts 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
30
th
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 1
st
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
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
INDUSTRY OIL & GAS
Target Price Rs 380
Nifty 7,568
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
Source : BSE

Satish Mishra
+91-22-6171-7334


INDRAPRASTHA GAS : UPDATE

ASSUMPTIONS

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

Gas Volumes to pickup

Margins to remain stable


-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
F
Y
1
5
E
F
Y
1
6
E
F
Y
1
7
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
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
Y
1
1
F
Y
1
2
F
Y
1
3
F
Y
1
4
F
Y
1
5
E
F
Y
1
6
E
F
Y
1
7
E
CNG Vol (mmscmd) PNG Vol (mmscmd)
Total Vol (mmscmd) Growth RHS (%)
Page | 39


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
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

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

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
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

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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


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
Debtors (days) 19 19 20 20 20
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

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