Kotak02May11 Energy PDF

Energy CAUTIOUS
India
May 2, 2011
UPDATE
BSE-30:19,136
Oil, coal or hole? Our holistic analysis of India’s energy supply and demand is
underwhelming, showing a rising energy deficit and increasing dependence on
expensive imports. These potential trends could derail India’s economic growth in the
absence of (1) swift deregulation of retail prices (both power and fuel), (2) enhanced
planning and coordination and (3) better demand management. We compute India’s
energy imports to rise to 41% of its total energy requirement and to US$162 bn (4%
of nominal GDP) by FY2017E.
Deficit in Indian energy: Low domestic supply to continue to compel imports

INSIDE
We project India’s energy deficit to increase to 350 mtoe (mn tons of oil equivalent) by Rising oil demand
FY2017E, equivalent to 41% of its total energy requirement. India will have to rely on versus stable
expensive imports to meet its burgeoning demand amidst a modest increase in domestic supply…pg13
supply. We estimate energy imports at US$162 bn in FY2017E or 4% of nominal GDP.
Gas supply and
Domestic supply: Stymied by poor access and poorer management
pricing issues…pg21
We do not see India’s supply prospects improving dramatically over the next few years given
continued government apathy. India faces geological and geographical limitations in oil and Domestic coal
gas. These supply challenges are compounded by poor strategic planning. The country has not production faces
been able to exploit its vast coal reserves optimally due to environmental and infrastructure
challenges…pg30
constraints.
Demand: Determined growth driven by GDP growth, pricing and policy
We expect India’s energy demand to grow at 9% CAGR in FY2011-17E to 850 mtoe led by
strong real GDP growth of around 8-9%. The price of fuels, end-products and domestic
policies on pricing of fuels, power and end-products (subsidized or free market) will also
influence demand. Deregulation of fuel and power prices may not affect demand negatively;
on the other hand, it may remove artificial constraints on demand in the power sector.
Downstream deregulation: Critical reforms to control fiscal deficit and CAD Sanjeev Prasad
sanjeev.prasad@kotak.com
Mumbai: +91-22-6634-1229
India’s fiscal deficit and current account deficit (CAD) could deteriorate significantly without
reforms in the downstream part of the energy chain—(1) deregulation of prices of regulated Gundeep Singh
products such as cooking and transportation fuels and (2) free-market pricing of power. India gundeep.singh@kotak.com
Mumbai: +91-22-6634-1286
would do well to introduce its pricing reforms given (1) the energy deficit and subsidies could
soon reach unmanageable levels, (2) high inflation is inevitable with high subsidies and fiscal Murtuza Arsiwalla
deficits and (3) subsidized prices subvert market economics, feeding nefarious practices like murtuza.arsiwalla@kotak.com
Mumbai: +91-22-6634-1125
corruption and black money.
Tarun Lakhotia
Company data and valuation summary tarun.lakhotia@kotak.com
Mumbai: +91-22-6634-1188
Upside/
Price Target price (downside) Market cap. Shubham Satyarth
Rating (Rs) (Rs) (%) (US$ mn) shubham.satyarth@kotak.com
Reliance Industries REDUCE 984 1,080 9.8 66,153 Mumbai: +91-22-6634-1320
ONGC BUY 308 360 17.0 59,465
Coal India BUY 380 390 2.6 54,256
Cairn India REDUCE 349 335 (4.0) 14,952
Oil India BUY 1,397 1,550 11.0 7,585 Kotak Institutional Equities
Research
NHPC BUY 26 28 8.3 7,186
Important disclosures appear
Source: Kotak Institutional Equities estimates at the back
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India Energy
TABLE OF CONTENTS
Overview: Rising energy deficit, no solutions in sight ..............................3
Oil: No help here ..................................................................................13
Gas: Supply and pricing are issues ........................................................21
Coal: Domestic coal production faces challenges..................................30
Hydropower: Large potential but ground realities differ .......................40
Economy: Severe challenges from rising energy deficit .........................44
Appendix: Financial summaries of companies .......................................50
The prices in this report are based on the market close of April 29, 2011.
2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Energy India
OVERVIEW: RISING ENERGY DEFICIT, NO SOLUTIONS IN SIGHT

We forecast India’s energy imports to increase sharply over the next few years, which will pressure India’s
BOP and fiscal position. India can do little about energy imports; however, it can (1) raise prices in order to
improve its fiscal position and (2) increase production of coal from its large reserves—a task that will entail
better planning and coordination between various government agencies. Hydro and nuclear power have
potential but they may not contribute meaningfully over the next 5-6 years. We note that domestic oil supply
is unlikely to increase meaningfully from current levels and gas has failed to live up to expectations so far.
Rising energy deficit

Exhibit 1 gives our supply-demand balance for energy up to FY2017E. We forecast India’s
energy deficit to rise to around 350 mtoe (million tons of oil equivalent) by FY2017E from
171 mtoe in FY2011E. We estimate energy demand to rise to around 850 mtoe by FY2017E
led by strong real GDP growth of 8-9%. We use a bottom-up approach based on demand
for various fuels (coal, oil, gas and others) to estimate overall energy demand for India. We
clarify that in some cases, oil and gas are also used as feedstock for production of fertilizers
and petrochemicals; however, we treat inputs for the aforementioned sectors (gas and
naphtha) as part of the energy chain.
Exhibit 1: India’s dependence on imported energy to increase further

India’s energy deficit, March fiscal year-ends, 2008-17E (mtoe)
2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Energy demand
Coal (mn tons) 493 555 581 607 711 775 847 929 1,022 1,124
Natural gas (bcm) 43 44 60 65 69 77 90 96 102 112
Petroleum products (mn tons) 125 135 141 148 155 163 170 177 185 194
Electricity (hydro+nuclear) (bn KwH) 140 128 126 137 146 155 173 187 196 206
Total demand (mtoe) 416 456 488 513 574 620 674 727 785 853
Energy supply
Coal (mn tons) 454 490 513 527 564 607 654 705 753 801
Natural gas (bcm) 32 33 48 52 52 58 65 66 68 77
Crude oil (mn tons) 34 33 34 38 42 45 45 45 45 44
Electricity (hydro+nuclear) (bn KwH) 140 128 126 137 146 155 173 187 196 206
Total supply (mtoe) 287 303 326 342 364 392 422 449 473 504
Total energy shortfall (mtoe) 129 153 162 171 210 228 251 278 312 349
Energy deficit (%) 31 33 33 33 37 37 37 38 40 41
Notes:
(a) We assume that natural gas demand will be constrained by supply. We do not assume any incremental demand for gas from the power sector.
Source: Kotak Institutional Equities estimates
Exhibit 2 shows historical correlation between real GDP growth and energy growth. In our
view, historical energy consumption may not fully reflect actual demand given supply
restrictions, particularly in power, which in turn would have led to lower consumption of
fuels versus actual demand. In our view, demand is quite inelastic and less dependent on
price of fuels and power; we note that gasoline demand has continued to grow strongly
(9.5% yoy growth over the past six months) despite a 21% increase in retail gasoline prices
since June 25, 2010—when the government last attempted deregulating gasoline prices.
KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

India Energy
Exhibit 2: Correlation between India’s real GDP growth and energy growth
India’s energy growth versus GDP growth, March fiscal year-ends, 1986-2011E (%)
(%)
12
Energy growth GDP growth
10
0
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E
Source: Kotak Institutional Equities
In contrast with rising demand for energy, we expect the domestic supply of oil, gas, coal
and other forms of energy to rise to around 500 mtoe, leading to a massive deficit of 350
mtoe by FY2017E. India is not blessed geologically except for coal. Exhibit 3 ranks India with
resource-rich countries in terms of reserves of oil, gas and coal. We also see a fair degree of
risk to our supply estimates, which we detail in subsequent sections.
Exhibit 3: India is not blessed with natural resources (except coal)

Reserves of oil, natural gas and coal in key global economies, 2009
Oil (bn bbls) Natural gas (tcm) Coal (bn tons)

Rank Country Reserves Rank Country Reserves Rank Country Reserves
1 Saudi Arabia 265 1 Russia 44.4 1 US 238
2 Venezuela 172 2 Iran 29.6 2 Russia 157
3 Iran 138 3 Qatar 25.4 3 China 115
4 Iraq 115 4 Turkmenistan 8.1 4 Australia 76
5 Kuwait 102 5 Saudi Arabia 7.9 5 India 59
6 UAE 98 6 US 6.9 6 Ukraine 34
7 Russia 74 7 UAE 6.4 7 Kazakhstan 31
8 Libya 44 8 Venezuela 5.7 8 South Africa 30
9 Kazakhstan 40 9 Nigeria 5.2 9 Poland 8
10 Nigeria 37 10 Algeria 4.5 10 Brazil 7
11 Canada 33 11 Indonesia 3.2 11 Colombia 7
12 US 28 12 Iraq 3.2 12 Germany 7
13 Qatar 27 13 Australia 3.1 13 Canada 7
14 China 15 14 China 2.5 14 Czech Republic 5
15 Angola 14 15 Malaysia 2.4 15 Indonesia 4
16 Brazil 13 16 Egypt 2.2 16 Greece 4
17 Algeria 12 17 Norway 2.0 17 Hungary 3
18 Mexico 12 18 Kazakhstan 1.8 18 Pakistan 2
19 Norway 7 19 Kuwait 1.8 19 Bulgaria 2
23 India 6 25 India 1.1 20 Turkey 2
Source: BP Statistical Review 2009, Kotak Institutional Equities
` Coal. We see downside risks to our forecasts for domestic coal supply without the
development of coal resources in areas that are currently forbidden for exploitation for
environmental reasons or concurrent development of railway and evacuation
infrastructure. We forecast incremental coal production of 273 mn tons in FY2011-17E. In
contrast, incremental domestic coal production has been only 96 mn tons in FY2007-11.
In addition, we see environmental infrastructure and logistical bottlenecks that may
prevent the use of domestic coal. Finally, inadequate import capacity may prevent imports
of requisite quantities of coal. We project coal imports to rise to ~325 mn tons in
FY2017E from 80 mn tons in FY2011E.

Energy India
We note that coal supply is very critical to India’s energy situation since it dominates India’s
energy mix and will likely continue to do so (see Exhibit 4 that shows India’s energy mix
over various periods). India has large amounts of coal reserves (the fifth-largest in the world)
in contrast to limited resources of oil and gas.
Exhibit 4: Share of coal in India’s energy mix is likely to increase

Energy mix in India, March fiscal year-ends, 2010, 2012E and 2017E (%)
Energy mix in 2010 Energy mix in 2012E Energy mix in 2017E
Petroleum Petroleum Petroleum

products products products
29% 27% 23%
Electricity Electricity
Electricity
(hydro+ (hydro+
(hydro+
nuclear) nuclear)
nuclear)
3% 3%
3%
Natural
Natural Coal Natural
Coal gas
Coal gas 63% gas
58% 11%
60% 11% 12%
Exhibit 5 gives the breakdown of reserves of coal by major states and categories. As can
be seen, India has large amounts of proved coal reserves that are yet to be exploited fully
and resources that are yet to be ‘discovered’. However, the exploitation of abundant
reserves would require better coordination between various government bodies and
timely strategic planning. India’s coal production in FY2011E was 527 mn tons only in
contrast to proved reserves of almost 110 bn tons.
Exhibit 5: India has large unexploited quantities of coal

Distribution of coal reserves in India (mn tons)
State Proved Indicated Inferred Total
Jharkhand 39,633 30,992 6,338 76,963
Orissa 21,507 32,074 12,726 66,307
Chhattisgarh 12,441 30,230 4,011 46,682
West Bengal 11,752 13,030 5,071 29,853
Madhya Pradesh 8,505 11,267 2,216 21,988
Andhra Pradesh 9,257 9,730 3,029 22,016
Maharashtra 5,360 2,984 1,964 10,308
Uttar Pradesh 866 196 — 1,062
Others 477 151 709 1,337
Total 109,798 130,654 36,358 276,810
Source: Ministry of Coal, Kotak Institutional Equities
` Gas. We see downside risks to our estimates of domestic natural gas production in light
of (1) production problems at Reliance Industries’ KG D-6 block and (2) continued delay in
E&P activity in several NELP blocks where companies have already made discoveries. In
addition, India’s inability to sign long-term LNG contracts and pricing issues in the end-
user industries such as power and fertilizers may result in inadequate demand for
imported spot LNG. We expect most of the incremental imports of gas to be in the form
of spot LNG; the availability and pricing of spot LNG cargoes may result in lower-than-
expected supply from LNG imports.
` Hydroelectricity. We expect only 15 GW of new hydropower generation capacity in

FY2012-17E, which would increase India’s dependence on thermal power. Large execution
risks and a disparity in return profile of hydro projects in comparison to coal-based
generation has so far resulted in low investments in hydro-based generation and its
declining share in India’s power mix. We do not expect this situation to alter in the
medium term despite the government’s initiatives to increase the share of hydropower in
India’s energy mix. The Government of India (GoI) has identified hydropower as a key
area for development and has unveiled a hydro policy to encourage investments in the
sector. It has identified 162 schemes for preliminary feasibility reports under a 50,000
MW hydroelectric initiative.

India Energy
Rising imports to lead to massive import bill and pressure on CAD

We expect India’s fuel imports to increase significantly in value terms over the next few years
led by (1) increasing imports and (2) likely higher price of energy relative to historical levels.
Exhibit 6 estimates likely value of energy imports broken down by various products and price
assumptions behind our estimates. We note that we use US$90/bbl crude oil and US$90/ton
coal price beyond FY2015E in this exercise; thus, we see upside risks to our estimates that
may put further pressure on India’s finances. Exhibit 7 shows the same exercise at higher
global fuel prices.
Exhibit 6: Fuel imports to increase significantly over the next few years
Energy imports, March fiscal year-ends, 2008-17E (US$ bn)
2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Energy imports (net basis)
Coal (mn tons) 38 65 68 80 146 169 193 224 270 323
LNG (bcm) 11 11 12 13 17 20 25 30 33 34
Crude oil (mn tons) 102 113 120 122 127 132 139 147 157 167
Total imports (mtoe) 129 153 162 171 210 228 251 278 312 349
Price assumptions
Coal (US$/ton) 169 154 130 123 130 114 114 114 114 114
LNG prices (US$/mn BTU) 4.2 5.1 4.4 6.5 9.3 10.5 11.0 12.0 12.0 12.0
Crude prices (US$/bbl) 79 89 67 84 105 95 90 90 90 90
Value of energy imports (US$ bn)
Coal 6 10 9 10 19 19 22 26 31 37
LNG 2 2 2 3 6 8 10 13 15 15
Oil 55 64 56 75 97 91 91 97 103 110
Total imports 64 76 67 88 122 118 124 136 148 162
Notes:
(a) Price of imported coal has been adjusted down to reflect its higher calorific value.
(b) In the case of crude oil, data represents net imports of crude oil.
Exhibit 7: Value of fuel imports carry significant upside risk

2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Energy imports
Coal (mn tons) 38 65 68 80 146 169 193 224 270 323
LNG (bcm) 11 11 12 13 17 20 25 30 33 34
Crude oil (mn tons) 102 113 120 122 127 132 139 147 157 167
Price assumptions
Coal (US$/ton) 169 154 130 123 140 140 140 140 140 140
Coal 6 10 9 10 21 24 27 31 38 45
LNG 2 2 2 3 7 10 14 18 20 21
Oil 55 64 56 75 111 115 122 129 137 146
Total imports 64 76 67 88 139 149 163 178 195 212
Notes:
Stocks: Own resource owners

We believe resource owners will benefit from India’s rising energy deficit and eventual
alignment of domestic prices to global levels. In addition, certain asset owners (ports, LNG
terminals) may benefit from rising imports of fuels although specific issues about pricing of
imported fuel and downstream infrastructure will also matter. We discuss some of the key
companies under our coverage that may benefit from India’s rising energy deficit.

Energy India
` Coal India (BUY, CMP: `380, TP: `390). Coal India with 52 bn tons of proved coal
reserves (48% of total proved reserves in India) and annual production of 443 mn tons is
ideally positioned to increase its production. However, various factors have constrained
production. Also, CIL should benefit from eventual increase in its coal prices that are
substantially below global levels (see Exhibit 8). Exhibit 9 gives our key assumptions on
volumes and pricing over the next few years.
Exhibit 8: CIL’s energy-adjusted realizations are at a steep discount to average FOB price of South
African coal
Average realization of CIL and average FOB price of imported coal, March fiscal year-ends, 2006-10 (Rs/ton)
Average realization of CIL (Rs/ton)

(Rs/ton) Average FOB price of improted coal (Rs/ton)
Average energy-adjusted realization of CIL (Rs/ton)
5,000
4,000
3,000
2,000
1,000
-
2004
2005
2006
2007
2008
2009
2010
Source: CIL, Bloomberg
Exhibit 9: CIL’s profitability will likely improve to US$11/ton (EBITDA/ton) in FY2015E from US$6/ton in FY2010
Key operational and financial assumptions for CIL, March fiscal year-ends, 2009-17E
2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E

Production (mn tons)
U/G 44 43 44 45 47 49 50 51 52
OC 360 388 399 412 434 453 471 488 500
Total 404 431 443 458 481 502 521 539 552
Sales (mn tons)
Raw coal 337 355 362 378 393 407 417 429 436
Beneficated 15 15 12 18 23 27 34 38 43
E-auction 49 46 53 56 59 62 65 67 69
Total 401 415 426 453 475 497 516 534 548
Realization (Rs/ton)
Raw coal 926 976 1,044 1,153 1,181 1,239 1,295 1,352 1,417
Beneficated 0 2,267 2,504 2,780 2,887 2,791 2,614 2,604 2,471
E-auction 1,481 1,583 1,589 1,759 1,803 1,848 1,890 1,935 1,984
Average 968 1,075 1,152 1,294 1,342 1,400 1,456 1,514 1,572
Others
EBITDA (Rs mn) 39,309 114,735 137,494 177,437 200,744 230,120 255,863 280,808 263,987
EBITDA per ton (Rs/ton) 97 266 310 388 417 458 491 521 478
EBITDA per ton (US$/ton) 2.2 5.9 6.9 8.6 9.3 10.2 10.9 11.6 10.6
Source: CIL, Kotak Institutional Equities estimates

India Energy
` Reliance Industries Ltd (REDUCE, CMP: `984, TP: `1,080). RIL can enhance India’s gas
production significantly if it can accelerate development work at some of its discoveries
and bring them into production. Continued delays in exploration activity in blocks such as
MN D-4, KG D-3 and KG D-9 and development work in KG D-6 (other zones apart from
current production zones) and NEC-25 will likely push gas production from the new
discoveries to FY2016E, potentially later. Most of the blocks are at an early stage of
exploration or appraisal (NEC-25). KG D-6 gas block’s production problems are well
known now and its volumes can surprise negatively versus our estimates if RIL and its
proposed partner, BP, are unable to fix technical problems in the block. Exhibit 10 gives
our estimated production of gas from RIL’s various blocks through FY2020E.
Exhibit 10: We assume gas production over 200 mcm/d by FY2020E from RIL’s blocks but risks exist
Gas production from RIL’s blocks, March fiscal year-ends, 2010-20E (mcm/d)
KG-DWN-98/3 (KG D-6) NEC-OSN-97/2 (NEC-25) KG-DWN-2003/1 (KG D-3)

(mcm/d) KG-DWN-2001/1 (KG D-9) MN-DWN-2003/1 (MN D-4)
240
200
160
120
80
40
-
2010
2011E
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
Source: Company, Kotak Institutional Equities estimates
` Oil and Natural Gas Corp. (BUY, CMP: `308, TP: `360). ONGC’s likely flat crude oil
production volumes over the next few years may not improve India’s energy situation. Its
mature fields and largely steady reserves over the past few years may preclude a ramp-up
in production from current levels. Exhibit 11 shows that ONGC’s proved reserves (broken
down by oil, gas, domestic and overseas assets) have remained largely constant over the
past few years.
Exhibit 11: Proved reserves for ONGC have remained stable over the past few years
Proved oil and gas reserves of ONGC (including share of PSCs), March fiscal year-ends, 2003-10
2003 2004 2005 2006 2007 2008 2009 2010

Domestic
Oil (mn ton) 441 424 422 403 408 417 414 414
Gas (bcm) 366 347 332 314 336 347 345 363
International
Oil (mn ton) 83 82 82 92 95 75 100 96
Gas (bcm) 117 116 115 113 99 83 85 83
Total reserves (mn TOE) 955 919 904 877 891 876 898 908
Total reserves (mn BOE) 6,970 6,710 6,597 6,401 6,507 6,397 6,554 6,632
Source: Company, Kotak Institutional Equities
However, ONGC should benefit from fuel price deregulation as and when the
government deregulates the pricing of auto and cooking fuels and/or restricts subsidies to
needy households. Exhibit 12 shows the gap between global crude oil prices and ONGC’s
net realized price (after payment of subsides to downstream oil companies as part of a
government-devised subsidy-sharing formula) and our volume assumptions.

Energy India
Exhibit 12: Sharp increase in ONGC’s net crude price realization over the next few years
Key assumptions for ONGC, March fiscal year-ends, 2006-2014E
2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E

Macro assumptions
Rs/US$ rate 44.3 45.3 40.3 45.8 47.4 45.6 45.5 44.0 44.0
Subsidy share scheme loss (Rs bn) 119.6 170.2 220.0 282.3 115.5 197.5 272.0 131.3 119.9
Import tariff on crude oil (%) 5.1 5.1 5.2 0.9 0.4 5.2 5.2 5.2 5.2
Pricing and volumes assumptions
Crude price
Crude price, Bonny Light (US$/bbl) 57.2 64.8 78.9 83.0 67.1 84.0 95.0 90.0 85.0
Net crude price, ONGC-India (US$/bbl) 43.8 46.1 52.9 47.7 55.9 57.0 57.4 72.9 69.8
Natural gas price
Ceiling natural gas price, India (Rs/cu m) 3.52 3.20 3.20 3.20 3.20 6.78 7.50 7.50 7.50
Ceiling natural gas price, India (US$/mn BTU) 2.12 1.89 2.12 1.87 1.80 3.98 4.41 4.56 4.56
International operations
Net natural gas price, OVL-Vietnam (Rs/cu m) 3.1 3.2 2.8 3.2 3.3 3.2 3.2 3.1 3.1
Net crude price, OVL-Sudan (Rs/ton) 8,118 9,384 10,142 12,136 10,173 12,223 13,778 12,628 11,933
Net crude price, OVL-Russia (Rs/ton) 8,320 9,633 10,434 12,493 13,931 16,777 18,933 17,345 16,381
Sales volumes—Domestic fields
Crude oil - own fields (mn tons) 20.7 22.6 22.3 21.2 20.5 20.1 20.2 20.6 21.0
Crude oil - JV (mn tons) 1.7 1.8 1.8 1.7 1.8 3.0 4.3 5.1 5.1
Natural gas - own fields (bcm) 18.2 17.9 17.8 17.7 18.1 17.6 17.5 17.5 17.8
Natural gas - JV (bcm) 2.3 2.4 2.7 2.8 2.5 2.7 2.9 2.9 2.9
Sales volumes—Overseas fields
Crude oil (mn tons) 4.6 5.8 6.8 6.6 6.5 6.9 8.5 8.8 9.0
Natural gas (bcm) 1.8 2.1 2.0 2.2 2.4 2.8 2.8 2.9 3.0
Total sales
Crude oil (mn tons) 27.0 30.2 30.9 29.4 28.8 30.0 33.0 34.4 35.0
Natural gas (bcm) 22.3 22.5 22.4 22.8 23.0 23.1 23.2 23.3 23.7
Total sales (mn toe) 46.9 50.3 50.9 49.8 49.3 50.6 53.7 55.2 56.2
Total sales (mn boe) 342 367 372 363 360 369 392 403 410
Crude oil (%) 58 60 61 59 58 59 61 62 62
Natural gas (%) 42 40 39 41 42 41 39 38 38
Source: Company data, Kotak Institutional Equities estimates
` Oil India Ltd (BUY, CMP: `1,397, TP: `1,550). OIL is in a similar position to ONGC but is
theoretically in a better position to ramp up production from its oil and gas fields given its
large 2P and 3P reserves compared to 1P reserves (see Exhibit 13). However, the location
of OIL’s oil and gas fields in the north-eastern part of the country with inadequate
refining, gas-consuming industries and evacuation infrastructure may limit its production
in the short term. As with ONGC, OIL should benefit from a deregulation of the oil sector
as its net realization for crude oil is significantly below global levels (see Exhibit 14 that
also gives our volume assumptions for OIL).
Exhibit 13: 2P reserves are 84% higher than proved reserves for Oil India
Reserves of Oil India, March fiscal year-ends, 2007-10 (mn boe)
2007 2008 2009 2010

1P reserves
Crude oil 283 296 285 282
Natural gas 169 233 247 239
Overall 452 529 532 521
2P reserves
Crude oil 540 588 575 580
Natural gas 289 345 399 377
Overall 829 933 974 957
3P reserves
Crude oil 1,000 1,039 999 915
Natural gas 471 472 543 522
Overall 1,471 1,511 1,542 1,437

India Energy
Exhibit 14: Sharp increase in OIL’s net crude price realizations over the next few years
Key assumptions for Oil India, March fiscal year-ends, 2006-2014E
2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E

Rs/US$ rate 44.3 45.3 40.3 45.8 47.4 45.6 45.5 44.0 44.0
Subsidy share scheme loss (Rs mn) 9,775 19,938 23,051 30,233 15,488 26,241 36,176 17,458 15,946
Import tariff on crude oil (%) 5.1 5.1 5.2 0.9 0.4 5.2 5.2 5.2 5.2
Crude/natural gas prices
Crude price
Crude price, Bonny Light (US$/bbl) 57.2 64.8 78.9 83.0 67.1 84.0 95.0 90.0 85.0
Net crude price, OIL-India (US$/bbl) 48.8 47.0 59.8 55.6 56.2 65.2 68.8 78.7 75.1
Natural gas price
Ceiling natural gas price, India (Rs/cu m) 3.52 3.20 3.20 3.20 3.20 6.78 7.50 7.50 7.50
Ceiling natural gas price, India (US$/mn BTU) 2.12 1.89 2.12 1.87 1.80 3.98 4.41 4.56 4.56
Net natural gas price, OIL-India (Rs/cu m) 3.16 2.88 2.88 2.88 2.88 5.49 6.07 6.07 6.07
Net natural gas price, OIL-India (US$/mn BTU) 1.91 1.70 1.91 1.68 1.62 3.22 3.56 3.69 3.69
Sales volumes—Domestic fields
Crude oil (mn tons) 3.1 3.0 3.0 3.4 3.5 3.6 3.7 3.8 3.9
Natural gas (bcm) 1.7 1.8 1.8 1.7 1.9 1.8 2.0 2.6 2.7
Total sales (mn toe) 4.7 4.6 4.7 4.9 5.2 5.3 5.5 6.1 6.3
Total sales (mn boe) 35 34 35 37 39 39 41 45 47
Crude oil (%) 67 66 65 68 68 69 67 63 61
Natural gas (%) 33 34 35 32 32 31 33 37 39
Source: Company data, Kotak Institutional Equities estimates
` Cairn India (REDUCE, CMP: `349, TP: `335). Cairn’s large in-place reserves and
resource base of 6.5 bn boe in its key Rajasthan block (RJ-ON-90/1) can theoretically allow
it to ramp up production from the current production level of 125,000 bpd. We model
peak production at 230,000 bpd from FY2013E although this figure can be higher if
Cairn can bring additional resources into play. Cairn has production infrastructure for
240,000 bpd. Exhibit 15 gives the company’s estimates of resources, proved and probable
reserves.
Exhibit 15: Cairn India’s estimate of its reserves and resources in the key Rajasthan block
Estimate of hydrocarbon reserves and resources of Cairn India in RJ-ON-90/1 block (mn boe)
Gross proved and Gross proved and Net proved and

probable hydrocarbons probable reserves probable reserves
initially in place and resources and resources
Mar-10 Mar-09 Mar-10 Mar-09 Mar-10 Mar-09
Rajasthan MBA fields 2,054 2,054 694 685 486 479
Rajasthan MBA EOR — — 308 308 216 216
Rajasthan block other fields 1,976 1,708 152 86 107 61
Total 4,030 3,762 1,154 1,079 809 756
` NHPC (BUY, CMP: `26, TP: `28). NHPC is currently executing 4.5 GW of hydropower
capacity. These projects are due over the next four years but they have seen delays due to
various reasons. NHPC has 5.2 GW of power capacity currently. Exhibit 16 gives our
assumptions for NHPC’s installed capacity and gross generation through FY2017E.

Energy India
Exhibit 16: NHPC to reach 9.7 GW of installed capacity by FY2017E

Gross generation and installed capacity of NHPC, March fiscal year-ends, 2005-17E
(bn units) (GW)
50 Generation [LHS] Capacity [RHS] 12
40
9
30
6
20
3
10
0 0
2005
2006
2007
2008
2009
2010
2011E
2012E
2013E
2014E
2015E
2016E
2017E
Source: NHPC, Kotak Institutional Equities estimates
` Mundra Ports and SEZ (BUY, CMP: `144, TP: `160). MPSEZ will likely play a key role in
importing energy into India, both coal and oil. Based on the company’s current plans, we
expect coal import volumes to ramp up to 43 mtpa by FY2015E and crude oil imports to
27 mtpa by FY2015E. Exhibit 17 gives details of import volumes of key fuel items over the
next few years. More important, we believe MPSEZ is ideally placed to expand its capacity
and cater to India’s rising energy deficit given its superb location and deep-water port.
Exhibit 17: Mundra Port’s fuel imports set to rise sharply

Commodity-wise cargo projections at Mundra port, March fiscal year-ends, 2009-15E (MMT)
2009 2010 2011E 2012E 2013E 2014E 2015E

Dry cargo 14.5 14.7 21.6 33.9 42.8 52.8 56.9
Coal and coke 7.4 8.5 14.2 25.8 34.1 41.5 43.1
Fertiliser and raw materials 2.7 2.1 2.3 2.5 2.8 2.9 3.1
Minerals 1.1 2.1 2.3 2.5 2.7 2.8 2.9
Iron and steel 2.8 1.9 2.3 2.5 2.8 3.1 3.4
Foodgrains 0.6 — 0.5 0.5 0.5 0.5 0.5
Others — — — — — 2.0 4.0
Liquid cargo 11.6 14.4 16.4 19.2 29.2 29.2 30.5
Edible oils 1.5 2.2 2.5 2.7 3.0 3.3 3.6
Crude 6.8 7.5 8.2 10.7 20.4 20.2 21.2
Petroleum products 3.3 4.8 5.7 5.7 5.7 5.7 5.7
Container cargo 9.4 11.2 15.9 19.3 23.2 26.6 30.7
CT1 (TEUs) 711,700 628,620 722,913 831,350 956,052 1,051,658 1,156,823
CT1 (mn tons) 8.5 7.5 8.7 10.0 11.5 12.6 13.9
CT2 (TEUs) 94,710 295,580 575,000 747,500 934,375 1,121,250 1,345,500
CT2 (mn tons) 0.9 3.7 7.2 9.3 11.7 14.0 16.8
Total 35.5 40.3 53.9 72.4 95.2 108.6 118.2
Growth in total volumes (%) 13.6 33.5 34.5 31.3 14.2 8.8
` Petronet LNG (SELL, CMP: `132, TP: `105). Petronet LNG should theoretically benefit
from enhanced LNG imports. However, PLNG’s inability to sign long-term contracts for
the bulk of incremental volumes and structural rigidities in the downstream fertilizer and
power sector will preclude the use of spot LNG (or high-priced LNG) from the crucial
fertilizer and power segments. More on this later in this report. Exhibit 18 gives our major
assumptions behind our earnings model for PLNG.

India Energy
Exhibit 18: We model Petronet’s volumes ramping up to 11 mtpa by FY2013E

Key volume/price assumptions for Petronet LNG, March fiscal year-ends, 2007-17E
2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Volume assumptions
Contract LNG volume (mn tons) 5.1 4.8 4.8 7.1 7.5 7.5 8.4 10.7 13.6 14.5 14.5
Spot LNG volume (mn tons) 0.6 1.5 1.5 0.8 1.1 2.5 2.5 2.5 2.5 2.0 2.0
Total volumes 5.6 6.3 6.3 7.9 8.7 10.0 10.9 13.2 16.1 16.5 16.5
Price assumptions
LNG purchase price (FOB) (US$/mn BTU) 3.3 3.7 4.2 4.7 5.7 8.4 9.5 10.4 10.5 10.4 10.4
Landed cost (incl. import tariff) (US$/mn BTU) 3.8 4.2 4.7 5.3 6.4 9.3 10.4 11.4 11.5 11.5 11.5
Base re-gasification charges (US$/mn BTU) 0.58 0.69 0.64 0.65 0.71 0.74 0.81 0.85 0.88 0.88 0.88
Base re-gasification charges (Rs/mn BTU) 26.5 27.8 29.2 30.6 32.2 33.8 35.5 37.2 38.6 38.6 38.6
Escalation in re-gasification charges (%) 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 3.7 — —
Sales price (US$/mn BTU) 4.4 4.9 5.4 5.9 7.1 10.0 11.2 12.3 12.4 12.3 12.4
Other assumptions
Rupee/US dollar exchange rate 45.3 40.1 45.8 47.4 45.6 45.5 44.0 44.0 44.0 44.0 44.0
We give the financial summaries of the abovementioned companies in the Appendix (see
Exhibits 84-91).

Energy India
OIL: NO HELP HERE

We project India’s oil imports to continue to increase over the next few years due to increasing demand (5-
6% per annum) for liquid fuels and stable domestic crude oil production. Rising penetration of passenger
vehicles and freight transportation by the road sector will likely drive overall demand for oil. We expect
consumption of oil products to increase to 176 mn tons by FY2017E from 130 mn tons in FY2011E.
Demand for oil will grow at a steady pace

Exhibit 19 gives our estimates for oil demand broken down by key products. We expect
rising demand for transportation fuels to drive overall demand for oil.
Exhibit 19: Rising demand for transportation fuels to drive overall oil demand
Demand of major oil products in India, March fiscal year-ends, 2008-17E (mn tons)
2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
LPG 11 12 13 14 15 16 17 18 19 20
Gasoline 10 11 13 14 15 17 18 20 22 24
Naphtha 14 14 12 13 14 14 14 14 14 14
Jet fuel 5 4 5 5 6 6 7 7 8 9
Kerosene 9 9 9 9 9 8 8 8 8 8
Diesel 48 52 56 61 65 69 74 78 83 88
Light diesel oil 1 1 0 — — — — — — —
Fuel oil 8 9 9 8 8 7 7 6 6 6
Low Sulfur heavy stock 3 3 2 2 2 2 2 2 2 2
Bitumen 4 5 5 5 5 5 5 6 6 7
Total demand 114 120 124 130 138 145 152 159 168 176
Growth rate (%) 8.2 5.0 3.8 4.8 5.7 5.2 4.8 5.0 5.1 5.3
Source: Industry, Kotak Institutional Equities estimates
` Gasoline. Gasoline demand has accelerated over the past few years led by increasing
sales of four-wheelers and two-wheelers in India and we expect the trend to continue
over the next few years (see Exhibit 20). The penetration of four-wheelers is still quite low
in India compared to developed and emerging economies. Exhibit 21 compares
penetration of four-wheelers (latest data available) in major economies. Exhibit 22 shows
the explosion in the number of vehicles in China over the past 10 years. India seems to be
about nine years behind China in the four-wheeler cycle.
Exhibit 20: Strong growth in sales of passenger cars and two-wheelers in India
Sales of passenger cars and two-wheelers in India, March fiscal year-ends, 2003-17E (mn units)
(mn units) Passenger car sales Two-wheeler sales

24 22.4
20.4
20 18.5
16.9
15.0
16
13.4
11.8
12
9.4
7.9 7.3 7.4
7.1
8 6.2 5.4
4.8 5.4
3.8 4.5
2.7 3.1
4 2.0 2.3
0.8 0.9 1.1 1.2 1.2 1.5
0.5 0.7
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012E
2013E
2014E
2015E
2016E
2017E

India Energy
Exhibit 21: Penetration of four-wheelers is quite low in India Exhibit 22: Strong growth in sales of passenger cars in China
compared to developed and emerging economies over the past decade
Passenger car penetration in major economies (Units per 1,000 Sales of passenger cars in China, calendar year-ends, 2000-10 (mn
people) units)
(#) (mn units) Passenger car sales

600 10 9.4
500
500 460
444
8 7.3
400
300 260 6 5.1 5.0

226 4.6
200 3.7
113 4 3.1
2.7
100 30 1.8
14 2 1.0 1.2
0
EU
Brazil
Japan
China
India
US
Russia
S.Korea
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Notes:
(a) Data for India and China corresponds to CY2010.
Source: ACEA, Kotak Institutional Equities estimates
We expect gasoline demand to likely grow ahead of real GDP growth as we expect
disposable income (even adjusted for inflation) to grow faster led by rising salaries in
manufacturing and services sector and wealth creation. We note that gasoline
consumption is a function of the total number of four-wheelers and two-wheelers in the
economy and distance traveled by vehicles. The poor quality of public transportation will
likely continue to drive the trend of private ownership of vehicles.
` Diesel. We expect diesel demand to grow slightly below real GDP growth over the next
few years. Exhibit 23 compares diesel growth with real GDP growth and manufacturing
GDP growth over the past 10 years. We note that diesel is the primary transportation fuel
in the country but it finds large use (~18% of total anecdotally) in the agriculture sector
also for irrigation purposes. We expect demand for diesel in the agriculture sector to
grow at a lower pace than demand for transportation.
Exhibit 23: Diesel consumption growth versus GDP growth over the past few years
Growth in diesel consumption versus real GDP growth and manufacturing GDP growth, March fiscal year-
ends, 2000-11E (%)
Growth in diesel consumption Real GDP growth

(%) Manufacturing GDP growth
15
10
(5)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011E

Energy India
Also, diesel demand will depend on the relative competitiveness of road transportation
versus railway transportation. We note that data is not available regarding haulage of
goods (weight and distance) by various modes (rail, road, sea, inland waterways) in India.
However, we would assume that the railways have lost market share to road given only
moderate growth in railways freight volumes over the past few years. Exhibit 24 shows
freight data of Indian Railways broken down by key products over the past few years.
Exhibit 24: Railway freight has increased at a CAGR of 5% over the past four years
Product-wise freight data of Indian Railways, March fiscal year-ends, 2008-11 (mn tons)
2008 2009 2010 2011

Coal 338 369 396 420
Iron ore 137 131 133 118
Cement 79 86 93 99
Fertiliser 36 41 44 48
Foodgrains 38 34 38 42
Petroleum products 36 39 40 40
Container service 24 29 34 37
Pig iron & finished steel 27 27 31 32
Raw material for steel (excluding iron ore) 11 11 12 13
Other goods 67 66 69 71
Total 794 833 888 922
Source: CMIE, Kotak Institutional Equities
` Cooking fuels. We expect demand for cooking fuels to grow slowly given the high
penetration of LPG among urban and semi-urban households. Exhibit 25 shows that the
number of LPG households has increased steadily over the past few years. We see
substitution of kerosene by LPG as the primary cooking fuel in the balance households
over a period of time as income levels increase. Finally, we expect kerosene consumption
to drop off sharply whenever the government (1) deregulates kerosene pricing and/or
(2) restricts subsidy on kerosene to poor households. Various government studies estimate
that around 40% of kerosene is used for transportation after being diverted from the
public distribution system (PDS) and mixed with diesel. However, this will not impact
overall oil demand as diesel demand will decline proportionately.
Exhibit 25: Number of LPG households has increased at a CAGR of 9% over the past decade
LPG households, March fiscal year-ends, 2000-10 (# mn)
(# mn) IOCL HPCL BPCL

120
100 28
27
25
80 24
22
21 29
19 27
60 17 24 25
15 23
14 22
20
11 16 18
40 14
12 53 57
44 48 50
20 35 38 41
30 32
24
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Industry, Kotak Institutional Equities estimates

India Energy
` Industrial fuels. We expect consumption of industrial fuels to decline gradually, with

furnace oil (FO) being displaced by cheaper natural gas. However, we expect the pace of
substitution to be more gradual versus our earlier expectations given disappointing
domestic gas supply and high price of imported spot LNG. The substitution of FO by
natural gas would depend on the relative pricing of the two products. However, we see
two other equally important factors—(1) reach of gas pipeline network to industrial
clusters across India and (2) inability of refineries to cut production of FO and their
desperation to sell FO even at uneconomical prices; we note refineries will produce FO as
a by-product of more value-added products during the refining process and would be
keen to dispose of FO at any price. We expect refineries to gradually upgrade their refineries
to produce less FO and other bottom-of-the-barrel products over a period of time.
High crude prices and consequent high FO prices make even spot LNG attractive
compared to FO prices. However, FO is cheaper on a historical basis (we use a five-year
average price of crude oil of US$78/bbl and FO price of US$69/bbl for the purpose of
normalization) and thus, spot LNG prices would have to be fairly low to be competitive
with FO. Exhibit 26 compares the price of gas with that of FO in energy-equivalent terms.
Exhibit 26: Spot LNG is expensive compared to FO in energy-equivalent terms up to US$85/bbl crude
oil price
Energy-equivalent price of FO versus spot LNG (US$/mn kcal)
Import parity price of FO (US$/ton) 445

Net calorific value for fuel oil (kcal/kg) 10,500
Energy-equivalent price of FO (US$/mn kcal) 42.3
Current spot LNG price (fob basis) (US$/mn BTU) 12.5
Spot LNG prices (including import duty, reg-gasification tarrifs and shipping charges) (US$/mn BTU) 14.2
Net calorific value for natural gas (kcal/kg of LNG) 13,000
Energy-equivalent price of spot LNG (US$/mn kcal) 46.3
Notes:
(a) Price of FO is the average price for FY2007-11. Average crude oil price during this period was US$78/bbl.
We expect incremental demand for naphtha to be lumpy and increase in line with new
petrochemical capacity (naphtha-based steam crackers or PX plants). We see limited
scope of displacement of naphtha by natural gas in the fertilizer and power sectors. We
note that consumption of naphtha has already come off significantly over the past two
years with natural gas already displacing naphtha in most applications other than
petrochemicals. We note that naphtha will continue to be used by naphtha-based steam
crackers for production of olefins or by reformers for production of aromatics. Exhibit 27
gives the breakdown of naphtha by sectors for FY2008-10 and FY2011E (April 2010-
February 2011 data annualized).

Energy India
Exhibit 27: Naphtha and fuel oil/LSHS consumption has been negatively impacted by gas; limited scope for further displacement of
naphtha by gas
Sector-wise consumption of various petroleum products, March fiscal year-ends, 2008-11E
2008 2009 2010 2011E

('000 tons) (%) ('000 tons) (%) ('000 tons) (%) ('000 tons) (%)
Naphtha
Petrochemicals 10,454 75 9,889 70 10,228 84 11,251 89
Fertilizers 1,863 13 2,217 16 766 6 840 7
Power 1,309 9 1,913 13 1,121 9 533 4
Steel 203 1 155 1 20 0 34 0
Miscellaneous 27 0 26 0 20 0 37 0
Total naphtha consumption 13,856 100 14,200 100 12,155 100 12,695 100
Fuel oil/LSHS
Fertilizers 1,641 14 1,664 14 1,636 15 1,602 15
Power 1,590 13 1,975 17 1,563 14 861 8
Petrochemicals 334 3 600 5 489 4 431 4
Steel 89 1 141 1 226 2 243 2
General trade 6,566 56 5,890 50 5,635 51 5,549 53
Others 1,608 14 1,405 12 1,540 14 1,710 16
Total FO/LSHS consumption 11,829 100 11,675 100 11,088 100 10,396 100
Source: IOG, Kotak Institutional Equities
Supply—stable at best
Exhibit 28 gives our estimates of domestic production of crude oil broken down by crucial
fields, basins and geographical regions. We expect domestic production of oil to remain
stagnant after FY2013E once Cairn’s Rajasthan block reaches peak production rate of
230,000 bpd. We see limited scope for potential surprises given that most of India’s oil
production comes from mature fields and new discoveries have been rare; the only notable
exception is Cairn’s large discoveries in pre-NELP RJ-ON-90/1 block. We discuss drivers of oil
production in India over the next few years.
Exhibit 28: Crude oil production from domestic fields to remain stable after FY2013E
Crude oil production in India, March fiscal year-ends, 2008-17E (mn tons)
2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Crude supply
ONGC 25.9 25.4 24.9 24.5 24.7 25.0 25.5 25.5 25.5 25.5
Mumbai High fields 18.0 17.8 17.3 17.1 17.1 17.1 17.1 17.1 17.1 17.1
Other fields 7.9 7.6 7.5 7.4 7.6 7.9 8.4 8.4 8.4 8.4
Oil India 3.0 3.3 3.5 3.6 3.7 3.8 3.8 4.0 4.1 4.2
Cairn India 2.6 2.4 2.5 6.9 10.3 12.7 12.8 12.5 12.0 11.3
Rajasthan block — — 0.4 5.1 8.6 11.3 11.5 11.5 11.1 10.5
Other fields 2.6 2.4 2.1 1.8 1.7 1.5 1.3 1.0 0.9 0.8
Reliance Industries (KG-DWN-98/3) — 0.1 0.5 1.2 1.3 1.3 1.3 1.3 1.3 1.3
Private/JVC 2.5 2.1 2.2 2.2 2.2 2.2 2.2 2.2 2.2 2.2
Total 34.0 33.4 33.6 38.5 42.1 45.0 45.6 45.4 45.0 44.4
Source: Ministry of petroleum and natural gas, Kotak Institutional Equities estimates
` Resource potential in Rajasthan block is large. We model gross production from

Rajasthan block to ramp up to 230,000 bpd by FY2013E and sustain at those levels for
the next few years before going into natural decline. We hope Cairn-ONGC can increase
eventual production from the block, which has a large resource base (4 bn bbls of oil-in-
place estimate). Cairn management has guided for the eventual recovery of 1.15 bn bbls
and we model eventual production of 1.44 bn bbls over the life of the block. Exhibit 29
compares proved and probable reserves in the block with initial oil-in-place estimates.

India Energy
Exhibit 29: Gross oil in place is about 4 bn barrels and 2P reserves is 1.1 bn barrels
Original oil in place and reserves of RJ-ON-90/1 block (bn bbls)
Orginal oil 2P
in place reserves
MBA 0.69
2.05
MBA EOR 0.31
Rajasthan other fields 1.98 0.15
Total RJ-ON-90/1 4.03 1.15
Source: Company, DeGolyer and MacNaughton, Kotak Institutional Equities
` Continued re-development of Mumbai High fields to sustain production. We

expect ONGC’s workhorse Mumbai High fields to sustain production over the next few
years with the help of EOR/IOR techniques. Exhibit 30 gives details of various phases of re-
development of Mumbai High fields, both North and South. ONGC is currently executing
the second phase of Mumbai High North and Mumbai High South redevelopment. The
first phase of redevelopment of Mumbai High North field was completed in 2006 and
that of Mumbai High South in 2007. The first phase of redevelopment of the fields
helped ONGC arrest the decline in production. Mumbai High production has remained
largely stable over the past few years after peaking in the late 1980s and a jump in the
mid-1990s (see Exhibit 31 that shows production from Mumbai High fields).
Exhibit 30: Mumbai High redevelopment projects to stem decline in production

Status of Mumbai High redevelopment projects, February 2011
Cost
(Rs bn) Status Completion date Wells drilled
Completed projects
Mumbai High North Redevelopment Phase-I 32.4 Completed December-2006 73
Mumbai High South Redevelopment Phase-I 65.8 Completed May-2007 140
Projects under progress
Mumbai High North Redevelopment Phase-II 71.3 38.03% completed September-2012 19
Mumbai High South Redevelopment Phase-II 88.1 87.66% completed March-2013 63
Exhibit 31: Crude oil production from Mumbai High fields remain largely stable
Crude oil production from Mumbai High fields, March fiscal year-ends, 1984-2010 (mn tons)
(mn tons)
Mumbai High crude oil production
25
20
15
10
0
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Energy India
` Limited scope of positive surprise from other fields/blocks given low number of oil
discoveries in NELP or nominated blocks. We note that only three of the 241 blocks
awarded since 1998 under the eight rounds of NELP have started production. The key KG
D-6 block has seen disappointing output of late with both oil and gas production falling
well below expected levels. More important, operators seem to have gone very slow over
the past few years after the initial enthusiasm of exploration and discoveries. Exhibit 32
gives the number of discoveries by years since 2002 (when RIL made its first discovery in
KG D-6 block); the pace of discoveries has remained stable in the past five years despite a
steep increase in the number of blocks awarded under NELP. We note that out of the 81
discoveries in NELP blocks, only 15 are oil discoveries and 9 are oil/gas discoveries.
Exhibit 32: Slow progress in exploration activity in NELP blocks

Current status of E&P activity in NELP blocks (#)
NELP I NELP II NELP III NELP IV NELP V NELP VI NELP VII NELP VIII NELP IX
1999 2000 2002 2003 2005 2006 2008 2009 2011 Total
Blocks offered 48 25 27 24 20 55 57 70 34 360
Blocks awarded 25 23 23 21 20 52 44 33 — 241
PSCs signed 24 23 23 20 20 52 41 32 — 235
Blocks under operation 9 4 23 19 20 52 41 32 — 200
Wells drilled 82 64 56 39 43 2 — — — 286
Discoveries 39 6 16 10 10 — — — — 81
Oil discoveries 2 1 2 4 6 — — — — 15
Gas discoveries 35 4 10 5 3 — — — — 57
Oil/gas discoveries 2 1 4 1 1 — — — — 9
Blocks with discoveries 5 4 6 5 3 — — — — 23
Blocks under production 1 2 — — — — — — — 3
Year-wise discoveries 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total
NELP discoveries 3 6 2 13 11 9 16 10 11 81
Total discoveries 10 14 14 15 26 25 67 39 28 238
Source: DGH, Kotak Institutional Equities
Even in the case of nominated blocks of ONGC and OIL, new discoveries have been fairly
rare. In our view, most of the upward revision in reserves over the past few years may
have been due to higher prices rather than contribution from new discoveries. Exhibit 33
shows the increase in 1P, 2P and 3P reserves of ONGC and OIL over the past few years.
The only exciting discovery seems to be Block-IG of ONGC, which may produce 150,000
b/d of oil by FY2017E.
Exhibit 33: Reserves of ONGC and OIL have remained flat over the past few years
Reserves of ONGC and OIL, March fiscal year-ends, 2008-11 (mn boe)
ONGC OIL
2008 2009 2010 2011 2008 2009 2010
1P reserves
ONGC 5,256 5,380 5,355 Oil 296 285 282
5,577
PSC JV 285 292 272 Gas 233 247 239
OVL 1,387 1,358 1,256
Total 1P reserves 6,928 7,030 6,883 529 532 521
2P reserves
ONGC 6,789 7,074 7,023 Oil 588 575 580
PSC JV 321 321 304 Gas 345 399 377
OVL 2,708 2,606 2,885
Total 2P reserves 9,819 10,001 10,212 933 974 957
3P reserves
ONGC 8,151 8,315 8,578 8,515 Oil 1,039 999 915
PSC JV 954 336 336 320 Gas 472 543 522
OVL 2,047 2,971 2,905 3,188
Total 3P reserves 11,152 11,622 11,819 12,023 1,511 1,542 1,437

India Energy
` Overseas oil assets of Indian companies. We discuss the supply of oil from overseas
assets of Indian companies in this section although equity oil does not really enhance
supply. India does not import significant quantities of oil produced by its companies
overseas and oil is anyway fungible to some extent. Nonetheless, equity oil does provide
some degree of energy security. It also increases the profits of Indian companies at high
levels of crude oil prices and provides some buffer to the country through higher profits
for the companies and dividends for the Indian government. Exhibit 34 shows that the
production of oil from overseas assets of Indian E&P companies will increase moderately
over the next few years. Exhibit 35 gives details of overseas assets of Indian companies.
Exhibit 34: Crude oil production from overseas assets to increase to 9 mn tons by FY2014E
Crude oil production from overseas assets of Indian companies, March fiscal year-ends, 2010-14E ('000 tons)
2010 2011E 2012E 2013E 2014E

ONGC
Brazil (Block BC-10) 192 600 600 600 600
Colombia (Mansarovar Energy) 409 470 900 900 900
Russia (Imperial Energy) 543 838 1,250 1,250 1,250
Russia (Sakhalin 1) 1,532 1,505 1,505 1,505 1,500
Sudan (Block-5A and GNOP) 2,373 2,038 2,700 3,000 3,200
Syria (Al-Furat) 718 650 700 700 700
Venezuela (San Cristobal) 704 762 800 800 800
Vietnam (Block 06.1) 42 39 39 39 39
RIL
Yemen (Block-9) 58 56 56 56 56
Total 6,571 6,958 8,550 8,850 9,045
Exhibit 35: Key overseas assets of Indian companies

Summary of key overseas assets of Indian companies
Country Block Indian consortium partners

Producing assets
Brazil Block BC-10 ONGC (15%)
Colombia Mansarovar Energy ONGC (50%)
Russia Imperial Energy ONGC (100%)
Russia Sakhalin 1 ONGC (20%)
Sudan Block-5A ONGC (24%)
Sudan Greater Nile project ONGC (25%)
Syria Al-Furat ONGC (33.3%)
Venezuela San Cristobal project ONGC (40%)
Vietnam Block 06.1 ONGC (45%)
Yemen Block-9 RIL (25%)
Other key assets with discoveries
Brazil BM-C-30, Campos basin BPCL (12.5%), Videocon (12.5%)
Indosnesia Nunukan PSC BPCL (12.5%), Videocon (12.5%)
Kazakhstan Satpayev ONGC (25%)
Mozambique Area 1, Rovuma basin BPCL (10%), Videocon (10%)
Myanmar Block A-1 ONGC (20%), GAIL (10%)
Venezuela Carabobo-1 ONGC (11%), OIL (3.5%), IOC (3.5%)

Energy India
GAS: SUPPLY AND PRICING ARE ISSUES

In our view, supply and pricing issues will likely constrain demand for natural gas. We expect domestic gas
supply to increase moderately from current levels even assuming recovery in production in KG D-6 block. If
RIL’s KG D-6 block is unable to ramp up production to its stipulated peak production rates, domestic
production volumes will likely be stagnant through FY2017E. Also, imports of spot LNG may be at risk given
availability and pricing issues.
Large demand, on paper

Exhibit 36 shows our estimates of demand for gas in India in FY2015E based on bottom-up
demand from various industries. However, we would note that this is a hypothetical figure
and would depend on (1) eventual availability of gas, (2) price of gas and (3) regulations in
downstream industries such as fertilizer and power. In our view, the price of gas would be
the most important factor for demand since it will determine the cost of production of the
end-products (power or fertilizer) in the key power and fertilizer sectors.
We discuss likely demand from key sectors and the factors in respective sectors that would
influence demand.
Exhibit 36: Current supply-constrained demand set to increase sharply if supply is available at right
prices
Segment-wise demand for natural gas, current versus potential (mcm/d)
(mcm/d) FY2009 FY2012E FY2015E FY2017E

400
343
350
288
300
250 214
200 164
150 127 118
89
100 63 63
48
35 40 3743
50 25 19 16171921 19 19 20 22 27
4 1014
0
Power Fertilizer Industrial Captive use Domestic Others Total
Source: Ministry of Petroleum and Natural Gas, Kotak Institutional Equities estimates
` Power. We estimate demand from the power sector at 127 mcm/d in FY2015E versus the
current 79 mcm/d. Our estimated demand is a collation of theoretical demand from all
gas-based power projects, operational, under-construction and planned. Exhibit 37 gives
the breakdown of demand among operating power plants and planned new capacity.

India Energy
Exhibit 37: Potential demand from power sector can be large

Potential demand for gas from power sector, March fiscal year-ends, 2011-17E (mcm/d)
Capacity Gas demand (mcm/d)

(MW) Gross demand Current supply Net demand
Existing power plants 18,763 78.7 72.0 6.7
Plants likely to be comissioned in 2012E 2,494 10.5 — 10.5
Rithala (NDPL) 37 0.2 — 0.2
GSCE, Utran 370 1.6 — 1.6
APGCL, Lakwa 37 0.2 — 0.2
GSPC, Pipavav 700 2.9 — 2.9
GSCE, Hazira extension 350 1.5 — 1.5
Pragati Power 1,000 4.2 — 4.2
Plants likely to be comissioned in 2013-17E 17,950 75.3 — 75.3
Samalkot (Reliance Power) 2,400 10.1 — 10.1
NTPC (Kawas, Gandhar) 2,600 10.9 — 10.9
Essar, Hazira 1,500 6.3 — 6.3
Others 11,450 48.0 — 48.0
Total 39,206 164.4 72.0 92.4
Notes:
(a) Gross demand estimated at 85% PLF assuming calorific value of gas at 9,000 kcal/m3 and a station heat rate of 1,850 kcal/kwh.
Source: Infraline, Kotak Institutional Equities estimates
However, we would reiterate that the bulk of the incremental demand is largely on paper
since a large portion of the theoretical demand pertains to power projects that are yet to
sign gas supply and purchase agreements (GSPA) pending their inability to source gas at
reasonable prices. A more realistic assessment of demand would put it at 99 mcm/d in
FY2015E based on bottom-up consumption by power plants that are already operational
and a few more that may receive gas.
Price of gas relative to other fuels. In our view, the price of gas would largely
determine demand for gas from the power sector. We rule out power plants based on
imported spot LNG since the price of power (including a certain return on investment)
would exceed `5/kWh at current spot LNG rates. Potential power project developers
would be better off using imported coal (despite its high price currently versus
historical levels) versus using spot LNG to generate power. Exhibit 38 compares the
price of power (including capital charge of 15.5% pre-tax ROCE) based on various
fuels.
Exhibit 38: Power generated from spot LNG to cost significantly higher versus power generated from imported coal
Comparative cost of power generation using various fuels
Naphtha (a) Gas (b) Coal (e) Gas (c) Coal (f) Coal (g) Gas (d)
Unit Kg m3 Kg m3 Kg Kg m3
Fuel price (Rs/unit) 32.1 6.0 1.0 13.6 1.8 5.5 23.0
Calorific value (Kcal/unit) 10,500 9,000 3,500 9,000 3,500 6,500 9,000
Thermal efficiency (%) 54 54 37 54 37 37 54
Thermal requirement (kcal/kWh) 1,593 1,593 2,324 1,593 2,324 2,324 1,593
Cost of generation (Rs/kWh) 4.88 1.05 0.63 2.41 1.20 1.97 4.07
Other operating costs (Rs/kWh) 0.16 0.16 0.20 0.16 0.20 0.20 0.16
Plant load factor (%) 85 85 85 85 85 85 85
Fixed capital investment (Rs mn/MW) 30 30 45 30 45 45 30
Depreciation charge (%) 5.5 5.5 4.8 5.5 4.8 4.8 5.5
Depreciation charge (Rs/kWh) 0.22 0.22 0.29 0.22 0.29 0.29 0.22
Total cost (Rs/kWh) 5.26 1.44 1.12 2.79 1.69 2.46 4.45
Pre-tax capital charge (%) 15.5 15.5 15.5 15.5 15.5 15.5 15.5
Fixed capital charge (Rs/kWh) 0.62 0.62 0.94 0.62 0.94 0.94 0.62
Price for end-consumer (Rs/kWh) 5.88 2.06 2.06 3.42 2.62 3.40 5.07
Notes:
(a) Naphtha price for CY2010.
(b) Gas price at US$3.5/mn BTU (delivered).
(c) Gas price at US$8/mn BTU (delivered).
(d) Gas price at US$13.5/mn BTU (delivered).
(e) Domestic coal at pithead.
(f) Domestic coal 1,000 kms from pithead.
(g) Imported coal price at US$100/ton (FOB).
Source: Platt's, Indian Railway Budget, Kotak Institutional Equities estimates

Energy India
Also, we believe that it is extremely unlikely that (1) power companies will set up
power plants on LNG given both availability and price issues, or (2) lenders will provide
debt to power projects that do not have firm fuel supply agreements. We doubt that
even ‘pooling’ of gas prices (see discussion below) will address the concerns of power
companies and lenders about availability of LNG or price of LNG in the long term;
pooling will only reduce the price of gas to more acceptable levels and there is no
guarantee that pooling will last in perpetuity.
Pooling of gas. India may implement pooling of gas from various sources (indigenous
and imported) in order to reduce the final price to customers. This may reduce the
price of imported LNG for a customer using spot LNG but will increase the price of gas
for others. Pooling may theoretically improve the economics of power producers based
on spot LNG; however, it is unlikely to address the basic issue of guaranteed supply of
gas and help a project achieve financial closure. As discussed above, lenders are
unlikely to lend funds to power projects without a firm fuel supply agreement.
Availability of alternative fuels. We believe imported coal will be preferred over

imported LNG due to better economics and availability. In our view, supply of
imported coal is likely to be more secure versus the supply of spot LNG and will be the
preferred choice for the power sector after domestic coal and gas, in that order. Also,
it is far easier to acquire overseas coal assets than overseas gas assets. Several Indian
companies have bought overseas coal assets to secure coal supplies for their power
plants in India. India will likely face a shortage of coal over the next few years unless it
can exploit its vast coal reserves. We discuss this issue in more detail in the next section.
Financial condition of state electricity boards (SEBs). We note that the poor financial
condition of SEBS will likely preclude them from purchasing high-priced power.
Anecdotal evidence suggests that the SEBs are reluctant to procure merchant power at
high rates (around `4/kWh) and have resorted to blackouts in view of their precarious
financial condition. Exhibit 39 shows the yearly losses of the SEBs since FY2000.
Exhibit 39: Reported losses of SEBs have increased in the recent years
Finances of SEBs/Unbundled entities (Rs bn)
(Rs bn) Reported losses Subsidy funded by states

600
526
500
400
321
300 248 267
236
214 215 206
178 184
200 151 165
130 134 129
113 114 105
75 83
100
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: PFC, Ministry of Power, Kotak Institutional Equities
` Fertilizers. We estimate demand from the fertilizer sector at 63 mcm/d in FY2015E

against consumption of 40 mcm/d in FY2011E. Exhibit 40 shows our estimates of gas
consumption in FY2015E based on a bottom-up analysis of current requirement by
fertilizer plants that are already using gas as feedstock, plants due for conversion to gas
from liquid fuels such as naphtha and FO (there are about five plants with a likely
consumption of 6 mcm/d of additional gas) and new planned units. We are not sure
about the off-take of gas by the planned urea plants as they are still at a planning stage
and are unlikely to proceed with the project without firm supply agreements.

India Energy
Exhibit 40: Potential demand from fertilizer sector exists

Gas consumption (current and potential) by FY2015E in fertilizer sector (mcm/d)
Urea capacity ('000 tons)

Gas-based capacity 16,301
Naphtha-based capacity (a) 2,938
Fuel oil-based capacity (b) 1,502
Total current capacity 20,741
Extant units closed currently (c) 3,898
Naphtha/NG-based projects under consideration (d) 6,834
Demand for natural gas (mcm/d)
Existing demand from fertilizer units (A) 42
Additional demand from conversion of non-gas units (a) + (b) 6
Additional demand from closed units (c) 6
Additional demand from new units 10
Potential demand for additional gas (B) 21
Potential demand for gas in medium term (mcm/d) (A + B) 63
Source: The Fertilizer Association of India, Kotak Institutional Equities estimates
We suspect India’s reliance on imported urea may increase going forward; this need not
be a bad strategy as anyway the government has to subsidize urea at present. We do not
think security of supplies is a very big issue as there are enough suppliers of urea globally
and India has reasonable amount of domestic production. Exhibit 41 shows supply-
demand balance of urea over the past few years and next few years.
Exhibit 41: We expect urea imports to rise moderately

Urea demand and supply scenario, March fiscal year-ends, 2005-2012E (mtpa)
Production
Year Demand Domestic OMIFCO Total Gap
2005 22.8 20.2 20.2 (2.6)
2006 23.5 20.1 1.3 21.4 (2.1)
2007 24.2 20.3 1.8 22.1 (2.1)
2008 26.2 19.8 1.9 21.7 (4.4)
2009 27.0 19.9 1.9 21.8 (5.1)
2010 27.0 21.1 2.3 23.5 (3.5)
2011E 27.5 22.0 2.3 24.3 (3.2)
2012E 28.0 22.5 2.3 24.8 (3.2)
Source: Fertilizer Association of India, Ministry of Chemicals and Fertilizers
Price of gas. We believe the price of gas would be critical for demand from the
fertilizer sector, especially for new units. Exhibit 42 shows that the price of natural gas
cannot exceed US$6/mn BTU if domestic urea has to compete with imported urea. We
note that urea prices have increased sharply over the past few months (see Exhibit 43)
and we use current high price in our hypothetical exercise. Even at the current high
prices of urea compared to historical levels, we note that the price of gas will need to
be below US$7/mn BTU for viable domestic production. We highlight that the cost of
urea based on current spot LNG prices would be prohibitively expensive.

Energy India
Exhibit 42: It may be cheaper to import urea than produce it on imported LNG
Comparison of domestic urea cost with imported urea (US$/ton)
Domestic gas Imported LNG

Cost of urea using:
Cost of gas, delivered (US$/mn BTU) 5.8 14.0
Cost of gas (Rs/cubic meter) 10 24
Feedstock cost 112 270
Fuel cost 68 153
Other manufacturing costs 8 8
Employee costs 11 11
SG&A costs 21 21
Total 219 463
Depreciation (@ 6.33%) 55 55
Fixed capital charge (@ 12%) 104 104
Total cost 378 622
Cost of imported urea
Middle-East urea price (FY2011 average, fob basis) 323
Freight to India (bulk) 19
Landed cost of urea 342
Long-term import tariff (%) 5
Packaging cost 7
Port charges, distribution cost 5
Other costs 5
Selling price in India 378
Source: Chambal fertilizers, Kotak Institutional Equities estimates
Exhibit 43: Urea prices have increased recently

Global urea price index, 2005-11YTD (US$/ton)
(US$/ton) Urea price index

800
600
400
200
0
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Source: Bloomberg, Kotak Institutional Equities
Regulations in the fertilizer sector. We note that regulations in the fertilizer sector
will determine (1) relative consumption of various fertilizers (N, P and K) and (2) the
ability of companies to raise prices for their end-consumers. The government is keen to
control the amount of subsidies on fertilizers and is studying various options to reduce
the subsidy burden over a period of time. It has recently decided to overhaul the
distribution system to monitor subsidies more closely.
Downside risks to supply

Exhibit 44 gives our supply projections for the Indian market up to FY2017E broken down by
key basins, fields/blocks and import terminals. We expect supply to increase to 263 mcm/d in
FY2015E from 178 mcm/d in FY2011E. However, we see significant downside risks to our
estimates due to several factors discussed below.

India Energy
Exhibit 44: We see delays in several domestic projects, which may delay domestic gas supply
Supply of natural gas in India, March fiscal year-ends, 2008-17E (mcm/d)
2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Mumbai High 45 46 48 48 48 48 48 48 48 48
Gujarat 8 7 7 7 7 7 7 7 7 7
North-East 9 9 9 9 10 11 12 12 12 12
Rajasthan 1 1 1 1 1 1 1 1 1 1
TN/AP 7 8 7 7 7 7 7 7 7 7
Eastern offshore
KG-D6 (RIL-Niko) — — 39 56 52 65 80 80 80 80
KG-D3 (RIL-Hardy) — — — — — — — — — 10
KG-D9 (RIL-Hardy) — — — — — — — — — 10
NEC-25 (RIL-Niko) — — — — — — — — 6 12
Deen Dayal (GSPC) — — — — — — 3 5 6 6
ONGC — — — — 2 3 5 5 5 5
PY-3 0 0 0 0 0 0 0 0 0 0
Ravva 2 2 1 2 1 1 1 1 1 1
Western offshore
Lakshmi 1 1 1 1 1 0 0 — — —
Panna-Mukta 6 5 5 4 6 5 5 5 4 4
Tapti 9 12 8 7 7 7 6 6 6 5
LNG and CBM
Petronet LNG - Dahej 24 24 30 33 38 38 38 46 44 44
Petronet LNG - Kochi — — — — — 3 12 15 18 18
RGPPL - Dabhol — — — — 1 2 6 8 15 18
Shell Total LNG - Hazira 8 6 3 4 8 11 14 14 14 14
CBM gas — — — — 1 2 3 5 5 5
Total gas supply 120 119 160 178 188 212 247 263 278 306
Source: MOPNG, Kotak Institutional Equities estimates
` Continued production problems at RIL’s KG D-6 block. A recent report of the

Directorate General of Hydrocarbons (DGH), India’s upstream regulator, indicated that
production from RIL’s KG D-6 block would decline to 37-38 mcm/d (from its D1 and D3
fields) from the current 43-44 mcm/d. This would reduce total production from the block
to 46-47 mcm/d against current production of 52-53 mcm/d. The DGH highlighted
certain technical problems in the block, which we summarize in Exhibit 45.
Exhibit 45: DGH's observations and recommendations for KG D-6 block

Summary of DGH observations
Observations Recommendations
Decline in gas production to 44.6 mcm/d in Dec'10 Well-wise performance analysis should be carried out and the
Increase in WGR from 1.9 to 7.2 cu m/mcm reservoir model should be updated incorporating drilling, testing and
Increase in WGR for A1, A2A, A6, A10, A16, B1, B2, B6 & B13 wells production results of all the drilled wells to define early water
D1 & D3 gas
Increase in choke size resulting in sharp increase in water production breakthrough and future inputs required. The production in optimally
field
No commensurate increase in gas production with increase in choke size performing wells A5, A9, A13, A20, B4, B7, B8, B11 & B-15 needs to
No reduction in WGR on decrease in choke size be optimized with continuous monitoring of WGR. Operator needs to
Decline in reservoir pressure by 500-700 psi drill new wells as per approved FDP to increase gas production.
Oil and gas production is 18,400 b/d and 8.16 mcm/d in Dec'10
Decline in oil production in all oil wells Performance review of the field should be carried out and the
D-26 (MA) High water cut & GOR in MA-6H & MA-7H wells reservoir model should be updated incorporating drilling and
oil field High GOR in MA-3H, MA-4H & MA-5H wells production history of all the drilled wells to define the early water
High GOR is due to breakthrough from gas cap breakthrough and future inputs required.
Water cut does not respond to reduction in choke size
Source: DGH, Kotak Institutional Equities

Energy India
We are not sure about the solution to RIL’s production problems. We assume additional
wells can increase production and the DGH has recommended drilling additional wells as
a way to increase production. RIL is currently producing gas from 18 wells at its D1 and
D3 fields (other than 8-9 mcm/d of associated gas from MA-1 field), it has drilled two
wells that are yet to be connected to evacuation infrastructure and is due to drill another
two wells as part of the first phase of the approved Field Development Plan (FDP).
However, drilling of additional rigs and installing subsea infrastructure may take about
18-24 months. Also, we doubt RIL is going to drill additional wells without conducting
further studies on reservoir behavior; it may wait to complete its farming-out deal with BP
in 23 E&P blocks (including KG D-6 block) to benefit from BP’s global expertise in deep-
water development and production.
` Limited progress in other major blocks. We see limited progress in E&P activity in
blocks awarded under various rounds of NELP. Both RIL and ONGC have made discoveries
in several blocks. However, most of the blocks are in the early stages of exploration and
we do not think any of these blocks will start production of gas before FY2016E. Exhibit
46 gives the exploration status of various blocks where companies have made discoveries
or are considered prospective by the operators. Also, we note that purported problems in
RIL’s KG D-6 block raise issues about similar challenges in other deep-water blocks.
Exhibit 46: The progress on some of the key blocks has been tardy
Status of work on key E&P assets in India
Stipulated exploration
Date of Duration schedule Status of exploration Date of first
Block Operator contract Phase (years) 2D (GLK/LK) 3D (sq. km) Wells 2D (GLK/LK) 3D (sq. km) Wells discovery Comments
12-Apr-00 I 4 1,000 1,500 3 2,781 1,500 6 FY2006 DoC submitted for Southern Discovery
KG-DWN-98/2 ONGC II 3 2 258 4,676 9 Area in December 2009 and Northern
III 1 1 3,217 Discovery Area in July 2010
12-Apr-00 I 3 1,000 500 1 June-04
Ministry has denied extension for
NEC-OSN-97/2 RIL II 2 2 6,000 3,200 8
appraisal program
III 2 4
16-Aug-01 I 2 1,000 1,000 December-06
MN-OSN-2000/2 ONGC II 3 2 979 2 DoC submitted in December 2009
III 2 2 1,150 2
4-Feb-03 I 4 2,100 1,650 4 2
Two-well drilling program from July
KG-DWN-2001/1 RIL II 2 4 2,087 4,188
2011
III 2 4
4-Feb-03 I 2.5 1,250 14 1,636 June-05
KG-OSN-2001/3 GSPC II 2.5 4 16 Under development phase
III 1.5 2
23-Sep-05 I 4 2,100 6 1,150 4 February-08
Planning to undertake two-well
KG-DWN-2003/1 RIL II 3 4
exploratory program
III 1 4
23-Sep-05 I 4 2,100 1,800 3
Five-well drilling program postponed
MN-DWN-2003/1 RIL II 3 3 2,365 3,600
to August 2011
III 1 6
Source: Infraline, Kotak Institutional Equities estimates
` Inability to source spot LNG at reasonable prices from global markets. We note that
46 mcm/d of our incremental growth in supply of 85 mcm/d in FY2011-15E is in the form
of LNG imports. Almost all of the incremental supply will be in the form of spot LNG as
India has not entered into long-term LNG contracts with LNG suppliers.
India has currently signed long-term contracts for 7.5 mtpa of LNG for PLNG’s Dahej
terminal and another 1.5 mtpa of LNG for PLNG’s Kochi terminal even though it will have
24 mtpa of LNG terminal capacity by end-CY2012E (see Exhibit 47). We note that India
will have to import the balance 15 mtpa of LNG imports as spot LNG. It is currently
importing 7.5 mtpa of contract LNG from RasGas, Qatar. Also, we note that contract LNG
supply for PLNG’s Kochi terminal is unlikely to commence before CY2014/15E (depending
on the completion of the upstream Gorgon LNG project) although the LNG import
terminal will likely start operations by end-CY2012E.

India Energy
Exhibit 47: India will have significant LNG capacity by end-CY2012E

LNG import capacity in India, End-CY2012E (mtpa)
Capacity Expected completion

Petronet - Dahej 10 Operational
Petronet - Kochi 5 January 2013
Shell - Hazira 4 Operational
Dabhol terminal 5 End-FY2012
Total 24
We see several challenges to importing large volumes of spot LNG over the next 3-4 years.
Availability of spot LNG. We are not sure if importing 10-11 mtpa of spot LNG is
feasible given global supply-demand balance of LNG. Most LNG liquefaction projects
are set up after the entire capacity has been tied up with off-takers. Typically, this
leaves very low volumes for spot LNG. Exhibit 48 gives details of LNG liquefaction
terminals that have commenced operations over the past few years, terminals that are
due over the next few years and their off-take arrangements. As can be seen, the
scope for spot LNG cargoes is fairly limited; the cargoes available currently reflect
diversion of contracted volumes away from the US market, which has seen a rapid
increase in domestic gas production driven by higher shale gas volumes.
Exhibit 48: LNG supply contracted for key projects

Supply and demand of LNG by project, 2009-15E (mn tons)
Country/project Capacity Buyers

2009
Indonesia, Tangguh 7.6 CNOOC (2.6), POSCO (1.1), Sempra (3.7)
Qatar, Qatargas 2 15.6 South Hook LNG terminal, UK
Qatar, RasGas Train 6 & 7 15.6 US, Kogas (2), Kuwait (1.6), Italy
Russia, Sakhalin II 9.6 Japan (6), South Korea (1.5), US
Yemen LNG 6.7 Kogas (2), Suez Energy (2.5), Total (2)
Total 55.1
2010
Peru, Melchorita 4.4 Repsol YPF Mexico, Chile
Qatar, Qatargas 3 7.8 PetroChina (2), CNOOC (5)
Total 12.2
2011E
Australia, Pluto LNG 4.3 Tokyo Gas (1.8), Kansai Electric (2), Petronas
Qatar, Qatargas 4 7.8 PetroChina (3), Centrica (2.4), Dubai (1), PGNiG Poland (1)
Total 12.1
2012E
Algeria, Sonatrach Arzew 4.7 UK, Spain, France
Algeria, Sonatrach Skikda 4.5 UK, Spain, France
Angola, Angola LNG 5.2 Gulf LNG, US
Total 14.4
2013E
Canada, Kitimat LNG 5.5 Kogas (2), Gas Natural (1.5)
Total 5.5
2014E
Australia, Curtis LNG 8.5 CNOOC (3.6), Tokyo Gas (1.2), Chile, Singapore
Australia, Gorgon LNG 15.0 PetroChina (4.3), Japan (4.7), India (1.5), Korea (2), Mexico
Indonesia, Donggi Senoro LNG 2.0 Chubu Electric (1), Kogas (0.7), Kyushu (0.3)
Papua New Guinea (FLNG) 3.0 South Korea, Southeast Asia
Papua New Guinea, Port Moresby 6.6 Sinopec (2), CPC Taiwan (1.2), Osaka Gas (1.5), Tokyo Electric (1.8)
Total 35.1
2015E and beyond
Australia, APLNG 9.0 Sinopec (4.3)
Australia, Gladstone LNG 7.8 Kogas (3.5), Petronas (3.5)
Australia, Wheatstone LNG 8.6 Tokyo Electric (4.1), Kyushu Electric (0.8), Kogas (1.5), CNPC
Papua New Guinea, Napa Napa 4.0 South Korea, China, Japan
Total 29.4
Source: LNG Unlimited, Upstream Online, Kotak Institutional Equities estimates

Energy India
We see the recent accident at Japan’s Fukushima nuclear plant (9.1 GW generation
capacity) as potentially reducing the availability of spot LNG cargoes in global markets.
In our view, Japan will likely import additional LNG to make up for lost power
generation capacity following the accident. It has sufficient LNG import capacity (see
Exhibit 49) and gas-based power generation capacity (see Exhibit 50).
Exhibit 49: LNG imports capacity utilization of ~41% in 2010 Exhibit 50: Capacity utilization of gas-based power plants was
Capacity utilization of LNG terminals in Japan, 2008-10 (%) ~67% in 2009
LNG for power generation and capacity utilization of gas-based
(%) 2008 2009 2010 power plants in Japan, 2000-09
55
LNG for power generation [LHS]
50 Capacity utilization of gas-based power plants [RHS]
(mn tons) (%)
50 100
45
40 80
40
30 60
35
20 40
30
10 20
25
Jul
Jan
Feb
Jun
Aug
Sep
May
Nov
Dec
Mar
Apr
Oct
0 0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Ministry of Economy, Trade and Industry (Japan), Kotak
Institutional Equities
Source: Ministry of Economy, Trade and Industry (Japan), TEPCO,
Kotak Institutional Equities
Pricing of spot LNG. We see the pricing of spot LNG as another significant challenge
for imports of large quantities of spot LNG. Additional demand from Japan following
the nuclear power plant accident may push up prices of spot LNG. As discussed
previously, high prices of spot LNG effectively rule it out of the two biggest consuming
industries, power and fertilizer.
` Trans-national pipelines may not be realistic. The Indian government has periodically
examined the options of importing gas from neighboring gas-rich countries such as
Bangladesh, Iran, Myanmar and Turkmenistan. Most of these proposals have come to
naught due to geopolitical issues and strategic mistakes; the most notable one is gas from
Block A-1 in offshore Myanmar being exported to China despite two Indian companies
owning 30% stake in the block. The government had vacillated about building a gas
pipeline to India, which led to China securing the gas for itself through a Myanmar-China
pipeline.
The Indian government is currently pursuing a proposal to import natural gas from
Turkmenistan through a trans-national pipeline (Turkmenistan-Afghanistan-Pakistan-India,
TAPI) passing through Afghanistan and Pakistan. We are skeptical of this pipeline being
executed given that it will likely face the same geopolitical issues that led to the Iran-
Pakistan-India (IPI) pipeline being finally aborted. Even before economic sanctions against
Iran by several developed countries ruled out gas imports from Iran, India and Pakistan
could not agree on the critical issues of (1) security of pipeline and guarantee of gas
supply by Pakistan up to India’s border and (2) transit fees to be paid by India to Pakistan.

India Energy
COAL: DOMESTIC COAL PRODUCTION FACES CHALLENGES

India’s dependence on coal as its primary energy source will likely continue in the foreseeable future. We
estimate demand to grow at 10.8% CAGR in FY2011-17E to 1.1 bn tons in FY2017E. However, a tepid ramp-
up in domestic supply (7.2% CAGR) despite abundant resources will result in consumption being increasingly
fuelled by high-cost imports. We estimate imports of coal to increase to over 300 mn tons in FY2017E from 80
mn tons in FY2011E. However, poor infrastructure may constrain both domestic production and imports.
Dependence on imports set to increase

We estimate demand for coal in India to increase to 1.1 btpa (billion tons per annum) by
FY2017E, fuelled largely by 118 GW of coal-based power plants and supplemented by fuel-
intensive steel and cement industries. However, a tepid ramp-up in domestic supplies will
increase dependence on imported coal; Coal India will likely miss its production targets and
captive mines will make negligible contribution to overall supply.
Exhibit 51 highlights our overall assessment of demand for and supply of coal. We estimate
demand for coal based with a top-down approach factoring the requirement of electricity in
India based on GDP growth. However, theoretical demand based on aggregation of coal-
based capacities currently under construction, development or planning could be potentially
higher.
Exhibit 51: Coal imports set to rise sharply with incremental domestic supply lagging incremental
demand
Details of demand and supply for coal, March fiscal year-ends, 2008-17E (mn tons)
2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Demand
Power 364 374 386 390 470 507 551 603 663 728
Others 144 174 195 217 241 269 296 326 359 396
Total demand 507 549 581 607 711 775 847 929 1,022 1,124
Supply
CIL 375 401 415 426 453 475 497 516 534 548
SCCL 42 45 49 47 47 47 47 47 47 47
Others 37 45 49 54 65 84 110 143 171 206
Domestic production 454 490 513 527 564 607 654 705 753 801
Surplus/(deficit) (53) (59) (68) (80) (146) (169) (193) (224) (270) (323)
Notes:
(a) We model demand and supply of coal on the basis of calorific value of domestic coal.
Source: Ministry of Coal, Kotak Institutional Equities estimates
Demand to reflect strong GDP growth; demand from power sector key
Key drivers of demand for coal
` Power—large appetite but increasingly cost-conscious. We estimate demand for coal

from the power sector to increase to 728 mn tons in FY2017E from 390 mn tons in
FY2011E. We assume that most of the incremental power generation will be on coal
(domestic or imported) with a small portion of incremental demand to be met by new
hydroelectricity generation capacity. We rule out incremental gas-based generation
capacity given insufficient domestic gas and uncompetitive pricing of power generated on
spot LNG versus from coal (domestic or imported).
Exhibit 52 gives our key assumptions for estimating demand for coal from the power
sector. We simply assume a link with real GDP growth for estimating demand for power
over the next few years. However, we note that pricing also plays a large role in a price-
sensitive market such as India. Demand can theoretically be higher if the price of power is
cheap enough. However, we rule out this utopian scenario as (1) most of incremental
power generation will be based on expensive imported coal and (2) domestic coal prices
will also rise in the future as they are increasingly realigned to global levels.
Energy India
Exhibit 52: Power demand set to rise 8% per annum

Key assumptions for estimation of demand of coal from the power sector, March fiscal year-ends, 2008-17E
2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Assumed GDP growth (%) 8.1 8.5 8.5 8.5 8.5 8.5
Elasticity to GDP growth for power (X) 0.95 0.95 0.95 0.95 0.95 0.95
Growth in power demand (%) 7.7 8.1 8.1 8.1 8.1 8.1
Power demand (mn Kwh) 777,039 830,594 859,557 925,700 1,000,450 1,081,237 1,168,546 1,262,907 1,364,886
Non-coal thermal generation (mn Kwh) 100,434 116,317 128,132 128,132 128,132 128,132 128,132 128,132 128,132
Hydro and nuclear generation (mn Kwh) 127,228 126,168 136,773 146,000 155,100 173,200 186,500 195,825 205,616
Coal-based generation (mn Kwh) 489,113 514,757 529,537 651,568 717,218 779,905 853,914 938,950 1,031,138
Assumed GCV (kcal/kg) 3,400 3,400 3,400 3,400 3,400 3,400 3,400 3,400 3,400
Station heat rate (kcal/kwh) 2,603 2,553 2,503 2,453 2,403 2,400 2,400 2,400 2,400
India will require 118 GW of coal-based power generation by FY2017E based on our
demand scenario. We collate coal-based capacity addition of 75 GW over the next few
years (up to FY2015E), which would require incremental coal of 350 mtpa. We note that
75 GW of coal-based capacities are currently under construction, of which 40 GW is
dependent on linkages from Coal India, 23 GW is based on allocated captive mines and
the balance 11 GW on imported coal. In addition, another 70 GW of capacity is under
development; these projects are yet to start construction although they have tied up
necessary inputs. Exhibit 53 details coal-based power projects in various stages of
construction, development and planning. We are not sure about the eventual execution
of these projects as both demand for power and supply of coal may act as constraints.
Exhibit 53: 74 GW of coal-based power generation capacity currently under construction

Coal-based capacity additions, March fiscal year-ends, 2012-17E (MW)
2012E 2013E 2014E 2015E 2016E 2017E

Under construction
Captive 6,040 4,800 10,180 1,820 — —
Linkage 12,125 16,445 10,995 660 — —
Imported 2,800 1,600 6,800 — — —
Total under construction 20,965 22,845 27,975 2,480 — —
Under development
Captive — — 9,000 14,980 4,600 —
Linkage — 3,060 10,560 14,050 6,420 —
Imported — 300 5,520 1,660 — —
Total under development — 3,360 25,080 30,690 11,020 —
Planning
Captive — — — 3,570 29,285 62,920
Linkage — — 1,720 16,340 29,830 51,890
Imported — — — 4,500 8,000 5,400
Total under planning — — 1,720 24,410 67,115 120,210
Total 20,965 26,205 54,775 57,580 78,135 120,210
Notes:
(1) Projects that are yet to commence construction but have tied necessary inputs have been classified
as under development.
(2) Projects that are yet to tie up necessary inputs have been classified as under planning.
Source: CEA, Kotak Institutional Equities estimates
` Steel—limited domestic supplies of coking coal. We estimate domestic steel

consumption to grow at a CAGR of 9.8% between FY2011 and FY2017E, resulting in
demand for coking coal increasing from 47 mn tons in FY2011E to 110 mn tons by
FY2017E. Domestic steel manufacturers consumed 40 mn tons of coking coal, of which
23.5 mn tons was imported and the balance supplied by CIL (8.2 mn tons) and captive
mines (8.3 mn tons). All domestic steel companies rely either partially or fully on imported
coking coal to meet their captive needs with Australia being the main exporter. Steel
companies are also large consumers of thermal coal for the purpose of fueling their
captive power requirement. In FY2010, CIL supplied 20.5 mn tons of coal to the metal
sector (including 12.3 mn tons of non-coking coal to sponge iron units).

India Energy
` Cement—adjusting to parity prices of coal. We estimate demand for coal from the
cement sector to increase to 32 mn tons in FY2017E against 19 mn tons in FY2011E
(excluding demand from CPP). The cement sector consumed 27 mn tons of coal in
FY2011E (including 8.3 mn tons of CPP consumption) fueling 78% of its overall energy
requirements (see Exhibit 54). Of the 27 mn tons consumed, 12 mn tons was procured
from CIL under linkages, 5.3 mn tons was purchased under the e-auction format while
the balance 10 mn tons was imported. Cement companies consume ~0.2 mn tons of
thermal coal per ton of cement production—both directly in the kiln as well as indirectly
through the captive power plant.
Exhibit 54: Dependence on imported fuels will likely increase dramatically for the cement sector
Source-wise supply of coal to cement sector, March fiscal year-ends, 2009-17E (mn tons)
2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Coal
Linkage/FSA 14 11 12 11 12 14 15 16 18
E-auction 6 4 5 6 6 7 7 8 9
Import 7 7 10 12 13 15 16 18 19
Less: Consumption for CPP 8 7 8 9 10 11 12 13 14
Total coal for process 20 15 19 20 22 24 27 29 32
Lignite 0 0 0 0 0 0 0 0 0
Petroleum coke 2 4 4 5 5 5 6 6 7
Total fuel for process 23 19 23 25 28 30 33 36 39
Fuel mix (%)
Linkage/FSA 63 56 50 45 45 45 45 45 45
E-auction 27 23 23 23 23 23 23 23 23
Import 31 36 44 49 49 49 49 49 49
Less: Consumption for CPP 34 36 36 36 36 36 36 36 36
Total coal for process 88 79 81 81 81 81 81 81 81
Lignite 2 1 1 1 1 1 1 1 1
Petroleum coke 11 20 18 18 18 18 18 18 18
Total fuel for process 100 100 100 100 100 100 100 100 100
Source: CMA, Kotak Institutional Equities estimates
We note that companies have to increasingly depend on imports as domestic supply has
not been enough to meet their demand. In fact, companies have received increasingly
lesser quantity of coal compared to their linkages as can be seen in Exhibit 55. Cement
companies have varying exposures to imported coal, depending on the location of their
plants and pricing and availability of coal. Ambuja Cements, India Cement and Ultratech
have a higher exposure to imported coal due to the coastal location of their plants that
facilitate imports. India Cements, with ~80% of its coal being imported, will be more
impacted by the rising prices of imported coal while the impact will be muted for ACC
due to its relatively lower dependence on imported coal. We also note that Shree
Cements, with almost 100% dependence on petroleum coke, will be severely impacted
as petroleum coke (used for both cement and power capacities) prices tend to follow the
pricing trends of global coal market.

Energy India
Exhibit 55: Receipt of coal against linkages has been declining steadily for the cement sector
Coal receipts against linkages, March fiscal year-ends, 2006-10 (mn tons)
Actual linkage/FSA quantity Coal receipts against linkages

(mn tons) (%)
% received
25 100
90
20
80
15 70
60
10
50
5 40
2006 2007 2008 2009 2010
Notes:
(a) Coal receipts and linkage quantity for 2010 does not include ACC and Ambuja Cement.
Source: CMA, Kotak Institutional Equities
Supply—domestic supply will lag overall demand

We expect domestic supply of coal to lag demand for coal leading to increasingly greater
reliance on coal imports. We discuss supply from various sources and related issues below.
` Coal India—regulatory and infrastructure hurdles have affected ramp-up. CIL, with
48% of proven coal reserves in the country, will continue to bear the responsibility for
meeting a large portion of the incremental demand. We expect its production to increase
to 548 mn tons by FY2017E from 443 mn tons in FY2011E, implying a CAGR of 4.2%.
This may not seem very challenging but CIL may fall short of the targeted production of
648 mn tons in FY2017E owing to capacity constraints and delays in new mine
development. We estimate CIL’s FY2012E production at 458 mn tons and total coal
dispatches at 453 mn tons.
CIL is running a large ‘negative balance’ wherein the commitment for coal supplied far
exceeds CIL’s internal production target (see Exhibit 56). However, we note that
commitments under allocation of linkages unlike FSAs do not contractually oblige CIL to
supply coal. Amongst various subsidiaries of CIL, CIL’s two largest subsidiaries, SECL and
MCL, have the largest deficits (90-104% of their production targets), which will likely put
power projects that depend on coal from these subsidiaries at greater risk.

India Energy
Exhibit 56: SECL and MCL have commitments far in excess of their production targets
Details of production targets and linkage commitments of subsidiaries of CIL, March fiscal year-end, 2013E
(mn tons)
(mn tons) Production Commitment

300
250
200
150
100
50
0
ECL BCCL CCL NCL WCL SECL MCL NEC
Source: MoC, Kotak Institutional Equities
As India improves its execution track record in the power sector during the current five-
year plan (tepid so far, see Exhibit 57), domestic supplies will need to significantly ramp
up to match higher capacity additions.
Exhibit 57: Actual capacity addition in the power sector has lagged the targeted addition by almost
50%
Actual capacity addition versus planned capacity addition (GW)
(GW)
80 Planned Achieved 79
60
40 41 40
40
31
19 21
20 17
0
1993-97 1997-02 2003-07 2008-12E
Source: CEA, MOP, Infraline, Kotak Institutional Equities estimates
` Captive mines—limited progress so far. Captive coal mines currently contribute less
than 10% of the domestic coal production at 34 mn tons in FY2010. This is despite
allocation of 198 coal blocks allocated under the captive route, with reserves aggregating
50 bn tons. Only 20 of the 198 blocks are under production currently. In our view, the
production of coal from captive coal mines (extant production of 34 mn tons) will likely
fall short of the Ministry of Coal’s target of 96 mtpa by end-FY2012E. Exhibit 58
highlights the allocation of captive coal blocks to various end-user industries broken down
by ownership pattern.

Energy India
Exhibit 58: 50 bn tons of coal resources have been allocated to various industry participants
Allocation of coal resources amongst various stakeholders (mn tons)
Central, 10,662
Private, 21,331
State, 19,280
In our view, development of captive coal blocks has been hindered by (1) difficulties in
acquisition of land and obtaining of environmental clearances, (2) absence of railway
connectivity to facilitate evacuation of coal, (3) land-locked nature of captive coal blocks,
which make them inaccessible, and (4) lack of coordination between central and state
governments to facilitate development of coal blocks. Exhibit 59 gives data on production
of coal broken down by captive blocks.
Exhibit 59: Captive production has not ramped up as originally planned

Coal production from captive coal mines, March fiscal year-ends, 2007-11 (mn tons)
Production (mn tons)
Company Block Sector 2007 2008 2009 2010 2011
WBPDCL Tara (West) Power 4.8 4.2 4.1 3.3 2.9
JSPL Gare Palma IV/1 Iron & Steel 6.0 6.0 6.0 6.0 6.0
CESC Sarshatoli Power 2.5 2.8 3.0 3.2 2.9
ML Talabira-4 Power 1.2 1.5 2.1 2.3 2.3
BLA Gotitoria (E&W) Pvt Commercial 0.2 0.3 0.2 0.3 0.3
MIL Gare Palma IV/5 Iron & Steel 0.7 0.8 1.0 1.0 1.0
PSEB Panchwara Central Power 1.6 3.8 6.2 8.5 8.4
JNL Gare Palma IV/4 Iron & Steel 0.1 0.3 0.4 0.6 0.4
PIL Chotia Iron & Steel 0.6 0.9 0.9 1.0 1.0
ANPMDL Namchik Namphuk Govt. Commercial 0.1 0.1 0.3 0.3
JPL Gare Palma IV/2&3 Power 0.6 4.9 6.0 5.6
SIL Belgaon Iron & Steel 0.0 0.1 0.1 0.1
KPCL Baranj I-IV, Kiloni and Manora Deep Power 1.0 2.3 2.3
UML Kathautia Iron & Steel 0.0 0.1 0.3
ESCL Parbatpur Iron & Steel 0.0 0.1 0.0
RAPL Gare Palma IV/7 Iron & Steel 0.0 0.3 0.4
WBPDCL Barjora Power — 0.1 0.3
SAIL Tasra Iron & Steel 0.1 0.0
DVC Barjora North Power 0.0
B.S. Ispat Marki Mangli-I Iron & Steel 0.0
Total 17.6 21.2 30.0 35.5 34.6
Source: Infraline, Kotak Institutional Equities
` Imports. Dependence on imported coal will likely increase from 80 mn tons in FY2011E
to over 300 mtpa by FY2017E as supplies from CIL and captive coal blocks will not be
sufficient to meet the demand of the power and other sectors. Low calorific value and
concentration of the domestic coal fields in the eastern region have made imported coal a
viable substitute for power plants located in coastal India. However, the current
configuration of power plants, which use high-ash domestic coal, limits the quantum of
blending with high-quality imported coal.

India Energy
Indonesia has emerged as the natural choice for Indian companies due to its proximity to
India as compared to Australia, China and Russia. Indonesia exports 80% of its
production of 250 mtpa, making it one of the largest exporters of coal in the world. We
note that several Indian companies have bought overseas coal assets to secure supplies
for their power plants in India (see Exhibit 60).
Exhibit 60: Indian power companies have acquired overseas coal assets
Details of coal asset acquisitions by Indian power companies
Resource base Extant production

Company Transaction Mine location (mn tons) (mtpa)
Adani Enetrprises Linc Energy 100% stake in coal block Queensland, Australia 7,800 NA
Lanco Griffin coal 100% shares of Griffin coal Western Australia 1,100 4
JSW Energy CIC Energy 100% shares of CIC Energy Bostwana 2,600 NA
JSW Energy SACMH 49.8% stake in Royal Bafokeng Capital South Africa 15 1
Tata Power Bumi Resources 30% stake in mines of Bumi Resources Indonesia 10,689 63
Notes:
(a) Resource is based on JORC code of resource estimation.
Regulatory and infrastructure bottlenecks

We discuss key regulatory and infrastructure issues that may affect both domestic
production and overseas imports below. In our view, the mere availability of coal reserves in
India or overseas is not enough. Domestic coal needs to be exploited and transported to
consumption centers and sufficient import infrastructure needs to be built to cope with likely
higher imports of coal.
` Inadequate logistics infrastructure key impediment to sourcing coal. We see the

current infrastructure as being grossly inadequate to handle our sharp estimated increase
in production of domestic coal or imports of coal over the next few years. Incremental
coal supplies, both domestic as well as imports, will necessitate augmentation of port and
railway infrastructure.
Port capacity. We see challenges in handling higher imports of coals given the current
high capacity utilization at the major Indian ports. The major Indian ports handled
~560 mn tons of cargo in FY2010 and have been operating at near 100% capacity
utilization for the past few years (see Exhibit 61).
Exhibit 61: Inadequate import capacity may act as an impediment for importing coal
Capacity utilization at major and minor ports, March fiscal year-ends, 2005-09 (%)
(%)
Major ports Minor ports
120
97 93 96 95
100 90
78 82
80 72 74
64
60
40
20
0
2005 2006 2007 2008 2009
Source: Ministry of Shipping, Kotak Institutional Equities

Energy India
Private ports such as Mundra and Krishnapatnam will likely import the bulk of
incremental coal imports in the future. Several large power projects are being or have
been set up in close vicinity of these ports. For example, the Mundra port of Mundra
Ports and SEZ will likely import 21 mtpa of coal required for the capacity at Mundra
UMPP (12 mtpa for 4,000 MW) and for Adani Power (9 mtpa for 2,640 MW) by
FY2013E. Similarly, the Krishnapatnam port will import 12 mtpa of coal to meet the
requirement of Krishnapatnam UMPP of 4,000 MW.
Railway capacity. We also see challenges for dispatch of coal from ports to inland
locations or from coal mines to consumption centers across India. The Indian Railways
has been operating at over 100% capacity utilization in terms of freight capacity and
actual traffic for the past several years (see Exhibit 62). Indian Railways handled around
890 mn tons of cargo in FY2010, of which coal contributed 60% (500 mn tons).
Exhibit 62: Railways is running at over 100% utilization levels

Capacity utilization for India Railways, March fiscal year-ends, 2003-09
2003 2004 2005 2006 2007 2008 2009

Demand
Freight (mn tons) 519 557 602 667 726 794 833
Supply
Wagon (Nos) 214,760 227,752 222,379 207,983 207,719 204,034 211,763
Average wagon capacity (tons) 46.5 46.8 47.7 47.9 48.4 50.2 52.4
Wagon capacity (mn tons) 10 11 11 10 10 10.2 11.1
Wagon turnaround time (days) 7.0 6.7 6.4 6.1 5.5 5.3 5.2
Freight capacity (mn tons) 521 581 605 596 667 705 779
Utilization (%) 100 96 100 112 109 113 107
Source: Ministry of Railways, Crisil
` Environmental hurdles may stall development of mines. In our view, environmental

hurdles will likely continue to be the biggest bane for project development of coal mines
as in the past. CIL has 101 applications pending with the Ministry of Environment and
Forests (MoEF) for clearances to proceed with land development for mines. The MoEF
takes about 1-2 years to clear applications for mine development. Exhibit 63 gives details
of various stages involved in mine development.
Exhibit 63: Environmental hurdles will likely continue to be the biggest bane for development of coal mines
Illustration of stages involved in development of coal mines in India
Drafting and approval Environmental

Geological report Forest clearance Land acquisition
of mine plan clearance
(2-2.5 years) (1-3 years) (1-2 years)
(1.5-2 years) (1-2 years)
z For unexplored coal z The stage involves z The stage involves z If the mine is to be z This could be a major
block, prepration of preparing a detailed taking up an developed over or hurdle as mining
geological report can mine plan including Environmental Impact below forest land, cannot start before
take 2-2.5 years the useful life of mine Assessment (EIA) forest clearnce is entire land acquisition
and plans for closure study followed by required which involves as per mining plan
public hearing in the determination of
affected areas damage and
identification of land
for forestation
We note that the development process gets further delayed due to local opposition for
land acquisition. Large infrastructure projects have faced delays and in some cases have
also been abandoned due to delayed environmental clearance or stiff local opposition for
the acquisition of large tracts of land.

India Energy
Comprehensive Environmental Pollution Index (CEPI). In January 2010, the MoEF

imposed a temporary moratorium on development projects in 43 clusters, which also
includes seven coalfields of CIL. The moratorium was put in place until August 2010
but was extended by MOEF (in October 2010) until March 2011 thus further delaying
the award of environmental clearance for these projects. CIL management has
indicated that the continuation of CEPI norms could impact production targets by 16
mn tons and 39 mn tons in FY2011E and FY2012E, respectively (see Exhibit 64). CEPI
was introduced by the Ministry of Environment and Forest (MoEF) in 2009 to assess
the environmental quality of industrial clusters in India.
Exhibit 64: CEPI has affected coalfields that contributed to 68% of CIL's FY2010 production
Production and reserves profile of CIL coalfields, FY2010 data (mn tons)
Reserves (mn tons)
Coalfield Subsidiary Location Capacity Production Proved Indicated Inferred Reserves Extractable
BCCL
Jharia BCCL Dhanbad,Bokaro/Jharkhand 32.7 27.5 5,983 1,009 51 7,043 1,145
Total BCCL 32.7 27.5 5,983 1,009 51 7,043 1,145
CCL
Ranchi,Hazaribagh,Chatra,Palamu
North Karanpura CCL and Latehar/Jharkhand 23.7 23.6 4,458 35 — 4,493 2,072
East Bokaro CCL Bokaro/Jharkhand 10.5 12.7 2,116 1,110 — 3,227 692
West Bokaro CCL Ramgarh, Hazaribagh/Jharkhand 6.6 5.2 1,516 236 10 1,762 462
South Karanpura CCL Ramgarh, Hazaribagh/Jharkhand 5.0 4.0 1,550 196 7 1,753 308
Ramgarh CCL Ramgarh/Jharkhand 1.4 1.1 386 19 — 405 138
Giridh CCL Giridih/Jharkhand 0.9 0.6 18 — — 18 15
Total CCL 48.0 47.1 10,044 1,596 17 11,658 3,687
ECL
Burdwan,Bankura,Purulia,Birbhu
m/West Bengal
Raniganj ECL Dhanbad/Jharkhand 21.0 17.0 7,556 1,242 379 9,177 662
Rajmahal/Deogarh ECL Deograh and Godda/Jharkhand 11.1 13.1 1,378 382 579 2,339 546
Total ECL 32.1 30.1 8,934 1,624 958 11,516 1,208
MCL
Talcher MCL Angul/Orissa 69.3 59.7 7,568 1,721 640 9,929 5,893
Jharsugudah and
IB Valley MCL Sundergarh/Orissa 45.3 44.3 3,242 161 — 3,403 2,119
Total MCL 114.6 104.1 10,810 1,882 640 13,332 8,012
NCL
Madhya Pradesh and Uttar
Singrauli NCL Pradesh 77.4 67.7 3,270 212 — 3,482 1,891
Total NCL 77.4 67.7 3,270 212 — 3,482 1,891
NEC
Makum NEC Tinsukia/Assam 1.1 1.1 362 — — 362 239
Total NEC 1.1 1.1 362 — — 362 239
SECL
Korba SECL Korba/Chattisgarh 75.2 78.5 3,896 1,605 51 5,552 2,670
Central India Coalfields SECL Madhya Pradesh and Chattisgarh 28.6 24.7 2,665 892 123 3,681 774
Mand Raigarh SECL Raigarh/Chattisgarh 5.2 4.8 1,957 114 — 2,070 659
Total SECL 109.1 108.0 8,518 2,611 174 11,303 4,103
WCL
Chandrapur and
Wardha Valley WCL Yeotmal/Maharashtra 29.2 29.3 2,249 614 58 2,921 795
Kamptee WCL Nagpur/Maharashtra 4.8 5.0 817 121 — 938 214
Umrer Nand Bander WCL Nagpur/Maharashtra 4.3 4.3 558 1 — 558 215
Pench-Kanhan WCL Chindwara/Madhya Pradesh 5.0 3.9 693 199 44 936 148
Pathakhera WCL Betul/Madhya Pradesh 3.6 3.3 190 28 — 218 87
Total WCL 46.9 45.7 4,507 963 102 5,571 1,459
Total CIL 462 431 52,428 9,897 1,942 64,267 21,744
Source: CIL, Kotak Institutional Equities
‘No-go’ areas—another stumbling block. Pursuant to a proposal dated July 8, 2010,

the MoEF introduced an initiative for the identification of environmentally-sensitive
areas classified as ‘No-go’ where coal mining activities would not be permitted. ‘No-
go' areas for mining have been defined as those that have over 30 per cent gross
forest cover or over 10 per cent weighted forest cover. Several significant coal fields
where CIL is currently carrying on mining activities have been classified as ‘No-go’
including large mines such as North Karanpura in Jharkhand, Ib Valley in Orissa and
Chhattisgarh, Singrauli Coalfield in Madhya Pradesh and Uttar Pradesh and Talcher
coalfield in Orissa.

Energy India
Coal mafia and Naxalite activity. Domestic coal mining has traditionally depended
on local contractors and intermediaries for support services; these ancillary service
providers have in several instances known to be working with the local ‘coal mafia’
involved in pilfering coal. Coal is diverted or stolen from coal stocks, coal washeries,
coal transfer and loading points and also in the transport routes.
The problem is further exacerbated by the fact that most of India’s coal resources are
concentrated in East India, and the mines are in uninhabited Naxal-affected regions.
Naxalite activity in coal mining areas creates problems as coal pilferage is one of the
largest sources of funding the civil disobedience movement. Exhibit 65 highlights the
‘Red Corridor’—an euphemism for the contiguous region across several states in
central India rife with insurgency—along with geographical distribution of India’s coal
resources.
Exhibit 65: The Naxal belt closely corresponds with the coal belt of India
Naxal belt of India
Source: Maps of India, CIL, Kotak Institutional Equities

India Energy
HYDROPOWER: LARGE POTENTIAL BUT GROUND REALITIES DIFFER

Despite large potential, we see only 15 GW of new hydropower generation capacity in FY2012-17E, which
would increase dependence on thermal power. High execution risks and lower return profile of hydro
projects compared to coal-based generation has resulted in (1) low investments in hydro-based generation
and (2) its declining share in India’s power mix. The Government of India (GoI) has identified hydropower as a
key area for development and has unveiled a hydro policy to encourage investments in the sector. It has
identified 162 schemes for preliminary feasibility reports under a 50,000 MW hydroelectric initiative.
Large untapped hydroelectricity potential

India has large river-systems offering considerable untapped hydroelectricity potential (see
Exhibit 66). Considering the protracted implementation time required for hydropower
projects, the government is creating a shelf of projects to facilitate higher hydropower
th
capacity addition during the XII five-year plan period (FY2012-17). The government had
identified 162 schemes for preliminary feasibility reports under an initiative of installing 50
GW, of which 77 attractive schemes (tariff<Rs2.50/kWh) have been selected with potential
generation capacity of 33,951 MW for preparation of DPRs.
Exhibit 66: About 65% of hydropower generation potential is yet to be tapped

Data on hydropower potential in India
Capacity
(MW) (%)
Capacity developed 38 0.0
Capacity under construction 15,542 10.5
Capacity yet to be developed 133,121 89.5
Identified capacity as per re-assessment study 148,701 100
Notes:
1. Data as on April 30, 2008 and excludes schemes below 3 MW up to March 2003
and up to 25 MW thereafter.
Source: CEA, Kotak Institutional Equities
In our view, considerable work needs to be done to increase the share of hydropower
capacity in total generation. DPRs for only 23 projects have been prepared until March 2011
with a cumulative capacity of 8,262 MW (see Exhibit 67). Although the working group on
th
power for the XI plan also recommended a higher contribution of hydropower projects for
th
incremental capacity addition, slippages (of thermal capacity addition) from the X plan has
ensured that the proportion of hydropower capacity addition will remain lower than desired
th
in the XI plan as well.
Exhibit 67: DPR's ready for less than 9,000 MW of the 50,000 Hydroelectric initiative
Status of 50,000 MW Hydroelectric initiative as of March 2011
No. of Capacity
schemes MW
Preliminary feasibility reports (PFRs) 162 47,930
PFRs with tariff up to Rs2.5/unit 78 34,020
Schemes not taken up for DPR/implementation 1 69
Schemes taken up for DPR/implementation 77 33,951
DPRs prepared until March 2011 (reassessed capacity) 23 8,262
DPRs under prepration 21 16,059
Work held up due to:
- Non allocation by state government 10 2,364
- MOEF clearance 13 3,991
- Local agitation/other issues 10 2,894
Source: Hydropower Policy 2008, CEA, Infraline, Kotak Institutional Equities

Energy India
The government is targeting significantly higher 40.3 GW of hydropower capacity addition

th
in the XII plan. However, we would highlight that only 15.5 GW is currently under
construction while another ~47 GW is under various stages of planning and development
(see Exhibit 68). Past experiences of hydropower project execution suggests that most
projects that have not yet commenced construction are likely to slip beyond FY2017E (or
shelved completely) while those under construction may also face commissioning delays. We
therefore do not envisage capacity addition in excess of 15 GW in FY2012-17E.
Exhibit 68: 15 GW of hydro capacities are currently under construction

Hydrocapacity additions, March fiscal year-ends, 2012-17E
2012E 2013E 2014E 2015E 2016E 2017E

Under construction
Central 1,372 400 5,242 60 330 600
Private 1,170 2,029 820 101 1,849 —
State 153 360 606 450 — —
Total under construction 2,695 2,789 6,668 611 2,179 600
Under development
Central — — — 1,400 2,194 1,220
Private — — — 3,381 2,448 1,870
State — — — 2,283 3,139 —
Total under development — — — 7,064 7,781 3,090
Planning
Central — — — — 7,090 5,586
Private — — — — 2,522 6,931
State — — — — 1,647 5,480
Total under planning — — — — 11,259 17,997
Total 2,695 2,789 6,668 7,675 21,219 21,687
Notes:
(1) Projects that are yet to commence construction but are in advance stages
of development have been classified as under development.
Source: CEA, Kotak Institutional Equities estimates
Supply—large execution risk and tariff disparity may constrain investments
We expect the share of hydropower in India’s total power capacity will decline over the next
five years due to continued delays in execution of projects (see Exhibit 69). The share of
hydropower in the total installed generation capacity in India has declined to 22% in FY2011
from 34% in FY1985 (see Exhibit 70) and 44% in 1970. Hydropower projects are a
renewable, non-consumptive and environmentally benign source of energy and, therefore,
recognized as the most economical and preferred source of electricity. The ideal hydro-
thermal mix is 40:60 and the current imbalance in India is largely responsible for peak hour
deficits. We note that even resource-rich countries such as Norway and Brazil have a much
higher dependence on hydropower than India (see Exhibit 71).

India Energy
Exhibit 69: Share of hydro capacity to fall to 19% from the current level of 22% in India
Hydropower capacity and share of total power capacity, March fiscal year-ends, 2011-17E
(GW) Hydro capacity (GW, LHS) Share in total capacity (%, RHS) (%)
60 22
50 21
20
40
19
30
18
20
17
10 16
0 15
2011 2012E 2013E 2014E 2015E 2016E 2017E
Exhibit 70: Share of hydropower in installed capacity has Exhibit 71: Hydropower generation accounts for a large share
declined to 25% from 34% in the past two decades of generation in resource-rich countries
Installed capacity (GW) and share of hydropower in overall capacity, Share of hydropower in electricity generation, CY2008 (%)
March fiscal year-ends, 1985-2011 (%)
(%)
Hydro generation capacity (LHS) 100 98.5
Total installed capacity (LHS)
79.8 72.8
Share of hydropower in installed capacity (RHS) (%) 80
(GW)
200 40 58.7
60
46.1
160
30 40
120 16.0 16.2 16.9 13.8
20 7.7
20 6.5
80
0
USA
Brazil
Norway
Japan
Sweden
Canada
China
Venezuela
Russia
India
World average
10
40
0 0
1985
1990
1992
1997
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: IEA - Key World Energy Statistics 2010

Source: CEA, Kotak Institutional Equities
We discuss key challenges that have prevented India from realizing its vast hydropower
potential.
` Delays in project implementation and consequent escalation in project costs.

Uncertainties inherent in the implementation of hydropower projects result in delays and
cost overruns. These include delays in the acquisition of land, rehabilitation and
resettlement issues, adverse weather conditions and natural disasters, geological surprises
etc. These problems are compounded by the remote location of the sites. Approval of a
hydropower project requires clearances from multiple government agencies such as the
Ministry of Environment and Forests, Central Electricity Authority, state governments etc.,
which may delay project implementation.

Energy India
Exhibit 72 shows India’s actual generation capacity addition in hydropower against

planned additions. Exhibit 73 highlights the project delays and consequent cost
escalations in NHPC’s projects currently under construction.
Exhibit 72: Hydropower capacity addition has trailed targeted capacity addition
Target and actual capacity addition (MW)
Target capacity addition Actual capacity addition Achievement

Period (MW) (MW) (%)
1969-74 3,518 1,058 30.1
1974-79 4,654 3,868 83.1
1979-1980 548 551 100.5
1980-85 4,768 3,076 64.5
1985-90 5,541 3,828 69.1
1990-91 1,007 446 44.3
1991-92 754 436 57.8
1992-97 9,282 2,428 26.2
1997-02 9,818 4,538 46.2
2002-07 14,393 7,886 54.8
2007-12 15,627 2,913 18.6
Notes:
(1) For 2007-12 period, actual capacity addition is as of March 2011.
Source: Hydropower Policy 2008, CEA
Exhibit 73: Delays and cost overruns are common in hydro projects
Delays and cost escalation of NHPC's projects under construction
Project
Total Design execution cost
capacity energy COD (Rs bn)
(MW) (mn units) Initial Revised Assumed Latest Original Remarks
Teesta Low Dam III 132 594 FY2007 FY2011 Jun-11 14.1 7.7 Work held up at site from May-July 2010 due to local issues; frequent interruption of work
Teesta Low Dam IV 160 720 FY2010 FY2012 Sep-11 14.6 10.6 Work held up at site from May-July 2010 due to local issues; frequent interruption of work
Uri II 240 1,124 FY2010 FY2011 Apr-12 17.0 17.2 Work affected by earthquake and landslides
Parbati II 800 3,109 FY2010 XIIth plan Mar-13 40.8 39.2 E&M work on power house has now been resumed
Chamera III 231 1,108 FY2011 FY012 May-11 19.4 14.1 T&G erection for Unit 3 in progress
Nimmo-Bazgo 45 239 FY2011 FY2012 Aug-11 9.1 6.1 Delay in supply of E&M and HM parts by BHEL due to civil disturbance in Kashmir
Parbati III 520 1,963 FY2011 FY2012 Sep-11 21.0 23.0 Delay in award of E&M contract
Chutak 44 213 FY2011 FY2012 Aug-11 9.8 6.2 Delay in supply of E&M and HM parts by BHEL due to civil disturbance in Kashmir.
Subansiri (Lower) 2,000 7,422 FY2011 XIIth plan Sep-13 81.6 62.9 Plagued by law and order problems
Kishanganga 330 1,350 FY2017 FY2017 Jun-16 36.4 36.4 Progress affected due to civil disturbance in Kashmir
Total 4,502 17,842 263.9 223.4
Source: NHPC
` Inferior return profile to thermal projects. Hydro-based generation plants earn

inferior returns compared to those of cost-plus thermal power projects despite (1) higher
execution risks and geological surprises in hydro projects and (2) higher capital cost and a
longer gestation period in the case of hydro projects. Coal-based regulated projects make
an effective yield of 21-22% on invested equity, superior to the 18% yield earned by
NHPC. The key differentiator in the earnings profile of coal-based cost plus projects is
savings on fuel cost (versus normative reimbursements) made by coal-based projects that
is absent in hydel projects. We note that (1) higher capital cost and (2) elongated
implementation schedule also requires a higher investment in CWIP, which further dilutes
the equity IRR of hydro-based projects.
We highlight that high execution risks in hydropower projects from geological surprises
make it difficult to estimate project cost and timelines, hence making it difficult for the
developer to commit both, price (due to cost overruns) and time (due to delays) for the
eventual sale of power.

India Energy
ECONOMY: SEVERE CHALLENGES FROM RISING ENERGY DEFICIT

We see significant challenges to the Indian economy (CAD and fiscal position) from the growing energy
deficit and from energy imports. India has no option but to import energy at global prices to grow its
economy. However, it can deregulate the prices of fuels and power to prevent a fiscal crisis; there is no way
India can live with an open-ended subsidy situation in perpetuity, especially in light of steep inflation in
global energy prices and high volatility.
Large CAD from higher energy imports

Exhibit 74 shows our computations of energy imports through FY2017E. We estimate India’s
total energy imports to rise to US$162 bn in FY2017E compared to US$88 bn in FY2011E.
India’s energy imports (net basis after factoring in exports of refined products) will be about
4% of India’s FY2017E nominal GDP. We note that we use US$90/bbl crude oil price,
US$90/ton coal price and US$12/mn BTU for natural gas in our exercise and thus, do not
rule out upside risks to our estimates.
Exhibit 74: Fuel imports to increase significantly over the next few years
2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E
Energy imports (net basis)
Coal (mn tons) 38 65 68 80 146 169 193 224 270 323
LNG (bcm) 11 11 12 13 17 20 25 30 33 34
Crude oil (mn tons) 102 113 120 122 127 132 139 147 157 167
Price assumptions
Coal (US$/ton) 169 154 130 123 130 114 114 114 114 114
Coal 6 10 9 10 19 19 22 26 31 37
LNG 2 2 2 3 6 8 10 13 15 15
Oil 55 64 56 75 97 91 91 97 103 110
Total imports 64 76 67 88 122 118 124 136 148 162
Notes:
India’s exports (including of services) and repatriation from overseas Indians would need to
grow proportionately to keep its CAD under control. We already see India’s CAD at
uncomfortable levels with CAD likely to exceed 3% of GDP in FY2012E. India has
increasingly relied on portfolio flows to manage its BOP. However, this may not be
sustainable without adequate reforms in other areas of Indian economy and society. Exhibit
75 shows our estimates of trade balance, CAD and BOP for FY2012E at various levels of
crude oil prices and compares the same for the past few years.

Energy India
Exhibit 75: CAD/GDP can widen to 3.3% with crude at US$115/bbl

India's balance of payments under crude price assumptions, March fiscal year-ends, 2009-2012E (US$ bn)
2012E
2009 2010 2011E Oil@100 Oil@105 Oil@110 Oil@115
Current account (27.9) (38.4) (42.4) (52.0) (56.7) (61.4) (66.1)
GDP 1,218 1,381 1,726 1,982 1,982 1,982 1,982
CAD/GDP (%) (2.3) (2.8) (2.5) (2.6) (2.9) (3.1) (3.3)
Trade balance (119.5) (118.4) (131.1) (157.5) (162.2) (167.0) (171.7)
Trade balance/GDP (%) (9.8) (8.6) (7.6) (7.9) (8.2) (8.4) (8.7)
- Exports 189 182 246 297 299 301 303
- Imports 309 301 377 455 461 468 475
o/w Oil imports 94 87 110 135 141 148 155
o/w Non-oil imports 215 213 267 320 320 320 320
Invisibles (net) 92 80 89 106 106 106 106
- Services 54 36 48 56 56 56 56
o/w Software 44 48 56 62 62 62 62
o/w Non-software 10.2 (12.5) (7.7) (6.0) (6.0) (6.0) (6.0)
- Transfers 45 52 54 58 58 58 58
- Income (net) (7.1) (8.0) (13.6) (8.0) (8.0) (8.0) (8.0)
Capital account 6.8 53.4 62.7 71.0 71.0 71.0 71.0
% of GDP 0.6 3.9 3.6 3.6 3.6 3.6 3.6
Foreign investment 5.8 51.2 42.2 40.0 40.0 40.0 40.0
- FDI 19.8 18.8 10.1 18.0 18.0 18.0 18.0
- FII (15.0) 29.0 31.0 20.0 20.0 20.0 20.0
- ADRs/GDRs 1.2 3.3 2.3 2.0 2.0 2.0 2.0
Banking capital (3.2) 2.1 7.7 4.0 4.0 4.0 4.0
- NRI deposits 4.3 2.9 2.8 3.0 3.0 3.0 3.0
Short-term credit (2.0) 7.6 11.0 15.0 15.0 15.0 15.0
ECBs 7.9 2.8 13.3 16.0 16.0 16.0 16.0
External assistance 2.4 2.9 5.2 4.0 4.0 4.0 4.0
Other capital account items (4.1) (13.1) (16.7) (8.0) (8.0) (8.0) (8.0)
E&O 1.1 (1.6) (3.8) (3.0) (3.0) (3.0) (3.0)
Overall balance (20.1) 13.4 16.5 16.0 11.3 6.6 1.9
Memo items:
Average exchange rate (US$/Rs) 45.82 47.41 45.63 45.50 45.50 45.50 45.50
Average Indian crude (US$/bbl) 84.0 70.0 85.1 100 105 110 115
Source: Reserve Bank of India, Kotak Institutional Equities estimates
Fiscal challenges will remain without deregulation of fuel prices

We discuss implications of high energy prices on interest rates and inflation in FY2012E to
understand the long-term implications of high energy prices and continued high subsidies.
India’s fiscal position will likely deteriorate further without reforms of retail prices of fuels
and power since (1) energy consumption will continue to grow strongly and (2) India will
likely import increasing quantities of fuels to sustain its economic growth at 8-9%.
In our view, India will have to face up to the task of deregulation of fuel prices quickly since
it is not in a position to provide large subsidies on fuel and power. Also, large subsidies and
deficits ultimately have a negative impact on the economy through high interest rates and
inflation. There are serious non-economic implications also in the form of increased
corruption and other social ills.
` High interest rates and inflation both. We see high crude oil prices resulting in a large
negative impact on India’s fiscal deficit, government borrowing, interest rates and
inflation. As discussed in our report on the energy sector titled Oil on the boil will make
India toil dated March 18, 2011, India will have to contend with both high interest rates
and inflation as a result of high crude oil prices.
High interest rates. We expect the government’s borrowing program in FY2012E to
far exceed its budgeted `3.6 tn and potentially be as much as `4.5 tn if it fails to raise
the prices of diesel, kerosene and LPG significantly from current levels. Exhibit 76
shows likely government share of subsidies at various levels of crude oil prices (US$90-
130/bbl) without considering retail price increases for the three regulated products. In
Exhibit 77, we show that India’s fiscal position will deteriorate quite significantly at
high crude oil prices and without meaningful price increases.
India Energy
Exhibit 76: Under-recovery will be difficult to manage at current level of crude prices
Subsidy loss breakdown at various levels of crude oil price, March fiscal year-end, 2012E (Rs bn)
Dated Brent crude price (US$/bbl)

90 95 100 105 110 115 120 125 130
LPG 319 358 397 436 476 515 554 593 633
Kerosene 219 235 251 267 282 298 314 330 346
Diesel 367 455 544 632 721 809 898 986 1,075
Auto fuels 367 455 544 632 721 809 898 986 1,075
Cooking fuels 538 593 648 703 758 813 868 923 978
Total subsidy loss 905 1,048 1,192 1,335 1,479 1,622 1,766 1,909 2,053
Share of upstream companies 291 339 387 435 483 531 578 626 674
Share of downstream companies 75 75 75 75 75 75 75 75 75
Required compensation from government 538 634 730 825 921 1,017 1,112 1,208 1,304
Exhibit 77: Government borrowing program and interest rates may shoot up without meaningful oil
price correction
Major budgetary items of the central government, March fiscal year-ends, 2010-2012E (Rs bn)
2012E
2010A 2011RE 2012BE Oil@95 Oil@105 Oil@115
Receipts
1. Revenue receipts (2 + 3) 5,728 7,838 7,899 7,845 7,858 7,872
2. Gross tax revenue (a + b ) 6,245 7,869 9,324 9,243 9,262 9,281
2.a. Direct taxes 3,792 4,479 5,346 5,223 5,223 5,223
2.a.1. Corporation tax 2,447 2,964 3,600 3,482 3,482 3,482
2.a.2. Income tax 1,323 1,491 1,720 1,714 1,714 1,714
2.a.3. Other taxes 21 25 26 26 26 26
2.b. Indirect taxes 2,454 3,390 3,978 4,020 4,039 4,058
2.b.1. Customs duty 833 1,318 1,517 1,588 1,607 1,626
2.b.2. Excise duty 1,036 1,378 1,641 1,612 1,612 1,612
2.b.3. Service tax 584 694 820 820 820 820
2.c Transfers to States and UTs 1,680 2,232 2,680 2,653 2,658 2,664
2.d Net tax revenue 4,565 5,637 6,645 6,590 6,604 6,617
3. Non-tax revenue 1,163 2,201 1,254 1,254 1,254 1,254
4. Non-debt capital receipts (a + b) 332 317 550 550 550 550
4.a Recovery of loans 86 90 150 150 150 150
4.b Other receipts (Disinvestments) 246 227 400 400 400 400
5. Total receipts (1 + 4) 6,060 8,156 8,449 8,395 8,408 8,422
6. Non-plan expenditure 7,211 8,216 8,162 8,761 8,991 9,183

6.a. Interest payments 2,131 2,408 2,680 2,680 2,680 2,680
6.b. Subsidies 1,414 1,642 1,436 1,994 2,224 2,416
6.b.1. Food 584 606 606 650 650 650
6.b.2. Fertilizer 613 550 500 650 650 650
6.b.3. Oil 150 384 236 601 831 1,023
6.b.3. Other subsidies 67 102 94 94 94 94
6.c. Others 3,667 4,166 4,046 4,086 4,086 4,086
7. Plan expenditure 3,034 3,950 4,415 4,415 4,415 4,415
8. Total expenditure (6 + 7) 10,245 12,166 12,577 13,176 13,406 13,598
Deficit
Primary Deficit (PD) 2,054 1,602 1,448 2,101 2,318 2,496
Gross fiscal deficit (GFD) 4,185 4,010 4,128 4,781 4,998 5,176
Borrowings and other liabilities 4,510 4,475 4,171 5,088 5,041 5,219
Net market borrowing (dated secs.) 3,984 3,354 3,430 4,352 4,300 4,478
Short-term borrowing (T-Bills) (91) 100 150 150 150 150
GDP FY2005 base 65,388 78,779 89,809 89,809 89,809 89,809
PD/GDP (%) 3.1 2.0 1.6 2.3 2.6 2.8
GFD/GDP (%) 6.4 5.1 4.6 5.3 5.6 5.8
Notes:
(a) 2010A represents actual government financials for FY2010.
(b) 2012E represents FY2012 KIE estimates.

Energy India
High inflation. Our hypothetical exercise in Exhibit 78 shows that India’s inflation
may remain above 8% for most of FY2012E even with very modest price increases in
diesel, kerosene and LPG. We model `4/liter price increase for diesel, `2/liter price
increase in the case of kerosene and `50/cylinder price increase for LPG. We note that
our assumed price increases are very small in the context of the current under-
recoveries on those products (see Exhibit 79). We have also factored a `3/liter price
increase for gasoline in May 2011 followed by another `3/liter in November 2011.
Gasoline prices have been deregulated on paper but government-owned companies
continue to sell gasoline below market prices; current losses exceed `9/liter.
Exhibit 78: Inflation will likely remain above 8% through FY2012E even with small fuel price
increases
Inflation scenario, March fiscal year-ends, 2006-12E (%)
(%) Inflation (with fuel price hikes) Inflation (without fuel price increases)
12
8.98
10
8 8.7
6 6
0
Dec-07
Apr-06
Apr-11
Nov-10
Sep-06
Sep-11
Feb-07
May-08
Jan-10
Oct-08
Aug-09
Feb-12
Jun-10
Mar-09
Jul-07
(2)
Notes:
1. In our scenario on inflation with fuel price increases, we assume the following:
(a) Rs1/liter price increase in diesel in May 2011, August 2011, November 2011 and February 2012.
(b) Rs3/liter increase in gasoline prices in May 2011 and another Rs3/liter in February 2012.
(c) Rs50/cylinder increase in LPG prices and Rs2/liter in kerosene prices
2. In our scenario without fuel price increases, we assume no change in prices of regulated fuels through FY2012E.
Exhibit 79: High under-recoveries on key petroleum products in the recent weeks
Computed under-recovery for key petroleum products
Average for the week ended

15-Apr-11 22-Apr-11
Crude prices (US$/bbl) 122.7 123.0
Exchange rate (Rs/US$) 44.4 44.4
Under-recovery
Diesel (Rs/liter) 15.9 15.4
Gasoline (Rs/liter) 9.4 9.3
Kerosene (Rs/liter) 30.9 30.3
LPG (Rs/cylinder) 394.2 396.5
Source: Bloomberg, Kotak Institutional Equities estimates
` Social ills reinforced by subsidies. Artificially low prices of fuels lead to other social ills
such as corruption, diversion of fuels and generation of black money. As discussed
previously, 40% of kerosene is diverted from the PDS and sold at market rates as
transportation fuel (mixed with diesel). This leads to severe economic loss for the
government (~US$2 bn in FY2011) and generates black money. As per Power Finance
Corporation, ATC losses in the power sector are estimated to be 28.4% in FY2009 with
the majority portion coming from distribution segment.

India Energy
` Subversion of market forces. In our view, improper functioning of market forces also
leads to (1) lower incentives for companies to create capacity and (2) price collusion. The
situation is more acute in the power sector. In the oil and gas sector, government-owned
companies have no option but to sell fuels below market prices and depend on periodic
handouts from the government and upstream companies to finance their operations and
capex.
Power sector. Years of selling power below market prices have resulted in very poor
financial condition of most state electricity boards (SEBs). This has led to SEBs resorting
to frequent power shutdowns to curb consumption, which in turn leads to lower
productivity in the economy. We are not sure about the sustainability of this situation
since accumulated losses of SEBs have reached gargantuan proportions.
We note that most of the new power generation will be at significantly higher prices
based on imported fuels (coal) compared to current prices. Exhibit 80 compares the
price of domestic coal with imported coal adjusted for their different calorific values
while Exhibit 81 shows the sharp increase in blended power prices over the past few
years. Since NTPC has a large base of old capacity based on domestic coal its price
increases may not fully represent the price of incremental power. We expect it to be
much higher.
Exhibit 80: Bulk of domestic coal (Grade D,E and F) are at deep Exhibit 81: NTPC's average realization has increased at a CAGR
discount to imported parity price adjusted for calorific value of 8% in FY2005-10
Comparison of energy-adjusted notified prices of different grades of Average realization of NTPC (Rs/kWh), March fiscal year-ends, 2003-
domestic coal with price of imported coal (Rs/ton) 10 (Rs/kWh)
(Rs/ton) (Rs/kWh) Average realization of NTPC (Rs/kWh)

6,000
2.4
5,000
2.2
4,000
2.0
3,000
2,000 1.8
1,000 1.6
0
1.4
Imported
Grade C
Grade D
Grade A
Grade B
Grade F
Grade E
coal
1.2
2003
2004
2005
2006
2007
2008
2009
2010
Notes:
(a) All prices have been adjusted to 6,200 kcal/kag.
(b) Richard Bay index (FOB price of South African coal)
has been used as price of imported coal. Source: NTPC, Kotak Institutional Equities
Source: CIL, Bloomberg
Finally, power companies are aggressively creating capacity to benefit from rising
demand for power but they may have to contend with lower ‘demand’ from SEBs if
SEBs are not in a position to purchase more expensive power. This will also have a
negative impact on power equipment companies that have ambitious plans and are
setting up large capacities (see Exhibit 82).

Energy India
Exhibit 82: Power equipment capacity to increase by 50% over the next 2-3 years
Details of capacity expansion for power equipment for key domestic players (MW)
Capacity (MW)
Company Present Future Completion date Comment
L&T 5,000 5,000 NA Shelved expansion plan to 6 GW
BHEL 15,000 20,000 Mar-12 Capacity addition cost estimated around Rs540 mn
Cethar 8,000 12,000 Mar-14 Unlisted entity focussed on large-scale, low-cost model
BGR — 3,000 Mar-13 Capacity expansion though Hitachi JV
Thermax 1,500 4,500 Mar-13 3 GW capacity addition from B&W JV
Total 29,500 44,500
Downstream oil sector. The government-owned oil companies have been able to
maintain operations and create new marketing and refining capacities due to partial
compensation of their under-recoveries on selling cooking and transportation fuels
below market prices. Nonetheless, these companies have not been able to retain their
preeminent position in the energy sector given their inability to pursue capex as
aggressively as their private sector counterparts. Exhibit 83 gives the relative share of
refining of public and private companies in FY2000 and at present. On the other hand,
private companies have been unable to set up retail operations given large losses on
transportation fuels.
Exhibit 83: Relative share of refining of public and private companies

Share of public and private sector in India’s refining capacity, March fiscal year-ends, 2000 and 2011 (mn tons)
Refining sector in 2000 Refining sector in 2011
Private, 77
Public, 92 Private, 27
Public, 123
Gas sector. India may implement pooling of gas from various sources (indigenous and
imported) in order to reduce the final price to customers. This may reduce the price of
imported LNG for a customer using spot LNG but will increase the price of gas for
others. This may theoretically improve the economics of power producers based on
spot LNG.
In our view, the proposal is a retrograde one in that efficient domestic producers will
subsidize overseas LNG suppliers. It seems the pooling process is designed to help LNG
import companies that have not signed long-term LNG contracts and now face the
unattractive prospect of low utilization of LNG import terminals. The pooling process
will penalize domestic producers (who contribute to the bulk of the supply and
consumption) through a likely cap on their prices in the future or likely continuation of
prices below ‘market’ rates; they may not get meaningful price increases in the future
since the pooling concept is designed to keep overall prices ‘low’.

India Energy
APPENDIX: FINANCIAL SUMMARIES OF COMPANIES
Exhibit 84: Cairn India: Profit model, balance sheet and cash model, calendar year-ends, 2006-07, March fiscal year-ends, 2009-14E (Rs mn)
2006 2007 2009 (a) 2010 2011E 2012E 2013E 2014E

Profit model (Rs mn)
Net sales 18,254 16,561 25,156 22,627 112,125 210,337 232,929 222,784
EBITDA 7,521 6,817 9,098 9,874 85,066 157,969 154,173 108,658
Other income 1,100 1,324 5,510 4,077 1,425 2,270 4,023 5,670
Interest (201) (27) (64) (148) (3,259) (1,805) (351) —
Depreciation (497) (4,589) (4,382) (3,570) (11,546) (16,387) (20,135) (20,648)
Pretax profits 7,923 3,524 10,162 10,232 71,685 142,047 137,710 93,680
Extraordinary items — (2,120) (283) (69) — — — —
Tax (2,254) (740) (1,221) (739) (5,838) (16,654) (15,580) (10,815)
Deferred taxation (22) (764) (623) 1,087 (1,963) (1,005) (376) (329)
Net profits 5,648 (100) 8,035 10,511 63,884 124,388 121,754 82,536
Earnings per share (Rs) 3.2 (0.1) 4.3 5.5 33.7 65.6 64.2 43.5
Balance sheet (Rs mn)

Total equity 292,804 294,358 328,023 338,683 390,642 489,493 553,208 560,153
Deferred tax liability 4,258 4,916 5,540 4,453 6,417 7,422 7,797 8,127
Total borrowings 5,122 3,124 43,564 34,007 42,007 9,007 — —
Currrent liabilities 39,716 8,372 16,132 14,806 2,218 5,164 8,414 13,669
Total liabilities and equity 341,900 310,771 393,259 391,949 441,284 511,085 569,419 581,948
Cash 61,348 1,504 18,968 6,269 18,070 54,686 118,517 149,051
Current assets 6,470 19,029 53,712 17,465 25,312 37,420 40,205 38,954
Total fixed assets 17,609 25,157 62,660 92,904 28,146 27,856 27,761 24,109
Net producing properties 2,354 4,390 3,014 4,995 99,439 120,806 112,619 99,517
Investments 4 7,129 1,713 17,124 17,124 17,124 17,124 17,124
Goodwill 254,115 253,193 253,193 253,193 253,193 253,193 253,193 253,193
Deferred expenditure — 370 — — — — — —
Total assets 341,900 310,771 393,259 391,949 441,284 511,085 569,419 581,948
Free cash flow (Rs mn)

Operating cash flow, excl. working capital 4,505 6,387 8,213 6,501 62,340 123,045 122,808 86,944
Working capital changes 34,256 (908) 1,213 (7,082) (20,434) (9,163) 465 6,506
Capital expenditure (5,619) (11,739) (31,613) (33,662) (39,531) (35,512) (10,364) (2,444)
Investments/Goodwill (252,717) (53,863) (25,062) 25,194 — — — —
Other income 1,100 1,298 1,518 2,360 1,425 2,270 4,023 5,670
Free cash flow (218,474) (58,824) (45,730) (6,689) 3,800 80,640 116,932 96,676
Key assumptions
Gross production ('000 boe/d) 91.0 75.4 68.1 64.3 153.7 218.6 265.4 265.2
Net production ('000 boe/d) 25.1 19.4 17.8 21.0 89.4 132.5 167.9 170.0
Dated Brent (US$/bbl) 65.3 70.3 87.4 67.0 86.7 105.0 95.0 90.0
Discount of Rajasthan crude to Dated Brent (US$/bbl) — — — 5.0 10.0 8.0 8.0 8.0
Note:
(a) 15 months period starting from January 1, 2008 to March 31, 2009.

Energy India
Exhibit 85: Coal India: Profit model, balance sheet and cash model, March fiscal year-ends, 2009-2015E (Rs mn)
2009 2010 2011E 2012E 2013E 2014E 2015E

Profit model
Net sales 387,888 446,153 491,060 585,498 638,195 695,915 750,857
Coal issued for other purpose 20,220 20,690 23,796 28,902 32,500 35,324 38,195
Transport and loading recovery 14,698 12,260 12,802 13,572 14,277 14,918 15,456
Total income 424,142 485,774 534,496 629,800 686,772 747,502 805,640
EBITDA 39,309 114,735 137,494 177,437 200,744 230,120 255,863
Interest income 28,447 26,940 19,925 32,130 42,917 55,020 69,328
Other Income (ex transport, interest) 8,051 13,209 17,447 17,447 17,447 17,447 17,447
Interest expense (1,789) (1,560) (1,373) (1,293) (1,193) (1,134) (1,118)
Depreciation (16,909) (13,138) (16,225) (17,437) (19,159) (20,523) (21,537)
Pretax profits 57,110 140,186 157,268 208,285 240,757 280,929 319,982
Tax (36,336) (43,996) (49,828) (56,789) (63,813) (79,955) (92,432)
Net income 20,774 96,190 107,441 151,496 176,943 200,974 227,550
Extraordinary items 13 35 (2,237) — — — —
Reported profit 20,787 96,224 105,204 151,496 176,943 200,974 227,550
Earnings per share (Rs) 3 15 17 24 28 32 36
Balance sheet
Paid-up common stock 63,164 63,164 63,164 63,164 63,164 63,164 63,164
Total shareholders' equity 191,651 257,952 322,126 414,539 522,474 645,068 783,874
Minority interest 19 236 236 236 236 236 236
Total borrowings 21,485 20,869 17,869 15,469 13,148 12,540 12,140
Shifting and rehab fund 12,238 14,774 18,092 21,301 25,922 31,319 37,449
Total liabilities and equity 225,393 293,831 358,323 451,544 561,780 689,163 833,698
Net fixed assets 110,212 120,354 115,756 146,101 164,366 172,769 170,307
Capital work-in progress 19,195 22,107 56,269 52,601 52,477 48,958 45,430
Investments 15,052 12,823 12,823 12,823 12,823 12,823 12,823
Cash 296,950 390,778 444,750 543,421 666,031 822,239 1,009,152
Current assets (excl. cash) 174,009 152,466 170,403 200,071 216,933 234,720 251,653
Current liabilities and provisions 399,293 414,316 451,437 512,681 559,656 610,257 663,023
Deferred tax asset 9,268 9,604 9,759 9,208 8,804 7,910 7,354
Misc. expenditure — 15 — — — — —
Total assets 225,393 293,831 358,324 451,544 561,780 689,163 833,698
Free cash flow

Operating cash flow, excl. working capital 39,616 106,073 121,274 169,483 196,506 222,391 249,643
Working capital changes 77,708 22,856 19,183 31,577 30,113 32,815 35,832
Capital expenditure (18,758) (19,804) (45,789) (44,114) (37,299) (25,408) (15,547)
Free cash flow 98,567 109,125 94,668 156,946 189,319 229,798 269,928
Ratios
Net debt/equity (%) (143.7) (143.4) (132.5) (127.4) (125.0) (125.5) (127.2)
Return on equity (%) 11 43 38 36 35 33 31
Book value per share (Rs) 30 41 52 64 80 98 118
ROCE (%) 11 43 39 43 39 36 33

India Energy
Exhibit 86: Mundra Ports and SEZ : Consolidated profit model, balance sheet and cash model, March fiscal year-ends, 2008-15E (Rs mn)
2008 2009 2010 2011E 2012E 2013E 2014E 2015E

Income statement
Net sales 8,170 11,949 14,955 19,408 26,091 35,203 46,589 57,376
Total operating costs (2,813) (4,393) (5,293) (5,574) (7,326) (9,900) (11,713) (12,721)
EBITDA 5,357 7,557 9,663 13,215 18,093 24,576 32,623 40,664
Other income 279 446 321 1,069 1,717 2,897 5,141 8,017
Depreciation (1,023) (1,468) (1,868) (3,085) (3,411) (3,602) (3,934) (4,081)
Financial charges (1,079) (1,459) (559) (2,121) (2,232) (2,040) (2,294) (2,206)
Pre-tax profit 3,535 5,075 7,556 9,078 14,167 21,831 31,536 42,394
Taxation (1,534) (533) (601) (459) (289) (615) (920) (1,565)
Adjusted PAT 2,001 4,542 6,955 8,619 13,681 20,970 29,947 39,689
EPS (Rs) 1.0 2.1 3.3 4.3 6.8 10.4 14.8 19.7
Balance sheet
Shareholders funds 26,216 29,306 34,637 41,609 52,794 68,824 92,126 123,468
Share capital 4,035 4,035 4,035 4,035 4,035 4,035 4,035 4,035
Reserves and surplus 22,164 25,261 30,602 37,574 48,759 64,789 88,091 119,433
Loan funds 20,680 28,957 37,062 43,932 30,908 29,808 30,907 30,906
Amount received under LT lease 6,568 6,505 6,291 6,075 5,924 5,773 5,622 5,470
Deferred tax liability (net) 1,771 2,296 2,817 2,812 2,812 2,812 2,812 2,812
Total sources of funds 55,252 67,156 81,629 95,087 93,312 108,145 132,520 164,032
Investments 8,886 2,072 2,249 5,219 5,219 5,219 5,219 5,219
Cash and bank balance 9,029 12,951 9,997 17,942 13,520 25,806 48,656 65,975
Net current assets excl. cash 663 321 1,701 (183) (96) 190 137 365
Total application of funds 55,252 67,156 81,629 95,087 93,312 108,144 132,520 164,032
Cash from operating activities

Cash flow from operations before WC changes 5,402 7,994 9,904 13,820 19,521 26,858 36,844 47,116
Less increase in WC 1,841 342 (1,380) 1,884 (88) (286) 53 (228)
Cash flow from operations 7,243 8,336 8,524 15,705 19,433 26,572 36,898 46,888
Cashflow from investing activities (21,920) (10,094) (18,463) (9,539) (5,037) (5,251) (4,961) (17,548)
Free cash flow (14,678) (1,758) (9,939) 6,165 14,396 21,320 31,937 29,339
Cashflow from financing activities 22,806 5,519 5,927 2,886 (17,902) (8,230) (7,991) (10,705)
Cash generated/utilised 8,418 3,922 (4,539) 8,452 (4,373) 12,364 23,331 18,255
Net cash at begn. of year 611 9,029 12,951 9,997 17,942 13,520 25,806 48,656
Net cash at end of year 9,029 12,951 9,997 17,942 13,520 25,806 48,656 65,975
Key ratios
Debt/equity (X) 0.8 1.0 1.1 1.1 0.6 0.4 0.3 0.3
Net debt/equity (X) 0.4 0.5 0.8 0.6 0.3 0.1 (0.2) (0.3)
RoAE (%) 12.5 15.6 21.1 22.6 29.0 34.5 37.2 36.8
RoACE (%) 6.5 9.2 9.7 12.0 16.8 22.8 26.7 28.2

Energy India
Exhibit 87: NHPC: Profit model, balance sheet and cash model, March fiscal year-ends, 2009-2015E (Rs mn)
2009 2010 2011E 2012E 2013E 2014E 2015E

Profit model
Net revenues 34,767 52,273 46,080 58,915 67,229 89,268 97,017
EBITDA 23,110 41,290 35,221 46,777 54,196 72,074 77,301
Other income 5,953 6,473 9,009 11,476 11,177 11,921 12,376
Interest expense (7,760) (7,394) (6,253) (12,428) (13,086) (21,996) (19,780)
Depreciation (6,441) (12,827) (10,837) (12,911) (15,287) (18,927) (22,149)
Pretax profits 14,863 27,542 27,140 32,914 37,001 43,072 47,748
Tax (1,552) (3,475) (5,473) (6,633) (7,454) (9,177) (10,275)
Deferred taxation — (1,292) (1,151) (2,591) (1,420) (3,879) (1,371)
Minority interest (1,462) (1,020) (2,153) (2,454) (2,650) (2,596) (2,703)
Net income 11,849 21,756 18,362 21,235 25,478 27,421 33,400
Extraordinary items — — 630 — — — —
Reported profit 11,849 21,756 18,992 21,235 25,478 27,421 33,400
Earnings per share (Rs) 1.1 1.9 1.5 1.7 2.1 2.2 2.7
Balance sheet
Paid-up common stock 111,825 123,007 123,007 123,007 123,007 123,007 123,007
Total shareholders' equity 197,678 251,072 264,331 278,922 296,330 314,984 337,555
Advance against depreciation (AAD) 14,245 15,398 14,255 13,112 11,968 10,825 9,682
Minority interest 14,944 15,895 18,049 20,503 23,152 25,748 28,451
Total borrowings 149,310 163,515 201,389 217,340 215,561 200,693 185,825
Deferred tax liabilities — 2,521 3,672 6,263 7,684 11,562 12,933
Total liabilities and equity 376,177 448,402 501,696 536,140 554,695 563,813 574,446
Net fixed assets 238,323 223,016 222,404 283,631 284,192 387,314 365,165
Capital work-in progress 105,050 140,620 183,888 160,841 170,277 56,824 65,420
Investments 17,912 33,455 12,783 10,219 7,654 5,090 2,525
Miscellaneous expenses not w/o 23 — — — — — —
Cash 26,061 61,895 100,755 97,658 110,942 120,047 153,562
Net current assets (incl. cash) 14,868 51,311 82,621 81,449 92,572 114,585 141,335
Total assets 376,177 448,402 501,696 536,140 554,695 563,813 574,446
Free cash flow

Operating cash flow, excl. working capital 20,964 39,277 31,990 38,048 43,691 51,679 58,479
Working capital changes 1,858 (608) 7,549 (1,925) 2,162 (12,909) 6,765
Capital expenditure (39,545) (33,090) (53,493) (51,091) (25,284) (8,596) (8,596)
Free cash flow (16,723) 5,579 (13,954) (14,968) 20,569 30,174 56,648
Ratios
Net debt/equity (%) 34 33 26 25 23 22 20
Return on equity (%) 6.5 10.3 7.5 8.2 9.2 9.3 10.6
Book value per share (Rs) 17 20 21 22 24 26 28
ROCE (%) 5.7 7.4 5.3 6.3 7.0 8.1 9.0

India Energy
Exhibit 88: OIL: Profit model, balance sheet and cash model, March fiscal year-ends, 2007-2014E (Rs mn)
2007 2008 2009 2010 2011E 2012E 2013E 2014E

Net sales 53,892 60,819 72,414 79,056 95,353 104,077 119,452 117,927
EBITDA 22,280 23,812 28,400 34,486 50,430 56,246 67,538 65,033
Other income 5,335 6,770 9,372 9,371 9,389 9,832 10,969 11,928
Interest (140) (344) (87) (37) (44) (13) — —
Depreciation and depletion (2,595) (3,093) (3,768) (4,811) (9,049) (12,248) (13,822) (15,576)
Pretax profits 24,881 27,145 33,916 39,010 50,726 53,817 64,685 61,385
Tax (7,406) (8,538) (11,910) (11,598) (16,649) (17,420) (20,950) (19,883)
Deferred tax (1,020) (707) (343) (1,211) (201) (41) (37) (33)
Net profits 16,454 17,901 21,663 26,201 33,876 36,356 43,698 41,469
Earnings per share (Rs) 76.9 83.6 101.2 115.3 140.9 151.2 181.7 172.5

Total equity 68,491 79,330 93,310 137,638 158,896 181,279 208,209 233,749
Liability for abandonment cost 11 11 15 19 19 19 19 19
Total borrowings 8,140 1,749 565 375 2,000 — — —
Cash 32,757 42,808 60,700 85,429 95,707 99,574 113,840 127,007
Current assets 22,350 18,957 22,853 37,266 38,349 39,707 42,099 41,862
Investments 4,075 4,887 4,887 8,594 8,594 8,594 8,594 8,594
Deferred expenditure — — — 184 184 184 184 184
Total assets 94,995 107,286 133,801 180,934 204,475 225,576 253,913 279,267

Working capital changes (8,696) 7,435 2,368 (9,113) (626) (681) (1,023) 19
Investments 226 (811) — (3,201) — — — —
Other income 2,892 4,214 5,470 7,268 9,389 9,832 10,969 11,928
Free cash flow 3,409 21,450 26,587 7,091 21,270 19,840 31,034 29,096
Ratios (%)
Debt/equity 11.9 2.2 0.6 0.3 1.3 — — —
Net debt/equity (32.8) (31.9) (31.9) (38.3) (39.4) (36.3) (37.8) (39.4)
RoAE 23.2 21.8 22.8 20.9 21.4 20.1 21.3 17.9
RoACE 23.0 21.5 22.7 20.9 21.3 20.1 21.3 17.9
Key assumptions
Rs/dollar rate 45.3 40.3 45.8 47.4 45.6 45.5 44.0 44.0
Crude fob price (US$/bbl) 64.8 78.9 83.0 67.1 84.0 95.0 90.0 85.0
Ceiling/actual natural gas price (Rs/'000 cm) 3,200 3,200 3,200 3,200 6,783 7,500 7,500 7,500
Subsidy loss (Rs bn) 19.9 23.1 30.2 15.5 26.2 36.2 17.5 15.9

Energy India
Exhibit 89: ONGC: Consolidated profit model, balance sheet and cash model, March fiscal year-ends, 2007-2014E (Rs mn)
2007 2008 2009 2010 2011E 2012E 2013E 2014E

Net sales 966,542 1,091,644 1,200,176 1,070,520 1,291,530 1,535,427 1,630,688 1,606,897
EBITDA 357,906 408,423 419,955 445,845 535,128 625,778 689,975 660,178
Other income 45,378 53,565 50,721 50,409 34,011 41,682 49,603 61,633
Interest 394 (12,027) (5,966) (3,019) (2,840) (2,291) (3,271) (5,697)
Depreciation and depletion (119,550) (138,624) (153,985) (186,838) (197,156) (230,696) (247,872) (243,378)
Pretax profits 284,127 311,338 310,725 306,397 369,143 434,473 488,436 472,736
Tax (88,986) (102,908) (111,333) (95,580) (119,353) (123,388) (137,656) (131,122)
Deferred tax (9,264) (6,471) (3,495) (11,457) (9,136) (8,642) (8,860) (10,787)
Net profits 178,318 203,710 201,719 199,951 260,216 302,444 341,919 330,826
Adjusted net profits after minority interests 181,772 198,963 194,664 196,409 244,580 299,002 338,681 328,508

Total equity 670,137 786,657 929,353 1,024,615 1,142,919 1,323,330 1,523,488 1,713,310
Liability for abandonment cost 151,857 129,325 171,451 174,590 174,590 174,590 174,590 174,590
Total borrowings 21,826 22,039 73,633 61,274 55,790 93,190 109,590 83,990
Total liabilities and equity 1,111,847 1,277,045 1,560,013 1,669,680 1,826,332 2,068,491 2,307,835 2,490,947
Cash 206,262 249,807 224,671 222,348 269,286 339,915 534,355 733,843
Current assets 192,652 257,384 309,514 306,619 308,958 345,594 357,605 361,664
Total fixed assets 643,219 695,227 871,287 986,293 1,088,729 1,223,623 1,256,516 1,236,081
Goodwill 27,686 22,847 111,108 92,455 92,455 92,455 92,455 92,455
Investments 36,888 45,041 36,926 53,551 58,491 58,491 58,491 58,491
Deferred expenditure 5,141 6,739 6,506 8,413 8,413 8,413 8,413 8,413
Total assets 1,111,848 1,277,045 1,560,013 1,669,680 1,826,333 2,068,491 2,307,836 2,490,947

Working capital changes (4,990) (24,929) (109,306) (29,693) 82,358 29,070 64,638 4,044
Investments 53,822 (7,348) (92,159) (11,021) — — — —
Other income 20,422 22,822 31,612 22,154 34,011 41,682 49,603 61,633
Free cash flow 186,976 108,636 (103,668) 75,650 249,274 205,262 382,524 366,092
Ratios (%)
Debt/equity 3.3 2.8 7.9 6.0 4.9 7.0 7.2 4.9
Net debt/equity (27.5) (29.0) (16.3) (15.7) (18.7) (18.6) (27.9) (37.9)
RoAE 25.5 24.9 21.2 18.6 21.9 22.5 22.2 19.0
RoACE 22.1 22.0 18.2 16.1 17.8 20.0 20.0 17.4
Key assumptions
Rs/dollar rate 45.3 40.3 45.8 47.4 45.6 45.5 44.0 44.0
Crude fob price (US$/bbl) 64.8 78.9 83.0 67.1 84.0 95.0 90.0 85.0
Ceiling/actual natural gas price (Rs/'000 cm) 3,200 3,200 3,200 3,200 6,783 7,500 7,500 7,500
Subsidy loss (Rs bn) 170.2 220.0 282.3 115.5 197.5 272.0 131.3 119.9

India Energy
Exhibit 90: Petronet LNG: Profit model, balance sheet and cash model, March fiscal year-ends, 2007-2014E (Rs mn)
2007 2008 2009 2010 2011E 2012E 2013E 2014E

Net sales 55,090 65,553 84,287 106,491 131,973 233,394 272,999 363,099
EBITDA 6,481 8,661 9,013 8,465 12,163 14,111 15,153 19,145
Other income 366 536 765 978 570 443 459 455
Interest (1,070) (1,024) (1,012) (1,839) (1,931) (2,253) (2,538) (4,622)
Depreciation (1,020) (1,022) (1,025) (1,609) (1,847) (1,938) (2,520) (4,593)
Extraordinary items — — — — 110 — — —
Pretax profits 4,756 7,152 7,740 5,995 9,064 10,363 10,553 10,384
Tax (6) (2,185) (2,526) (1,410) (2,650) (2,674) (2,430) (2,078)
Deferred taxation (1,617) (220) (30) (540) (218) (688) (994) (1,292)
Net profits 3,133 4,747 5,184 4,045 6,196 7,001 7,129 7,015

Total equity 12,755 16,185 19,834 22,349 26,802 31,187 35,702 39,884
Deferred taxation liability 2,472 2,692 2,722 3,262 3,480 4,168 5,162 6,453
Cash 3,405 3,586 6,578 3,405 1,540 1,831 1,902 1,736
Current assets 7,478 7,890 11,519 8,811 12,334 19,997 23,257 32,305
Investments 2,780 5,473 3,043 5,386 11,649 11,649 11,649 11,649
Total assets 34,936 43,242 54,295 59,614 74,577 92,356 113,949 121,757

Working capital (710) 1,589 (3,384) 3,026 (395) (958) (674) (3,214)
Capital expenditure (36) (263) (27) (15,757) (8,337) (10,500) (18,830) (3,150)
Investments (1,211) (2,780) 2,462 (2,339) (6,263) — — —
Free cash flow 2,970 5,528 4,429 (9,556) (7,854) (3,537) (11,273) 5,712
Other income 326 (414) 695 452 570 443 459 455
Ratios (%)
Debt/equity 91 84 101 98 106 108 126 104
Net debt/equity 68 65 72 84 101 103 122 100
RoAE 23.6 27.8 25.0 16.8 22.2 21.3 18.7 16.1
RoACE 14.5 17.0 14.7 11.0 13.3 12.5 10.7 10.8
Adjusted CROCI 29.6 33.2 28.7 19.2 24.4 26.8 14.2 15.9
Key assumptions
Contract LNG volume (mn tons) 5.1 4.8 4.8 7.1 7.5 7.5 8.4 10.7
LNG purchase price (FOB) (US$/mn BTU) 3.3 3.7 4.2 4.7 5.7 8.4 9.5 10.4
Base re-gasification charges (US$/mn BTU) 0.58 0.69 0.64 0.65 0.71 0.74 0.81 0.85
Sales price (US$/mn BTU) 4.4 4.9 5.4 5.9 7.1 10.0 11.2 12.3
Rupee/US dollar exchange rate 45.3 40.1 45.8 47.4 45.6 45.5 44.0 44.0

Energy India
Exhibit 91: RIL: Profit model, balance sheet, cash model, March fiscal year-ends, 2007-2014E (Rs mn)
2007 2008 2009 2010 2011 2012E 2013E 2014E

Net sales 1,114,927 1,334,430 1,418,475 1,924,610 2,481,700 3,344,183 3,008,958 2,905,458
EBITDA 198,462 233,056 233,139 305,807 381,260 369,660 381,387 413,133
Other income 4,783 8,953 20,599 24,605 30,520 45,047 43,845 53,810
Interest (11,889) (10,774) (17,452) (19,972) (23,280) (28,683) (11,652) (4,340)
Depreciation & depletion (48,152) (48,471) (51,953) (104,965) (136,080) (97,726) (104,255) (116,422)
Pretax profits 143,205 182,764 184,332 205,474 252,420 288,298 309,324 346,180
Extraordinary items 2,000 47,335 — — — — — —
Tax (16,574) (26,520) (12,634) (31,118) (43,200) (78,829) (90,457) (100,787)
Deferred taxation (9,196) (8,999) (18,605) (12,000) (6,360) 11,855 14,850 15,864
Net profits 119,434 194,580 153,093 162,357 202,860 221,324 233,716 261,258
Adjusted net profits 117,789 152,605 153,093 162,357 202,860 221,324 233,716 261,258

Total equity 673,037 847,853 1,263,730 1,371,706 1,515,400 1,705,542 1,904,612 2,127,759
Deferred taxation liability 69,820 78,725 97,263 109,263 115,623 103,768 88,918 73,054
Minority interest 33,622 33,622 — — — — — —
Total liabilities and equity 1,301,712 1,704,700 2,457,057 2,510,064 2,847,203 2,698,923 2,595,635 2,789,572
Cash 18,449 42,822 221,765 134,626 271,349 267,814 247,310 467,113
Current assets 286,566 402,721 325,358 489,165 644,070 772,512 706,860 681,960
Total fixed assets 899,403 1,081,638 1,693,869 1,653,987 1,555,264 1,282,077 1,264,946 1,263,979
Investments 97,294 177,519 216,065 232,286 376,520 376,520 376,520 376,520
Deferred expenditure — — — — — — — —
Total assets 1,301,712 1,704,700 2,457,057 2,510,064 2,847,203 2,698,923 2,595,635 2,789,572

Working capital (13,075) (31,071) (37,983) (53,015) (16,844) (112,854) 7,970 3,205
Investments (105,760) (78,953) (10,392) 14,206 (144,234) — — —
Other income 4,143 6,132 16,195 22,043 30,520 45,047 43,845 53,810
Free cash flow (197,681) (162,865) (104,800) (13,587) 112,155 137,026 234,404 259,129
Ratios (%)
Debt/equity 44.8 53.2 54.3 42.2 41.3 18.3 5.1 5.0
Net debt/equity 42.3 48.6 38.0 33.1 24.7 3.5 (7.3) (16.2)
RoAE 20.3 18.9 13.6 11.8 13.1 12.9 12.3 12.4
RoACE 13.9 12.7 11.2 9.3 10.4 10.4 10.7 11.3
"I, Sanjeev Prasad, hereby certify that all of the views expressed in this report accurately
reflect my personal views about the subject company or companies and its or their securities.
I also certify that no part of my compensation was, is or will be, directly or indirectly, related
to the specific recommendations or views expressed in this report."

India Energy
Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional
70%
Equities, within the specified category.
60%
Percentage of companies within each category for which
Kotak Institutional Equities and or its affiliates has provided
50%
investment banking services within the previous 12 months.
40% * The above categories are defined as follows: Buy = We

32.3% expect this stock to outperform the BSE Sensex by 10%
30% 28.0% over the next 12 months; Add = We expect this stock to
26.8%
outperform the BSE Sensex by 0-10% over the next 12
months; Reduce = We expect this stock to underperform
20% the BSE Sensex by 0-10% over the next 12 months; Sell =
12.8% We expect this stock to underperform the BSE Sensex by
10% more then 10% over the next 12 months. These ratings are
4.3% 4.3% 3.0% used illustratively to comply with applicable regulations. As
0.0% of 31/03/2011 Kotak Institutional Equities Investment
0% Research had investment ratings on 164 equity securities.
BUY ADD REDUCE SELL
Source: Kotak Institutional Equities As of March 31, 2011
Analyst coverage
Sanjeev Prasad, the lead analyst in this report, also covers the following companies
Company Name Ticker

Aban Offshore ABAN.BO
Bharat Petroleum BPCL.BO
Cairn India CAIL.BO
Castrol India CAST.BO
GAIL (India) GAIL.BO
Gujarat State Petronet GSPT.BO
Hindustan Petroleum HPCL.BO
Indian Oil Corp. IOC.BO
Oil & Natural Gas Corporation ONGC.BO
Oil India OILI.BO
Petronet LNG PLNG.BO
Reliance Industries RELI.BO
Source: Kotak Institutional Equities research

Disclosures
Ratings and other definitions/identifiers

Definitions of ratings
BUY. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months.
ADD. We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months.
REDUCE. We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months.
SELL. We expect this stock to underperform the BSE Sensex by more than 10% over the next 12 months.
Our target price are also on 12-month horizon basis.
Other definitions
Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.
Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s)
and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving
this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and
should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

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Copyright 2011 Kotak Institutional Equities (Kotak Securities Limited). All rights reserved.
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communications with a subject company, public appearances and trading securities held by a research analyst account.
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our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking
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Energy CAUTIOUS

Deficit in Indian energy: Low domestic supply to continue to compel imports

Demand: Determined growth driven by GDP growth, pricing and policy

Overview: Rising energy deficit, no solutions in sight ..............................3

Oil: No help here ..................................................................................13

Gas: Supply and pricing are issues ........................................................21

Coal: Domestic coal production faces challenges..................................30

Hydropower: Large potential but ground realities differ .......................40

Economy: Severe challenges from rising energy deficit .........................44

Appendix: Financial summaries of companies .......................................50

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

OVERVIEW: RISING ENERGY DEFICIT, NO SOLUTIONS IN SIGHT

Rising energy deficit

Exhibit 1: India’s dependence on imported energy to increase further

Source: Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Exhibit 3: India is not blessed with natural resources (except coal)

Oil (bn bbls) Natural gas (tcm) Coal (bn tons)

Source: BP Statistical Review 2009, Kotak Institutional Equities

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 4: Share of coal in India’s energy mix is likely to increase

Petroleum Petroleum Petroleum

Source: Kotak Institutional Equities estimates

Exhibit 5: India has large unexploited quantities of coal

Source: Ministry of Coal, Kotak Institutional Equities

` Hydroelectricity. We expect only 15 GW of new hydropower generation capacity in

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

Rising imports to lead to massive import bill and pressure on CAD

Source: Kotak Institutional Equities estimates

Exhibit 7: Value of fuel imports carry significant upside risk

Source: Kotak Institutional Equities estimates

Stocks: Own resource owners

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Average realization of CIL (Rs/ton)

2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E

Source: CIL, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

KG-DWN-98/3 (KG D-6) NEC-OSN-97/2 (NEC-25) KG-DWN-2003/1 (KG D-3)

2003 2004 2005 2006 2007 2008 2009 2010

Source: Company, Kotak Institutional Equities

8 KOTAK INSTITUTIONAL EQUITIES RESEARCH

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E

Source: Company data, Kotak Institutional Equities estimates

2007 2008 2009 2010

Source: Company, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 9

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E

Source: Company data, Kotak Institutional Equities estimates

Gross proved and Gross proved and Net proved and

Source: Company, Kotak Institutional Equities

10 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Exhibit 16: NHPC to reach 9.7 GW of installed capacity by FY2017E

Exhibit 17: Mundra Port’s fuel imports set to rise sharply

2009 2010 2011E 2012E 2013E 2014E 2015E

Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH 11

Exhibit 18: We model Petronet’s volumes ramping up to 11 mtpa by FY2013E

Source: Kotak Institutional Equities estimates

12 KOTAK INSTITUTIONAL EQUITIES RESEARCH

OIL: NO HELP HERE

Demand for oil will grow at a steady pace

Source: Industry, Kotak Institutional Equities estimates

(mn units) Passenger car sales Two-wheeler sales

Availability of alternative fuels. We believe imported coal will be preferred over