Motilal Oswal expects higher GRM and auto fuel margins to benefit oil marketing companies in Q4FY15

1. April 2015 213
GRM’s high, under recoveries at 6 year low
Diesel/Petrol marketing margins trending higher; await subsidy clarity
n 4QFY15 subsidy is expected to decline ~81% YoY and ~53% QoQ led by lower oil price
and diesel deregulation.
n Expect refiners to report high profits led by uptick in GRM and largely flat crude prices
leading to minimal/nil inventory impact. Nevertheless, oil PSU profitability will be
determined by the subsidy sharing and await clarity and rationalization of the same.
n RIL’s standalone PAT is expected to be up 6% YoY to ~INR60b led by higher GRM.
Expect OMC’s to report higher operating profits led by higher GRM and higher auto
fuel marketing margins.
Crude largely flat in 4QFY15, model nil subsidy for PSU upstream in 4QFY15
n Unlike 3QFY15, the crude price opening and closing price is largely flat, hence
refiners will not have any adverse impact of inventory movement.
n We exp ect 4 QFY15 u nder r ecoveries t o d ecline ~ 81% Yo Y a nd ~5 3% Q oQ to
~INR75b led by low oil price and diesel deregulation (nil loss in 4QFY15).
n Similar t o previous years, oil P SUs’ p rofitability for 4QFY15 s hall remain
dependent o n s ubsidy s haring. W e m odel n il s ubsidy s haring f or u pstream
companies in 4QFY15.
On QoQ basis, GRM up 36% QoQ to USD8.6/bbl; Polymer spread down QoQ
n Regional benchmark, Reuters Singapore GRM was up 38% YoY and 36% QoQ to
average at USD8.6/bbl led by higher gasoline, naphtha and FO cracks.
n On th e p etchem f ront, except P VC, a ll th e major polymer ( PE an d P P) an d
polyester (POY, PSF) were down on QoQ basis.
Exhibit 1: Expected quarterly performance summary (INR m)
Sector CMP Sales (INR m) EBDITA (INR m) Net Profit (INR m)
(INR)
06.04.15
Reco. Mar-15
Var %
YoY
Var %
QoQ
Mar-15
Var %
YoY
Var %
QoQ
Mar-15
Var %
YoY
Var %
QoQ
Oil & Gas
BPCL 802 Buy 431,247 -42.3 -25.5 31,814 -49.7 182.0 17,595 -56.8 219.2
Cairn India 221 Neutral 28,758 -43.0 -17.9 15,935 -58.5 -27.0 8,987 -70.4 -33.4
GAIL 399 Neutral 131,836 -8.9 -11.7 12,410 -7.2 30.6 7,543 -22.4 34.8
Gujarat State Petronet 124 Neutral 2,471 7.2 1.8 2,269 13.6 11.8 1,007 10.2 13.6
HPCL 655 Buy 397,739 -38.0 -22.1 26,920 -54.2 LP 14,717 -68.1 LP
IOC 374 Buy 923,639 -31.4 -13.6 80,126 -40.4 LP 53,774 -42.7 LP
Indraprastha Gas 411 Neutral 9,432 -2.4 0.2 1,905 -0.1 1.0 1,003 10.8 -7.3
MRPL 72 Neutral 104,424 -45.4 -29.0 8,744 140.9 LP 6,490 -39.2 LP
Oil India 459 Buy 27,205 49.1 32.0 11,045 211.6 113.0 8,896 57.3 78.5
ONGC 317 Buy 213,362 2.2 14.0 115,883 4.0 23.3 63,685 30.3 78.3
Petronet LNG 178 Neutral 97,564 -6.4 -12.9 3,481 -10.0 2.1 1,494 -11.8 -8.0
Reliance Inds. 824 Neutral 763,715 -19.8 -4.8 85,894 3.1 19.2 59,863 6.3 17.7
Sector Aggregate 3,131,391 -29.1 -13.6 396,425 -23.5 121.1 245,054 -29.1 238.9
Excl. RMs 1,378,766 -18.0 -5.9 257,565 -1.5 31.9 158,968 -3.7 66.8
Source: MOSL
Oil & Gas
Harshad Borawake (HarshadBorawake@MotilalOswal.com)
March 2015 Results Preview | Sector: Oil & Gas
Company name
BPCL
Cairn India
GAIL
Gujarat State Petronet
HPCL
Indraprastha Gas
IOC
MRPL
Oil India
ONGC
Petronet LNG
Reliance Industries

2. April 2015 214
n Brent c rude a verage f or th e q uarter declined 5 0% Y oY a nd 29% QoQ to
USD54/bbl led by continued OPEC stance of maintaining its production quota
and subdued demand trend. YoY and QoQ decline in Light-Heavy differentials
would lower the premium for complex refiners.
Auto fuel marketing margins trending higher v/s regulated period
n Post d iesel d eregulation on O ctober 18, 2014 O MC’s h ave b een a ble to
consistently earn higher marketing margin.
n We estimate average diesel marketing EBITDA at INR1.9/ltr in 4QFY15 v/s earlier
regulated E BITDA o f I NR0.7/ltr. Giv en t he e conomics o f p rivate p layers ( new
marginal p layers) and g lobal margin t rend, e arning ad ditional I NR0.5-1/ltr
marketing margin consistently on diesel should be possible for PSU OMC’s.
n For subsidy s haring i n FY15/FY16/FY17, w e m odel O MCs’ s hare at ~ 3%,
upstream at 57%/30%/30% (v/s 48% in FY14) and lower government share at
41%/67%/67% ( v/s 5 1% i n F Y14). A ny v ariation in t his would impact o ur
estimates for oil PSUs.
Valuation and view
n After auto fuel deregulation and gas price hike, other key reforms to watch out
are ( a) s ubsidy reduction in L PG/kero through d irect b enefit transfer a nd ( b)
subsidy sharing and its likely rationalization.
n In t he b ackdrop of lo wer oil p rice re gime an d h igher m arketing margins, w e
retain HPCL/BPCL as our top picks. While ONGC and OINL’s earnings revival is
contingent on oil price increase, we remain positive due to attractive valuations
and likely lower subsidy sharing. Maintain Neutral on GAIL due to headwinds for
gas availability and profitability concerns on new petchem capacity .
n Maintain N eutral on C airn I ndia, led by l ikely s ubdued o il p rice a nd d elay i n
production ramp-up. While R IL c ould g ive s ome s hort t erm o utperformance,
maintain Neutral on RIL, as the next earnings growth phase is still some time
away – we b elieve F Y17/FY187, wh en i ts n ew core b usiness c ommission,
however, await clarity on its telecom business plans.
Exhibit 2: Comparative valuation
Sector / Companies CMP Reco. EPS (INR) PE (x) EV/EBIDTA (x) ROE (%)
(INR) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E
Oil & Gas
BPCL 802 Buy 54.6 63.6 73.4 14.7 12.6 10.9 9.0 8.0 7.2 19.1 19.6 19.9
Cairn India 221 Neutral 38.7 16.1 19.0 5.7 13.7 11.6 2.5 4.6 3.0 12.2 4.9 5.7
GAIL 399 Neutral 25.5 28.3 33.7 15.6 14.1 11.9 11.7 9.1 7.7 11.4 11.8 13.0
Gujarat State Petronet 124 Neutral 6.9 8.8 9.7 18.1 14.1 12.8 8.5 8.0 7.5 12.7 12.7 12.6
HPCL 655 Buy 60.3 63.0 73.1 10.9 10.4 9.0 9.3 9.0 8.3 13.0 12.5 13.4
Indraprastha Gas 411 Neutral 31.6 34.4 37.9 13.0 12.0 10.9 7.0 6.1 5.3 23.0 21.2 19.9
IOC 374 Buy 12.0 38.3 41.7 31.0 9.8 9.0 16.5 7.9 6.9 4.2 12.8 12.5
MRPL 72 Neutral -12.7 9.7 11.8 - 7.4 6.1 -7.1 5.5 5.1 -37.5 31.0 29.7
Oil India 459 Buy 47.4 59.2 73.3 9.7 7.8 6.3 7.4 5.7 4.3 13.3 15.3 17.3
ONGC 317 Buy 26.0 30.5 39.4 12.2 10.4 8.0 5.0 4.6 3.8 12.4 13.4 15.7
Petronet LNG 178 Neutral 9.8 11.3 13.9 18.2 15.7 12.8 10.0 9.1 7.3 13.9 14.4 15.7
Reliance Inds. 824 Neutral 80.1 83.7 104.0 10.3 9.8 7.9 8.9 8.5 6.2 11.3 10.8 12.3
Sector Aggregate 12.9 10.8 8.8 7.7 6.6 5.3 10.5 11.5 12.8
Ex RMS 11.9 10.8 8.6 6.7 6.2 4.9 11.0 11.1 12.7
Source: MOSL
Relative Performance-3m (%)
Relative Performance-1 Yr (%)
92
95
98
101
104
Jan-15
Feb-15
Mar-15
Apr-15
Sensex Index
MOSL Oil & Gas Index
90
102
114
126
138
Apr-14
Jun-14
Aug-14
Oct-14
Dec-14
Feb-15
Apr-15
Sensex Index
MOSL Oil & Gas Index
March 2015 Results Preview | Sector: Oil & Gas

3. April 2015 215
On QoQ basis, GRM up 38%, Brent down 29%, Light-heavy spreads lower
Exhibit 3: Brent crude price was down 29% QoQ and 50% YoY
(USD/bbl)
Source: Bloomberg, MOSL
Exhibit 4: Premium of Brent over WTI up QoQ to USD5.4/bbl
in 4QFY15
Source: Bloomberg, MOSL
Exhibit 5: Reuters Singapore GRM was up 38% YoY and 36%
QoQ to average at USD8.6/bbl
Source: Bloomberg, MOSL
Exhibit 6: Gasoline, Naphtha and FO cracks up QoQ in 4QFY15
(USD/bbl)
Source: Bloomberg, MOSL
Exhibit 7: Arab Light-Heavy differential declined in 4QFY15
(USD/bbl)
Source: Bloomberg, MOSL
0
20
40
60
80
100
120
140
4QFY03 4QFY05 4QFY07 4QFY09 4QFY11 4QFY13 4QFY15
Brent Crude Price (USD/bbl)
(5)
0
5
10
15
20
25
4QFY03 4QFY05 4QFY07 4QFY09 4QFY11 4QFY13 4QFY15
Brent less WTI (USD/bbl)
0
2
4
6
8
10
4QFY03 4QFY05 4QFY07 4QFY09 4QFY11 4QFY13 4QFY15
Reuters Singapore GRM (USD/bbl)
(40)
(30)
(20)
(10)
0
10
20
Gasoline
Naphtha
LPG
Diesel
Jet/Kero
FuelOil
4QFY14 1QFY15 2QFY15 3QFY15 4QFY15
(2)
-
2
4
6
8
10
4QFY03 4QFY05 4QFY07 4QFY09 4QFY11 4QFY13 4QFY15
Brent - Dubai Arab L-HInUSD/bbl
Our key assumptions
n Our crude price assumptions fo r FY15/16/17 are
USD86/60/70/bbl and USD70/bbl over long term.
n We expect regional benchmark Singapore Reuters
GRM to remain in t he USD6-8/bbl range for t he
near t erm w ith d ownward b ias, g iven it s lo ng
term trend with crude prices.
March 2015 Results Preview | Sector: Oil & Gas

4. April 2015 216
Exhibit 8: Except PVC, Polymer and Polyester margins decline QoQ (INR/kg)
RIL Basic prices Simple Spreads Int.Spreads
In INR/kg PE PP PVC POY PSF PE PP PVC POY PSF
3QFY13 89.4 92.2 62.0 94.0 98.3 37.9 40.7 10.6 53.2 57.5
4QFY13 93.0 97.9 63.5 97.3 101.4 40.6 45.4 11.1 55.8 59.9
1QFY14 92.5 95.9 63.3 95.0 96.3 44.3 47.7 15.2 56.9 58.1
2QFY14 104.4 109.7 72.8 107.2 107.9 46.6 51.9 15.0 61.4 62.1
3QFY14 107.6 109.8 72.3 103.4 106.0 48.4 50.6 13.1 56.3 58.9
4QFY14 112.3 113.0 74.3 97.9 100.9 53.9 54.6 15.9 51.4 54.4
1QFY15 109.0 107.7 77.0 97.7 97.6 51.4 50.1 19.5 51.8 51.7
2QFY15 113.0 110.3 79.4 102.9 103.6 57.1 54.4 23.5 58.5 59.2
3QFY15 109.3 107.0 70.0 92.7 92.4 68.4 65.8 27.7 58.3 58.4
4QFY15 90.7 84.3 63.7 80.6 79.8 60.1 53.8 33.2 56.6 55.8
QoQ (%) -17.1% -21.2% -8.9% -13.0% -13.6% -13.0% -19.4% 11.6% -7.2% -8.1%
YoY (%) -19.3% -25.4% -14.2% -17.6% -20.9% 11.6% -1.4% 108.8% 10.2% 2.6%
Source: Company, MOSL
Exhibit 9: Polymer spreads in 4QFY15 (INR/kg)
Source: Bloomberg, Company
Exhibit 10: Intg. POY/PSF spreads decline (INR/kg)
Source: Bloomberg, Company
Exhibit 11: 4QFY15 under-recoveries down QoQ at INR75b; we model upstream share at 57%/30%/30% in FY15/16/17E
(INR b) FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Fx Rate (INR/USD) 45.2 40.3 46.0 47.5 45.6 47.9 54.5 60.6 61.1 63.0 64.0
Brent (USD/bbl) 64 82 85 70 86 114 111 108 86 60 70
Product-wise Gross Under recoveries (INR b)
Petrol 20 73 52 52 27 0 0 0 0 0 0
Diesel 188 353 523 93 348 819 915 628 109 0 0
Kerosene 179 191 282 174 200 278 296 306 249 153 179
LPG 107 156 176 143 205 284 399 465 386 171 313
Total 494 773 1,033 461 780 1,385 1,610 1,399 745 324 493
Sharing of Gross Under recoveries (INR b)
Government 241 353 713 260 410 829 1,000 707 302 217 330
Upstream 205 257 329 145 303 552 600 671 428 97 148
OMC's 48 163 (9) 56 67 0 10 21 15 10 15
Total 494 773 1033 461 780 1,385 1,610 1,399 745 324 493
Sharing of Gross Under recoveries (%)
Government 49 46 69 56 53 60 62 51 41 67 67
Upstream 42 33 32 31 39 40 37 48 57 30 30
OMC's 10 21 (1) 12 9 0 1 2 2 3 3
Total 100 100 100 100 100 100 100 100 100 100 100
Source: Company, MOSL
0
20
40
60
80
4QFY03 4QFY05 4QFY07 4QFY09 4QFY11 4QFY13 4QFY15
PE PP PVC
20
40
60
80
4QFY03 4QFY05 4QFY07 4QFY09 4QFY11 4QFY13 4QFY15
POY PSF
December 2014 Results Preview | Sector: Oil & GasMarch 2015 Results Preview | Sector: Oil & Gas

5. April 2015 217
Exhibit 12: Petrol and diesel price difference (INR/litre)
Source: PPAC, MoPNG, MOSL
Exhibit 13: Diesel into over recovery zone post deregulation
Source: PPAC, MoPNG, MOSL
Exhibit 14: With likely nil subsidy, model ONGC’s net
realization for 4QFY15 at USD55/bbl
Source: Company, MOSL
Exhibit 15: Expect lower LNG volumes in 4QFY15
Exhibit 1: (mmscmd)
Source: Company, MOSL
Exhibit 16: Expect RIL GRM to benefit with higher gasoline ad
naphtha cracks (USD/bbl)
Source: MOSL, Company
Exhibit 17: Cairn’s Rajasthan production likely to remain low
in 4QFY15 (kbpd)
Source: MOSL, Company
0
10
20
30
40
Mar-07 Mar-09 Mar-11 Mar-13 Mar-15
Petrol-Dieselprice
difference(INR/ltr)
(15)
(12)
(9)
(6)
(3)
0
3
6
1QFY10 Feb-12 Nov-12 Aug-13 May-14 Feb-15
Diesel (under)/over recovery (INR/ltr)
48
63
65
39
48
83
45
44
47
47
48
51
40
45
46
33
47
41
36
55
33
16
24
70
73
33
67
77
63
63
62
63
63
64
62
74
62
61
40
81
79
89
109
121
116
111
122
110
110
110
114
103
109
108
107
109
102
76
55
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4QE
FY11 FY12 FY13 FY14 FY15
Net Realization Subsidy Burden Gross Realization
36 33
29
24
19
15 14 12 14 13 13 12 11
42 40 42 44
38 40 38 38
36
43
46
44 41
31 31 29 27
22 22 21 20 21 22 25 23 23
116
110
106 105
100 99
95 96 95
97
91
94 96
6 0 . 0
7 0 . 0
8 0 . 0
9 0 . 0
1 0 0 . 0
1 1 0 . 0
1 2 0 . 0
4QFY12 2QFY13 4QFY13 2QFY14 4QFY14 2QFY15 4QFY15
RIL KG-D6 PLNG GSPL GAIL India
5 4 6 7 9 9 8 8 7
9
7
9 7 5 4 6 6 5 6
9
2 4
4 2
2 1
(1)
1
3
1
2 2 3
3 3 4 1
1
7.3
7.9
9.0
9.2
10.3
10.1
6.8
7.6
7.6
9.5
9.6
10.1
8.4
7.7
7.6
9.3
8.7
8.3
7.3
9.8
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4QE
FY11 FY12 FY13 FY14 FY15
Singapore GRM Premium / (Disc) RIL GRM
118
125
125
125
138
167
172
170
169
173
175
186
191
183
163
180
178
4QFY11
1QFY12
2QFY12
3QFY12
4QFY12
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
4QFY14
1QFY15
2QFY15
3QFY15
4QFY15
Rajasthan Gross oil Production (kbpd)
March 2015 Results Preview | Sector: Oil & Gas

6. 9 April 2015 4
Metals | Coal auction
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