India upstream PSUs

EQUITY: OIL & GAS/CHEMICALS

Declines in oil prices weaken outlook

Global Markets Research

Risk-reward still favourable for ONGC/OIL at new oil
assumptions; low oil for long a negative

15 January 2015

Earnings/TPs down on lower oil price assumptions; new subsidy formula
remains the key, but we think risk-reward still favourable for ONGC/OIL
Our oil & gas team has lowered its base case oil price assumptions to
USD60/bbl Brent for 2015, rising to USD80/bbl in the medium term (earlier:
USD85 for 2015, and USD90 thereafter). Lower oil assumptions are certainly
negative for upstream producers ONGC/OIL. But, as we highlighted in our
report last month, the weak oil price may be a blessing in disguise for
upstream operators. With oil now below USD50/bbl, the current USD56/bbl
formula simply cannot work. An early decision on subsidies is key for the
revival of investor interest ahead of ONGC’s planned follow-on offer.
At fixed INR300bn GoI support, expect 12-13% EPS CAGR for ONGC/OIL
The government is well aware of the issues, and appears to be working on an
early decision on subsidies. But high volatility of oil/INR makes the decision
difficult. We think the formula will have to be such that ONGC/OIL’s earnings
are not impacted much at the current very low oil prices. As oil recovers, we
think upside will accrue. We assume fixed govt compensation of INR300bn for
FY15-17F, and expect three-year earnings CAGRs of 12-13% for ONGC/OIL.
We highlight that a fixed outgo of INR300bn should not be difficult (the outgo
was much higher in FY13/14, at INR1000/708bn). Also, annual gains from the
recent three excise duty hikes alone are above INR500bn.

Anchor themes
While further declines in oil
prices have weakened the
outlook, the risk-reward still
looks favourable for ONGC /
OINL. In our base case, we
continue to prefer upstream
over downstream PSUs.
Nomura vs consensus
We are more positive on
upstream PSUs than
consensus.
Research analysts
India Oil & Gas/Chemicals
Anil Sharma - NFASL
anil.sharma.1@nomura.com
+91 22 4037 4338
Ravi Adukia, CFA - NFASL
ravikumar.adukia@nomura.com
+91 22 4037 4232

We continue to prefer upstream over OMCs in base case
In our base case, we assume oil prices of USD60/70/80/bbl for FY16/17/18F.
We also mark to market forex and assume reduced capex and costs to reflect
a weaker macro environment. Our earnings for ONGC/OIL fall by 8-12%, and
we cut TPs by 8% for Oil India and 13% for ONGC. In our base case of oil
price recovery, we continue to prefer upstream over downstream PSUs.
Among upstream, our preference remains for ONGC over Oil India.
In bear case LT USD60/bbl, we would prefer downstream over upstream
In a bear case of USD50/bbl in FY16 and flat at USD60/bbl thereafter, we
would expect further 14-16% cuts in FY16 earnings and 1-6% cuts in FY17
earnings. While subsidy support would likely ensure not much of a decline in
domestic oil realisations, earnings would be impacted due to lower realisation
in condensates and the overseas business. Also, in a low price environment,
our expectations of growth would reduce. In a low oil price scenario, our
preference would be for downstream oil marketers, as concerns on fuel underrecoveries would further reduce. While the earnings impact would not be much
for OMCs, we think the sentiment in a low-price environment would get better.
Fig. 1: Stocks for action
Com pany

Code

Rating

ONGC

ONGC IN Buy

Oil India

OINL IN

Buy

M. Cap

Avg. TO

Target

Price

(USDm n)
47,923

(USDm n)

Price

12-Jan

%

30.6

410

348

18%

3.7

650

551

18%

5,335

Upsides

Source: Nomura research. Note: Share prices are as of 12 January 2015 close.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | India upstream PSUs

15 January 2015

Contents
Summary ................................................................................................3 
Lower oil price weakens outlook .............................................................4 
Lower oil price assumptions ......................................................................... 4 
Under-recovery estimates decline further ..................................................... 4 
High sensitivity of under-recoveries to oil price ............................................. 5 

Subsidy clarity key; we are optimistic......................................................6 
Early subsidy decision key for revival of investor interest .............................. 6 
New subsidy formula will have to be remunerative at current oil price; upsides
will be higher when oil recovers.................................................................... 6 
We assume government subsidy of INR300bn; balanced by upstream ......... 6 
Risk-reward remains favourable at new oil assumptions ............................... 8 
Bear case: What if oil remains low for longer ................................................ 9 

New government’s focus on “delivery” and “efficiency” seems to be
paying off..............................................................................................10 
Oil and Natural Gas ..............................................................................11 
Oil India ................................................................................................15 
Appendix A-1 ........................................................................................19 

2

Nomura estimates Fig.2 7.6) (2.9 Buy Buy 410 OINL IN 551 5. Source: Bloomberg.8 8.2) (16.8) (3. 3: Upstream oil PSUs – key market information Name Ticker ONGC Oil India Market price No.5) (7.9 (3.6 472-264 OINL IN 551 601 5.5) Rel.1 (0.5) 6m 8. 4: Upstream oil PSUs – summary valuations P/E(x) EV/EBITDA(x) Price/Book(x) FY14 FY15F FY16F FY17F FY14 FY15F FY16F FY17F FY14 FY15F FY16F FY17F Dividend Yield FY14 FY15F FY16F FY17F ONGC 11. of o/s shares (mn) M Cap (USDbn) Free Float FII holdings 3M TO (USDmn) 52W H/L ONGC IN 348 8555 47.1) (11.3 23.5) (1. Nomura estimates 3 . Nomura estimates Fig.6 10.9 3. local m arket (%) 12m 4.5) (7.4 BSE Sensex 0.0) (22.9) 11.0 8.7) (1.7) (3.0 18.Nomura | India upstream PSUs 15 January 2015 Summary Fig.8) (18.732 1.5 12m ytd 34.9 13.0) (3.2 30.4) 1m 0.5 4.9 (9.6) (5.3 7.2 11.7 4.7 2.8) 13.7 31.4) (12.1 1.5) (14.3 Pricing as of 12 January 2015.7 5.863 578 592 691 756 265 262 331 372 31 31 39 43 92 95 117 120 36 37 54 56 29 28 40 42 49 47 67 70 Source: Company data.0) 13.4 4. 6: Upstream oil PSUs – absolute and relative stock performance Absolute local (%) Com pany ONGC 1m 0.7 8.9) (10. 5: Upstream oil PSUs – summary financials INRbn ONGC Oil India Revenue (INRbn) EBITDA (INRbn) PAT (INRbn) EPS (INR/sh) FY14 FY15F FY16F FY17F FY14 FY15F FY16F FY17F FY14 FY15F FY16F FY17F FY14 FY15F FY16F FY17F 1.7 668-439 Pricing as of 12 January 2015.5 1.4 9.726 1. Nomura estimates Fig.6 0.3 2.4 1.4 1.2 3.7 1.5 Pricing as of 12 January 2015.9 3m 6m (16. MSCI Oil & Gas (%) ytd 1m 3m (0.1) ytd 16. Source: Bloomberg.4) (14. Source: Bloomberg.3 4. Nomura estimates Fig.5 Oil India (1.6 2.6 5. Nomura estimates Fig.6 (6.5) (13.9 29.2 30.0 (1.8) (2.9 3.6) (14.668 1.5 3. 7: Nomura vs.5 Oil India 11.0 3m 6m 12m (20.4 1. Source: Bloomberg.1) Rel.9) 0.7 3. 2: Upstream oil PSUs – summary of our rating and target price revisions Company ONGC Oil India Rating TP (INR/sh) Price (INR/sh) Market Cap (USDbn) New Old New Old ONGC IN 348 47.6 1. consensus Consensus INR ONGC Oil India Nomura TP FY16F EPS Rating TP FY16F EPS ONGC IN 444 40 Buy 410 39 OINL IN 681 71 Buy 650 67 Source: Bloomberg.3 11.2 5.4) (12.8 8.3 Buy Buy 650 Ticker Upsides Valuation Method 470 18% P/B 710 18% P/B Pricing as of 12 January 2015.5 9.5 5.1) Average (0.6 1.0 5.

14 Jan 2015) Under-recovery estimates decline further With our lower oil price assumptions partly offset by a weaker currency.4trillion in the last fiscal year (FY14).4 61.3 63. Fig.8 93. These include: 1) a change in Saudi policy on market share. our underrecoveries estimate declines to INR744bn in FY15F (47% y-y decline) and INR345bn in FY16F (54% y-y decline).0 63.399 23 100 241 402 744 12 145 201 345 5 168 298 466 7 190 408 598 9 Source: PPAC. (For more details on our latest oil price view. please see our European oil team’s note: EU Big Oil .610 30 628 306 465 1.385 29 921 294 396 1. while ensuring there is no quick rebound in volumes from unconventional plays. 9: Our fuel under-recoveries estimates FY11 Brent price (USD/bbl) 86. discounting USD 75-80/bbl. and 4) a marked slowdown in growth and/or acceleration in decline rates from the key unconventional tight oil basins in North America.6 54.0 63. and USD90 thereafter). rising to USD80/bbl in the medium term (earlier USD85 for 2015.7 Exchange rate (INR/USD) 45. An effective ‘do nothing’ statement at November’s OPEC meeting was a clear signal but there could be a tail event risk that the Kingdom chooses to increase production in the long run to maintain OPEC leadership against rising volumes particularly from Iraq or Iran.5 47. Nomura estimates 4 . 3) an unprecedented level of co-ordination between OPEC and key non-OPEC members including Russia and Mexico.USDbn 17 FY12 114.8 60.Nomura | India upstream PSUs 15 January 2015 Lower oil price weakens outlook Lower oil price assumptions Our oil & gas team has lowered its base case oil price assumption to USD60/bbl Brent for 2015.0 70.0 80.7 85.INRbn 782 Total .0 812 274 300 1.6 Gross under-recoveries (INRbn) Diesel 344 PDS Kerosene 196 Domestic LPG 220 Total .9 FY13 110. In the nonOPEC world.4 FY14 FY15F FY16F FY17F FY18F 107. Our team believes that the market continues to under-appreciate Saudi Arabia’s determination to protect its market share on a more medium-term basis. from INR1. deflation trends in contractor costs. 8: Our new oil price assumptions FY15F Brent oil (USD/bbl) FY16F FY17F FY18F New Old New Old New Old New Old 85.0 60. alongside weaker currencies also place meaningful downward pressure on perceptions of the back-end of the curve. We now estimate a sharp 75% y-y decline in FY16F underrecoveries. 2) better-than-expected economic data points translating into improved oil demand (underlying rather than seasonal).Not cheap enough. Fig. raw material and labour costs.5 60 85 70 90 80 90 Source: Nomura estimates Where could we be wrong? We point to a number of upward risks.

Nomura | India upstream PSUs 15 January 2015 High sensitivity of under-recoveries to oil price The underlying oil prices and exchange rate are key determinants of under-recoveries. We estimate: • Each USD5/bbl increase in oil price increases under-recoveries by INR58bn. 10: Under-recovery estimates are highly sensitive to oil prices Each USD5/bbl decline in oil price reduces under-recoveries estimate by INR58bn Brent (USD/bbl) 40 50 60 70 80 90 Under-recoveries 115 230 345 461 576 692 - - - - - - . Fig.Kerosene 77 111 145 178 212 246 . • Each INR appreciation in INR/USD reduces under-recoveries by INR13bn.LPG 38 120 201 282 364 445 .Diesel Source: Nomura estimates 5 .

Nomura | India upstream PSUs 15 January 2015 Subsidy clarity key. and the government will have to decide fast. upstream companies and the downstream marketers. Also. Among the proposals that were under consideration: • fixed government LPG subsidy of 20/kg. we are optimistic Early subsidy decision key for revival of investor interest The mechanism of under-recovery sharing has largely been very ad-hoc and nontransparent in recent years. But. The annual subsidy of INR300bn is 70% less than the peak payout of INR1000bn in FY13. the current USD56/bbl subsidy formula cannot work. it will likely result in upside when oil prices gradually recover. We expect a decision ahead of the 3QFY15 results. and thus the payout of INR300bn for under-recoveries should not be difficult. Over the past three years. if the formula is remunerative at current prices. and as at the end-of year the government further increased the upstream subsidy burden. an actual share of 51-62% over the past four years. 6 . and the largely declining trend in oil prices has meant that upstream’s net realisations have been falling. vs. This implies effective government under-recovery sharing of 40-87% in FY15-17F. On an absolute basis. New subsidy formula will have to be remunerative at current oil price. it will have to ensure that the subsidy formula is not burdensome. and high volatility of exchange rates. we believe there is a pressing need to re-visit the USD56/bbl upstream subsidy formula. The delayed decisions and further delayed payments exacerbated the subsidy sharing problem. the current mechanism of USD56/bbl cannot sustain for long. We think our assumption of INR300bn is conservative. and • 50:50 sharing among govt and upstream. and thereafter. we assume fixed government support of INR300bn. and subsidy share was increased to USD59/bbl in FY14. balanced by upstream While a formal announcement on subsidy sharing is imminent. Also. With oil now below USD50/bbl. The decline was higher in FY14F. as we note above. our numbers assume a sharp 58% decline in the government share in FY15F to INR300bn (from INR708bn in FY14) and staying constant at INR300bn over FY16-17F. the government is working on several options to determine subsidy sharing. as the government is considering a follow-on offer for ONGC soon. Volatile oil prices. We assume government subsidy of INR300bn. We forecast oil prices will rise from USD60/bbl in 2015 to USD70/bbl in 2016 and USD80/bbl in 2017. we highlight that from recent increases in the excise duties on diesel and petrol the government will collect annually over INR500bn. and at the same time ensures limited fiscal impact is a difficult task. upsides will be higher when oil recovers As we noted in our report “India oil PSUs . and the government can easily absorb this much. • 50:50 sharing with cess payout part of upstream’s 50% share But working out a subsidy sharing formula that is not very burdensome for upstream. There have always been concerns on relative sharing among the government. and is remunerative at current low oil prices of USD50-60/bbl. and 58% lower than the payout of INR708bn in FY14. the upstream share has been decided on the basis of USD56/bbl. With the recent sharp decline in oil prices.Now prefer upstream over downstream” last month. In our view. This is made more difficult by the continued decline in oil prices. which companies are likely to report in February.

5% 13.1% 0.0 59.8% 13% 5.6 107.8 13.4% 13% 4.9% 13.5 Net realisation 58.0 Upstream subsidy 56.0 63.3% 86.0 56.6 48.4 60. which is the likely amount if the govt provides a fixed subsidy of INR20/kg on LPG Source: PPAC.5 23.0 Exchange rate 47.8% 82.385 FY13 1.0 80.Nomura | India upstream PSUs 15 January 2015 Fig.3% 0. ONGC/OIL’s net oil realisation will likely be resilient at USD5657/bbl in FY16-18F Note: Net realisation in above chart means Brent less upstream subsidy Source: Company data.1% 13.5 110.5 Brent At our government support assumption of INR300bn.5% 84.5 54.8 60.9 54.1 56.4 61. 11: Our subsidy sharing assumptions Gross under-recoveries (INRbn) Sharing (INRbn) GoI Upstream Net to OMCs Sharing % GoI Upstream Net to OMCs Upstream sharing (INRbn) ONGC OIL GAIL Upstream sharing % ONGC OIL GAIL FY12 1.0% We assume fixed govt u/r compensation of INR300bn for FY15-17F.610 FY14 1.7 85. 12: At fixed govt support of INR300bn.0% 86.2 56.2% 2.0 70.4 47.3 63.399 FY15F 744 FY16F 345 FY17F 466 FY18F 598 835 550 0 1.7 3.5% 0. upstream net oil realisation will likely be resilient USD56-57/bbl in FY16-18F FY12 FY13 FY14 FY15F FY16F FY17F FY18F 114.7% 13.3 38.8% 84. Nomura estimates 7 .0% 86. Nomura estimates Upstream net realisations to increase sharply at our subsidy share assumptions Fig.000 600 10 708 670 21 300 444 - 300 45 - 300 166 - 300 298 - 60% 40% 0% 62% 37% 1% 51% 48% 1% 40% 60% 0% 87% 13% 0% 64% 36% 0% 50% 50% 0% 445 74 32 494 79 27 564 87 19 375 58 10 39 6 - 144 22 - 259 39 - 80.0 63.5 56.6% 13.0% 2.

Oil India Source: Company data. we note that net oil realisation will be resilient at 56-57/bbl from FY16-18F.ONGC .5 54. we expect earnings to grow from INR49/share in FY14F to INR70/share in FY17F.6%.5% 2. 14: Our P/B-based target price derivation for ONGC and Oil India P/B valuations ONGC Oil India Avg.0 80.2 4.0 56.Subsidy (USD/bbl) 52.5 46.0 Exchange rate (INR/USD) 45. while OIL’s CAGR was lower at 0.5% 12.6 56. implying a 12% CAGR over three years.9 16% 11% -3% 9% -1% 26% 12% 6% 6% 20% 4% -18% -5% 44% 5% 2% Gas price (USD/mmbtu) FY12 FY17F FY18F EPS (INR/sh) EPS Growth % .6 107. For the three years to FY14.5 110. we highlight that owing to high subsidies.8 48.4 61.0 70. Nomura estimates Fig.6 47.6 38.8% CAGR.0 63.3 63. Compared with the 12-13% earnings CAGR that we expect over the next three years.2 29.9 54.6 5.5% LT growth Cost of equity (Ke) 12.4 47. ONGC’s earnings recorded a 5.6 .0 59.7 85.2 4.Oil India 48. implying a 13% CAGR over the next three years.8 60.7 114.1 58. For ONGC. Similarly. 13: Our key assumptions and EPS estimates for ONGC / OIL FY13 FY14 FY15F FY16F Brent (USD/bbl) FY11 86.Nomura | India upstream PSUs 15 January 2015 Risk-reward remains favourable at new oil assumptions At our assumption of a fixed compensation of INR300bn for fuel under-recoveries. Fig.5% Target P/B multiple 1.0 .5 56.0 30.5 Upstream subsidy (INRbn) 303 550 600 670 444 45 166 298 4.2 4.0 57.5 Brent .3 31. ROE (FY16-17F) 16.6 5.0 63.2 56.7 3.2 28.45 FY17F book value per share 274 447 Implied Equity value per share 411 648 Price Target 410 650 Current market price 348 551 18% 18% up/down side Source: Nomura estimates 8 .7 43.3 71.ONGC 26.5 23.4 60. for Oil India.7 67.6 48.5/share in FY17.0 70.8 13.3 38.9% 3.9 46.7% 16.0 Upstream subsidy (USD / bbl) 34.2 4. earnings growth has been muted for both ONGC and OIL India.7 59. we expect earnings to grow from INR31/share in FY14 to INR43.50 1.1 56.8 5.

This would reduce our NAV by 21% for ONGC and 14% for Oil India. if oil is USD60/bbl or above. Also. net realisation would decline further to USD50/bbl. at sustained low oil prices. These include condensates and value added products (in ONGC operated blocks).3 69. Also.8 -1% NAV 411 324 -21% 648 558 -14% Source: Nomura estimates 9 .5 41. if oil prices remain low at USD50/bbl. While the earnings impact for OMCs would not increase due to lower oil prices (as all under-recoveries are compensated). we assume low oil prices of USD50/bbl in FY16F and USD60/bbl for FY17 and beyond. and lead to an earnings decline of 14-16% in FY16F.FY17F 43.6 . Fig. investments in exploration and development may considerably slow down for both ONGC and OIL. the concerns on subsides sharply reduce. we think demand for oil products would grow. and also in the overseas business of ONGC Videsh Limited (OVL. Earnings decline may be sharp at USD50/bbl.0 57.Nomura | India upstream PSUs 15 January 2015 Bear case: What if oil remains low for longer In a bear case. we note that earnings sensitivity would be higher for ONGC due to the higher sensitivity of earnings from businesses where there are no subsidies. if oil prices remain low for longer. oil production in Joint Venture blocks (Cairn-operated Rajasthan block and Panna-Mukta-Tapti block). This would likely slow down expectations of long-term growth rates. Hence.FY16F 38.7 32. Compared with our growth expectation of 3. not much at 60/bbl At our assumption of a fixed government subsidy of INR300bn.0 -6% 70. raising both marketing volumes and margins.5% for OIL India built in our P/B valuations.6 -14% EPS . In a scenario of low oil prices for a long term. our preference would be for downstream oil marketing companies (OMCs) over upstream. 15: Base and bear case scenarios – earnings and NAVs ONGC Base Oil India Bear Change Base Bear Change -16% 67. 100% unlisted subsidiary).5% for ONGC and 2. the net oil realisation for ONGC/OIL is largely resilient to oil price changes and will remain around USD56/bbl. However. but with a lower oil price. we would assume no growth in a bear case scenario. investment and long-term growth may likely slow down In our view. Also. earnings from own domestic oil and gas production will be largely resilient for both ONGC and OIL.

Nomura research Oct-14 Apr-14 Oct-13 Apr-12 Oct-11 Apr-11 Oct-10 Apr-10 Oct-09 Apr-09 5. and of both oil and gas for Oil India.4 70 6. there are early signs that these efforts are paying off. And production of oil for ONGC.0 Oct-08 Oct-14 Apr-14 Oct-13 Apr-13 Oct-12 Apr-12 Oct-11 Apr-11 Oct-10 Apr-10 Oct-09 Apr-09 50 Apr-08 5. 16: ONGC: Mumbai High oil (& condensate) production 380 (kbpd) Fig.0 75 Oct-14 Apr-14 Oct-13 Fig. While these are still early days. Nomura research Apr-13 Source: PPAC.Nomura | India upstream PSUs 15 January 2015 New government’s focus on “delivery” and “efficiency” seems to be paying off We also note that the new NDA government has been particularly focused on efficiency and delivery. Nomura research 10 .2 60 Source: PPAC.6 55 Source: PPAC. Nomura research Oct-12 Oct-12 Apr-12 Oct-11 Apr-11 Oct-10 Apr-10 Oct-09 Apr-09 Oct-14 Apr-14 Oct-13 Apr-13 Oct-12 Apr-12 Oct-11 Apr-11 Oct-10 Apr-10 Oct-09 440 Apr-09 300 (mmscmd) 7. 18: Oil India: Oil production trend Apr-13 Source: PPAC.8 65 6. 19: Oil India: Gas production trend 80 (kbpd) 8. Fig. 17: ONGC: Oil production trend (kbpd) 540 520 360 500 340 480 320 460 Fig. Our interaction with companies and industry participants suggests that the government is relatively more demanding in terms of targets and questions companies if there are misses. as shown in the figures below. has moved up in recent months.

69 47. we think that the current oil price weakness is likely a blessing in disguise for upstream PSUs.2 N/A 11. and estimate an FY14-17F earnings CAGR of 12% for ONGC.09 30.3 12. maintain Buy With our lower oil price and net realisation estimates. important disclosures and the status of non-US analysts.2 32. We expect a 12% EPS CAGR over FY14-17F.64 43. we cut our FY15-17F EPS by 8-12%.3 15. rising to USD80/bbl for the medium term (earlier USD85 for 2015F.adukia@nomura. as the government will be forced to decide on subsidies. the current USD56/bbl formula simply cannot work.81 38. We highlight that the fixed outgo of INR300bn should not be difficult to achieve (the government outgo was much higher at INR1000/708bn in FY13/14).7 N/A 1.com +91 22 4037 4338 New FD norm.730 1.0 EV/EBITDA (x) 5. FY14 FY15F FY16F FY17F New Old New Revenue (bn) 1. Year-end 31 Mar Buy 2.sharma. INR470 earlier).9% Ravi Adukia.5 18. as we mentioned in our oil PSU report last month (link).3 Dividend yield (%) +17.5 ROE (%) 16. An early decision on subsidy is key for the revival of investor interest ahead of the planned follow on offer soon.4 10.0 N/A 8. court ruling on royalties Valuation: We cut earnings and TP. early subsidy clarity key for reviving investor interest Our oil & gas team has lowered its base case oil price assumption to USD60/bbl Brent for 2015F. With oil now below USD50/bbl.NS ONGC IN EQUITY: OIL & GAS/CHEMICALS Risk reward remains favourable Global Markets Research Realisation to be resilient at fixed govt subsidy. We expect domestic production trends to reverse and estimate growth of 3-4% in oil and 4-5% in gas over FY15-17F.3 10. But. USD90 thereafter).004 1.1 Price/book (x) 1.5 N/A 3.6 N/A 1. Currency (INR) Reported net profit (bn) Target price Reduced from 470 Anchor themes While counter-intuitive.6 14. we assume fixed government compensation of INR300bn for FY15-17F. Our TP is 8% below consensus.7 16.6 N/A 5.com +91 22 4037 4232 Old FD normalised P/E (x) Potential upside Anil Sharma . Government focus on delivery yielding early results For a long-term re-rating. The new government’s focus is on efficiency/delivery.50 9. Our new P/B-based TP is INR410 (vs.7 N/A 4. we note that ONGC’s production growth of 1.7 N/A 2. low oil prices for long term a negative 15 January 2015 Rating Remains Action: Reduce earnings/TP to INR410 on lower oil price assumption.726 2. .4 16.732 1.NFASL anil. Catalysts: Subsidy-sharing clarity.5 8.4 Source: Company data.9 N/A 3.2 7.6 17.60 43. While it is still early days.4 11.668 1. The lower oil assumption is certainly negative for upstream producers ONGC and OIL. CFA .Oil and Natural Gas ONGC. the gains from the recent three excise duty hikes themselves will be over INR500bn annually.3 12. at fixed govt subsidy In our numbers.4 6.7 12.8 Net debt/equity (%) 12.8 -1.1@nomura.4 N/A 9.9% in Oct-14 and 3% in Nov-14 was the highest in five years.863 265 283 262 375 331 408 372 265 283 262 375 331 408 372 30. EPS growth (%) INR 348 India Oil & Gas/Chemicals Old FD normalised EPS Closing price 12 January 2015 Research analysts Actual Normalised net profit (bn) INR 410 Nomura vs consensus Our FY16F EPS is 3% below consensus.4 N/A 1.NFASL ravikumar.878 1. Also. the weak oil price may be a blessing in disguise for upstream operators.4 26. ONGC should deliver production growth.2 5.5 N/A 4.98 33. on our estimates. Nomura estimates Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification.

4 32.3 2.3 119.8 14.0 1.2 11.9 Balance sheet (INRbn) Income statement (INRbn) Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Dec in other LT assets Inc in other LT liabilities Adjustments CF after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others CF from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Company data.2 0.0 34.50 30.5 5.9 15.3 4.3 21.3 16.50 274.02 0.5 16.0 10.7 110.722 3.4 12.3 12.0 8.7 2.2 1.69 38.0 9.817.6 54.179 0 124 2.2 34.0 5.98 30. Nomura research Notes: Performance (%) Absolute (INR) Absolute (USD) Rel to MSCI India 1M 3M 12M 3.0 46.31 10.6 5.8 13.27 52.6 35.31 178.586 0 93 1.7 38.0 40.2 0.412 534 1.2 -1.00 43.7 34.2 11.3 M cap (USDmn) 47.3 0.3 95.9 6.497 174 0 61 3.0 3.6 26.3 1.3 16.4 1.5 FY13 1.1 6.8 11.4 12.7 2.2 14.7 5.98 201.5 20.289 179 0 61 3.98 30.6 13.2 8.597 36 0 43 2.6 9.533 32 0 43 1.3 -8.50 43.3 32.528 501 1.60 30.60 30.22 9.7 10.5 -1.37 12.3 0.2 2.4 35.096 184 0 61 3.2 3.9 16.3 -8.659 550 1.8 45.5 -19.979 139 277 314 730 317 411 984 19 0 43 1.9 15.5 60.614 -871 743 -442 0 301 530 -215 -14 301 -5 0 72 367 -128 240 2 0 0 242 0 242 -94 148 FY14 1.7 5.668 -878 790 -459 0 331 592 -257 -5 331 -7 0 76 401 -138 263 -1 0 0 262 0 262 -100 162 FY16F 1.0 34.4 63.0 32.28 9.938 0 114 2.4 11.0 22.1 -14.7 -9.4 -15.242 139 307 228 674 317 FY15F 224 0 155 142 316 836 48 2.7 3-mth ADT (USDmn) 30.0 3.29 55.31 28.695 170 0 61 3.4 2.8 Free float (%) 20.979 1.3 11.5 4.60 220.8 47.2 32.3 77.0 33. Nomura estimates As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Per share Reported EPS (INR) Norm EPS (INR) FD norm EPS (INR) BVPS (INR) DPS (INR) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Company data.4 52.5 7.7 6.4 18.6 1.38 63.4 Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA Normalised EPS Normalised FDEPS FY13 530 -103 20 447 -423 24 8 0 5 37 -39 35 -110 2 -3 0 -7 -118 -83 279 196 8 FY14 578 113 -158 533 -616 -83 -26 FY15F 592 -12 -110 471 -416 54 0 FY16F 691 -7 -141 543 -426 117 0 FY17F 756 9 -160 604 -421 184 0 -36 90 -48 -104 -98 2 247 0 1 152 49 196 245 211 0 16 13 83 -98 0 0 0 -7 -104 -21 245 224 232 0 16 13 146 -120 0 0 0 -8 -128 18 224 242 214 0 16 16 216 -120 0 0 0 -8 -128 88 242 330 126 FY13 196 0 154 128 274 752 21 1.0 25.69 38.26 49.31 28.55 62.726 -829 897 -462 0 435 691 -251 -5 435 -8 0 80 507 -174 333 -2 0 0 331 0 331 -120 211 FY17F 1.0 9.4 40.3 -3.0 8.4 28.5 33.00 38.7 116.3 12.1 7.2 19.11 10.39 12.5 26.863 -887 976 -482 0 493 756 -258 -5 493 -8 0 86 571 -196 376 -4 0 0 372 0 372 -120 252 12.9 1.50 43.7 7.2 -14.6 15.4 -3.0 8.69 244. Nomura estimates 12 .5 1.1 53.737 0 103 1.3 12.9 34.492 29 0 43 1.9 33.9 9.1 -21.1 9.3 9.7 -24.4 9.4 11.50 30.Nomura | Oil and Natural Gas 15 January 2015 Key data on Oil and Natural Gas Relative performance chart Cashflow statement (INRbn) Source: Thomson Reuters.9 1.659 139 259 284 682 317 FY17F 330 0 173 158 345 1.5 0.9 16.4 38.4 4.6 26.525 2.17 5.242 518 1.528 116 186 181 484 88 FY14 245 0 160 148 301 854 47 2.4 3.5 9.883 3.00 30.6 62.346 3.094 3.3 36.77 12.5 19.4 52.8 3.647 83 0 25 2.5 10.499 30 0 43 1.430 0 53 1.732 -944 789 -461 0 327 578 -246 -5 327 -6 0 71 392 -128 264 -2 2 0 265 0 265 -95 170 FY15F 1.412 139 269 256 664 317 FY16F 242 0 160 147 331 879 48 2.1 -3.8 18.006 48 2.23 12.7 9.

Total Y-Y% Source: Company data.9 26. Nomura estimates Fig.5 110.8 .0 30. Nomura estimates Fig.1 23.Share of JVs 1.8 25.2 4.Increase by USD1/mmbtu 2.8 2.0 28.6 5.2 25.5 6.7 62.7 24.0 26.7 23.5 8.2 28.7 % 55.0 56.8 6.3 24.3 31.2 2.6 1.8 24.2 4.0 23.9 41.4 110.2 3. However.9 2.5 4.0 70.INR1/USD depreciation % 55.2 4.8 7.4 23.Total 26.7 22.0 27.1 54.8 9.5 23.7 .9 69.0 80.3 25.0 2.8 Oil production (MMT) .5 46.7 43.1 23.0 2.6 EPS (INR.8 13.9 43.6 7.4 9.8 42. 21: ONGC production estimates FY10 FY11 FY12 FY13 FY14 FY15F FY16F FY17F 24.1 1.3% 1.6 3.9 y-y % 9.Nomura | Oil and Natural Gas 15 January 2015 Fig. it reports per bbl burden only on actual sales volume of oil (excludes condensates).0 59.6 23.9 4.9 3.7 47.3% 63.2 7% -8% -17% 15% 6% 6% -2% Source: Company data.4 23.5% 0. 20: Key assumptions and EPS estimates for ONGC USD/bbl FY12 FY13 FY14 FY15F FY16F FY17F FY18F Brent 114.5 1% -1% 1% -1% -2% -3% 4% 5% Gas production (BCM) .6 25.7 3.5 56.8 1.0 43.3 26.6 3. Nomura estimates Fig.7 85.8 Gas (BCM) 2.7 106.2 14.Nomination blocks .Nomination blocks .1 56.9 25.0 EPS Growth % 11% -3% 9% -1% 26% 12% 6% Note: ** ONGC’s subsidy is calculated on its production volume of both oil & condensates based on government intimated subsidy number.6 5.3 25.3 23.9 6.4 8.4% Source: Nomura estimates 13 .1 Gas price (USD/mmbtu) 4.6 48.7 2.2 1.2 2.6 38.6 1.9 5.0 0.6 5.4 47.2 .sh) 29.8 60.2 4.Increase by USD1/bbl Exchange rate (INR/USD) FY17F 38.5 2.5 54.0 Subsidy 56.2 55.5 Reported realisation (USD/bbl) Gross 117.7 55.7 59. 22: OVL production estimates FY10 FY11 FY12 FY13 FY14 FY15F FY16F FY17F Oil (MMT) 6.6 .3 5.3 8.Share of JVs .1 26.0 Y-Y% -2% 3% -1% -3% -1% 0% 4% 4% 23.4 3.6 Gas price (USD/mmbtu) 5.5 Net realisation 58.4 1.8 Net reported realisation ** 54.5 27.9 Reported subsidy ** 62. 23: Sensitivity of key variables to ONGC’s EPS FY16F Base EPS INR/share Net reported oil realisation (USD/bbl) 0.9 79.7 85.3 3.7% 63.4 Total 8.6 22.5 2.2 56.3 26.5 5.5 INR/share 2.7 3.3 38.9 3.3 22.8 5.2 22. Source: Company data.4 2.5 25.9 65.4% 5.6 107.5 1.

5% 12. 26: 1-year forward P/B band (INR/share) 500 (INR/share) 450 2. ROE (FY16-17F) 16.0x 350 1.5% (unchanged) and growth rate of 3.50x FY17F P/B multiple We use an average ROE (FY16-17F) of 16. cost of equity of 12.7% 18.5% to derive our target P/B multiple new old Avg.50x (earlier 1.0x 450 350 8.25x Apr-11 7.0x Apr-10 10.5% Growth rate % 3. A negative Supreme Court decision on the royalty issue may result in a sharp earnings impact. Based on our revised average ROE estimate for FY16-17F (unchanged) at 16.1% earlier).5% (unchanged).0x 250 1.Nomura | Oil and Natural Gas 15 January 2015 Revise TP to INR410.50x Dec-10 300 9.65 FY17F book value per share 274 286 Implied Equity value per share 411 472 Price Target 410 470 Source: Nomura estimates Fig.5% 3. Possible delays in key projects and lower-than-expected production pose downside risks to our estimates.1% Cost of equity 12.25x 500 Source: Datastream. Our revised TP is INR410 (INR470 earlier).0x 300 Dec-14 Apr-14 Aug-14 Dec-13 Apr-13 Aug-13 Dec-12 Apr-12 Aug-12 Dec-11 Dec-14 Apr-14 Aug-14 Dec-13 Aug-13 Apr-13 Dec-12 Aug-12 Apr-12 Dec-11 Aug-11 Apr-11 Dec-10 Apr-10 Aug-10 Aug-11 250 200 Source: Datastream. 24: We value ONGC at 1. Nomura estimates Risks A higher-than-expected upstream subsidy burden could hurt ONGC’s financials. Nomura estimates 1. reiterate Buy We continue to use a one-year forward P/B multiple to value ONGC. 14 .75x 400 Aug-10 11.7% (18. 25: 1-year forward P/E band Fig.0x 400 200 2. Fig.65x). we revise our one-year forward P/B multiple target to 1.50 1.5% Target P/B multiple 1.7% and cost of equity of 12.

67 73. but early subsidy clarity key Our oil & gas team has lowered its base case oil price assumption to USD60/bbl Brent for 2015F. as we mentioned in our oil PSU report last month (link). the Assam government has also raised a similar demand.4 17.2 N/A 7. the weak oil price may be a blessing in disguise for upstream operators. Year-end 31 Mar FY14 FY15F FY16F India Oil & Gas/Chemicals Anil Sharma .2 18. as the government will be forced to decide on subsidies.02 77.6 N/A 1.43 67. We assume a fixed govt compensation of INR300bn for FY15-17F. OINL’s entire oil production is from on-land blocks.NFASL anil.3 N/A 4.8 13.NS OINL IN EQUITY: OIL & GAS/CHEMICALS Early clarity on subsidy sharing key Global Markets Research Sharp oil price decline to force early subsidy clarity.Oil India OILI. Gas production should rise as GAIL’s Brahmaputra cracker starts next year.2 ROE (%) Net debt/equity (%) INR 551 Research analysts Old Dividend yield (%) Closing price 12 January 2015 +18% Nomura vs consensus Our FY16F EPS/TP are 5%/6% below consensus. we think that the current oil price weakness is likely a blessing in disguise for upstream PSUs. maintain Buy with a revised TP of INR650 With our lower oil price and net realisation estimates.71 70. . This issue could be a near-term overhang. rising to USD80/bbl for the medium term (earlier USD85 for 2015F. Concerns: Court decision on royalty issue Following the Gujarat government’s decision to challenge post-discount royalty payouts by ONGC (Gujarat won in the High Court and the matter is now before the Supreme Court).61 46. important disclosures and the status of non-US analysts.000bn/708bn for FY13/14). EPS growth (%) -18.4 N/A 1. With oil now below USD50/bbl. Oil production recovering and rise in gas production likely soon After declining for two years (down 4%/6% in FY13/14) due to the law-andorder situation in the north-east.com +91 22 4037 4232 FY17F New Old New Revenue (bn) 92 100 95 126 117 130 120 Reported net profit (bn) 29 32 28 44 40 47 42 29 32 28 44 40 47 42 FD normalised EPS 48.com +91 22 4037 4338 Ravi Adukia.8 N/A 8.8 14.9 16. But.7 N/A 5. CFA .5 net cash net cash net cash net cash net cash net cash net cash Source: Company data.5 14. Nomura estimates Key company data: See page 2 for company data and detailed price/index chart See Appendix A-1 for analyst certification.1@nomura. and production will improve.8 EV/EBITDA (x) 8.8 4. and its payout may sharply rise.adukia@nomura. efficiency. we reduce our FY15-17F EPS estimates by 9-11% and cut P/B-based TP to INR650 (from INR710).4 Price/book (x) 1.8 17.6 39.3 N/A 11.9 N/A 3.7 N/A 8.NFASL ravikumar. delivery and close monitoring of targets will yield results.sharma.5 N/A 1. oil production has been recovering. Old Normalised net profit (bn) Target price Reduced from 710 Potential upside Actual Currency (INR) Buy 3.5 -4.29 FD norm. An early decision on subsidy is key for the revival of investor interest.9 11. counter intuitively lower oil blessing in disguise. and expect an FY14-17F earnings CAGR of 13% for Oil India. We cut earnings and TP. the current USD56/bbl formula simply cannot work.1 7. New FD normalised P/E (x) INR 650 Anchor themes While counter-intuitive. We also believe the government’s focus on faster decisions.6 43.6 5.5 N/A 5. USD90 thereafter). The lower oil assumption is certainly negative for upstream producers ONGC and OIL. but low oil for long to weaken outlook 15 January 2015 Rating Remains Action: Reduce earnings/TP on lower oil price assumption.94 52.4 N/A 4. We highlight that the fixed outgo of INR300bn should not be difficult to achieve (the government outgo was much higher at INR1.

3 29.7 -4.7 FY13 95 -53 42 -8 0 34 42 -8 FY14 92 -56 36 -13 0 23 36 -13 FY15F 95 -58 37 -11 0 26 37 -11 FY16F 117 -63 54 -12 0 42 54 -12 FY17F 120 -64 56 -12 0 44 56 -12 34 0 23 -1 26 -4 42 -4 44 -4 19 53 -17 36 21 44 -14 29 20 42 -14 28 22 61 -21 40 24 64 -22 42 0 0 0 0 0 36 29 28 40 42 36 -21 15 29 -15 14 28 -13 15 40 -16 24 42 -17 25 9.02 67.3 46.8 18.4 5.8 1.6 -4.4 122.4 16.9 17.3 39.5 39.3 6.9 -9.Nomura | Oil India 15 January 2015 Key data on Oil India Relative performance chart Cashflow statement (INRbn) Source: Thomson Reuters.2 10.8 3.8 72.3 -13.9 32.4 1.3 39.21 30.75 59.4 28.9 Valuations and ratios Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA Normalised EPS Normalised FDEPS FY13 42 -10 -20 12 -15 -4 7 FY14 36 -6 -3 26 -29 -2 -31 FY15F 37 -2 -5 31 -21 9 -4 FY16F 54 4 -14 44 -26 17 -4 FY17F 56 1 -12 45 -27 18 -5 -9 2 22 19 -20 0 13 0 0 -7 12 109 121 -109 -22 4 -21 -72 -21 0 89 0 -1 67 -5 121 117 -15 -9 0 21 18 -15 0 0 0 -4 -19 -1 117 116 -15 -13 0 26 25 -13 0 0 0 -4 -17 9 116 125 -23 -13 0 26 26 -16 0 0 0 -4 -20 6 125 130 -29 FY13 121 10 9 6 27 174 9 21 0 0 50 254 13 17 15 45 FY14 117 14 5 10 27 172 36 19 53 0 71 351 101 17 8 126 FY15F 116 18 5 10 27 175 36 20 53 0 81 365 101 17 6 124 FY16F 125 22 6 13 27 192 36 21 53 0 93 396 101 21 9 132 FY17F 130 27 6 13 27 204 36 23 53 0 106 422 101 22 10 133 0 17 62 0 21 147 0 21 145 0 21 153 0 21 154 6 163 6 175 6 190 6 214 6 239 24 192 254 24 205 351 24 220 365 24 244 396 24 268 422 3.2 37.29 446.0 -27.75 59.0 4.3 11.0 40.41 7.8 7.60 37.5 15.2 7.4 35.2 8. Nomura estimates As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) net cash net cash net cash net cash net cash net cash net cash net cash net cash net cash Per share Reported EPS (INR) Norm EPS (INR) FD norm EPS (INR) BVPS (INR) DPS (INR) 59.0 46.4 1.7 7.5 3.2 8.75 320.72 21.6 1.7 -60.2 5. Nomura research Notes: Performance (%) Absolute (INR) Absolute (USD) Rel to MSCI India 1M 3M 0.2 9.94 48.8 7.0 27.5 -3.4 M cap (USDmn) Free float (%) 3-mth ADT (USDmn) 5.6 0.0 -30.8 12.67 46.1 -18.0 109.6 3.7 36.2 39.322.7 -8.5 7.4 17.3 27.9 4.3 3.3 65.5 53.3 46.5 43.7 5.53 12. Nomura estimates 16 .12 23.67 365.7 3.02 67.3 31.6 51.4 26.3 7.6 -24.55 18.5 34.1 2.9 -18.2 0.0 4.5 40.9 12M 18.2 9.6 43.8 4.2 25.8 63.36 33.6 8.6 2.94 340.29 70.4 1.8 11.2 18.46 12.2 5.5 12.3 11.3 137.67 46.7 13.46 70.4 10.0 40.5 17.67 67.0 1.1 34.4 19.5 8.6 33.4 14.7 8.3 3.5 45.0 34.7 -29.105.86 1.6 32.6 23.9 12.02 405.9 16.63 24.8 11.4 6.9 12.8 11.1 44.1 58.6 1.7 11.8 -13.50 46.2 4.3 106.1 35.00 48.6 0.7 -15.7 Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Company data.94 48.3 1.3 36.7 46.5 Balance sheet (INRbn) Income statement (INRbn) Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Dec in other LT assets Inc in other LT liabilities Adjustments CF after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others CF from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Company data.0 1.9 46.8 13.3 -3.9 111.29 70.6 44.

5 55.6 5.7 3% Source: Nomura estimates 17 .Increase by USD1/mmbtu % 55.sh) 57.8 48.2 4.6 47.4 2% 5.2 68.2 7.6 5.6 106. 27: Key assumptions and EPS estimates for OIL India (USD/bbl) FY12 FY13 FY14F FY15F FY16F FY17F FY18F Brent 114. Nomura estimates Fig.5 54.6 .5 23.0 3% 1.8 70.5 4.2% 6.0 70.Increase by USD1/bbl 1.0 59.6 2.9 71.MMT 3.4 2.6 EPS (INR.2 4.0 .54 3.kbpd 70.7 3.4 Gas price (USD/mmbtu) 5.0 .9 7% 63.9 59.7 2% 1.0 70.4 2.4 84.0 80.7% -4% -5% 1% 3% 2% .50 3.8 13.6 7% 4.7 67.3 68.6 2.1 8.2 56.4 3.8 60.mmscmd 6. 28: Production volume assumptions FY10 FY11 FY12 FY13 FY14 FY15F FY16F FY17F .0 Subsidy 56.6 75.4 47.2 55.3 79.87 3.6 6.3 71.9% -0.3 38.4 7.9 EPS growth % 20% 4% -18% -5% 44% 5% 2% Source: Company data.3 Y-Y% 6% -3% 12% 0% 0% 6% 5% 3% Oil production Y-Y% Gas production Source: Company data.2 7.5 Reported realisation Gross 114.3 INR/share Net reported oil realisation (USD/bbl) .3 38.5 INR/share % 55.64 3.5 Net 59.6 2.0 59.2 Subsidy 54.2 7.8 13.8 Exchange rate (INR/USD) 63.1 56.7 55.0 70.5 110.9 3.6 107.62 3.7 3.63 3.Nomura | Oil India 15 January 2015 Fig.7 Gas price (USD/mmbtu) 4.70 3.BCM 2.6 48.2 4.6 8. Nomura estimates Fig.5 56.8 53.INR1/USD appreciation 1.0 56.8 5.7 109.8 56.8 2.71 .4 69.9 46.7 59.5 Net realisation 58.7 85.5 23.4 72.1 46. 29: Sensitivity of key variable to Oil India’s EPS Base EPS(INR/share) FY16F FY17F 67.0 72.

and growth rate of 2. ROE (FY16-17F) New 16.9% Old 18. • An adverse Supreme Court decision on royalty issues could significantly impact OINL's earnings.45 1. Nomura estimates 18 .3% Cost of equity 12.3%).5% Target P/B multiple 1.45x (1. 32: Oil India – 1-year forward P/B band (INR/share) 700 (INR/share) 650 650 10x 600 1. Fig.5x 600 9x 550 500 8x 450 7x 400 550 1. we arrive at our target one-year forward P/B multiple of 1.9% (earlier 18. • Lower-than-expected production growth also poses downside risks to our estimates.55x previously).3x 500 Dec-14 Aug-14 Apr-14 Dec-13 Apr-13 Aug-13 Dec-12 Apr-12 Aug-12 Dec-11 Apr-11 Aug-11 Dec-10 Apr-10 Dec-14 Aug-14 Apr-14 Dec-13 Apr-13 Aug-13 Dec-12 Aug-12 Apr-12 Dec-11 Aug-11 Apr-11 Dec-10 Apr-10 Aug-10 Source: Datastream.7x 1. Nomura estimates 400 Aug-10 450 350 300 2. cost of equity of 12.45x FY17F P/BF multiple Avg.1x Source: Datastream.5% 12.5% 2.Nomura | Oil India 15 January 2015 Reiterate Buy with a new TP of INR650 We continue to use one-year forward P/B multiple to value Oil India.9x 1.55 FY17F book value per share 447 458 Implied Equity value per share 648 710 Price Target 650 710 Growth rate Source: Nomura estimates Fig.5% (unchanged).5% (unchanged). 31: Oil India – 1-year forward P/E band Fig. Risks • Higher-than-expected upstream subsidy burden could negatively impact OINL’s financials. Our revised TP is INR650/share (down from INR710 earlier).5% 2. Based on our revised average ROE estimates for FY16-17F (unchanged) at 16. 30: We value Oil India at 1.

30 476.and growth rate of 2. Risks that may impede the achievement of the target price Higher-than-expected upstream subsidy burden could have a negative impact on OIL’s financials.5%. is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International.9%. Lower-than-expected production growth also poses downside risks to our estimates. hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report.00 Closing price 561.00 Buy 690. (2) no part of our compensation was. An adverse Supreme Court decision on royalty issue could significantly affect OINL's earnings.00 Reduce 405. A6 The Nomura Group expects to receive or intends to seek compensation for investment banking services from the issuer in the next three months. Nomura International plc or any other Nomura Group company. we set our target price at INR650. Oil India (OINL IN) INR 535 (13-Jan-2015) Buy (Sector rating: N/A) Rating and target price chart (three year history) Date 18-Dec-14 22-May-14 22-May-14 23-Jul-13 23-Jul-13 14-Dec-12 18-Sep-12 18-Sep-12 Rating Target price 710.80 618.45x.05 449.90 532. Materially mentioned issuers Issuer Oil India Oil and Natural Gas Ticker OINL IN ONGC IN Price INR 535 INR 339 Price date Stock rating Sector rating Disclosures 13-Jan-2015 Buy N/A A4. or any of its affiliates or subsidiaries.Nomura | India upstream PSUs 15 January 2015 Appendix A-1 Analyst Certification We. Inc. cost of equity of 12.00 Neutral 590.5%. Applied to our FY17F book value per share forecast.30 For explanation of ratings refer to the stock rating keys located after chart(s) Valuation Methodology We value Oil India based on P/B methodology. 19 . and may refer to one or more Nomura Group companies. Based on average ROE (FY16-17F) of 16.90 618.30 476. we arrive at a target FY17F P/B of 1. Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings. Inc..The benchmark index for this stock is MSCI India. Anil Sharma and Ravikumar Adukia.00 400.05 532.A6 13-Jan-2015 Buy N/A A4 The Nomura Group had an investment banking services client relationship with the issuer during the past 12 months.

cost of equity of 12. 20 . Reuters and ThomsonOne.com/research/globalresearchportal/pages/disclosures/disclosures. Based on average ROE (FY16-17F) of 16.00 225.nomuranow.15 259. Inc. Nomura Global Financial Products Inc. public appearances. If you have any difficulties with the website. Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage.50 280.75 For explanation of ratings refer to the stock rating keys located after chart(s) Valuation Methodology We use P/B methodology to value ONGC. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. (“NDPI”) and Nomura International plc. Risks that may impede the achievement of the target price Downside risks: Higher-than-expected upstream subsidy burden could negatively impact ONGC’s financials.Nomura | India upstream PSUs 15 January 2015 Oil and Natural Gas (ONGC IN) INR 339 (13-Jan-2015) Buy (Sector rating: N/A) Rating and target price chart (three year history) Date 18-Dec-14 22-May-14 22-May-14 23-Jul-13 23-Jul-13 14-Dec-12 18-Sep-12 18-Sep-12 Rating Target price 470.15 312.50x FY17F P/B.00 Reduce 250. for purposes of mandatory disclosures. we set our TP at INR410. Important disclosures may be read at http://go. for purposes of mandatory disclosures. Bloomberg. (“NIplc”) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. any of which may be the subject of this report. a portion of which is generated by Investment Banking activities.00 Closing price 344.5%. 26% of companies with this rating are investment banking clients of the Nomura Group*. the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules.and growth rate of 3. 8% have been assigned a Reduce rating which. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 49% have been assigned a Buy rating which. and trading securities held by a research analyst account.00 Neutral 330. Factset. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues. for purposes of mandatory disclosures. and NIplc are generally engaged in the trading of swaps and other derivative products. on 1-877-865-5752.aspx or requested from Nomura Securities International. please email grpsupport@nomura..75 280. 43% of companies with this rating are investment banking clients of the Nomura Group*. Capital IQ. Unless otherwise noted. NGFP.5%. At our target multiple of 1. NDPI. Negative Supreme Court decision on royalty issue may result in sharp earnings impact. Rating and target price changes Issuer Ticker Old stock rating New stock rating Old target price New target price Oil India Oil and Natural Gas OINL IN ONGC IN Buy Buy Buy Buy INR 710 INR 470 INR 650 INR 410 Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.00 Buy 475.7%. is classified as a Hold rating. may not be associated persons of NSI.com for help.95 392.com/research. and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies. MarkitHub. are classified as a Buy rating. (“NGFP”) Nomura Derivative Products Inc.nomuranow.50x FY17F for ONGC.80 312. Delays in key projects and lower-than-expected production pose downside risks to our estimates.The benchmark index for this stock is MSCI India. are classified as a Sell rating. 54% of companies with this rating are investment banking clients of the Nomura Group*. 43% have been assigned a Neutral rating which.80 392. we arrive at target P/B of 1.

INF231299034.400 018. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. Inc. Nomura Securities International. indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months.aspx. NIHK. A rating of 'Reduce'. (‘NAL’). but are not limited to. (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL. Middle East and Africa. Europe: Dow Jones STOXX 600. defined as (target price . Bhd. Explanation of Nomura's equity research rating system in Europe. SECTORS A 'Bullish' stance. A rating of 'Neutral'. Plot F. Taiwan. Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Target Price A Target Price. NSE INB231299034. 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