Psus Test Case

Thematic | June 2014
India PSUs
New reins, new reign!

Research Team (Rajat@MotilalOswal.com)
Thematic | India PSUs
India PSUs: New reins, new reign!
Page No.
Summary .............................................................................................................. 3
PSUs: A force to reckon with ............................................................................. 6
Performance has deteriorated in last five years .............................................. 9
Change in guard a possible trigger for turnaround ....................................... 13
Restructure or retire? ................................................................................... 18
Profitability at bottom; valuations attractive ............................................. 25
Sector and key PSU stocks to watch out for ................................................ 28
Annexure I: Valuation snaphots ................................................................... 30
Companies (PSU top companies - A) ......................................................... 32-73
SBIN ............................................................................................... 33
ONGC ............................................................................................. 38
BHEL ............................................................................................... 43
NTPC .............................................................................................. 48
BPCL ............................................................................................... 53
COAL .............................................................................................. 58
SAIL ................................................................................................ 63
Companies (PSU top companies - B) ........................................................ 68-112
CBK ................................................................................................. 68
GAIL ............................................................................................... 73
HPCL ............................................................................................... 78
IOCL ................................................................................................ 83
NMDC............................................................................................. 88
OINL ............................................................................................... 93
PNB ................................................................................................ 98
PWGR........................................................................................... 103
UNBK ........................................................................................... 108
Prices as on 16 June 2014

Investors are advised to refer through disclosures made at the end of the Research Report.
16 June 2014 2
Thematic
Thematic||India
June PSUs
2014
India PSUs
New reins, new reign!
Harnessing potential for a new harvest
 The profitability of Indian PSUs, most of which were plagued with project delays,
policy paralysis and deteriorating balance sheet, is almost at half the FY04 levels.
However, we believe the worst is behind.
 As Chief Minister of Gujarat, Mr Narendra Modi transformed a number of state PSUs.
As Prime Minister, we believe he could drive similar transformation in central PSUs.
 We propose a ‘SECURE’ framework to turn around PSUs’ performance, but also
recognize that divestment too would be essential to further the nation’s development
agenda.
 In this backdrop, we believe the likely winners among the listed PSUs would be SBI,
ONGC, BHEL, NTPC and BPCL.
PSU top companies - A PSUs A force to reckon with

 SBIN Pg-33
Indian PSUs have developed a formidable franchise, with leadership positions in
sectors like Oil & Gas, Financials, Utilities, Mining and Heavy Engineering controlling
 ONGC Pg-38
60%-90% market share. Over the years, they have played a significant role in the
 BHEL Pg-43 growth of the Indian economy. Central and State PSUs contribute ~26% to the
 NTPC Pg-48 national GDP. India ranks 7th in terms of share of PSUs (equally weighted share of
 BPCL Pg-53 sales, assets and market value) in a country’s top 10 companies
 COAL Pg-58 Performance has deteriorated in last five years But has bottomed out
 SAIL Pg-63 PSUs’ performance deteriorated in the second half of the last decade. Over FY09-14,
their aggregate sales and PAT grew at just a third of the growth rates achieved
during FY04-09. More than one-third (34%) of the CPSEs were loss-making in FY13
PSU top companies - B
versus 27% in FY08. However, profitability and growth have bottomed-out. This is
 CBK Pg-68
getting reflected in both consensus and our estimates for the next couple of years.
 GAIL Pg-73 (PAT growth estimates of 9% and 14% in FY15 and FY16, respectively, versus 5.7%
 HPCL Pg-78 CAGR during FY09-14).
 IOCL Pg-83 Change in guard A possible trigger for turnaround
 NMDC Pg-88 Corporate India is replete with examples of transformation in companies’ fortunes
 OINL Pg-93 following leadership changes. This should apply to politics as well, and hence, to
PSUs. As Chief Minister of Gujarat, Mr Narendra Modi transformed a number of
 PNB Pg-98
state PSUs by giving them more authority and autonomy in operations. With Mr
 PWGR Pg-103 Modi as Prime Minister, the capital markets are now looking for similar
 UNBK Pg-108 transformative measures for the CPSEs.
Restructure or retire? A ‘SECURE’ framework can turnaround PSUs

Emphasis on restructuring of PSUs is clearly visible in some recent comments from
the new government. We propose a ‘SECURE’ framework to turn around PSUs’
performance. However, divestment would also be a necessity to further the
development agenda. We expect the government to keep the PSUs of strategic and
social importance but restructure them, and increase divestment in others (or even
privatize them). Several interesting suggestions focusing on ‘how to’ for divestment
have already started pouring in for the new government (refer page 24 for one such
suggestion).
Rajat Rajgarhia
16 June 2014 (Rajat@MotilalOswal.com); +91 22 3982 5441 3
Shubhashish Dubey (Shubhashish.Dubey@MotilalOswal.com) / Harshad Borawake (HarshadBorwake@MotilalOswal.com)
Profitability at bottom Valuations attractive

The profitability of Indian PSUs, most of which were plagued with project delays,
policy paralysis and high debt, is almost at half the FY04 levels. However, we believe
the worst is behind and the new government’s policy actions could lead to a revival
in their fortunes. In this backdrop, we believe the likely winners among the listed
PSUs would be SBI, ONGC, BHEL, NTPC and BPCL.
Valuation table: Our top picks in PSU’s

Div. Abs.
Mkt Target Up- Sales Sales PAT PAT P/E P/B RoE
Yld Perf.
Company Cap Price side INR b Gr. (%) (INR b) Gr. (%) (x) (x) (%)
(%) (%)
INRb (INR) (%)
FY14 FY15 FY16 FY17 CAGR FY14 FY15 FY16 FY17 CAGR FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 FY15 3M 12M
ONGC 3,803 500 17 1,732 10.9 7.9 2.0 14.8 266 20.3 13.2 2.0 11.0 11.3 10.0 9.8 1.9 1.7 1.5 18.1 18.3 16.7 2.8 37.9 42.3
SBI 2,013 3,240 26 676 18.3 16.9 21.0 15.6 142 44.9 26.8 31.0 9.9 12.1 9.5 7.3 1.2 1.0 0.9 13.5 15.3 17.6 1.7 60.4 28.4
NTPC 1,348 187 15 716 7.5 5.7 9.9 14.3 99 -6.9 15.3 16.0 6.6 11.1 9.6 8.3 1.2 1.1 1.0 10.8 11.8 12.8 3.6 32.3 3.8
BHEL 590 300 24 391 -15.7 10.2 11.3 16.7 36 -31.5 51.4 29.5 16.5 25.6 16.9 13.1 1.8 1.7 1.6 7.3 10.5 12.6 1.2 31.8 35.8
BPCL 442 676 15 2,643 -3.0 4.2 3.3 17.0 39 -29.2 21.0 13.0 7.3 14.3 11.8 10.5 1.8 1.7 1.5 13.7 15.0 15.3 1.8 37.2 66.3
CAGR: FY04-14 Source: MOSL, Capitaline
Story in charts
PSUs’ PAT growth catching up with larger market RoEs have been comparable
60 PAT growth (listed PSUs) 25.0 Overall PSUs RoE (%)
BSE 200 Index PAT growth BSE 200 Index RoE (%)
40 20.0
15.0
20
10.0
0 5.0
-20 0.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
Source: MOSL, Capitaline Source: MOSL, Capitaline
Listed PSUs’ performance deteriorated in last 5 years Gap between PSUs and market P/E increased
FY04-09 FY09-14 FY04-14 Overall PSUs PE (x) BSE 200 Index PE (x)
Sales CAGR (%) 21.4 8.6 14.8 22
PAT CAGR (%) 19.4 5.7 12.4
18
PAT margin (%) 15.5 12.3 13.9
RoE (%) 20.5 15.6 18.1 14
RoCE (%) 19.1 13.3 16.3
10
Dividend yield (x) 2.8 2.8 2.8
PE (x) 11.6 14.7 13.1 6
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
PB (x) 2.4 2.3 2.3

Price performance rel to Sensex 7.9 (11.8) (2.1)
16 June 2014 4
PSUs have dominated position within respective industries

40
QUESTION STARS
MARKS
Industry sales CAGR FY03-13 (%)
30 Utilities
Infrastructure
Automobiles Banks - PSU
Telecom Metals
20 NBFC
Capital Goods
Misc Chemicals & Fertilizers Oil & Gas
10
DOGS CASH COWS
0
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0
Share in sector sales (%)
Source: MOSL, Capitaline
SECURE framework that can be used to revive PSUs Market reforms coupled with PSUs revival/divestment can
improve their profitability and drive re-rating
DIVEST / PRIVATIZE DIVEST
• Concor PSU Banks
• Balmer Lawrie ONGC
Investment Coal India
High
GMDC
NTPC
Power Grid
Profitability
Strong professional management

 Focus on strategic leadership
PRIVATIZE REVIVE
S  Induct industry experts with proven track record
 Induct technocrats both in management and board
 Scooters India • Mysore Paper SAIL
 HMT • Dredging Corp Petronet
 Bharat • HFL CPCL
Empowerment
Low
Immunology • Hind Photofilms OMCs (BPCL, HPCL, IOCL)

 ITDC • SCI
 Reduce political interference beyond policy issues
E  Full autonomy to management and board for day-to-
 Balmer Lawrie
 Mysore Lamps
• STC
• MMTC
day operations of all PSUs
Consolidate and control through SLAs Low (non-core) High (core)
 Consolidate under one PSU watchdog; sever ties with
C ministries. Set vision and overall goals.
Strategic importance
 Monitor performance through pre-defined SLAs Source: MOSL
Upgrade technology and skills
 Continuous upgrade in technology to remain competitive
U and generate efficiencies
 Upgrade talent and technical know-how
Restructuring
 Align businesses, supply chain, products and operations
R  Improve fiscal prudence
 Optimize usage of resources
Expand
E  Expand globally
 Expand product portfolio
Source: MOSL
16 June 2014 5
PSUs: A force to reckon with

Central PSUs contribute ~20% to national GDP
 Indian PSUs have developed a formidable franchise, with leadership positions in

sectors like Oil & Gas, Financials, Utilities, Mining and Heavy Engineering.
 Over the years, they have played a significant role in the growth of the Indian
economy. Central PSUs contribute ~20% to the national GDP.
th
 India ranks 7 in terms of share of PSUs (equally weighted share of sales, assets and
market value) in a country’s top 10 companies
Number of PSUs in India

In India, PSUs have grown considerably in number and size
863 An Independent India set up public sector undertakings (PSUs) in the first five-year
plan, primarily with the objective to achieve self-sufficiency and sustainable
economic growth. Since then, both state and central PSUs have grown in number
277
and size. Central public sector enterprises (CPSEs) have grown from just five, with a
total investment of INR0.3b in 1951, to 277, with a total investment of INR8,506b in
Central State
FY13. Additionally, there are several hundred state public sector enterprises and
departmental undertakings.
Source: Department of Public Enterprise
Growth in central PSUs in India*

10,000 Investment (INR b) No. of operating enterprises 240
8,000
230
6,000
220
4,000
210
2,000
0 200
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Source: MOSL, Department of Public Enterprises
*Data for central public sector enterprises. Includes government companies wherein the central government holds
>51% equity. Does not include departmental undertakings (e.g., railways, postal services, broadcasting, etc), public
sector banks, insurance companies and state level public enterprises.
Have built a formidable franchise, with leadership in multiple sectors

Indian PSUs have developed a formidable franchise and sizable business across
sectors. PSUs are leaders, with sizable market share in sectors such as Oil & Gas
(ONGC, GAIL, IOCL), Financials (SBIN), Utilities (NTPC, NHPC, PWGR), Mining (COAL,
NMDC), Heavy Engineering (BHEL), Logistics & Transportation (Indian Railways, SCI,
FCI, CWC, STCI), Aviation (Air India, HNAL) and Telecom (BSNL, MTNL). India’s
country state-owned-enterprise share* (CSS) is 58.9, the 7th highest in the world.
16 June 2014 6
PSUs have significant market share across sectors (%)

Public sector Private sector
22 9
33 32 23
43
78 91
67 68 77
57
Crude oil & gas Refinery crude Power Banking - total Telecom - fixed Coal production
production throughput generation - o/s loans lines
installed
capacity
Source: MOSL
Country state-owned-enterprise share*
China 96
United Arab Emirates 88
Russia 81
Indonesia 69
Malaysia 68
th
India ranks 7 in terms of Saudi Arabia 67
share of PSUs in a country’s India 59
top 10 companies Brazil 50
Norway 48
Thailand 37
Singapore 22
France 17
Ireland 16
Greece 15
Finland 13
Korea 10
Belgium 8 * CSS is an equally weighted average of state-
sweden 8 owned-enterprises shares of sales, assets and
market values among country‘s top ten
Austria 7
companies.
Turkey 3
Source: Kowalski, P. et al. (2013), OECD publishing
Number of PSUs in Forbes 2000, by Increasing importance of PSUs in line with trend in emerging countries
country The increasing importance of PSUs in India is contrary to the wide-scale privatization
70 in the developed world, but in line with the trend in emerging countries. Of the 204
state-owned companies on the Forbes Global 2000 companies list (year 2011), 30
30 were Indian. India had the second highest number of state-owned companies on the
list after China, which had 70.
9 9 8
China India Russia UAE Malaysia

Flag bearers of economic growth; CPSEs contributing ~20% to India’s GDP
PSUs have played a significant role in India’s economic growth. CPSEs’ total gross
Source: Kowalski, P. et al. (2013), OECD turnover as a percentage of India’s GDP has ranged between 18% and 23% during
publishing
FY92-13. Additionally, state-level PSUs contributed around 6% to India’s GDP (FY10).
Even relative to other developing and developed countries, the contribution of
state-owned companies to the Indian economy is significant.
16 June 2014 7
Contribution of CPSEs to India’s GDP State-owned enterprises’ share as percentage of GNI* (%)
Turnover (INR b) Turnover as percent of GDP (%) Market
Country Sales Profit Assets
Value
24,000 26%
Brazil 12.0 1.7 51.0 18.0
18,000 20% China 26.0 2.9 145.0 44.0
12,000 13% India 16.0 4.3 75.0 22.0

Indonesia 3.0 0.3 19.0 12.0
6,000 7%
Russia 16.0 3.0 64.0 28.0
0 0% South Africa 2.0 1.7 3.0 1.0
BRIICS average 12.5 2.3 59.5 20.8
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
OECD countries avg. 5.0 0.4 29.1 5.9
Source: Department of Public Enterprises, MOSL Source: Kowalski, P. et al. (2013), OECD publishing
*Financial data for 2011 and GNI for 2010 (covers PSUs that are part of Forbes 2000 list).
16 June 2014 8
Performance has deteriorated in last five years

However, profitability and growth have bottomed-out
 PSUs’ performance deteriorated in the second half of the last decade. Over FY09-14,
their aggregate sales and PAT grew at just a third of the growth rates achieved during
FY04-09.
 More than one-third (34%) of the CPSEs were loss-making in 2013 versus 27% in 2008.
 However, profitability and growth have bottomed-out. This is getting reflected in both
consensus and our estimates for the next couple of years.
Several PSUs have underperformed

There were 79 loss-making While some PSUs have performed well, several have underperformed in terms of
central PSUs (FY13); and growth, profitability and meeting social objectives. The underperformance was
215 loss-making state PSUs largely driven by (i) economic slowdown, (ii) inflexible structure, (iii) excessive
(FY10) government control and intervention, (iv) misuse of PSUs’ finances to meet the
government’s fiscal objectives, (iv) lack of preparedness post the financial crisis of
2008-09, and (v) uncompetitive operations.
Number of loss-making CPSEs has continuously increased during the last decade
Profit making CPSEs Loss incurring CPSEs
CPSEs making no profit/loss Total CPSEs
230 216 226 217 217 220 225 229
214 213
2 - 1 1 - - - 1
- -
89 73 63 61 54 55 60 62 64 79
139 143 160 154 160 158 157 158 161 149
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Source: MOSL, Department of Public Enterprises
The average contribution of Significant deterioration in performance in last five years

all CPSEs (both listed and Listed PSUs’ performance was markedly different in the two halves of the last
unlisted) to GDP during decade. Over FY09-14, their aggregate sales and PAT grew at just a third of the
FY04-09 was ~22% versus CAGR clocked during the previous 5-year period, FY04-09.
~19% during FY10-13.
Listed PSUs’ performance during two phases of last decade
FY04-09 FY09-14 FY04-14
Sales CAGR (%) 21.4 8.6 14.8
PAT CAGR (%) 19.4 5.7 12.4
PAT margin (%) 15.5 12.3 13.9
RoE (%) 20.5 15.6 18.1
RoCE (%) 19.1 13.3 16.3
Dividend yield (x) 2.8 2.8 2.8
PE (x) 11.6 14.7 13.1
PB (x) 2.4 2.3 2.3
Price performance rel to Sensex 7.9 (11.8) (2.1)
16 June 2014 9
Profitability and growth have bottomed-out

The new government at the center and its resolve to (1) turn around PSUs’
performance, and/or (2) pursue divestment/retirement policy with renewed vigor
augur well for the PSUs at large.
The aggregate PAT of listed PSUs (excluding banks and the three oil marketing
companies (OMCs)) is expected to register 4% growth compared with a 4% decline
in FY13. PSUs’ PAT growth is catching up with the rest of the market. MOSL
estimates indicate double-digit growth in PSUs’ aggregate PAT during FY15 (11%)
and FY16 (13%).
Against a decline in PSUs’ aggregate sales in FY14, MOSL estimates indicate 4%

growth in FY15 and 7% growth in FY16.
PSUs’ PAT growth catching up with larger market Sales growth likely to turn positive from FY15
60 PAT growth (listed PSUs) 40.0 Sales growth (listed PSUs)
BSE 200 Index PAT growth BSE 200 Index Sales growth
40 30.0
20 20.0
0 10.0
-20 0.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
PSUs continued to outperform the market in terms of profit margins, with long-term
PAT margin of 14.1% against 12.3% for BSE 200. RoEs of listed PSUs and BSE 200
stocks are largely comparable (14.5% for PSUs v/s 14.6% for BSE 200 in FY14).
PSUs continued to outperform the market on PAT margins RoEs have been comparable
20.0
25.0 Overall PSUs RoE (%)
15.0 BSE 200 Index RoE (%)
20.0
15.0
10.0
10.0
PAT margin (listed PSUs)
5.0
BSE 200 Index PAT margin 5.0
0.0 0.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
16 June 2014 10
Stark contrast in performance within PSUs

However, there is a stark contrast in performance within the PSUs. While PSUs
operating in the Resource and Utilities spaces have been competitive, Consumer-
oriented and Manufacturing PSUs have continuously underperformed.
Consumer-centric and Manufacturing PSUs have consistently underperformed.

This is manifested in lower sales growth and profitability of PSUs in Telecom and
Airlines as compared to other PSUs and their respective sector peers. Telecom PSUs
witnessed sales de-growth of 6% during FY04-14. PSUs in these sectors are loss
making, with significant negative average PAT margins during FY04-14 (Telecom: -
34%, Autos: -51%).
Resource and Utilities PSUs are more competitive primarily due to their
monopolistic situation and high entry barriers (capital cost, regulations), resulting in
better financial performance.
PSUs’ performance by sector (FY04-14)

PSUs sales CAGR, by sector (%) PSUs PAT CAGR, by sector (%) PSUs average PAT margin, by sector (%)
Utilities 21.1 17.8 20.9

Infrastructure 20.5 28.4 7.7
Oil & Gas 17.2 10.6 14.9
Capital Goods 13.5 15.3 13.1
Metals 9.9 9.5 13.3
Chemicals & Fertilizers 9.7 10.1 4.5
Misc 7.0 -4.0 3.7
NA -39.6
Telecom -6.0
NA -51.3
Automobiles -10.4
Profit concentration is significant among PSUs. The top-10 profit-making PSUs

contribute nearly two-third of the total profits of profit-making central PSUs. The
top-10 loss-making PSUs contribute a whopping 87% to the total loss of loss-making
central PSUs. The contrast in performance across sectors is clearly visible, with most
of the top profit-making PSUs belonging to the Resources and Utilities space, and
most loss-making PSUs being from Services and Manufacturing.
16 June 2014 11
Most profit-making PSUs are in Resources and Utilities Most loss-making PSUs are in Services and Manufacturing
100%=INR1,350 b (net profit of profit-making central PSUs) 100%=(INR283 b) (net loss of loss- making central PSUs)
ONGC NTPC Air India CPRL Hindustan

FCI
16% 9% 19% 6% Photo Films
8%
Coal India 6% Hindustan
7% Cables
MTNL MRPL
BHEL 3%
19% 3% Bharat
5%
NMDC Petro
5% 1%
IOCL Hindustan
4% Fertilizer
Others PFC Fertilizers &1%
37% BSNL Others Chemicals
GAIL Power Grid 3%
28% 13%
3% 3% 1%
Source: MOSL, Department of Public Enterprises Source: MOSL, Department of Public Enterprises
On BCG matrix, all resources, banks and capital goods PSUs figures as “stars” (high
market share in high growth sectors) indicating that they are doing well and offer
great opportunities. However, services-centric and light manufacturing related PSUs
figures as “question marks” (low market share in high growth sectors) signifying a
need to either revive or privatize/disinvest in such PSUs. Heavy manufacturing,
which includes railway components, defense, ship building, etc, is an exception.
These account for a large chunk of the current non-oil imports in India. Thus,
supporting this segment through opening up of the FDI in key areas (like defense,
railways, etc) is critical. We believe that PSUs stand to benefit given the already
established infrastructure in several cases, which can be scaled up / modernized
quickly.
Listed PSUs performance vis-à-vis market

40
QUESTION STARS
MARKS
Industry sales CAGR FY03-13 (%)
30 Utilities
Infrastructure
Automobiles Banks - PSU
Telecom Metals
20 NBFC
Capital Goods
Misc Chemicals & Fertilizers Oil & Gas
10
DOGS CASH COWS
0
0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0
Share in sector sales (%)
16 June 2014 12
Change in guard a possible trigger for turnaround

Will Mr Modi transform CPSEs as he did the Gujarat PSUs?
 Corporate India is replete with examples of transformation in companies’ fortunes

following leadership changes. This should apply to politics as well, and hence, to PSUs.
 As Chief Minister of Gujarat, Mr Narendra Modi transformed a number of state PSUs
by giving them more authority and autonomy in operations.
 With Mr Modi as Prime Minister, the capital markets are now looking for similar
transformative measures for the CPSEs.
Leadership changes often transform companies’ performance

We had argued in our earlier India Strategy note that change in management and its
impact on underlying performance is as relevant to politics (and hence, PSUs, as
they are controlled by the government) as it is to corporate India. Changes in senior
leadership of a company bring about changes in its goals and direction. Recent
history suggests that changes in senior leadership of underperforming companies
have given a renewed thrust to their operations, and hence, stock performance. A
few examples:
 Mr P J Nayak took over as MD of Axis Bank in January 2000. Since then, the
stock has delivered annualized returns of ~48%.
 Mr Romesh Sobti took over as CEO of IndusInd Bank in February 2008. Since
then, the stock has provided annualized returns of ~32%.
 Mr N Chandresekaran took over the reins of TCS in October 2009. Since then,
the stock has provided annualized returns of ~31%.
 Mr Bhaskar Bhat took over as MD of Titan in April 2002. Since then, the stock
has delivered annualized returns of ~45%.
 Mr Punit Goenka took over as MD of Zee in October 2009. Since then, the stock
has provided annualized returns of ~21%.
Change in management #1: Axis Bank Change in management #2: IndusInd Bank
Price (INR) Sensex Index Rebased Price (INR) Sensex Index Rebased
600
1,400 562
Romesh Sobti took over as CEO in Feb 2008
P J Nayak took over as MD in Jan 2000
1,050 450
CAGR: 48% CAGR: 32%
700 300
781
148
350 150
89
0 0
Feb-01
Sep-02
Feb-07
Sep-07
Jan-00
Jan-06
Mar-02
Mar-08
Jun-99
Dec-04
Jun-05
Jul-00
Aug-01
Jul-06
Apr-03
May-04
Nov-98
Nov-03
Aug-09
Jul-12
Oct-07
Oct-10
May-11
May-14
Feb-13
Sep-13
Jan-09
Mar-10
Jun-08
Dec-11
Source: Bloomberg, Company, MOSL Source: Bloomberg, Company, MOSL
16 June 2014 13
Change in management #3: TCS

Price (INR) Sector Index Rebased
2,600
N Chandrasekaran took over as CEO in Oct -09
2158
2,000
CAGR: 31%
1,400
1,044
800
200
Jan-08
Jan-12
Mar-09
Mar-13
Jun-07
Dec-10
Jun-11
Aug-08
Aug-12
Oct-09
Oct-13
May-10
May-14
Nov-06
Source: Bloomberg, Company, MOSL
Change in management #4: Titan Change in management #5: Zee

Price (INR) Sensex Index Rebased Price (INR) Sensex Index Rebased
340 300
Bhaskar Bhat took over as MD in Apr-02 307 Punit Goenka took over as MD
in Oct-09 273
255 225
198
CAGR: 45%
170 150
85 75
19 CAGR: 21%
0 0
Feb-09
Sep-10
Sep-11
Jan-08
Mar-10
Mar-11
Aug-08
Aug-09
Oct-12
Apr-12
Apr-13
May-14
Nov-13
Oct-01
Oct-03
Oct-05
Oct-07
May-10
May-12
May-14
Feb-01
Feb-03
Feb-05
Feb-07
Sep-09
Sep-11
Sep-13
Jan-09
Jan-11
Jan-13
Jun-02
Jun-04
Jun-06
Jun-08
Source: Bloomberg, Company, MOSL Source: Bloomberg, Company, MOSL
This should apply to politics as well, and hence, to PSUs

Similarly, we believe a change in the Indian government, which was marked by poor
governance, widespread corruption and policy paralysis under the UPA regime,
bodes well for the market. As Chief Minister of Gujarat, Mr Narendra Modi
transformed a number of state PSUs. The capital markets are now looking for similar
transformative measures for the central PSUs.
16 June 2014 14
Taking inspiration from Gujarat

As Chief Minister of Gujarat, Gujarat is the only state with profit-making state PSUs among the top 10 states in
Mr Narendra Modi terms of capital employed. Gujarat PSUs are also among the most productive,
transformed a number of ranking 4th in terms of turnover per employee and 5th in terms of PAT per
state PSUs by giving them
employee. Greater autonomy and an enabling environment have led to turnaround
more authority and
autonomy in operations and outperformance by Gujarat-based PSUs. Gujarat State Fertilizers and Chemicals
(GSFC), which posted a loss of ~INR4b in FY03, reported a PAT of ~INR5b in FY13.
During the same period, Gujarat State Petronet (GSPL) registered a PAT CAGR of
42%, followed by Gujarat Industries Power (GIPC; 25%), Gujarat Alkalies (24%) and
Gujarat Mineral Development Corporation (GMDC; 22%).
Gujarat tops the ten states with profit making PSUs
Net profit/loss, FY10, INR b Total capital employed, FY10, INR b

Gujarat 6 Maharashtra 705
Kerala 4 Rajasthan 501
Madhya Pradesh 1 Karnataka 453
Tripura 0 Punjab 436
Goa 0 Uttar Pradesh 376
Himachal Pradesh 0 Andhra Pradesh 358
Puducherry 0 Gujarat 333
Assam 0 Haryana 238
Andaman 0 West Bengal 238
Dadra Nagarhaveli 0 Odisha 155
Arunachal Pradesh (0) Kerala 142
Nagaland (0) Tamilnadu 136
Meghalaya (0) Chhattisgarh 85
Odisha (0) Jammu & Kashmir 74
Karnataka (1) Madhya Pradesh 29
Chhattisgarh (2) Delhi 19
Maharashtra (2) Assam 15
Bihar (2) Tripura 11
Andhra Pradesh (3) Bihar 6
West Bengal (4) Goa 3
Tamilnadu (4) Himachal Pradesh 3
Jammu & Kashmir (5) Puducherry 2
Rajasthan (7) Meghalaya 1
Haryana (11) Andaman 1
Punjab (15) Dadra Nagarhaveli 0
Delhi (37) Arunachal Pradesh 0
Uttar Pradesh (52) Nagaland 0
Source: National survey on state level public enterprises, 2009-10; MOSL
16 June 2014 15
Gujarat is among the top five states with most productive state PSUs
PAT per employee, FY10, INR '000 Sales per employee, FY10, INR '000
Andaman 235.8 Punjab 15,060

Puducherry 97.2 Bihar 6,061
Madhya Pradesh 90.3 Andaman 5,834
Goa 54.7 Gujarat 4,051
Gujarat 49.5 Madhya Pradesh 4,033
Kerala 46.9 Haryana 3,780
Tripura 31.2 Uttar Pradesh 3,667
Himachal Pradesh 30.4 Chhattisgarh 3,061
Assam 2.9 Himachal Pradesh 3,050
Karnataka (4.5) Odisha 2,505
Maharashtra (9.0) Jammu & Kashmir 2,459
Andhra Pradesh (12.8) Rajasthan 2,406
Odisha (13.0) West Bengal 2,287
Tamilnadu (23.5) Karnataka 2,189
Nagaland (33.3) Maharashtra 2,006
West Bengal (54.7) Tamilnadu 1,784
Meghalaya (62.3) Andhra Pradesh 1,671
Chhattisgarh (72.8) Puducherry 1,637
Rajasthan (78.7) Goa 1,060
Haryana (263.6) Kerala 1,037
Bihar (387.7) Delhi 774
Uttar Pradesh (433.0) Tripura 616
Delhi (582.5) Assam 398
Jammu & Kashmir (605.2) Meghalaya 353
Punjab (700.0) Nagaland 8
Source: National survey on state level public enterprises, 2009-10; MOSL
Gujarat PSUs have outperformed other listed PSUs in terms of sales and PAT growth
Sales CAGR 2004-14 (%) Avg PAT margin 2004-14 (%)

Gujarat Gujarat PSU sector (listed)
Gujarat State Petronet 22.3 32.8
Gujarat provides several
Limited 17.2 14.9
case studies of revival in
PSUs performance through Gujarat Mineral
16.8 25.5
governance reforms Development
9.9 13.3
Corporation
Gujarat State Fertilizers 9.9 9.3

and Chemicals 9.7 4.5
Gujarat Narmada Valley 11.3 9.0

Fertilisers 9.7 4.5
Gujarat Alkalies and 9.5 14.2

Chemicals Limited 9.7 4.5
16 June 2014 16
Case studies of turnaround of few Gujarat PSUs

Gujarat State Fertilizers & Chemicals (GSFC)
GSFC (PAT, INR b) GSFC is a clear example of PSU turnaround through bold policy decisions,
productivity enhancement, cost reduction through technology upgrade,
7.5 7.6
3.3 3.2 2.4
5.0 5.2 improvement in governance and reduction in political interference. GSFC, which was
1.8 1.5 2.5
loss-making in FY02 and FY03, generated profits in all subsequent years. It
registered an average PAT margin of ~10.6% during FY08-13.
-3.8 The revival was supported by the government of Gujarat, which had earlier set up a
PSU restructuring committee. On the advice of the committee, the government
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
professionalized the Board and gave complete autonomy to the management team
Source: Company, MOSL for day-to-day operations. A strong team monitored the progress being made. Other
major factors that turned the company profitable include:
 Efficient operations
 Reduction in cost of sales by substituting naptha and LSHS with natural gas
 Backward integration and competitive contracting with private players (JV with
Tunisian Indian Fertilizers; strategic stake in Karnalyte Resources Inc, Canada)
 Foray into the global market
 Technology upgrade (alternative energy generation facilities; formed 100%
subsidiary, GSFC Agrotech Limited for research and production of liquid
biofertilizers, plant growth promoters, etc)
 Focus on ideal product mix (diversified into MEK-oxime, biofertilizers and
biotechnology products, and advanced tissue culture facilities to support
horticulture and other crops)
GSPC (PAT, INR b)

Gujarat State Petroleum Corporation (GSPC)
8.5 GSPC is another turnaround story. It has grown from a company operating small gas
6.1 fields in Gujarat to an expansive Oil & Gas exploration, development, production,
4.1 3.7
2.8 2.8 2.3 3.2 3.2 and trading company, with global operations. The government of Gujarat gave it a
free hand and allowed to it expand globally. Currently, it holds working interest in
64 onshore and offshore exploration and production blocks, including 11 located in
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Australia, Egypt, Indonesia and Yemen.
Source: Company, MOSL

Gujarat Electricity Board (GEB)
GEB (PAT, INR b) GEB, earlier a loss-making state monopoly, was turned around through a series of
2 2 1 1 4 organizational restructuring and reform measures. First, GEB was restructured in
2005 into seven corporate entities: six functional entities (one each for generation
and transmission, and four distribution companies for four regions of the state) and
(9)
one holding company also handling bulk purchase and sale of power. Consumer-
(19)
centric services and improvement in key metrics (higher PLF, lower T&D losses,
optimum use of resources and manpower) also helped the turnaround. Most
FY04
FY05
FY06
FY07
FY08
FY09
FY10
notably, the turnaround came despite no hike in power tariffs for the last six years
Source: Company, MOSL (barring the 63p/unit pass-through of higher fuel surcharge).
16 June 2014 17
Restructure or retire?
Expect a mix of both; proposing a ‘SECURE’ framework for revival
 Emphasis on professional restructuring of PSUs is clearly visible in some recent

comments from the new government.
 We propose a ‘SECURE’ framework to turn around PSUs’ performance. However,
divestment would also be a necessity to further the development agenda.
 We expect the government to keep the PSUs of strategic and social importance but
restructure them, and increase divestment in others (or even privatize them).
With the revival of Gujarat PSUs and the man behind it, Mr Narendra Modi now at
the center, the debate has opened on whether the government’s stake in Indian
PSUs would be divested or would the government try to revive and restructure PSUs
to make them viable business entities. We expect the government to follow a dual
policy – keep the PSUs of strategic and social importance but restructure them, and
increase divestment in others (or even privatize them).
Key challenges faced by PSUs

Indian PSUs face unprecedented political interference. The government looks at
PSUs not as for-profit businesses, but merely as organizations with a socio-political
agenda, thus hurting the interests of minority shareholders. This manifests itself
through (i) high subsidy burden (in case of OMCs), (ii) payment of jumbo dividends
(most PSUs) instead of investing excess cash in value enhancing opportunities, (iii)
conduct of operations (awarding contracts to private sector, etc), (iv) talent and
compensation policies, and (v) continued underachievement of disinvestment
targets.
Challenges faced by PSUs
Excessive
bureaucratic Multiple
government principles and
control and multiple goals
Union- intervention
ization Talent
issues
Inflexible
structure
Lack of
Miss-use of PSUs clarity in
vision Uncompetitive
financials to control
operations
government’s fiscal
situation
Source: MOSL
16 June 2014 18
PSUs face unprecedented PSUs have been bereft of proper autonomy and authority to make investments and
challenges compared with acquisitions both in India and overseas. They are required to follow convoluted
their private counterparts procedures and face protracted delays, which limits their operational and strategic
due to excessive political decision-making. While Maharatna and Navratna PSUs have been given some
interference
autonomy to make investment decisions, they face substantial interference in
operations, including recruitment, board and key management appointments, etc.
PSUs lag their private sector peers in talent management, including (i) attracting and
retaining right talent, (ii) providing adequate compensation based on meritocracy,
and (iii) equipping employees with right skills and technology.
Restructuring of PSUs to make them viable: A possibility

The new NDA government’s pro-privatization stance, and more importantly, Prime
Minister Narendra Modi’s focus on reviving PSUs through professional makeover
and greater autonomy should drive improvement in PSUs’ performance. The
management teams of the PSUs too are optimistic and are waiting in anticipation.
Emphasis on professional restructuring of PSUs is clearly visible in some recent
comments from the new government.
Recent comments in favor of PSU revival
“These decisions should be professional and not “Gujarat has shown the way that even loss
political. Even today if you take the employees of incurring public sector companies could be made
these PSUs into confidence and empower them profitable with correct planning. We are hoping for
they can deliver a better performance than a lot of same kind of financial restructuring without
private firms. We should not doubt the capability burdening the consumers.”
of the employees of PSUs but instead have faith in
them”
Narendra Modi on PSUs privatisation Pyush Goyal, Union Minister of State for Power
(then PM designate)
"His [Modi's] views [on disinvestment] are not the “We are hoping that a lot will change around PSUs.
same as mine … There will be constraint of And I hope they [the new government] do it within
resources. Other means will be required for the first month of taking charge else it will be
revenue generation…He [Modi] has managed to difficult to do”
turn around industries like GSFC and the electricity
boards”
Arup Roy Choudhury, Chairman and MD, NTPC

Arun Shourie, Former minister,
Disinvestment, in previous NDA
Source: Industry news
Is it really hard to bring in change and revive PSUs?

Is it really hard
to revive PSUs?
Gujarat PSUs
revival suggest
otherwise.
Source: Industry news
16 June 2014 19
Maharatna, Navratna and Miniratna: Do we need such classification?

The Department of Public Enterprises confers the status of Maharatna, Navratna
and Miniratna to various PSUs. The classification is based on the size and quality of
past earnings and confers varying degrees of autonomy. The question is, “Do we
need such classification?” Curbing the autonomy of Miniratna or unclassified PSUs
based on past performance would, in our view, further restrict their potential
turnaround. We believe the government should focus setting up SLAs (including
shareholder value creation) and monitoring mechanism, and let the board and
management of individual PSUs undertake day-to-day management including
investing and financing activities.
Classification of PSUs in India
Source: MOSL, BSEPSU.com
16 June 2014 20
Strategy | PSU
Benefits of Maharatna, Navratna and Miniratna status

Capital JV and subsidiary Restructuring and HR Capital M&A Business
Expenditure investment management raising travel
 No monetary  Equity investment to establish  Effect organizational restructuring  Raise debt from domestic  Undertake M&A subject to  Approve travel of directors
ceiling on financial JV, owned subsidiaries including creation of profit centers, and international markets, conditions that i) it should be in line <5 days duration in
capital & undertake M&A in India or creation of below board level posts upto the latter being subject to with the growth plan & in core area emergency under
investments abroad, subject to a ceiling of E-9 level & abolition of all below board approval from RBI/ of the functioning, ii) Cabinet intimation to
Maharatna 15% of net worth, limited to level posts, delegation of powers to Department of Economic Committee on Economic Affairs Administrative Ministry.
INR 50b in one project along make all appointments, effect internal Affairs, as applicable & (CCEA) to be informed in case of All other cases including
with an overall ceiling of 30% of transfers & re-designation of all below should be obtained investments made abroad those of CEO, travel
net worth on all projects put board level posts, structuring and through the abroad would continue to
together implementing schemes relating to HR Administrative Ministry require the prior approval
and training of the Ministry.
 No monetary  Equity investment to establish  Effect organizational restructuring  Raise debt from domestic  Undertake M&A subject to  Approve abroad travel of
ceiling on financial JV & owned including creation of profit centers, etc, markets and for conditions that i) it should be in line directors <5 days duration
capital subsidiaries in India or abroad, creation of below board level posts upto borrowings from with the growth plan & in core area in emergency under
Navratna investments subject to a ceiling of 15% of E-6 level & abolition of all below Board international market, of functioning, ii) conditions/ limits intimation to
net worth, limited to INR10 b in level posts, delegation of powers related subject to approval of RBI/ would be as in case of establishing Administrative Ministry.
one project along with an to HR management (appointments, Department of Economic JVs/ subsidiaries and iii) CCEA to be All other cases including
overall ceiling of 30% of net transfers, postings etc.) of below Board Affairs, as applicable & informed in case of investments those of CEO, travel
worth on all projects put level executives by Board of Directors to should be obtained made abroad abroad would continue to
together Board sub-committees or to executives o through the administrative require the prior approval
fPSUs Ministry of the Ministry.
 Monetary • Equity investment to establish  Structuring & implementing schemes  NA • Undertake mergers and acquisitions  Approve abroad travel of
ceiling of joint ventures and subsidiaries related to personnel and human subject to conditions that i) it should directors <5 days duration
INR5 b or in India, subject to a ceiling of resource management and training, etc, be in line with the growth plan & in in emergency under
Miniratna I equal to net 15% of net worth, limited to delegation of powers related to human core area of the functioning of intimation to
worth, INR 5b in one project along resources management (appointments, respective CPSE, ii) conditions/ limits Administrative Ministry.
whichever is with an overall ceiling of 30% of transfers, postings etc.) of below Board would be as in case of establishing All other cases including
lower net worth on all projects put level executives by Board of Directors to joint ventures/ subsidiaries and iii) those of CEO, travel
together Board sub-committees or to executives CCEA to be informed in case of abroad would continue to
of the CPSE investments made abroad require the prior approval
of the Ministry.
 Monetary • Equity investment to establish  Structuring & implementing schemes  NA • Undertake mergers and acquisitions  Approve abroad travel of
ceiling of Rs. joint ventures and subsidiaries related to personnel and human subject to conditions that i) it should directors <5 days duration
250 crores or in India subject to a ceiling of resource management and training, etc, be in line with the growth plan & in in emergency under
Miniratna II 50% of net 15% of net worth, limited to delegation of powers related to human core area of the functioning of intimation to
worth, INR2.5 b in one project along resources management (appointments, respective CPSE, ii) conditions/ limits Administrative Ministry.
whichever is with an overall ceiling of 30% of transfers, postings etc.) of below Board would be as in case of establishing All other cases including
lower net worth on all projects put level executives by Board of Directors to joint ventures/ subsidiaries and iii) those of CEO, travel
together Board sub-committees or to executives CCEA to be informed in case of abroad would continue to
of the CPSE investments made abroad require the prior approval
of the Ministry.
16 June 2014 21
SECURE framework for revival of PSUs

We believe that PSUs can be made to perform using a SECURE framework described
below: S – Strong professional management, E – Empowerment, C – Control through
predefined service level agreements (SLAs), U – Upgrade in technology, R –
Restructuring, and E – Expand.
SECURE framework to revive PSUs
Strong professional management

 Focus on strategic leadership
S  Induct industry experts with proven track record
 Induct technocrats both in management and board
Empowerment
 Reduce political interference beyond policy issues
E  Full autonomy to management and board for day-to-
day operations of all PSUs
Consolidate and control through SLAs
 Consolidate under one PSU watchdog; sever ties with
C ministries. Set vision and overall goals.
 Monitor performance through pre-defined SLAs
Upgrade technology and skills
 Continuous upgrade in technology to remain competitive
U and generate efficiencies
 Upgrade talent and technical know-how
Restructuring
 Align businesses, supply chain, products and operations
R  Improve fiscal prudence
 Optimize usage of resources
Expand
E  Expand globally
 Expand product portfolio
Source: MOSL
Divestment: A must
The long-term Disinvestment of government-owned entities in India has been way short of the
disinvestment achievement target set for the years. While bulk of the divestment happened during FY10-14
rate (actual disinvestment (two-third of the total disinvestment proceeds since 1991), but the actual proceeds
as a proportion of the during the period were ~44% short of the INR1,890b target.
target) is just 46%.
During FY08-12, India’s disinvestment proceeds accounted for just ~1% of global
privatization revenues. This peaked in FY11 (5.3%), primarily driven by 50%
reduction in global privatization revenues in 2011 due to global financial
retrenchment prompted by eco-political crises in Europe and the US.
Disinvestment in recent years has been way short of the Indian disinvestments are miniscule compared to the global
target privatization proceeds
600 Disinvestment Target (INR b) Indian disinvestment proceeds as % World's privatization
revenues 5.3
Disinvestment achieved (INR b)
450
3.6
3.2
300 2.3
1.9
1.5
1.1 1.0
150 0.9 0.9 1.0 0.9
0.2 0.4 0.3
0.0 0.1 0.0 0.0
0.1 0.2
0
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
Source: MOSL, Department of Disinvestment Source: MOSL, Privatization Barometer's PB report 2012
16 June 2014 22
To address India’s fiscal deficit and improve economic efficiencies, we believe it is

imperative for the government to urgently divest more. Focusing on restructuring
and revival of PSUs may not be enough, as the government would need funds to
push economic growth. We expect the government to continue divesting in
profitable and core PSUs while retaining its majority holding (e.g., in PSU banks,
ONGC, Coal India, GMDC, NTPC, PowerGrid, etc). It could sell significant stake in (or
even privatize) PSUs engaged in non-core areas such as Autos and Healthcare, and
where government holding is low and revival is difficult.
‘Restructure or retire’ guideline framework
DIVEST / PRIVATIZE DIVEST
• Concor PSU Banks
High • Balmer Lawrie ONGC
Investment Coal India
GMDC
NTPC
Profitability
Power Grid
PRIVATIZE REVIVE
 Scooters India • Mysore Paper SAIL
 HMT • Dredging Corp Petronet
 ITDC • HFL CPCL
Low
 Balmer Lawrie • Hind Photofilms OMCs (BPCL, HPCL, IOCL)

 Mysore Lamps • STC
• MMTC
Low (non-core) High (core)

Strategic importance
Source: MOSL, Department of Disinvestment
Disinvestment timeline
 Sale to CPSEs: KRL, CPCL and BRPL

 Strategic sale: BALCO, LJMC, CMC,
HTL, VSNL, IBP, PPL, HZL, IPCL, hotel
properties of ITDC and HCI,  Strategic sales in
 Slump sale of Hotel Centaur, NHPC, OIL, NMDC,
Mumbai and leasing of Ashok SJVN, EIL, COAL
Bangalore INDIA, PGCIL,  Planned sale of
 Minority shares sold by  Special dividend: VSNL, STC, MMTC MOIL, SCI, PFC, Tyre Corporation
auction method in  Sale to employees: VSNL, HZL, CMC NBCC, HCL, PFC of India, Hindustan
bundles of "very good",  Premium for renunciation of rights  Further dilution in Copper and
"good" and "average" issue in favour of SMC NTPC, REC, ONFC, Rashtriya Ispat
companies  Put Option of MFIL NMDC Nigam
1991-96 2000-03 2008-12 2014
1996-00 2003-08 2012-14

 GDR of VSNL, MTNL, GAIL  Strategic sale of JCL; Call  Strategic sale of NBCC,
 Domestic offering of VSNL, Option of HZL RCF, NALCO, NFL, NLC,
Concor, GAIL  Offer for Sale of MUL, IBP, BHEL
 Cross purchase by GAIL, ONGC IPCL, CMC, DCI, GAIL, NTPC,  Further dilution in HCL,
and IOC PGCIL, REC and ONGC NMDC, OIL, NTPC, SAIL,
 Strategic sale of MFIL  Sale of shares of ICI Ltd MMTC, ITDC, STC,
 Capital reduction and dividend  Sale of shares to IPCL NHPC, PGCIL, EIL, IOCL
from BALCO employees  CPSE-ETF
 Sale of MUL shares to DIIs,
banks and employees
Source: MOSL, Department of Disinvestment
16 June 2014 23
Right to disinvest: Masterstroke suggestion

Swaminathan Aiyar in an open letter to Finance Minister, Arun Jaitley, has made a
masterstroke suggestion to the legislative bottleneck plaguing multiple sectors.
Consider the following:
 Problem #1 – Oil Companies: Vajpayee government sought to privatize

government-owned oil companies (HPCL, BPCL). But these had been
nationalized through legislation, and the courts said the government couldn’t
sell a majority stake without fresh legislation. The Vajpayee government lacked
a majority in the Rajya Sabha, and so dropped the whole idea.
 Problem #2 – Coal Sector: Coal was nationalized by law in the 1970s. Courts
held that new legislation was required to divest more than half the government
stake in Coal India, or allow any private mines save for captive consumption. For
want a majority in both houses, neither the NDA nor UPA governments could
push forward on this.
 Problem #3 – PSU Banks: Without fresh legislation, the government cannot
drop its stake in nationalized banks (which account for 70% of the banking
system) below 50%. Indian banks must raise massive equity to keep lending in
coming years. Can the government find lakhs of crores from its budget to
recapitalize public sector banks?
 Problem #4 – Education System: Court decisions mandate that no state
government can approve a private university by executive decree: this needs
fresh legislation, with all the red tape, politics and corruption involved. Private
universities are a badly needed form of education reform, but the legislative
requirement means they are hamstrung.
What is the solution? – A new omnibus law giving government right to

disinvest, including right to privatize
The government should not see these as separate issues. Tackle them all in one go
by enacting a new omnibus law giving the government the right to disinvest by
executive action, overriding existing laws. In one sweep, it will allow government to
sell majority stakes in any government companies, raising resources for the budget
and infrastructure. It will let government denationalize coal and rapidly kick-start
new private universities. It will let public sector banks raise fresh capital on the
markets, reducing the government’s stake below 50%. Time is of the essence. The
government lacks a majority in the Rajya Sabha. If a Bill passes the Lok Sabha but
fails in the Rajya Sabha, the government can convene a joint session to pass it, and
the government now has an overall majority. But this is a politically painful and
time-consuming process, which government cannot wish to go through for every
economic reform. It’s surely preferable to have one omnibus Bill giving the
government the right to lower its shareholding in any government companies to any
level it pleases. This will facilitate rapid reforms in many areas, including coal.
Link to full letter: http://blogs.timesofindia.indiatimes.com/Swaminomics/jaitley-

should-enact-a-right-to-disinvest/
16 June 2014 24
Profitability at bottom; valuations attractive

Identifying likely winners in the PSU space
 The profitability of Indian PSUs, most of which were plagued with project delays,
policy paralysis and high debt, is almost at half the FY04 levels.
 However, we believe the worst is behind and the new government’s policy actions
could lead to a revival in their fortunes.
 In this backdrop, we identify likely winners among the listed PSUs.
The worst is behind, in our view

The profitability of Indian PSUs is almost at half the FY04 levels, with PAT margin at
6% (against 9.5% in FY04) and RoE at ~10% (against a healthy 18-20% in FY04).
However, we believe that the worst case scenario has played out for PSUs, which
were plagued with various issues including project delays, policy paralysis and high
debt.
Profitability of PSUs impacted much more than private peers in last five years
18
15 16 15
12 13 12
9
PSUs BSE200 PSUs BSE200 PSUs BSE200 PSUs BSE200
FY04-08 FY09-14 FY04-08 FY09-14
Avg. EBITDA margin (%) Avg. EBIT margin (%)
PSUs’ profitability declined rapidly in the last five years… …with EBIT margin in FY14 almost half the FY04 level
PSU EBITDA Margin (%) BSE 200 EBITDA Margin (%) PSU EBIT Margin (%) BSE 200 EBIT Margin (%)
17.0 15.1
14.8 15.0
11.9
11.6
14.5 13.6
11.2
10.5 9.1
7.8
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
16 June 2014 25
Return ratios of PSUs have declined; RoCE declining more PSUs couldn’t catch up with the private sector despite their
than RoE dominant position in the early 2000s
RoE (%) RoCE (%)
PSU PAT as a % of BSE 200 sales
19.3 57% PSU Mcap as a % of BSE 200 MCap
16.1 35%
18.4 15.0 40%
13.4 21%
10.8
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Lower valuations led by lack of Board control, lower profitability

PSU valuations have been at a discount to the broader markets, primarily due to (1)
greater operational and strategic control by the government, (2) lower profitability
in the recent years, and (3) higher dividend payout to meet the government’s fiscal
requirements, irrespective of the PSUs’ reinvestment needs.
Even in sectors like Mining and Utilities, where PSUs are market leaders, valuations
are lower than private peers, as reported profitability is not a reflection of true
business profitability, in our view. We expect the new government to focus on
improvement in PSUs’ operations and grant greater autonomy to their Boards of
Management. This could help revive their return ratios and lead to re-rating.
Is prevailing market price a reflection of true intrinsic value?

PSU valuation has always been a challenging task for the government during the
divestment process. Often, the prevailing profitability of a PSU does not reflect the
true profitability of its underlying business. This is because, unlike a private business
entity, the PSU’s primary focus is not on profit. PSUs serve a larger social goal.
We believe that investors should not use the prevailing market valuation of a PSU as
a benchmark. Instead, the focus should be on discovery of the true value of the
underlying business, which will be achieved with reduction in government control.
Increasing gap between PSUs and market P/E … … so is the case with P/B
Overall PSUs PE (x) BSE 200 Index PE (x) Overall PSUs PB (x) BSE 200 Index PB (x)
22 4
18
3
14
2
10
6 1
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY15E
FY16E
16 June 2014 26
PSUs’ payout higher than non-PSUs; special dividends by However, lower profitability keeps valuations subdued,
OINL and COAL boosted recent year payouts resulting in higher dividend yield
BSE 200 Payout (%) PSU Payout (%) PSU dividend yield (%) BSE 200 dividend yield (%)
50 5
40 4
30 3
20 2
10 1
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Profitability to improve with right policy decisions; will drive re-rating

A BJP-led government had presided over the early divestment and privatization
drive in 1998-2004. With the BJP-led NDA once again in power,
privatization/divestment could gather steam. However, given the turnaround of the
Gujarat PSUs, we believe the government could first resurrect the profitability of the
PSUs before opting for divestment.
If the right policy decisions are taken, PSUs’ profitability should improve, making a
Our top PSU picks include strong case for a re-rating. Prominent PSUs that we believe will see a sharp upturn
BHEL, BPCL, SBI, NTPC and in profitability, and consequently, a significant re-rating include BHEL, BPCL, SBI,
ONGC NTPC and ONGC.
Valuation table: Our top picks in PSU’s

Div. Abs.
Mkt Target Up- Sales Sales PAT PAT P/E P/B RoE
Yld Perf.
Company Cap Price side INR b Gr. (%) (INR b) Gr. (%) (x) (x) (%)
(%) (%)
INRb (INR) (%)
FY14 FY15 FY16 FY17 CAGR FY14 FY15 FY16 FY17 CAGR FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 FY15 3M 12M
O N G C 3,803 500 17 1,732 10.9 7.9 2.0 14.8 266 20.3 13.2 2.0 11.0 11.3 10.0 9.8 1.9 1.7 1.5 18.1 18.3 16.7 2.8 37.9 42.3
SBI 2,013 3,240 26 676 18.3 16.9 21.0 15.6 142 44.9 26.8 31.0 9.9 12.1 9.5 7.3 1.2 1.0 0.9 13.5 15.3 17.6 1.7 60.4 28.4
NTPC 1,348 187 15 716 7.5 5.7 9.9 14.3 99 -6.9 15.3 16.0 6.6 11.1 9.6 8.3 1.2 1.1 1.0 10.8 11.8 12.8 3.6 32.3 3.8
BHEL 590 300 24 391 -15.7 10.2 11.3 16.7 36 -31.5 51.4 29.5 16.5 25.6 16.9 13.1 1.8 1.7 1.6 7.3 10.5 12.6 1.2 31.8 35.8
BPCL 442 676 15 2,643 -3.0 4.2 3.3 17.0 39 -29.2 21.0 13.0 7.3 14.3 11.8 10.5 1.8 1.7 1.5 13.7 15.0 15.3 1.8 37.2 66.3
16 June 2014 27
Strategy | PSU
Sector and key PSU stocks to watch out for

Sectors What went wrong? Key reforms/ changes expected from new government Key stocks to watch out for
Financials  Stubborn inflation and volatility in INR resulted into tight liquidity  Resolution of bottle-necks created in infrastructure space and revival of  State Bank of India
conditions and high interest rate. growth would led to better loan growth and ROA (led by fall in credit  Canara Bank
 Moderating economic growth and fall in new investment demand has led cost).  Punjab National Bank
to significant slowdown of loan growth and increase in stress levels in the  Improvement in State DISCOMs financial health.  Union Bank of India
system.  Shareholding of GoI in state-owned banks to be brought below/at least
 Stress loans percentage for PSU Banks increased by 3x+ in last five years. 51%.
 AS-15 related provisions led to significant hit on the BV and profitability.  Access to foreign capital for state-owned banks is capped at 20% as
 Unable to raise capital and thus led to serious growth concerns and compared to 74% for private banks. Voting rights capped could be
eroding valuations increased.
 Design a new governance structure/HR reforms for PSU banks viz. i) pay
structure of the employees to be in sync with market, variable structure
to be introduced and ii) top management of the banks tenures should be
elongated as short tenures act as an impediment in laying out a well
defined strategy and implementation of the same.
 Consolidation among state-owned banks.
NBFCs Infrastructure Finance Companies
 Fuel shortage impacting the PLF; which is limiting the ability to service  Improvement in financial health of SEBs.  Power Finance
debt.  Resolution of fuel supply issues. Corporation
 Stressed financial health of SEBs and mounting debt burden
Asset Finance Companies

 Sharp decline in manufacturing, infrastructure, & investment activities,  Reducing the excise rates on commercial vehicles to revive demand.
impacted CV sales  Improvement in road infrastructure would increase the efficiency of
 Moreover, freight rates have been on a decline and diesel prices went up, vehicle and reduce turnaround time.
exerting pressure on profitability of CV financiers.
Capital  Projects completed (as a % of projects under implementation) have  Massive pick-up in government capex and spend in sectors like roads,  BHEL
Goods touched abysmally low (3.4%), thus impacting the virtuous cycle of cash railways, urban infrastructure, oil & gas, and power.
flow generation in the system.  Addressing the last-mile issues in terms of fast -tracking stuck projects.
 Public Private Partnership models in various sectors like roads, railways, Cabinet Committee on Investments has already cleared projects worth
ports, airports, etc. got impacted given weak regulatory and ~INR20t (equivalent to ~25% of the projects under implementation).
implementation structures.  Simplify contentious issues like land acquisition and forest clearances.
16 June 2014 28
Strategy | PSU
Sectors What went wrong? Key reforms/ changes expected from new government Key stocks to watch out for
Power  Power sector is reeling under pressure of poor demand.  Improvement in State DISCOMs financial health.  NTPC
 State owned power distribution companies faced mounting losses and  Augmenting/enabling fuel supply to projects.  Coal India
unserviceable debt components.  Cohesive regulatory framework.  PowerGrid Corporation
 Two decade low reported deficit.  Reliable and wide grid connectivity.
 Excessive fuel shortage impacting plant load factors (PLF) of Coal and Gas
projects
Metals  Steel demand slowed down from double digit annual growth during FY05-  We expect revival in infrastructure and capex cycle to boost the demand  SAIL
FY11 to grinding halt in FY14. for Metals.  NMDC
 Project execution became tardy due to both external and internal factors  The working of govt. and PSU is likely to get more efficient as new
for PSUs. ministers encourage performance rather than sycophancy.
 Shortage of domestic coal and higher prices at E-auction drove up costs  Remove the impediments so as to increase coal and mineral output.
and affected viability of new power intensive investments. This led to
idling of new capacities.
 Production of iron ore declined due to crack down on illegal mining and
virtual stop to granting of new mining leases for iron ore, bauxite & coal.
 Naxal activities affected supply chain and new investments.
16 June 2014 29
Annexure I: Valuation table for listed PSUs

Sales Sales PAT PAT P/E P/B RoE Div. Abs.
Mkt Cap
Company INR b Gr. (%) (INR b) Gr. (%) (x) (x) (%) Yld Perf. (%)
(INR b)
FY14 FY15 FY16 CAGR FY14 FY15 FY16 CAGR FY15E FY16E FY15E FY16E FY15E FY16E FY14 3M 12M
ONGC 3,803 1,732 10.9 7.9 14.8 266 20.3 13.2 11.0 11.3 10.0 1.9 1.7 18.1 18.3 3.0 37.9 42.3
Coal India 2,460 688 6.0 6.8 NA 160 13.2 7.4 NA 13.6 12.7 5.0 4.3 36.5 33.8 10.4 51.5 32.6
State Bank of India 2,013 676 18.3 16.9 15.6 142 44.9 26.8 9.9 12.1 9.5 1.2 1.0 13.5 15.3 1.8 60.4 28.4
NTPC 1,348 716 7.5 5.7 14.3 99 -6.9 15.3 6.6 11.1 9.6 1.2 1.1 10.8 11.8 4.5 32.3 3.8
IOCL 816 4,873 -12.5 -0.6 15.4 71 2.4 17.9 -0.6 11.2 9.5 1.1 1.0 10.0 10.9 3.1 30.3 38.5
NMDC 711 119 9.3 4.3 23.4 65 8.1 2.5 31.1 10.1 9.9 2.2 2.1 21.8 21.0 6.5 38.7 65.3
Power Grid Corpn 698 152 15.6 18.4 21.0 47 6.1 21.7 20.7 14.0 11.5 1.8 1.7 13.1 14.4 2.4 35.7 23.4
BHEL 590 391 -15.7 10.2 16.7 36 -31.5 51.4 16.5 25.6 16.9 1.8 1.7 7.3 10.5 1.4 31.8 35.8
GAIL (India) 564 572 5.4 12.0 17.0 40 -1.6 1.6 8.0 13.9 13.6 1.8 1.7 13.3 12.4 2.8 19.5 48.5
BPCL 442 2,643 -3.0 4.2 17.0 39 -29.2 21.0 7.3 14.3 11.8 1.8 1.7 13.7 15.0 3.7 37.2 66.3
SAIL 403 471 5.6 15.2 7.8 19 48.8 35.4 -2.8 14.3 10.5 0.9 0.8 6.2 7.8 2.8 75.2 77.7
Power Fin.Corpn. 394 83 20.0 13.6 14.2 56 20.0 12.8 13.3 5.9 5.2 1.3 1.1 22.0 21.2 5.4 73.3 82.9
Bank of Baroda 367 120 17.6 20.5 16.6 45 14.8 27.6 16.7 7.1 5.5 1.0 0.9 14.5 16.4 3.5 33.4 37.9
Oil India 364 91 7.3 22.5 11.2 30 12.2 22.2 12.1 10.7 8.8 1.6 1.5 14.9 16.5 4.5 25.6 5.6
Punjab National Bank 343 161 9.5 18.4 16.1 33 31.6 30.4 11.7 7.8 6.0 0.9 0.8 12.1 14.0 1.6 56.8 32.1
Rural Electrification 338 68 15.7 16.3 32.8 47 16.8 16.3 22.6 6.2 5.3 1.5 1.3 24.5 23.6 44.3 66.2 72.7
NHPC Ltd 292 67 8.3 3.3 NA 26 13.9 3.3 NA 9.8 9.4 0.9 0.9 9.7 9.5 3.9 52.1 44.4
Container Corporation 225 51 12.3 15.8 11.2 9 13.7 13.5 10.3 20.8 18.3 3.0 2.7 14.6 14.8 1.3 43.0 58.4
Canara Bank 202 89 17.5 17.5 12.8 24 10.8 30.7 6.2 7.5 5.7 0.8 0.7 10.8 12.9 4.9 89.3 16.1
Bank of India 186 108 18.3 18.3 17.3 27 29.1 30.5 10.5 5.3 4.0 0.7 0.6 13.2 15.2 2.5 48.5 6.7
IDBI Bank 168 59 9.7 7.5 NA 7 19.0 13.8 4.3 19.9 17.5 0.8 0.7 3.9 4.3 4.3 82.7 39.1
Neyveli Lignite 162 60 12.5 13.1 7.7 15 8.2 5.0 2.8 10.0 9.5 1.1 1.1 10.9 11.3 5.2 70.3 68.1
Bharat Electronics 146 64 10.9 13.7 8.4 10 -4.1 7.3 11.2 16.0 14.9 1.9 1.8 11.8 11.9 2.0 80.7 40.5
Union Bank (I) 143 79 15.8 15.8 16.3 17 18.0 24.9 9.1 7.1 5.7 0.8 0.7 11.3 12.8 3.4 109. 9.2
Natl. Aluminium 141 68 16.0 0.1 8.1 7 22.1 -8.6 -0.7 17.0 18.6 1.1 1.1 6.5 5.8 3.2 58.1 88.4
HPCL 138 2,231 -0.2 7.5 15.8 17 -45.1 23.5 -0.5 14.5 11.7 0.9 0.8 6.2 7.2 5.0 48.4 63.0
Petronet LNG 123 377 7.3 20.3 NA 7 8.1 25.0 NA 15.9 12.7 2.2 1.9 13.7 15.1 1.1 30.0 27.6
Central Bank 105 65 51.1 6.8 11.8 -13 - 87.9 NA 20.6 11.0 0.6 0.6 3.2 5.8 NA 78.4 21.7
Engineers India 104 18 16.6 15.5 3.7 5 16.0 18.6 19.4 18.5 15.6 3.8 3.5 20.4 22.2 2.7 69.4 108.
UCO Bank 103 61 31.0 12.7 17.6 15 4.5 19.5 13.2 6.5 5.4 1.0 0.9 14.9 15.7 4.8 57.8 37.3
Hindustan Copper 100 15 NA NA 12.6 3 NA NA NA NA NA NA NA NA NA NA 73.5 37.4
IOB 100 56 56.0 14.3 13.3 6 30.1 59.5 1.6 12.7 8.0 0.7 0.6 5.6 7.7 4.2 76.6 41.0
SJVN 99 19 21.7 11.3 24.0 11 5.8 6.8 NA 8.4 7.8 1.0 1.0 12.5 12.4 4.8 20.1 21.3
Oriental Bank 96 51 11.4 16.0 13.4 11 20.7 20.1 5.2 7.0 5.8 0.7 0.7 10.3 11.4 4.0 70.8 38.2
Syndicate Bank 96 55 43.8 15.8 14.5 19 -5.6 18.7 15.6 5.5 4.6 0.8 0.7 15.0 15.4 7.5 83.2 33.7
MMTC 94 279 NA NA 11.5 1 NA NA 1.0 NA NA NA NA NA NA 0.3 84.1 -40.0
Indian Bank 79 44 18.0 19.9 14.6 12 19.9 25.2 9.4 5.7 4.6 0.7 0.6 11.5 13.1 4.8 66.1 34.7
Allahabad Bank 73 53 52.9 12.4 17.3 12 13.1 16.9 9.4 5.4 4.7 0.6 0.5 11.0 11.7 6.1 71.7 26.2
Corporation Bank 66 39 17.3 15.3 15.0 6 21.4 17.5 3.4 8.4 7.1 0.6 0.6 7.5 8.3 2.9 66.5 5.2
Andhra Bank 57 37 10.9 13.4 15.1 4 14.0 6.5 -0.5 11.3 10.6 0.6 0.6 5.7 5.8 3.4 73.8 14.9
MOIL 53 10 5.8 7.3 16.1 5 -2.3 10.7 33.4 10.7 9.6 1.6 1.4 15.0 14.5 2.2 36.7 53.8
GMDC 52 13 27.4 11.6 16.8 4 27.6 8.5 18.4 9.3 8.5 1.7 1.4 18.3 17.0 2.2 32.7 38.0
Indraprastha Gas 47 39 7.2 6.5 25.0 4 7.9 11.4 16.0 12.2 10.9 2.3 2.0 19.0 18.3 1.8 25.5 22.0
Vijaya Bank 45 29 6.8 24.1 13.2 5 13.2 23.6 0.9 8.8 7.1 0.8 0.7 8.6 9.9 7.0 53.1 7.7
Gujarat State Petronet 44 10 5.6 6.0 22.3 4 11.0 11.1 72.7 9.4 8.5 1.2 1.1 12.6 12.5 1.4 27.7 49.2
Dena Bank 44 26 10.6 12.7 15.8 5 -4.2 5.1 8.8 8.5 8.1 0.8 0.7 9.3 9.0 3.3 54.9 -1.3
Bank of Maha 39 44 9.9 14.0 19.1 5 24.3 10.4 4.0 6.9 6.3 0.7 0.5 9.4 8.3 6.4 55.7 -6.2
NBCC 36 40 9.7 27.4 19.8 2 -3.3 19.7 32.4 15.0 12.5 3.0 2.6 19.9 20.5 2.9 107. 125.
RCF 35 66 16.0 6.5 11.1 2 29.6 20.4 3.7 11.1 9.2 1.3 1.2 11.9 13.1 4.5 113. 81.2
HMT 33 NA NA NA NA NA NA NA - NA NA NA NA NA NA NA 61.0 66.3
100 0
BEML 32 29 27.1 16.0 5.6 0 1,23 95.0 -13.0 39.0 20.0 1.2 0.9 3.1 4.6 1.0 197. 390.
GSFC 29 54 18.4 9.4 9.9 3 36.5 10.0 6.9 6.3 5.7 0.7 0.6 10.6 10.7 3.6 50.1 31.6
SCI 29 42 15.3 13.7 3.5 -3 -34.3 - NA NA 16.8 0.5 0.5 NA 2.7 NA 79.5 92.2
PTC India 28 123 12.9 9.9 18.4 4 -21.9 6.6 61.1 9.8 9.2 1.1 1.0 10.8 11.1 3.4 59.5 79.7
16 June 2014 30
Sales Sales PAT PAT P/E P/B RoE Div. Abs.

Mkt Cap INR b Gr. (%) (INR b) Gr. (%) (x) (x) (%) Yld (%) Perf. (%)
Company
(INR b)
FY14 FY15 FY16 CAGR FY14 FY15 FY16 CAGR FY15E FY16E FY15E FY16E FY15E FY16E FY14 3M 12M
Orissa Minerals 26 0 NA NA -41.7 0 NA NA -24.5 NA NA NA NA NA NA 0.1 101.3 106.4
United Bank (I) 25 40 12.9 -100.0 17.7 2 40.3 -100.0 -3.6 8.2 NA 0.5 NA 5.8 NA NA 70.4 -13.5
FACT 22 22 NA NA 8.5 -3 NA NA 4.7 NA NA NA NA NA NA NA 87.3 74.4
Natl.Fertilizer 21 80 NA NA 9.0 -1 NA NA NA NA NA NA NA NA NA NA 95.5 17.4
Pun. & Sind Bank 19 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA 79.2 30.8
MTNL 19 34 NA NA -6.1 -33 NA NA NA NA NA NA NA NA NA NA 123.5 76.5
Balmer Lawrie & 15 31 -1.6 5.0 11.0 2 20.8 5.0 17.6 8.2 7.8 1.4 1.2 16.6 15.3 4.8 84.3 48.6
GNFC 15 48 -15.4 5.0 11.3 3 -7.1 11.0 8.8 5.6 5.1 0.5 0.5 8.9 9.2 4.5 44.1 34.8
Guj Alkalies 15 19 NA NA 9.5 2 NA NA 11.3 NA NA NA NA NA NA 1.6 23.8 13.4
Guj Inds. Power 13 14 -4.6 1.6 6.3 2 2.0 1.0 10.7 7.1 7.0 0.8 0.7 10.6 9.8 3.9 64.8 34.1
STC 13 154 NA NA 5.9 -5 NA NA NA NA NA NA NA NA NA NA 36.1 132.5
CPCL 13 505 13.5 -16.1 19.2 -3 -223.4 20.6 NA 3.6 3.0 0.7 0.6 18.5 19.5 NA 41.5 11.8
ITDC 13 4 NA NA 4.7 0 NA NA 22.3 NA NA NA NA NA NA NA 63.5 -89.1
Dredging Corporation of 13 8 NA NA 4.0 0 NA NA -14.0 NA NA NA NA NA NA NA 109.7 139.9
Tamil Nadu Newsprint 11 25 -5.3 15.9 15.5 2 22.5 20.6 11.8 5.6 4.6 0.9 0.8 16.0 17.0 4.3 35.1 61.9
Tide Water Oil 9 10 NA NA 18.3 1 NA NA 24.4 NA NA NA NA NA NA NA 34.5 40.3
Andrew Yule & 8 4 NA NA 10.5 0 NA NA NA NA NA NA NA NA NA NA 102.6 145.1
ITI 7 7 NA NA -5.1 -3 NA NA -6.9 NA NA NA NA NA NA NA 67.1 70.2
Balmer Lawrie 5 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA 30.4 13.5
Orissa Sponge Iron 5 NA NA NA -44.8 0 NA NA NA NA NA NA NA NA NA NA 146.7 42.4
PNB Gilts 4 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA 36.3 16.0
Madras Fertilizers 4 26 NA NA 8.6 1 NA NA NA NA NA NA NA NA NA NA 57.2 125.7
Scooters India 3 2 NA NA 2.6 0 NA NA 15.0 NA NA NA NA NA NA NA 94.3 55.3
Punjab Communications 1 0 NA NA -6.4 0 NA NA NA NA NA NA NA NA NA NA 47.7 175.9
Hind.Organ.Chem. 1 2 NA NA -6.5 -2 NA NA 1.8 NA NA NA NA NA NA NA 68.0 99.0
Nitta Gelatin India 1 3 NA NA 12.6 0 NA NA -0.4 NA NA NA NA NA NA NA 42.3 -23.2
Bharat Immunolog 1 2 NA NA 25.1 0 NA NA -18.3 NA NA NA NA NA NA NA 161.1 97.7
Andhra Petrochem 1 3 NA NA 5.5 0 NA NA NA NA NA NA NA NA NA NA 18.1 -3.9
Guj. State Fin. Corp 1 NA NA NA NA NA NA NA -100.0 NA NA NA NA NA NA NA 365.2 452.0
Mysore Paper Mills 1 4 NA NA 4.8 -1 NA NA 21.2 NA NA NA NA NA NA NA 46.7 69.2
Punjab Alkalies 0 3 NA NA 8.4 0 NA NA NA NA NA NA NA NA NA NA 31.8 31.1
Elnet Technologies 0 0 NA NA 10.4 0 NA NA 8.5 NA NA NA NA NA NA 3.9 44.0 68.9
Tamil Nadu Telecom 0 0 NA NA -6.7 0 NA NA -3.5 NA NA NA NA NA NA NA 35.9 40.0
Hind.Fluoro Carb 0 0 NA NA 2.8 0 NA NA 9.4 NA NA NA NA NA NA NA 100.3 28.6
Swadeshi Polytex 0 0 NA NA NA 0 NA NA NA NA NA NA NA NA NA NA -41.8 -48.1
16 June 2014 31
Companies
BSE Sensex: 25,190 S&P CNX: 7,534 June 2014
PSU top companies - A

 SBIN Pg-33
 ONGC Pg-38
 BHEL Pg-43
 NTPC Pg-48
 BPCL Pg-53
 COAL Pg-58
 SAIL Pg-63
PSU top companies - B

 CBK Pg-68
 GAIL Pg-73
 HPCL Pg-78
 IOCL Pg-83
 NMDC Pg-88
 OINL Pg-93
 PNB Pg-98
 PWGR Pg-103
 UNBK Pg-108
16 June 2014 32
16 June 2014
Thematic | India PSUs | Sector: Financials
State Bank of India

BSE Sensex S&P CNX
25,190 7,534 CMP: INR2,580 TP: INR3,240 Buy
Best placed for economic recovery

Strong liability franchise |Healthy capitalization
Stock Info  In FY09-14, State Bank of India’s (SBIN) EPS CAGR was flat due to a) rising stress
Bloomberg SBIN IN levels, b) continued high one-off employee provisions and c) moderate balance
Equity Shares (m) 746.6 sheet growth and fees. Despite the 45%+ increase in balance sheet size, market
52-Week Range (INR) 2,834/1,453 capitalization is still 10% below the peak levels of November 2010.
1, 6, 12 Rel. Per (%) 18/26/3  Improvement in economic growth augurs well from growth and asset quality
M.Cap. (INR b) 2,013.3 perspective. With a 10bp decline in credit cost and 10bp improvement in NIM,
M.Cap. (USD b) 33.9 RoA/RoE will improve by 11bp/180bp+ and earnings will see an upgrade of 13%.
 RoE is expected to improve from 11% to 15%+ in FY16E. Better-than-expected
growth can provide significant upside.
Financial Snapshot (INR b) What went wrong in five years
Y/E March 2015E 2016E 2017E  Moderating economic growth and fall in new investment demand led to
NII (INR b) 577.1 674.2 814.9 slowdown of loan growth and significant rise in stress levels in the system.
OP (INR b) 392.0 469.9 599.3  Elevated inflation level and volatility in INR resulted in tight liquidity
NP (INR b) 159.6 201.8 264.1 conditions and high interest rate, further accentuating stress in the system.
EPS (INR) * 275.1 348.8 459.3  AS-15 related employee provisions led to significant hit on net worth
EPS Gr. (%) 44.9 26.8 31.7 (~INR80b) and profitability.
BV/Sh.(INR)* 2,110 2,394 2,770
What needs to be done
P/E (x) 9.0 7.1 5.4  Resolution of bottlenecks created in infrastructure space and revival of
P/BV (x)* 1.2 1.0 0.9 growth would not only provide opportunity for loan growth but also reduce
RoE (%) 13.5 15.3 17.6 stress assets and credit cost.
RoA (%) 0.8 0.9 1.0  Focus on plucking the low hanging fruits like operating leverage, fees
*consolidated improvement and improvement in CA balances.
 Shareholding of GoI in PSU banks to be brought below 51%. Access to
Shareholding pattern (% ) foreign capital for PSU banks could be raised from the current cap of 20%.
As on Mar-14 Dec-13 Mar-13 What the bank did in last five years
Promoter 58.6 62.3 62.3  SBIN’s earnings CAGR over the last five years has been at ~4%, led by rising
Dom. Inst 20.8 17.9 16.0 stress levels (GNPAs at 5% v/s 2.9% in FY09), which not only led to high
Foreign 12.0 11.5 13.3 credit cost (1.2% v/s average of 0.4% in FY05-08) but also impacted NIM.
Others 8.5 8.2 8.4  Liability franchise continues to be enviable with SBIN’s SA market share
(24% standalone) and CASA ratio being the best in the industry at 43%.
What is the underlying potential
Stock Performance (1-year)  SBIN being the market leader reflects the state of Indian economy. Revival
in economic growth is expected to translate into better loan growth
opportunities and improvement in asset quality.
 One-off employee related provisions are behind and new management’s
focus to reduce overheads will drive strong operating leverage in the next
growth cycle.
Valuation and view with sensitivity on target price
 SBIN trades at 1.2x P/BV (LPA) and with the economy bottoming out and
reform-oriented actions, we expect a re-rating in the stock.
 Core operating profitability and earnings are likely to have bottomed out in
FY14. We expect earnings CAGR of 30%+ over FY15-16E. Maintain Buy.
Alpesh Mehta (Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415

Sohail Halai (Sohail.Halai@MotilalOswal.com); +91 22 39825430
State Bank of India
Story in charts
Return ratios have bottomed out, expect to rebound (%) Trading at LPA, significant upside potential
RoE RoA PB (x) Peak(x) Avg(x) Min(x)
2.7
1.0 1.1 At peak Valuation:
0.9 1.0 0.9 0.9 0.9 1.0 0.9 TP INR5,630
0.9 0.8 2.3
1.9
0.7 0.6
1.2 1.2
1.1 At 25%+ LPA: TP
INR3,710
19.7
19.4
17.0
15.4
16.8
17.1
14.9
12.7
16.0
15.9
10.5
13.5
15.3
0.6
0.3
Feb-08
Feb-13
Aug-05
Aug-10
May-04
May-09
May-14
Nov-06
Nov-11
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
Source: Company, MOSL FY16E Source: Company, MOSL
NIM to be stable, NII growth to rebound (%) Earnings growth to rebound led by core operations (%)
NIM NII growth Core PPP growth PAT growth
80
37.4
33.1
50
24.7 22.6
17.1 16.8
12.1 12.1 13.0 13.4 11.2 20
3.0
2.4
-3.7 -10
3.0 3.4 3.5 2.8 2.7 2.6 3.2 3.8 3.2 3.2 3.2
3.3
-40
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
Source: Company, MOSL Source: Company, MOSL
Factored moderation in credit cost, can surprise positively Net stress loans lowest in the system (% of loans)
PCR (%) Credit Cost (%)
2.5 SEB, 0.3 AI, 0.1
NNPA, 2.6
60.1
57.1
51.2
50.6
49.9
49.5
49.0
45.4
47.4
41.8
44.4
42.2
38.4
1.4 1.3
0.7 1.2 1.1 1.1
0.5 0.5 1.0
0.1 0.8
0.5 OSRL, 3.1
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
16 June 2014 34
State Bank of India
Company description
State Bank of India (SBIN) is India's largest commercial bank, with a balance sheet
size of over ~INR24t (consolidated) and Government ownership of 58%. The bank,
along with its associate banks, has a network of over 22,000 branches across India
and controls over 20%+ of the banking business. The Bank also has the following
Non-Banking Subsidiaries in India: (1) SBI Capital Markets Ltd, (2) SBI Funds
Management Pvt Ltd, (3) SBI Factors & Commercial Services Pvt Ltd, (4) SBI Cards &
Payments Services Pvt. Ltd. (SBICPSL), (5) SBI DFHI Ltd, (6) SBI General Insurance
Company Limited and (7) SBI Pension Funds Pvt Ltd (SBIPFPL). Bank also has a joint
venture in Life Insurance with BNP Paribas Cardif, in which it owns 74% stake.
Market leader in terms of business (Market share, %) Significant gains in SA MS despite rising competition (%)
Loans Deposits CA SA
21.0 30.0
19.5 25.0
18.0 20.0
16.5 15.0
15.0 10.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Rapid branch expansion post FY07 Earnings impacted because of weak macros – expect rebound
EPS (INR) EPS growth, %
31.7 35.9
21.6
15.1 17.3 14.6
7.1
-1.2 1.2
-9.0
10,270
11,540
12,638
13,698
14,270
15,002
16,064
-27.5
9,093
9,156
9,247
9,314
105 104 105 121 142 173 185 168 229 262
190
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
16 June 2014 35
State Bank of India
Financials and Valuations

Income Statement (INR Billion)
Y/E March 2012 2013 2014 2015E 2016E 2017E
Interest Income 1,065.2 1,196.6 1,363.5 1,572.6 1,795.2 2,169.7
Interest Expense 632.3 753.3 870.7 995.5 1,121.0 1,354.8
Net Interest Income 432.9 443.3 492.8 577.1 674.2 814.9
Change (%) 33.1 2.4 11.2 17.1 16.8 20.9
Non Interest Income 143.5 160.4 185.5 202.3 233.3 276.2
Net Income 576.4 603.7 678.4 779.5 907.5 1,091.1
Change (%) 19.2 4.7 12.4 14.9 16.4 20.2
Operating Expenses 260.7 292.8 357.3 387.5 437.6 491.8
Pre Provision Profits 315.7 310.8 321.1 392.0 469.9 599.3
Change (%) 24.6 -1.6 3.3 22.1 19.9 27.5
Provisions (excl tax) 130.9 111.3 159.4 157.3 173.2 210.8
PBT 184.8 199.5 161.7 234.7 296.7 388.5
Tax 67.8 58.5 52.8 75.1 94.9 124.3
Tax Rate (%) 36.7 29.3 32.7 32.0 32.0 32.0
Profits for Equity SH 117.1 141.1 108.9 159.6 201.8 264.1
Change (%) 41.7 20.5 -22.8 46.5 26.4 30.9
Balance Sheet (INR Billion)

Y/E March 2012 2013 2014 2015E 2016E 2017E
Equity Share Capital 6.7 6.8 7.5 7.5 7.5 7.5
Reserves & Surplus 832.8 982.0 1,175.4 1,297.2 1,451.2 1,652.7
Net Worth 839.5 988.8 1,182.8 1,304.7 1,458.7 1,660.2
Deposits 10,436.5 12,027.4 13,944.1 16,035.7 19,162.7 24,145.0
Change (%) 11.7 15.2 15.9 15.0 19.5 26.0
of which CASA Dep 4,676.1 5,390.6 5,923.6 6,812.2 7,834.0 9,273.9
Change (%) 1.3 15.3 9.9 15.0 15.0 18.4
Borrowings 1,270.1 1,691.8 1,831.3 2,116.1 2,457.4 2,866.4
Other Liabilities & Prov. 809.2 954.1 964.1 1,099.6 1,255.4 1,434.6
Total Liabilities 13,355.2 15,662.1 17,922.3 20,556.1 24,334.2 30,106.2
Current Assets 971.6 1,148.2 1,325.5 1,364.2 1,567.5 2,258.3
Investments 3,122.0 3,508.8 3,983.1 4,580.5 5,267.6 6,215.8
Change (%) 5.6 12.4 13.5 15.0 15.0 18.0
Loans 8,675.8 10,456.2 12,098.3 14,034.0 16,840.8 20,882.6
Change (%) 14.7 20.5 15.7 16.0 20.0 24.0
Fixed Assets 54.7 70.1 80.0 76.5 82.3 87.2
Other Assets 531.1 478.9 435.5 500.8 575.9 662.3
Total Assets 13,355.2 15,662.1 17,922.3 20,556.1 24,334.2 30,106.2
Asset Quality (INR Billion)

Y/E March 2012 2013 2014 2015E 2016E 2017E
GNPA 396.8 511.9 616.1 548.5 486.0 419.1
NNPA 158.2 219.6 311.0 299.7 282.8 227.2
GNPA Ratio 4.5 4.8 5.0 3.8 2.9 2.0
NNPA Ratio 1.8 2.1 2.6 2.1 1.7 1.1
PCR (Excl Tech. write off) 60.1 57.1 49.5 45.4 41.8 45.8
PCR (Incl Tech. Write off) 68.1 66.6 62.9 66.3 70.1 77.3
16 June 2014 36
State Bank of India

Ratios (%)
Y/E March 2012 2013 2014 2015E 2016E 2017E
Spreads Analysis (%)
Avg. Yield-Earning Assets 9.2 9.0 8.8 8.8 8.6 8.6
Avg. Yield on loans 10.0 9.5 9.1 9.2 8.9 8.9
Avg. Yield on Investments 7.9 8.2 8.5 8.3 8.1 8.1
Avg. Cost-Int. Bear. Liab. 5.7 5.9 5.9 5.9 5.6 5.6
Avg. Cost of Deposits 5.6 6.0 6.0 5.9 5.7 5.6
Interest Spread 3.6 3.0 2.9 2.9 2.9 3.0
Net Interest Margin 3.8 3.3 3.2 3.2 3.2 3.2
Profitability Ratios (%)
RoE 16.0 15.9 10.5 13.5 15.3 17.6
RoA 0.9 1.0 0.6 0.8 0.9 1.0
Int. Expense/Int.Income 59.4 63.0 63.9 63.3 62.4 62.4
Non Int. Inc./Net Income 24.9 26.6 27.4 26.0 25.7 25.3
Efficiency Ratios (%)
Cost/Income* 45.2 48.5 52.7 49.7 48.2 45.1
Empl. Cost/Op. Exps. 65.1 62.8 63.0 59.1 56.5 54.3
Busi. per Empl. (Rs m) 82.2 93.7 107.8 127.5 152.9 191.1
NP per Empl. (Rs lac) 5.3 6.4 4.8 7.3 9.3 12.5
Asset-Liabilty Profile (%)
Loans/Deposit Ratio 83.1 86.9 86.8 87.5 87.9 86.5
CASA Ratio 44.8 44.8 42.5 42.5 40.9 38.4
Investment/Deposit Ratio 29.9 29.2 28.6 28.6 27.5 25.7
G-Sec/Investment Ratio 81.9 76.7 93.8 89.8 93.0 98.8
CAR 13.9 12.9 12.4 11.6 10.7 9.5
Tier 1 9.8 9.5 9.7 9.3 8.7 8.0
Valuations
Y/E March 2012 2013 2014 2015E 2016E 2017E
Book Value (INR) 1,215 1,395 1,503 1,667 1,873 2,143
BV Growth (%) 19.8 14.8 7.8 10.9 12.4 14.4
Price-BV (x) 1.7 1.5 1.4 1.2
Consol BV (INR) 1,541 1,769 1,885 2,110 2,394 2,770
BV Growth (%) 18.3 14.8 6.5 11.9 13.5 15.7
Price-Consol BV (x) 1.3 1.2 1.0 0.9
Adjusted BV (INR) 1,050 1,170 1,212 1,386 1,608 1,930
Price-ABV (x) 2.5 2.2 2.1 1.9 1.6 1.3
Adjusted Consol BV 1,321 1,475 1,506 1,745 2,050 2,493
Price-Consol ABV (x) 1.7 1.4 1.2 1.0
EPS (INR) 174.5 206.2 145.9 213.7 270.2 353.8
EPS Growth (%) 34.0 18.2 -29.3 46.5 26.4 30.9
Price-Earnings (x) 17.7 12.1 9.5 7.3
Consol EPS (INR) 228.6 261.9 189.9 275.1 348.8 459.3
Con. EPS Growth (%) 35.9 14.6 -27.5 44.9 26.8 31.7
Price-Consol EPS (x) 13.1 9.1 7.1 5.4
Dividend Per Share (INR) 35.0 41.5 30.0 43.4 54.9 72.1
Dividend Yield (%) 1.2 1.7 2.1 2.8
16 June 2014 37
16 June 2014
Thematic | India PSUs | Sector: Oil & Gas
ONGC
BSE Sensex S&P CNX
25,190 7,534 CMP: INR427 TP: INR500 Buy
High ad-hoc subsidy led non-remunerative profitability

Adequate profitability would revive ONGC’s prospects aided by
exploration focus and aggressive overseas acquisitions
Stock Info
Bloomberg ONGC IN  Last 5 year subsidy payout of USD41b is more than the capex of USD37b
Equity Shares (m) 8,555.5 impacting investment and acquisitions leading to production decline.
52-Week Range (INR) 472/234  Mere profit normalization through new gas price and elimination of subsidy
1, 6, 12 Rel. Per (%) 7/33/6 through pricing reforms leading to higher net oil realization could more than
M.Cap. (INR b) 3,803.3
double ONGC’s earnings
 In a free pricing scenario, we expect reversal of RoE’s which have dipped from
M.Cap. (USD b) 63.3
~30% to <17% now and expect likely doubling of fair value.
What went wrong in the five years?

Financial Snapshot (INR b)  During the last five years, ONGC’s net oil realization is down by ~USD5/bbl
Y/E March 2015E 2016E 2017E led by ad-hoc subsidy policy v/s USD20/bbl increase in international prices.
Net Sales 1,921 2,072 2,113  Since FY05, its cumulative capex of USD37b, is less than subsidy at USD41b.
EBITDA 667.5 784.6 796.5  ONGC’s Operational performance is marred by (a) non-remunerative and
Adj PAT 322.9 365.6 372.8 uncertain cashflows impacting long-term investments, (b) suboptimal
EPS (INR) 37.7 42.7 43.6 performance in overseas acquisitions and (c) dismal NELP performance.
Gr. (%) 20.3 13.2 2.0
What needs to be done?
BV/Sh. (INR) 222.3 249.8 278.2
 Give (a) remunerative oil and gas price realization, (b) free hand to
RoE (%) 18.1 18.3 16.7
management with control on operating cashflows, (c) expedite decision
RoCE (%) 16.5 18.5 16.8
making on new domestic & overseas investments, and (d) actively monitor
P/E (x) 11.3 10.0 9.8
and take timely corrective actions for any delay in the large projects.
P/BV (x) 1.9 1.7 1.5
What has company done in last five years?
 Sub-par ad-hoc earnings led to focus change from high value exploration to
Shareholding pattern (%) low return IOR/EOR (~20% of current production) to maintain production.
As on Mar-14 Dec-13 Mar-13  While, the ONGC efforts are commendable in maintaining production in
Promoter 68.9 69.2 69.2 aging fields, aggressive exploration and overseas acquisition would have
Dom. Inst 10.9 10.5 10.8 ensured more secure long term growth prospects
Foreign 6.7 6.8 6.3 What is the underlying potential?
Others 13.5 13.5 13.6  Last decade subsidy payout of USD55b, if reinvested, could have resulted in
additional production of 100mmt (4.5x of the current annual production).
 Mere profitability normalization through market determined oil and gas
Stock Performance (1-year) realization will add USD6.5b to ONGC’s PAT, implying MCap addition of
USD65b (@P/E of ~10x) v/s current MCap of USD57b.
Valuation and views with sensitivity on TP
 Every USD1/bbl increase in oil net realization increases ONGC’s EPS by
~INR0.8/sh implying INR8/sh increase in fair value @P/E of 10x.
 Every USD1/mmbtu increase in gas price increases ONGC’s EPS by
~INR2.7/sh implying INR27/sh @P/E of 10x.
Financials and valuations
 Likely doubling of gas price, lowering of subsidy to give remunerative oil
realization will help drive earnings growth of ONGC.
 The stock trades at 10x FY16E EPS of INR42.7. Buy.
Harshad Borawake (HarshadBorawake@MotilalOswal.com); +91 22 3982 5432

Nitish Rathi (Nitish.Rathi@MotilalOswal.com); +91 22 3982 5558
ONGC
Story in charts
Non-commensurate retail price increases led to India’s under Subsidy burden on ONGC resulted in de-linking its realization
recovery bill rising to INR1.6t in FY13 (INR b) from international oil prices, with discount rising to ~60%
Petrol Diesel INR b Brent (USD/bbl) ONGC net realization (USD/bbl)

LPG Kerosene 120
Total Crude (USD/bbl) - RHS
1,610 120
90
1,385 1,399
90
60
773 1,033 780 60
494 461
400 30
201 30
93 0
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: PPAC, MoPNG, MOSL Source: ONGC< MOSL
Since FY05, ONGC has paid cumulative subsidy of INR2.7t v/s Non-remunerative pricing and subdued capex has taken a toll
its own capex of INR2.3t on ONGC’s operations with stagnating oil and gas production
Subsidy (INRb) Capex (INRb) Standalone Oil Production (mmt)
564
Domestic Gas Production (bcm)

494
28
445
423
393
26
339
282
277
249
24
220
216
213
170
136
120
116
114
104
22
41
16
20
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: ONGC, PPAC, MOSL Source: ONGC, MOSL
ONGC’s consolidated EPS could increase 64% at rational Even at long term P/E of 9.7x, ONGC could see 34% upside
subsidy and gas ~USD8.4/mmbtu on the likely new EPS
Base Gas @USD8.4/mmbtu ONGC stock price
Subsidy @46% Total ONGC Price (@ 5Yr avg P/E of 10.2x new EPS)
realization (USD/bbl) 68.0 P/E (x)
53.4 600 516 15
47.8 47.1 4.6
41.5 5.8 400 10
37.7
28.3 31.0
200 5
37.7 42.7
28.3 31.0 0 0
May-04
May-06
May-08
May-10
May-12
May-14
FY13 FY14 FY15 FY16
16 June 2014 39
ONGC
Company description
ONGC, a Fortune 500 company, is an eminent exploration and production (E&P)
company in India. With over 300 discoveries, it has established in-place reserves of
6.9b ton of oil equivalent (btoe), with ultimate reserves of 2.4btoe. It currently
accounts for ~68% of India's domestic oil and gas production. Through its 100%
subsidiary ONGC Videsh Limited (OVL), it has equity investments in E&P blocks in 16
countries. Downstream presence is marked through its subsidiary (71.6% stake),
MRPL.
With government stake at 63%, we believe the medium term focus of the
government with respect to ONGC will be towards improving the profitability.
Further divestment, in our view would be after 2-3 years, when the expected
profitability increase is achieved.
ONGC: Key Assumptions

Year End: March 31 (INRm) FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Exchange Rate (INR/USD) 45.7 47.9 54.5 60.6 58.0 57.0 57.0
APM Gas Price (USD/mmbtu) 3.9 4.2 4.2 4.2 6.3 6.3 6.3
Brent crude price (USD/bbl) 86.5 114.5 110.6 107.8 105.0 105.0 100.0
Production Details (mmtoe) 0.9
Domestic Oil Production (mmt) 27.3 26.9 26.1 26.1 27.2 28.4 29.2
Domestic Gas Production (bcm) 25.3 25.5 25.3 24.9 26.4 27.0 27.6
Domestic Production (mmtoe) 52.6 52.4 51.5 51.0 53.6 55.4 56.8
OVL Production (mmtoe) 9.4 8.8 7.3 8.3 8.9 10.0 10.0
Group Production (mmtoe) 62.1 61.2 58.7 59.4 62.5 65.4 66.8
Subsidy Sharing (INRb) 249 445 494 564 491 369 311
Oil Price Realization (USD/bbl)
Gross 89.4 117.4 110.7 107.8 105.0 105.0 100.0
Upstream Discount 35.6 61.8 62.9 66.3 57.9 42.2 34.3
Net 53.8 55.6 47.8 41.5 47.1 62.8 65.7
Cons EPS Break-up (INR/sh)
EPS (Standalone) 20.4 26.8 24.5 25.8 31.3 35.3 36.6
EPS (OVL) 3.0 3.2 4.6 5.2 5.3 6.0 5.5
EPS (MRPL & Others) 1.1 0.4 -0.8 0.0 1.1 1.4 1.4
EPS (Consolidated) 24.5 30.4 28.3 31.0 37.7 42.7 43.6
16 June 2014 40
ONGC

Income statement (INR Billion)
Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Sales 1,463.7 1,624.0 1,732.3 1,921.3 2,071.9 2,113.0
Change (%) 24.4 11.0 6.7 10.9 7.8 2.0
EBITDA 577.7 548.8 569.8 667.5 784.6 796.5
EBITDA Margin (%) 39.5 33.8 32.9 34.7 37.9 37.7
Depreciation 234.3 231.4 250.8 243.8 268.2 285.5
EBIT 343.4 317.4 319.0 423.7 516.4 511.0
Interest 4.3 4.8 6.6 7.8 5.2 5.3
Other Income 57.6 54.9 81.7 60.7 48.5 56.7
Extraordinary items 0.0 0.0 0.0 0.0 0.0 0.0
PBT 428.0 367.4 394.1 476.6 559.6 562.4
Tax 143.7 127.5 127.6 150.8 190.3 185.7
Tax Rate (%) 33.6 34.7 32.4 31.6 34.0 33.0
Reported PAT 284.3 239.9 266.5 325.8 369.4 376.7
Adjusted PAT 263.1 239.9 263.6 325.8 369.4 376.7
Change (%) 23.3 -8.8 9.9 23.6 13.4 2.0
Min. Int. & Assoc. Share -2.9 2.3 1.9 -2.9 -3.8 -3.9
Adj Cons PAT 281.4 242.2 268.4 322.9 365.6 372.8
Balance sheet (INR Billion)

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 42.8 42.8 42.8 42.8 42.8 42.8
Reserves 1,321.6 1,482.5 1,655.9 1,858.7 2,094.2 2,337.0
Net Worth 1,364.4 1,525.3 1,698.7 1,901.5 2,137.0 2,379.8
Debt 152.2 204.5 348.4 348.8 349.2 349.2
Deferred Tax 122.0 142.3 179.8 182.4 194.4 201.9
Total Capital Employed 1,864.7 2,098.8 2,455.0 2,667.0 2,922.0 3,179.4
Gross Fixed Assets 1,113.7 1,235.0 1,399.2 1,482.5 1,570.7 1,659.7
Less: Acc Depreciation 806.3 827.2 932.1 1,033.6 1,133.7 1,221.5
Net Fixed Assets 687.9 805.2 801.9 867.3 943.2 1,032.1
Capital WIP 380.4 397.4 334.8 418.3 506.1 593.8
Investments 29.2 21.3 289.9 300.3 310.6 321.0
Current Assets 796.9 776.7 642.7 631.4 652.7 650.4
Inventory 131.7 127.8 107.1 109.4 113.1 115.7
Debtors 117.1 154.0 149.5 146.2 165.8 166.0
Cash & Bank 373.6 302.5 209.8 197.9 194.2 187.4
Loans & Adv, Others 174.4 192.4 176.4 178.0 179.6 181.3
Curr Liabs & Provns 451.8 429.6 351.2 360.6 374.7 378.9
Curr. Liabilities 390.3 373.4 296.6 304.6 318.2 322.4
Provisions 61.5 56.2 54.6 55.9 56.5 56.5
Net Current Assets 345.1 347.2 291.5 270.9 278.0 271.5
Total Assets 1,864.7 2,098.8 2,455.0 2,667.0 2,922.0 3,179.4
E: MOSL Estimates
16 June 2014 41
ONGC

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 32.9 28.3 31.4 37.7 42.7 43.6
Cash EPS 60.3 55.4 60.7 66.2 74.1 76.9
Book Value 159.5 178.3 198.5 222.3 249.8 278.2
DPS 9.8 9.5 9.5 12.0 13.0 13.0
Payout (incl. Div. Tax.) 30.3 45.4 35.4 37.1 35.5 34.9
Valuation(x)
P/E 13.0 15.1 13.6 11.3 10.0 9.8
Cash P/E 7.1 7.7 7.0 6.4 5.8 5.5
Price / Book Value 2.7 2.4 2.2 1.9 1.7 1.5
EV/Sales 2.3 2.2 2.2 2.0 1.8 1.8
EV/EBITDA 5.9 6.5 6.7 5.7 4.9 4.8
Dividend Yield (%) 2.3 2.2 2.2 2.8 3.0 3.0
RoE 22.7 16.6 16.5 18.1 18.3 16.7
RoCE 20.2 16.0 14.0 16.5 18.5 16.8
Turnover Ratios (%)
Asset Turnover (x) 0.9 0.8 0.8 0.8 0.7 0.7
Debtors (No. of Days) 29.2 34.6 31.5 27.8 29.2 28.7
Inventory (No. of Days) 32.8 28.7 22.6 20.8 19.9 20.0
Creditors (No. of Days) 0.0 0.0 0.0 0.0 0.0 0.0
Leverage Ratios (%)
Net Debt/Equity (x) 0.1 0.1 0.2 0.2 0.2 0.1
Cash flow statement (INR Billion)

Y/E March 2012 2013 2014 2015E 2016E 2017E
OP/(Loss) before Tax 428.0 367.4 394.3 476.7 559.8 562.5
Depreciation 129.2 120.9 199.8 199.9 212.1 210.0
Others 0.0 0.0 0.0 0.0 0.0 0.0
Interest 0.0 0.0 0.0 0.0 0.0 0.0
Direct Taxes Paid -118.8 -124.3 -90.0 -148.2 -178.3 -178.3
(Inc)/Dec in Wkg Cap -70.5 -11.7 -37.1 8.7 -10.8 -0.3
CF from Op. Activity 474.5 447.0 466.9 537.2 582.8 593.9
(Inc)/Dec in FA & CWIP -393.0 -422.8 -339.1 -419.2 -446.6 -460.4
(Pur)/Sale of Invt 2.9 10.7 -268.6 -10.3 -10.3 -10.3
Others 0.0 0.0 0.0 0.0 0.0 0.0
CF from Inv. Activity -390.0 -412.1 -607.8 -429.5 -457.0 -470.7
Inc/(Dec) in Net Worth 0.1 2.0 0.0 0.0 0.0 0.0
Inc / (Dec) in Debt 91.5 -2.7 143.9 0.4 0.4 0.0
Interest Paid -4.3 -6.9 0.0 0.0 0.0 0.0
Divd Paid (incl Tax) -85.4 -110.0 -95.0 -119.9 -129.9 -129.9
CF from Fin. Activity 1.9 -117.5 48.9 -119.5 -129.5 -129.9
Inc/(Dec) in Cash 86.4 -82.6 -91.9 -11.9 -3.7 -6.7
Add: Opening Balance 287.0 373.4 302.4 209.6 197.7 194.0
Closing Balance 373.4 290.8 210.4 197.7 194.0 187.3
E: MOSL Estimates
16 June 2014 42
16 June 2014
Thematic | India PSUs | Sector: Capital Goods
BHEL
BSE Sensex S&P CNX
25,190 7,534 CMP: INR241 TP: INR300 Buy
Cyclical factors support recovery

Strong operating leverage and FCF improvement to drive re-rating
Stock Info
 During FY14, BHEL’s BTB inched up to 2.5x (from lows of 2.2x in September 2013).
Bloomberg BHEL IN Also, Power segment BTB had improved to 2.5x in FY14 (from lows of 2.3x in
Equity Shares (m) 2,447.6 September 2013); we expect a bounce-back to 3x in FY15.
52-Week Range (INR) 292/100  Focus on cash realization led to a cash surplus situation after a gap of four years
1, 6, 12 Rel. Per (%) 1/34/5 in FY14; also the rising trend in debtors had been arrested. We expect operating
M.Cap. (INR b) 590.1
cash flows to improve from an average of ~INR20b in FY10 to ~INR75b in FY14-
17E. Net cash is expected to increase to INR256b in FY17E (41% of market
M.Cap. (USD b) 9.8
capitalization).
 BHEL has strong operating leverage, expect earnings CAGR of 40% in FY15E-17E.
Key variable to monitor will be the impact of VII Pay Commission.
Financial Snapshot (INR b)
Y/E March 2015E 2016E 2017E What went wrong in five years
Net Sales 323.7 356.8 397.1  Industry ordering declined from peak levels of ~30-35gw p.a. during FY07-
EBITDA 36.2 49.6 62.8 10 to ~10gw p.a. levels during FY12-14.
 Post NTPC’s bulk tender, BTG prices declined by ~20-25% over the last four
Adj PAT 24.9 37.6 48.7
years, despite increased commodity prices.
EPS (INR) 10.2 15.4 19.9
 Industry business failed to provide support in a constrained environment as
Gr. (%) -32 51 29
~60% of the revenue was largely from captive power plants.
BV/Sh. (INR) 142 152 165
RoE (%) 7.3 10.5 12.6 What needs to be done
RoCE (%) 7.4 10.3 12.6  Address contentious issues in the power segment, including fuel availability,
P/E (x) 25.6 16.9 13.1
SEB finances, distribution reforms etc.
 Increased spend in railways and demand pick-up in cement/metals is vital
P/BV (x) 1.8 1.7 1.6
to drive the industrial business.
What company did in last five years
Shareholding pattern (%)  BHEL has expanded capacity from 7gw to ~20gw. It has also built
As on Mar-14 Dec-13 Mar-13 capabilities for EPC execution, expanded manufacturing offerings (in terms
Promoter 63.1 67.7 67.7 of Auxillaries/Balance of Plant to capture an increasing part of the value
addition), outsourced Erection Testing Commissioning/rationalized vendor
Dom. Inst 16.5 12.0 12.4
base (leading to lower costs/higher operational efficiencies) etc.
Foreign 16.4 15.9 15.0
 Attempts are being made to broad-base revenue in segments like
Others 4.1 4.5 4.9
Transportation (Greenfield unit for Mainline Electric Multiple Units,
expanding locos capacity), renewable (solar manufacturing), Power T&D
(HVDC, STATCON, 765kva transformers, GIS etc).
Stock Performance (1-year) What is the underlying potential
 BHEL has meaningful operating leverage both at P&L (staff costs at 18.2% of
revenue in FY15E v/s 11.4% in FY12) and B/S (core NWC stable at ~200-210
days, while reported NWC at 154 days in FY14 v/s negative 24 days in FY09).
Valuation and views with sensitivity on target price
 Maintain Buy with a target price of INR310/sh (20x FY16E). BHEL is strongly
exposed to any cyclical uptick and we estimate that 1gw incremental
revenue v/s estimates can translate into a potential earnings upgrade of
24% in FY16E.
 Earnings CAGR of 40% over FY15E-17E.
Satyam Agarwal (AgarwalS@MotilalOswal.com); +91 22 3982 5410

Nirav Vasa (Nirav.Vasa@MotilalOswal.com); +91 22 3982 5422
FY02 28%
FY08 34.8 FY01 14.6 23.9 3QFY09 953 5.2
FY03 26% 4QFY09 970 4.5
FY02 14.4 20.1
42%33%
16 June 2014
1QFY10 1,029 4.6
FY09 32.9 FY04 39% FY03 15.0 20.7 2QFY10 1,032 4.4
FY04 16.4 19.6 3QFY10 1,126 4.6
FY05 48%
18% 18%
4QFY10 1,125 4.2
FY10 15.9 FY05 16.5 16.6 1QFY11 1,181 4.3
FY06 41%
Story in charts
FY06 18.8 13.7 2QFY11 1,240 4.2
Staff cost
FY07 45%
14% 5%
FY11 26.6 3QFY11 1,255 4.3
FY07 24.5 13.9 4QFY11 1,258 3.8
FY08 59%
FY08 31.2 15.8 1QFY12 1,248 3.7
FY12 (8.1) FY09 63% 2QFY12 1,282 3.7
NWC (excluding cash), % sales
FCF
NWC also driven by cyclical factors
FY09 41.1 15.4 3QFY12 1,165 3.1
FY10 58%
-3% -7% 2%
FY10 52.4 15.7 4QFY12 1,077 2.8
Power Orderbook (INR B)
FY13 18.6 1QFY13 1,063 2.7

FY11 51%
7%
FY11 54.8 13.5 2QFY13 993 2.5
FY12 42% 3QFY13 898 2.3
Expect FCF to improve meaningfully (INR b)…

24%
FY14E 54.6 FY12 54.7 11.4
4QFY13 933 2.4
FY13 34% FY13 57.5 11.9
35%
1QFY14 894 2.3
FY15E 73.6 34% 2QFY14 829 2.3
Power segment BTB has improved from lows in FY14
FY14E FY14E 59.3 15.2

BTB (x)
Staff cost is largely fixed, provides operating leverage
42%
Staff cost, % of revenues
3QFY14 835 2.3
FY15E 37% FY15E 60.4 18.2 FY14 835 2.6
38%
FY16E 98.0 FY16E 60.0 16.4 FY15E 810 3.0
FY16E 35%
21%
Client advances, % sales
FY02 5 3QFY09 184 18
FY08 82.9 4QFY09 213 34
FY06 2.2
FY03 5 1QFY10 224 34
FY09 101.7 FY04 5 FY07 1.3 2QFY10 234 32
3QFY10 243 32
FY05 5 FY08 4.0 4QFY10 269 26
FY10 96.6 1QFY11 277 23
FY06 12
25 25 25 18 32
FY09 4.6 2QFY11 293 25
FY07 27 3QFY11 291 20
Retention Money
FY11 95.3 4QFY11 332 23
FY08 28 FY10 (2.4)
1QFY12 336 21
FY12 65.5 2QFY12 343 17
FY09 42
57 54 58
FY11 6.3 3QFY12 375 29
FY10 68 4QFY12 379 14
75
FY13 63.2 FY12 3.0 1QFY13 389 16
Net Provisions + LDs (%)
Power Rev (INR B, ttm)
Net Cash / (Debt)

FY11 97
89
2QFY13 400 17
FY13 3.9 3QFY13 396 6
FY12 135
FY14E 92.2 104
No of days (x)
4QFY13 396 4
FY13 168 FY14E 7.1 1QFY14 382 -2
129
2QFY14 368 -8
Expect power segment revenue to improve in FY16E
FY15E 146.7
Provisions (incl. LDs) at high levels, expect to decline
FY14E 181 FY15E 5.0

% YoY
3QFY14 358 -10
…leading to strong increase in net cash position (INR b)

FY14 325 -18
Retention money has bloated given tight liquidity (INR b)
FY15E 163
172 184
FY16E 217.7 FY16E 3.6 FY15E 269 -17

FY16E 113
116
FY16E 293 9
44
BHEL
Source: MOSL, Company

y
BHEL
Company description
BHEL is India’s dominant producer of power and industrial machinery and a leading
EPC company, established in the late 1950s as the Government’s wholly-owned
subsidiary. The company has 14 manufacturing divisions, 8 service centers, 4 power
sector regional centers besides project sites spread across all over India and abroad.
It has a manufacturing capacity of 20gw spread across multiple factories in India,
including thermal, hydro and gas projects.
With Government’s stake at 63.1%, we believe that there exists scope for lowering
the same through an IPO.
Operating Matrix
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Order Intake (INR B)
Power 90 245 387 444 401 443 176 227 170 204 232 256
R&M 19 32 24 28 19 21 23 29 34 40 46 53
Industry 47 60 69 92 135 114 79 41 50 60 75 105
International Business 33 19 23 33 36 37 2 20 26 25 25 25
Cancellations - - - - - - 58 - - - - -
Total Order Intake 189 356 503 597 590 605 221 317 280 329 378 439
Order backlog (INR B)
Power 280 376 710 974 1,125 1,258 1,077 933 835 810 795 793
Industry 60 70 88 130 208 232 175 115 93 91 95 108
Total Order backlog 375 550 852 1,170 1,424 1,641 1,347 1,152 1,008 999 1,006 1,031
Growth (%) 3.9 88.2 41.1 18.7 (1.1) 2.5 (63.5) 43.2 (11.5) 17.5 14.9 16.2
Segmental Revenues
Power 98 127 159 213 269 348 379 396 325 269 293 310
Industry 37 50 44 56 57 90 102 100 73 62 71 92
Total Revenues 145 187 214 280 342 450 495 502 403 337 372 414
EBITDA Margins (%) 18.9 20.4 18.9 15.7 17.7 19.9 20.3 19.4 12.0 10.9 13.6 15.4
Contribution Margins (%) 43.3 43.3 44.4 38.5 40.4 40.3 41.5 42.1 42.1 42.6 42.2 42.2
Staff Costs (%) 13.7 13.9 15.8 15.4 15.7 13.5 11.4 11.9 14.8 18.2 16.4 14.3
Other Expenses (%) 10.7 9.0 9.7 7.4 6.9 9.5 9.4 10.9 15.3 13.5 12.2 12.5
Cash / (Debt), INR B
Cash 41.3 58.1 83.9 103.1 97.9 96.3 66.7 77.3 118.7 173.4 244.4 283.6
Retention Money 11.7 27.1 28.3 41.9 67.7 96.9 134.7 168.5 181.0 162.9 113.4 98.2
Debt -5.6 -0.9 -1.0 -1.5 -1.3 -1.0 -1.2 -14.2 -26.5 -26.7 -26.7 -26.7
Net Cash / (Debt) 47.4 84.3 111.2 143.5 164.3 192.2 200.2 231.6 273.2 309.6 331.1 355.1
INR/sh 19.4 34.4 45.4 58.6 67.1 78.5 81.8 94.6 111.6 126.5 135.3 145.1
16 June 2014 45
BHEL
Financials and valuation

Income statement (INR Million)
Y/E March 2012 2013 2014 2015E 2016E 2017E
Revenues 472,278 476,177 383,888 323,738 356,813 397,098
Change (%) 19 1 -19 -16 10 11
EBITDA 99,076 93,898 45,198 36,228 49,603 62,823
EBITDA Margin (%) 20.6 19.4 11.6 10.9 13.6 15.4
Depreciation 8,000 9,534 9,829 10,664 11,908 13,388

EBIT 91,076 84,364 35,369 25,564 37,696 49,434
Interest 513 1,253 1,326 1,782 1,877 1,985
Other Income 12,656 11,217 16,160 12,254 17,953 22,163
Extraordinary items -193 -4 253 0 0 0
PBT 103,026 94,324 50,456 36,035 53,772 69,612

Tax 32,623 28,177 15,849 11,171 16,131 20,884
Tax Rate (%) 31.7 29.9 31.4 31.0 30.0 30.0
Reported PAT 70,403 66,148 34,608 24,864 37,640 48,729
Adjusted PAT 68,922 65,540 36,303 24,864 37,640 48,729
Change (%) 22 -5 -45 -32 51 29
Balance sheet (INR Million)

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 4,895 4,895 4,895 4,895 4,895 4,895
Reserves 248,837 299,546 325,575 341,712 366,141 397,766
Net Worth 253,732 304,441 330,471 346,608 371,036 402,661
Debt 1,234 14,152 26,548 26,734 26,734 26,734
Deferred Tax -15,462 -15,507 -19,690 -19,690 -19,690 -19,690
Total Capital Employed 239,504 303,086 337,329 353,652 378,081 409,706
Gross Fixed Assets 97,066 107,832 119,135 129,424 143,214 160,004
Less: Acc Depreciation 54,098 63,248 72,005 82,669 94,577 107,965
Net Fixed Assets 42,968 44,585 47,131 46,755 48,638 52,039
Capital WIP 13,476 11,716 6,220 5,000 5,000 5,000
Investments 4,617 4,292 4,202 4,202 4,202 4,202
Current Assets 591,237 625,185 650,670 601,716 642,039 689,950
Inventory 135,487 117,638 97,976 85,791 92,771 99,274
Debtors 357,405 398,882 399,530 315,379 276,353 279,489
Cash & Bank 66,720 77,321 118,729 173,401 244,445 283,632
Loans & Adv, Others 31,624 31,344 34,435 27,146 28,469 27,555
Curr Liabs & Provns 412,794 382,692 370,894 304,021 321,798 198,182
Curr. Liabilities 336,380 293,270 267,633 202,146 214,336 84,550
Provisions 76,414 89,421 103,260 101,875 107,462 113,632
Net Current Assets 178,443 242,493 279,776 297,695 320,241 491,768
Total Assets 239,504 303,086 337,329 353,652 378,081 553,009
E: MOSL Estimates
16 June 2014 46
BHEL

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 28.2 26.8 14.8 10.2 15.4 19.9
Cash EPS 31.4 30.7 18.8 14.5 20.2 25.4
Book Value 103.7 124.4 135.0 141.6 151.6 164.5
DPS 6.4 5.4 2.8 3.0 4.6 6.0
Valuation(x)
P/E 9.2 9.7 17.6 25.6 16.9 13.1
Cash P/E 8.3 8.5 13.8 17.9 12.9 10.3
Price / Book Value 2.5 2.1 1.9 1.8 1.7 1.6
EV/EBITDA 5.8 6.1 12.1 13.5 8.5 6.1
Dividend Yield (%) 2.5 2.1 1.1 1.2 1.8 2.3
RoE 30.9 23.7 10.9 7.3 10.5 12.6
RoCE 43.3 31.1 11.0 7.4 10.3 12.6
Turnover Ratios (%)
Asset Turnover (x) 2.3 1.8 1.2 1.0 1.0 0.9
Leverage Ratios (%)
Net Debt/Equity (x) -0.3 -0.2 -0.3 -0.4 0.1 0.1
Cash flow statement (INR Million)

Y/E March 2012 2013 2014 2015E 2016E 2017E
OP/(Loss) before Tax 103,218 94,329 50,203 36,035 53,772 69,612
Depreciation 8,000 9,534 9,829 10,664 11,908 13,388
Others 0 0 0 0 0 0
Interest 513 1,253 1,326 1,782 1,877 1,985
Direct Taxes Paid 32,623 28,177 15,849 11,171 16,131 20,884
(Inc)/Dec in Wkg Cap -85,648 -8,217 40,073 47,384 40,807 969
CF from Op. Activity -11,438 31,108 54,628 73,635 98,007 73,401
(Inc)/Dec in FA & CWIP -13,097 -9,390 -6,879 -9,069 -13,790 -16,790
(Pur)/Sale of Invt -225 325 90 0 0 0
Others 0 0 0 0 0 0
CF from Inv. Activity -13,322 -9,065 -6,789 -9,069 -13,790 -16,790
Inc/(Dec) in Net Worth 6,169 -43 -5,035 0 0 0
Inc / (Dec) in Debt 213 12,918 12,396 187 0 0
Interest Paid 513 1,253 1,326 1,782 1,877 1,985
Divd Paid (incl Tax) 11,302 23,064 12,465 8,299 11,295 15,440
CF from Fin. Activity -5,434 -11,442 -6,431 -9,895 -13,172 -17,425
Inc/(Dec) in Cash -30,194 10,601 41,408 54,671 71,045 39,186
Add: Opening Balance 96,302 66,720 77,321 118,729 173,401 244,445
Closing Balance 66,108 77,321 118,729 173,401 244,445 283,632
E: MOSL Estimates
16 June 2014 47
16 June 2014
Thematic | India PSUs| Sector: Utilities
NTPC
BSE Sensex S&P CNX
25,190 7,534 CMP: INR164 TP: INR187 Buy
Poor demand, Stiff regulations impact performance

Higher PLF, possible inorganic growth key trigger to watch out for
Stock Info
Bloomberg NTPC IN  NTPC is formidable player in Power sector in India and accounts for ~18% of
Equity Shares (m) 8,245.5 India’s installed capacity (as at March 2014) but ~24% of total generation.
52-Week Range (INR) 169/111  Poor demand from DISCOMs led coal plant PLF to come down by 10ppt over
1, 6, 12 Rel. Per (%) 11/-9/-31 FY09-14. Improving demand scenario to bode well. Capacity under construction
M.Cap. (INR b) 1,347.7 represents ~50% growth on installed base.
M.Cap. (USD b) 22.7
 Valuations are trough. Reversal to mean could lead to TP of INR203/sh, upside of
24%. 5% higher PLF above 85% to drive 5% EPS upgrade, upside thus exists.
Financial Snapshot (INR b) What went wrong in the five years?

Y/E March 2015E 2016E 2017E  NTPC missed 11th plan capacity addition target by ~12GW vs original plan.
Net Sales 715.7 756.2 831.1  Reported RoE declined from peak of 15% in FY2008 to 12% in FY14.
EBITDA 168.8 194.5 234.2  Generation grew moderate at mere 2% CAGR over FY09-14, coal generation
Adj PAT 95.8 110.5 128.1
grew marginally higher at 3% CAGR. Coal supply woes along with slackening
EPS (INR) 11.6 13.4 15.5
demand led to lower coal project PLF from 92% in FY08 to 81% in FY14.
Growth (%) -5 15 16
BV/Share 110 118 126 What needs to be done?
( ) Need to (a) lower execution time, speedier project implantation, (b)
RoE (%) 10.8 11.8 12.8 
RoCE (%) 7.8 8.5 9.6 Conducive demand environment for higher PLF, (c) effective utilization of
P/E (x) 11.1 9.6 8.3 cash, free cash flow to core assets, pursue inorganic growth, vs treasury and
P/BV (x) 1.2 1.1 1.0 (d) Remove regulatory uncertainty, difficulties.
 Award of projects on bulk tendering basis of ~16GW, capacity under
Shareholding pattern (%)
construction now stands at ~20GW.
As on Mar-14 Dec-13 Mar-13  Capacity addition target in 12th plan of 14GW on track, as FY13-14 capacity
Promoter 75.0 75.0 75.0 addition already at 6.6GW (47% of target achieved).
Dom. Inst 12.9 12.1 10.5  Efforts on coal mines development, 3 MDOs appointed. First captive
Foreign 9.4 10.4 9.4 production likely in FY15E.
Others 2.7 2.5 5.1
What is the underlying potential?
 Projects under construction offers ~50% growth on current installed base.
Long term plan to reach 128GW by 2032 with projects already identified.
Stock Performance (1-year)  Near term potential is to achieve higher PLFs. We model coal project PLF at
86% by FY17E. Access to 5b tons of coal reserve.
 NTPC trades at PER of 12x on FY16E basis, vs LT peak PER of 26x and 10-year
average of 16x. 15x PER on current FY16E EPS would mean TP of INR203/sh
 Rise in PLF would be a key upside trigger. 5% PLF leads to increase in EPS by
INR0.7/sh increase or INR10/sh increase in TP (@15x PER).
 Earnings CAGR of 15% over FY15-17E, Buy with TP of INR187/sh.
Nalin Bhatt (NalinBhatt@MotilalOswal.com); +91 22 3982 5429

NTPC
Story in charts
Capacity addition momentum to continue (GW) Availability remains robust in FY14 (%)
4.2
Coal (PAF(%) Gas PAF(%)
3.5
3.2
2.8
93 92 93
2.5
92 92
2.4
91
2.1
2.0
90 90 90
1.8
1.7
1.6 89 89 89 89 93 93 94 93 89 88 88
91
1.0
1.0
88 90 90 90 90
88 88 88 88 89
0.8
87 87
0.5
0.5
87
0.2
82 84
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
PLFs however continue to remain muted (%) Generation growth thus remain muted
Coal PLF(%) Gas PLF (%) Gen. Gr (YoY, %) Cap Addn. Gr (YoY, %)
12.5
9.7
8.4
6.7
6.1
88 88 90 92 91 91 88 85
5.9
5.8
5.8
5.7
80 82 81 84 84 81 81 85 85 86
4.5
3.0
3.0
2.3
0.8
0.7
0.6
71 72 71 70 68 70 66 78 68 67 78 78 65 57 36 45 60 75
10
10
6
9
1
3
5
2
9
2
4
2
4
7
6
3
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Core RAB growth in-line with capacity addition growth Reported earnings growth robust over FY15-17E
64.7
RAB (INR b) Capacity (GW) 55.9 FY15-17E:
48.9 49.9 16%
FY09-12:
15.7
43.8
39.2 FY05-08: 0%
13.6
31.7 34.2 17.4%
12.0
11.8
30.1
27.4 29.1 FY02-04:
10.9
10.3
22.5 24.5 25.0

9.9
9.7
9.7
2.9%
9.0
8.3
7.1
5.6
5.1
5.1
4.2
155 164 167 205 215 227 237 262 301 315 345 414 465 488
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E

Expect capacity addition momentum to continue (GW)
4.2
3.5
3.2
2.8
2.5
2.4
2.1
2.0
1.8
1.7
1.6
1.0
1.0
0.8
0.5
0.5
0.2
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
16 June 2014 49
NTPC
Company description
NTPC is the largest power generator in India with Installed capacity stands at
43.1GW and contribute ~30% of generation of the electricity in India. This includes
17 coal based and 7 gas based stations, located across the country. In addition under
JVs, 7 stations are coal based & another station uses naptha/LNG as fuel and 7
renewable energy projects.
NTPC ranked 384th in the ‘2013, Forbes Global 2000’ ranking of the World’s biggest
companies. NTPC became a “Maharatna” company in May, 2010, one of the only
four companies to be awarded this status. The company has set a target to have an
installed power generating capacity of 128GW by the year 2032. It aims to add
14GW in 12th plan v/s ~9GW addition in 11th plan period. It has also ventured into
related areas like coal mining, distribution, transmission, and gas exploration.
With government stake at 75%, we believe the medium term focus of the
government with respect to NTPC will be towards improving the profitability.
Trend in core and reported profitability of NTPC

Year Gen. Profit Growth PAT Growth EPS Growth
(INR b) (%) (INR b) (%) (INR/sh) (%)
FY04 38.0 0.0 52.6 0.0 6.4 0.0
FY05 38.9 2.4 58.1 10.4 7.0 10.4
FY06 43.2 10.9 63.3 9.0 7.7 9.0
FY07 48.3 12.0 72.3 14.2 8.8 14.2
FY08 55.3 14.4 75.7 4.7 9.2 4.7
FY09 57.3 3.6 81.3 7.5 9.9 7.5
FY10 60.9 6.3 84.5 3.9 10.3 3.9
FY11 69.7 14.4 79.6 -5.9 9.7 -5.9
FY12 68.3 -2.0 79.7 0.2 9.7 0.2
FY13 70.9 3.8 89.9 12.8 10.9 12.8
FY14 80.7 13.8 109.7 22.0 13.3 22.0
FY15E 76.7 -4.9 97.0 -11.6 11.8 -11.6
FY16E 89.6 16.9 111.8 15.2 13.6 15.2
FY17E 101.1 12.7 129.5 15.8 15.7 15.8
Source: MOSL
16 June 2014 50
NTPC

Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Sales 615,937 647,024 666,027 715,685 756,194 831,079
Change (%) 12 5 3 7 6 10
EBITDA 140,399 171,141 174,253 168,849 194,480 234,214
EBITDA Margin (%) 22.6 26.1 26.1 23.5 25.6 28.1
Depreciation 27,917 33,968 39,724 46,063 52,635 60,123
EBIT 112,482 137,173 134,529 122,786 141,846 174,091
Interest 17,116 19,244 25,938 30,773 32,623 43,187
Other Income 27,897 31,016 28,457 29,868 32,450 35,877
Extraordinary items 0 -16,841 0 0 0 0
PBT 123,262 165,787 137,048 121,881 141,673 166,781
Tax 31,024 39,592 34,169 26,080 31,192 38,657
Tax Rate (%) 25.2 23.9 24.9 21.4 22.0 23.2
Reported PAT 92,237 126,194 102,878 95,801 110,481 128,124
Adjusted PAT 79,720 89,924 101,322 95,801 110,481 128,124
Change (%) 0 13 13 -5 15 16
Consolidated PAT 92,237 126,194 102,878 95,801 110,481 128,124

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 82,455 82,455 82,455 82,455 82,455 82,455
Reserves 650,457 721,421 775,699 827,369 886,958 956,062
Net Worth 732,912 803,875 858,153 909,824 969,412 1,038,516
Debt 476,955 553,309 665,281 681,944 758,090 821,888
Deferred Tax 6,369 9,153 10,516 10,516 10,516 10,516
Total Capital Employed 1,216,236 1,366,337 1,533,950 1,602,284 1,738,018 1,870,920
Gross Fixed Assets 818,283 1,032,457 1,269,644 1,302,428 1,487,604 1,687,189
Net Fixed Assets 452,564 629,361 826,824 813,545 946,086 1,085,549
Capital WIP 418,278 371,094 343,171 376,689 367,846 334,472
Investments 95,839 91,376 97,579 67,784 70,008 72,608
Current Assets 427,908 508,005 527,968 558,034 603,884 627,486
Inventory 37,029 40,572 53,734 59,103 61,866 64,755
Debtors 58,325 53,655 52,201 61,075 63,931 66,916
Cash & Bank 177,643 184,902 153,114 219,656 251,582 253,891
Loans & Adv, Others 154,911 228,877 268,920 218,200 226,505 241,924
Provisions 38,374 77,445 81,820 58,159 55,812 54,584
Total Assets 1,216,236 1,366,337 1,533,951 1,602,284 1,738,018 1,870,920
E: MOSL Estimates
16 June 2014 51
NTPC

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 9.7 10.9 12.3 11.6 13.4 15.5
Cash EPS 14.6 19.4 17.3 17.2 19.8 22.8
Book Value 88.9 97.5 104.1 110.3 117.6 126.0
DPS 4.0 5.8 5.1 4.6 5.3 6.2
Valuation(x)
P/E 13.4 11.9 10.5 11.1 9.6 8.3
Cash P/E 8.9 6.7 7.5 7.5 6.5 5.7
Price / Book Value 1.5 1.3 1.2 1.2 1.1 1.0
EV/Sales 2.2 2.2 2.4 2.1 2.1 2.0
EV/EBITDA 9.7 8.4 9.1 9.0 8.1 7.0
Dividend Yield (%) 3.1 4.4 3.9 3.6 4.1 4.8
RoE 13.1 16.4 12.4 10.8 11.8 12.8
RoCE 9.6 10.6 9.3 7.8 8.5 9.6
Turnover Ratios (%)
Asset Turnover (x) 0.5 0.5 0.5 0.5 0.5 0.5
Leverage Ratios (%)
Net Debt/Equity (x) 0.7 0.7 0.8 0.7 0.8 0.8

Y/E March 2012 2013 2014 2015E 2016E 2017E
Depreciation 27,917 33,968 39,724 46,063 52,635 60,123
Others 0 0 0 0 0 0
Interest 17,116 19,244 25,938 30,773 32,623 43,187
Direct Taxes Paid -31,024 -39,592 -34,169 -26,080 -31,192 -38,657
(Inc)/Dec in Wkg Cap -10,525 -17,693 -23,660 -11,346 22,115 -21,904
CF from Op. Activity 126,745 161,713 144,881 161,291 217,853 209,530
(Inc)/Dec in FA & CWIP -126,303 -166,990 -209,264 -66,302 -176,333 -166,211
(Pur)/Sale of Invt -27,609 -4,463 6,202 -29,795 2,225 2,600
Others 0 0 0 0 0 0
Inc/(Dec) in Net Worth 0 0 0 0 0 0
Inc / (Dec) in Debt 44,491 75,823 71,861 19,175 78,407 65,833
Interest Paid -17,116 -19,244 -25,938 -30,773 -32,623 -43,187
Divd Paid (incl Tax) -27,703 -40,086 -35,533 -32,319 -37,271 -43,223
CF from Fin. Activity 42,957 16,999 15,819 -30,989 -11,941 -43,768
Inc/(Dec) in Cash 15,791 7,258 -42,361 34,205 31,804 2,150
Closing Balance 177,643 184,902 142,540 187,319 251,460 253,732
E: MOSL Estimates
16 June 2014 52
16 June 2014
BPCL
BSE Sensex S&P CNX
25,190 7,534 CMP: INR590 TP: INR676 Buy
Ad-hoc/delayed subsidy impacts profitability

Diesel deregulation, marketing margin increase to drive earnings; E&P
Stock Info to give further upside
Bloomberg BPCL IN
 BPCL’s interest cost increased >6x in the last eight years. This increase was led by
Equity Shares (m) 723.1
ad-hoc subsidy sharing policy and delayed compensation by the government.
52-Week Range (INR) 650/256  Diesel deregulation and likely marketing margin can boost earnings for BPCL,
1, 6, 12 Rel. Per (%) 3/50/29 which if reinvested in improving GRMs can increase its bottom-line for long term.
M.Cap. (USD b) 7.4
 Gross under-recoveries increased from INR88b in FY06 to INR345b in FY14.
This coupled with delayed compensation increased debt and interest costs
Financial Snapshot (INR Billion) impacting BPCL’s profitability.
Y/E March 2015E 2016E 2017E  BPCL’s debt touched its peak in FY13 at INR238b, 185% higher than INR84b
Net Sales 2,564 2,670 2,757 in FY06. Interest costs in FY14 at INR20b are >6x than INR3b in FY06.
EBITDA 73.9 76.2 85.0  BPCL’s returns are marred by (a) lower realizations led by ad-hoc subsidy
Adj PAT 27.2 32.7 37.0 sharing, (b) Lower GRMs.
EPS (INR) 37.6 45.3 51.2
Gr. (%) -30.5 20.6 13.0
BV/Sh. (INR) 290.9 321.0 354.6
 Give (a) De-regulation of diesel, (b) lowering of subsidy, (c) ambitious
RoE (%) 13.7 15.0 15.3 investments in improving the refinery complexity to increase GRMs (as
RoCE (%) 8.5 8.9 10.5 being done by MRPL) and (d) actively monitor and take timely corrective
P/E (x) 14.3 11.8 10.5 actions for any delay in the large projects.
P/BV (x) 1.8 1.7 1.5 What has company done in last five years?
 BPCL has managed its treasury and inventory well, and along with its
increased focus on marketing and branding, its cost-efficiency has led to a
better performance than other MNCs.
As on Mar-14 Dec-13 Mar-13
 While, BPCL along with Oman Oil Company successfully commissioned Bina
Promoter 55.8 55.8 55.8
refinery, the refinery didn’t profits till FY13.
Dom. Inst. 15.9 16.8 16.6
Foreign 11.5 10.2 10.4 What is the underlying potential?
Others 16.9 17.2 17.2  Post FY06, subsidy payout of INR107b, could have been invested for
refinery up-gradation to improve its GRMs.
 Mere subsidy/interest cost reduction, could’ve increased EPS by INR4/sh.
Stock Performance (1-year)
 Every INR0.5/ltr increase in diesel marketing margin increases EPS by INR7.
 Refining contributes 26% in overall EBITDA. Every USD1/bbl increase in
BPCL’s GRM increases its SA EBITDA by 18% and EPS by INR3.5/sh.
 Lowering of subsidy to give timely realization, along with some marketing
margins in diesel will give boost to the earnings of BPCL.
 The stock trades at 11.8x FY16E EPS of INR45.3. Buy.

BPCL
Story in charts
Non-commensurate retail price increases led to India’s under BPCL has managed to keep its RoE high led by its cost
recovery bill rising to INR1.6t in FY13 (INR b) efficient business performance
Petrol Diesel INR b RoE (%)
LPG Kerosene 21.7
Total Crude (USD/bbl) - RHS 19.8
114 111 108 120
82 85 87 1,3851,610 1,399 12.5 11.9 11.5
70 90 11.1
58 64 1,033
42 773 780 60
29 461 6.1
400 494 4.8 5.0
201 30
93
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: PPAC, MoPNG, MOSL Source: Company, MOSL
Interest cost has increased 6 times to its FY06 level led by BPCL’s debt peaked in FY13 to INR238b, 185% higher than
higher debt due to delayed compensation for subsides INR84b in FY06
Interest Cost (INRb) Total Debt (INRb)
26 236 238
23 22 222
212
20 190
175
14 14 150
108
84
6 7
3
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
BPCL’s PAT could increase by 32% (~INR11.8/sh increase in Expect BPCL’s E&P valuation to increase led by SEAL basin in
EPS) by Int. cost reduction and INR0.5/lt marketing margin Brazil and Mozambique
BPCL PAT (INR b) Block INR/sh Remarks
-1.0
Brazil (Wahoo) 12 150-200mmbbl reserves
6.7
2.8 Brazil (SEAL) Yet to announce, expected
to be meaningful
34.8
26.3 Mozambique 185 50-70tcf gas reserves
Total 197
FY14 Base Benefit from Benefit from Impact of New likely
Case PAT lower higher MM 15% market PAT / EPS
interest share loss
Source: MOSL
16 June 2014 54
BPCL
Company description
A Fortune 500 company, BPCL has interests in oil refining and marketing of
petroleum products. It is the third largest refining company in India with a capacity
of 12mmtpa at its Mumbai facility and 9.5mmtpa at Kochi. BPCL has majority stake
(63%) in Numaligarh Refineries, a 3mmtpa refinery in the north-east. BPCL has
investments in IGL (22.5%) and Petronet LNG (12.5%). BPCL is a public sector firm in
which the government of India holds 54.93%.
With government stake at 54.9%, we believe the medium term focus of the
government with respect to BPCL will be towards improving the profitability.
BPCL: Key Assumptions

FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Brent Crude (USD/bbl) 86.5 114.5 110.0 107.8 105.0 105.0 100.0
Market Sales (MMT) 29.1 31.1 33.3 34.0 35.0 35.9 37.3
YoY (%) 4.9 7.0 6.9 2.1 3.0 2.5 4.0
GRM (USD/bbl) 4.5 3.2 5.0 4.3 5.0 5.0 5.1
Singapore GRM (USD/bbl) 5.2 8.2 7.7 5.6 6.5 6.5 6.5
Prem/(disc) (USD/bbl) (0.7) (5.1) (2.7) (1.3) (1.5) (1.5) (1.4)
Refinery Throughput (mmt) 21.8 22.9 23.2 23.4 24.0 24.0 24.2
YoY (%) 6.6 5.2 1.2 0.6 2.8 0.0 1.0
Under recoveries Sharing (INR b)
Gross under recoveries 180 326 390 345 205 165 139
Upstream sharing 70 130 168 156 130 99 83
Govt. sharing 65 197 219 184 72 63 53
Net sharing 45 0 2 5 4 3 2
Net sharing (%) 25 0 1 1 2 2 2
16 June 2014 55
BPCL

Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Sales 2,121.4 2,421.8 2,642.6 2,563.9 2,670.4 2,757.2
Change (%) 38.1 14.2 9.1 -3.0 4.2 3.3
EBITDA 48.1 66.7 92.1 73.9 76.2 85.0
EBITDA Margin (%) 2.3 2.8 3.5 2.9 2.9 3.1
Depreciation 24.1 24.6 26.1 30.0 31.1 32.0
EBIT 24.0 42.1 66.0 43.9 45.2 53.0
Interest 22.6 25.2 19.8 15.6 13.7 12.0
Other Income 14.6 15.3 15.5 13.8 17.8 14.7
PBT 16.0 32.2 61.7 42.1 49.3 55.7
Tax 7.5 12.8 21.1 14.5 16.1 18.3
Tax Rate (%) 46.8 39.9 34.3 34.4 32.7 32.8
Reported PAT 8.5 19.4 40.5 27.6 33.2 37.4
Adjusted PAT 7.8 18.8 39.1 27.2 32.7 37.0
Change (%) -52.2 140.9 107.9 -30.5 20.6 13.0
Min. Int. & Assoc. Share -0.7 -0.6 -1.4 -0.4 -0.4 -0.4
Adj Cons PAT 7.1 18.3 37.7 26.7 32.3 36.5

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 7.2 7.2 7.2 7.2 7.2 7.2
Reserves 151.6 160.5 185.2 203.1 224.8 249.1
Net Worth 158.8 167.8 192.5 210.3 232.1 256.4
Debt 301.5 328.6 305.2 271.6 245.5 217.6
Deferred Tax 16.8 16.1 16.1 16.7 17.4 18.7
Total Capital Employed 487.5 523.2 525.9 511.2 508.1 506.2
Gross Fixed Assets 416.7 437.8 483.1 499.8 514.8 526.0
Less: Acc Depreciation 174.4 198.2 224.3 254.3 285.3 317.3
Net Fixed Assets 242.3 239.6 258.8 245.6 229.4 208.7
Capital WIP 45.3 74.6 74.6 74.6 74.6 74.6
Investments 78.9 74.7 113.0 128.0 143.0 163.0
Current Assets 404.0 399.1 402.9 391.6 399.2 414.8
Inventory 211.0 199.6 192.1 181.4 183.9 189.6
Debtors 52.0 43.6 59.5 55.9 57.2 59.0
Cash & Bank 13.3 28.5 50.4 93.5 117.4 125.4
Loans & Adv, Others 127.8 127.5 100.8 60.8 40.8 40.8
Provisions 19.2 31.7 32.7 32.9 33.1 33.3
Total Assets 487.5 523.2 525.9 511.2 508.1 506.2
E: MOSL Estimates
16 June 2014 56
BPCL

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 10.8 26.0 54.1 37.6 45.3 51.2
Cash EPS 43.2 59.3 88.2 78.4 87.6 94.8
Book Value 219.6 232.0 266.2 290.9 321.0 354.6
DPS 5.5 11.0 17.0 11.0 13.0 15.0
Valuation(x)
P/E 9.9 14.3 11.8 10.5
Cash P/E 6.1 6.8 6.1 5.7
Price / Book Value 2.0 1.8 1.7 1.5
EV/Sales 0.1 0.1 0.0 0.0
EV/EBITDA 2.8 2.4 1.7 1.1
Dividend Yield (%) 3.2 2.1 2.4 2.8
RoE 5.5 11.9 22.5 13.7 15.0 15.3
RoCE 5.2 8.3 12.6 8.5 8.9 10.5
Turnover Ratios (%)
Asset Turnover (x) 4.6 4.8 5.0 4.9 5.2 5.4
Leverage Ratios (%)
Net Debt/Equity (x) 1.9 2.0 1.6 1.3 1.1 0.8

Y/E March 2012 2013 2014 2015E 2016E 2017E
Depreciation 24.1 24.6 26.1 30.0 31.1 32.0
Others 0.0 0.0 0.0 0.0 0.0 0.0
Interest 22.3 24.7 19.8 15.6 13.7 12.0
(Inc)/Dec in Wkg Cap -40.4 -11.3 76.7 59.4 25.9 9.1
(Inc)/Dec in FA & CWIP -42.2 -73.8 -45.3 -16.7 -14.9 -11.2
(Pur)/Sale of Invt 19.4 37.8 -38.3 -15.0 -15.0 -20.0
Others 0.0 0.0 0.0 0.0 0.0 0.0
Inc / (Dec) in Debt -14.9 42.0 -23.4 -33.6 -26.1 -27.9
Interest Paid -21.9 -25.5 -19.8 -15.6 -13.7 -12.0
CF from Fin. Activity -43.8 2.3 -57.6 -58.6 -50.8 -52.6
Inc/(Dec) in Cash -47.5 25.5 21.9 43.0 23.9 8.0
Add: Opening Balance 60.7 -3.2 28.5 50.4 93.5 117.4
Closing Balance 13.3 22.3 50.4 93.5 117.4 125.4
E: MOSL Estimates
16 June 2014 57
16 June 2014
Thematic | India PSUs | Sector: Utilities
Coal India
BSE Sensex S&P CNX
25,190 7,534 CMP: INR389 TP: INR421 Neutral
Volume, operational efficiency next growth driver

Enabling environment key to volume growth, initial steps encouraging
Stock Info  Constraints on clearances, land and evacuation front led to poor volume
Bloomberg COAL IN growth in the past. Corrective actions taken are encouraging.
Equity Shares (m) 6,316.4  Revamping clearances structure and establishing evacuation
52-Week Range (INR) 424/238
infrastructure would be a key to volume growth.
1, 6, 12 Rel. Per (%) 22/24/-3
 10% volume growth and operational efficiency can lead to ~13% upgrade
M.Cap. (INR b) 2,459.6
in FY16E earnings. Valuations near term LT average, but could improve as
M.Cap. (USD b) 40.9
earnings are driven by volume, cost efficiency.
Y/E March 2015E 2016E 2017E
Sales 729 779 837  Production growth over FY10-14 stood at 2% CAGR (FY11-12 growth of 1%
EBITDA 198 216 242 YoY) due to environment/forest clearances and evacuation issues.
NP* 181 194 213  Employee cost is up 1.7x from FY10 levels of INR167b to INR278b in FY14
EPS (INR)* 28.7 30.8 33.7
led by wage revision, conducted once in 5 years.
EPS Gr. (%) 13.2 7.4 9.7
BV/Sh. (INR) 78.6 90.9 104.4
 Other key issues were 1) Mandate from PMO to sign FSA for all capacity till
RoE (%)** 25.9 24.5 23.6 FY15, 2) Talks of coal regulator, lower E-auction volumes, 3) Delays in
RoCE (%) 60.1 54.8 52.1 setting up washeries, 4) regulatory uncertainty, 5) OFS, and union issues.
Payout (%) 55.9 60.0 60.0
Valuations What needs to be done?
P/E (x) 13.6 12.7 11.5  Conducive operating environment is must as timely clearances and land is
P/BV (x) 5.0 4.3 3.7 critical to volume growth. Removal of CEPI, 25% increases in Brownfield
EV/EBITDA 9.9 8.8 7.5
mines, etc are key initial steps, which are encouraging.
Div. Yld (%) 3.7 4.7 5.2
EV/ Sales (x) 2.7 2.4 2.2  Similar emphasis needs to be placed on railway evacuation infrastructure,
as mere production growth is of no consequence.
 Achieving volume growth through fire fighting measures, but outcome has
Promoter 89.7 90.0 90.0
been muted. FY13/14 still witnessed 3%+ growth in production.
Dom. Inst 2.9 2.4 2.0
 Price re-alignment to weather rising cost and lower volumes.
Foreign 5.4 5.5 5.5
Others 2.1 2.1 2.5 What is the underlying potential?
 Volume growth could be ramped-up to 8-10% with co-ordination of State
Stock Performance (1-year) and Centre. Clearance, land and evacuation are subject matter that needs
Coal India highest attention.
Sensex - Rebased  Drive to improve efficiency 1) rationalization of UG mines/legacy labor, 2)
430 theft of coal, 3) high scale modernization/private sector in mining.
380
330  At LT average PER 16x on FY16E EPS, TP would stands at INR492/sh. 10%
280 volume growth, operational efficiency could lead upgrade of 13% in FY16E.
230 Financials and valuations
Sep-13
Mar-14
Jun-13
Dec-13
Jun-14
 Expect earnings CAGR of 10% over FY14-16E. COAL trades at PER of 12.7x
and P/B of 4.3x on FY16E basis.

Coal India
Story in charts
Production growth to accelerate going forward… …as also dispatch growth, railway infrastructure is key
Production (m ton) CAGR of ~6% 10 Dispatches % YoY
Flat growth
Growth (% YoY) 10.2
from FY10-12
7 7.9
7.2 7.1
5.9 6.1 5.7
452
465
556
4
525
495
3.9
436
431
430
403
378
1.7
360
2.5 2.3
342
324
306
291
280
267
1 312 343 368 394 410 420 430 464 472 500 530 561
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
-2
Muted realization growth vs steady price revision in past Cost efficiency of 500bps over FY1-17E (INR/ton)
Stores & Spares Staff cost
Contractual Expenses Others
800 % of revenues 100
93.5
600 90
81.9
77.6 76.8
400 75.7 78.0 80
72.8 74.9 73.5 72.9 72.3
71.1
200 70
0 60
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
PAT growth largely in-line with volume growth (INR b) Payout strong and yield provides downside comfort
76.7 PAT Dividend Payout (%) Special dividend
Growth (% YoY) 160 Dividend Yield (%) 10
in FY14
29.8 47.8
120 8
11.2 9.3 13.2 7.4 9.7
1.9
(9.5) 80 5
(31.2) 40 3
61 42 43 56 98 109 162 177 160 181 194 213
0 0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY15E
FY16E
FY17E
16 June 2014 59
Coal India
Company description
Coal India Limited (CIL) is a leading public sector undertaking engaged into coal
mining in India and is working on establishing its footprint globally through
MoUs/acquisition route. CIL operates through its 9 wholly owned subsidiaries, of
which 1 subsidiary is engaged in exploration and feasibility study analysis. CIL has
total resources of 64.3b tonnes and proved reserves of 52.4b tonnes, of which
extractable reserves stand at 21.7b tonnes.
With government stake at 90%, there is a fair possibility of offer for sale. However,
given contentious issues of lower volume growth and cost push, we believe the near
term focus would be to first put COAL on growth path. This will also lead to
improved sentiments and valuation to conduct OFS.
Coal India: Operational matrix

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Production 430 431 436 452 465 495 525 556
% YoY 6.8 0.3 1.0 3.8 2.8 6.5 6.1 5.8
Coal Sales (m tons)
Linkages 321 328 362 397 400 428 450 465
Proportion (%) 78.4 78.1 84.2 85.6 84.7 85.6 84.9 82.9
E-Auction 46 48 51 49 55 52 53 53
Proportion (%) 11.2 11.4 11.8 10.6 11.6 10.4 9.9 9.4
Beneficiated coal 15 15 17 14 13 16 22 36
Proportion (%) 3.6 3.7 3.9 3.0 2.9 3.1 4.2 6.5
Grade A / B 28.4 28.8 - - - - - -
Proportion (%) 3.2 3.0 - - - - - -
Total 410 420 430 464 472 500 530 561
% YoY 3.9 2.5 2.3 7.9 1.7 5.9 6.1 5.7
Realization (INR/t)
Raw Coal (FSA) 884 958 1,235 1,298 1,323 1,326 1,326 1,326
E-auction coal 1,583 1,846 2,599 2,544 2,205 2,212 2,255 2,300
Beneficiated Coal 2,134 2,118 2,228 2,300 2,282 2,289 2,334 2,381
Grade A / B 2,000 2,100 - - - - - -
Blended 1,089 1,195 1,452 1,472 1,463 1,458 1,469 1,493
% YoY 10.7 9.8 21.5 1.4 (0.6) (0.3) 0.7 1.7
Cost Composition (% of Revenue)
Stores & Spares 11.0 10.5 8.8 8.9 10.2 9.3 9.2 9.0
Staff cost 37.3 37.7 42.3 40.0 40.4 40.4 40.0 39.3
Contractual Exp 8.4 9.2 7.9 8.5 9.9 9.3 9.2 9.0
Overburden Removal Adj 6.8 5.2 5.9 4.7 4.8 4.0 4.3 4.3
Others 12.9 10.2 10.0 11.5 11.5 10.0 9.7 9.5
Total Costs 76.5 72.8 74.9 73.5 76.8 72.9 72.3 71.1
EBIDTA Margins 23.5 27.2 25.1 26.5 23.2 27.1 27.7 28.9
Financials (INR/ton)
Revenues 1,089 1,195 1,452 1,472 1,463 1,458 1,469 1,493
EBIDTA 256 325 364 390 338 396 408 432
PBT 348 397 493 538 485 536 542 562
PAT 240 260 376 381 339 362 366 380
Source: MOSL
16 June 2014 60
Coal India

Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Sales 624,154 683,027 688,100 729,191 778,952 837,544
Change (%) 24 9 1 6 7 8
EBITDA 156,679 180,836 159,632 197,778 216,146 242,462
EBITDA Margin (%) 25.1 26.5 23.2 27.1 27.7 28.9
Depreciation 19,692 18,130 19,964 20,169 21,429 22,791
EBIT 136,986 162,707 139,668 177,609 194,716 219,671
Interest 540 452 580 375 353 332
Other Income 75,369 87,467 89,694 90,738 93,308 96,134
Extraordinary items -911 -69 -14 0 0 0
PBT 212,727 249,790 228,795 267,972 287,671 315,473
Tax 64,845 76,227 77,679 86,943 93,335 102,355
Tax Rate (%) 30.5 30.5 34.0 32.4 32.4 32.4
Reported PAT 147,883 173,564 151,116 181,028 194,336 213,118
Adjusted PAT 161,582 176,624 159,881 181,028 194,336 213,118
Change (%) 48 9 -9 13 7 10

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 63,164 63,164 63,164 63,164 63,164 63,164
Reserves 341,366 421,556 360,881 433,292 511,027 596,274
Net Worth 404,530 484,720 424,045 496,456 574,190 659,438
Debt 13,054 10,778 1,715 9,523 8,952 8,415
Deferred Tax -11,941 -22,550 -19,717 -19,717 -19,717 -19,717
Net Fixed Assets 134,403 134,658 176,089 221,851 272,285 327,857
Capital WIP 29,034 34,960 14,913 40,343 46,127 51,340
Investments 19,814 23,950 37,749 16,183 16,992 17,842
Current Assets 874,673 999,531 793,955 905,105 990,365 1,087,691
Inventory 60,713 56,178 55,681 59,006 63,032 67,774
Debtors 56,630 104,802 82,410 87,332 93,291 100,308
Cash & Bank 582,028 622,360 523,895 515,990 574,386 637,566
Loans & Adv, Others 175,302 216,190 131,969 242,778 259,655 282,043
Provisions 209,894 124,603 116,238 135,261 145,568 159,687
Total Assets 410,761 496,646 406,678 486,898 564,061 648,771
E: MOSL Estimates
16 June 2014 61
Coal India

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 25.6 28.0 25.3 28.7 30.8 33.7
Cash EPS 28.7 30.8 28.5 31.9 34.2 37.3
Book Value 64.0 76.7 67.1 78.6 90.9 104.4
DPS 10.0 14.0 30.0 14.3 18.5 20.2
Valuation(x)
P/E 15.2 13.9 15.4 13.6 12.7 11.5
Cash P/E 13.6 12.6 13.7 12.2 11.4 10.4
EV/EBITDA 12.1 10.2 12.1 9.9 8.8 7.5
EV/Sales 3.0 2.7 2.8 2.7 2.4 2.2
EV /m ton of Reserves 86.9 85.0 89.1 89.8 -25.9 -28.8
Price/Book Value 6.1 5.1 5.8 5.0 4.3 3.7
Dividend Yield (%) 2.6 3.6 7.7 3.7 4.7 5.2
RoE 40.1 39.0 33.3 39.3 36.3 34.6
RoCE 37.0 37.0 31.7 39.8 37.1 36.2
Turnover Ratios (%)
Asset Turnover (x) 1.7 1.5 1.5 1.6 1.5 1.4
Leverage Ratios (%)
Net Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0 0.0

Y/E March 2012 2013 2014 2015E 2016E 2017E
Depreciation 19,692 18,130 19,964 20,169 21,429 22,791
Others 0 0 0 0 0 0
Interest 540 452 580 375 353 332
(Inc)/Dec in Wkg Cap 76,585 -16,757 3,625 -38,499 38,260 40,105
(Inc)/Dec in FA & CWIP -22,286 -15,068 -29,739 -80,287 -66,126 -71,589
(Pur)/Sale of Invt -9,177 -4,136 -13,799 21,566 -809 -850
Others 0 0 0 0 0 0
Inc/(Dec) in Net Worth -1,496 12,741 15,598 0 0 0
Inc / (Dec) in Debt -610 -2,276 -9,063 7,809 -571 -537
Interest Paid -540 -452 -580 -375 -353 -332
CF from Fin. Activity -90,185 -115,921 -229,200 -112,259 -129,047 -118,882
Inc/(Dec) in Cash 123,963 40,332 -97,439 -7,905 58,396 85,026
Closing Balance 582,028 622,360 524,921 515,990 574,386 659,412
E: MOSL Estimates
16 June 2014 62
16 June 2014
Thematic | India PSUs | Sector: Metals
SAIL
BSE Sensex S&P CNX
Project execution mismanaged, wage hike hit margins

Need to focus on projects completion and asset sweating
Stock Info  Volume growth at inflection point, operating leverage will aid margins.
Bloomberg SAIL IN  Underlying growth potentials are huge due to large mining assets and land.
Equity Shares (m) 4,130.1
What went wrong in five years
 During FY10-14, Steel Authority of India Ltd’s (SAIL) EBITDA per ton declined
1, 6, 12 Rel. Per (%) 21/20/50
from USD176/t to USD57/t due to a fall in steel realization from USD718/t
to USD640/t and increase in specific labor cost from USD71/t to USD101/t.
M.Cap. (USD b) 6.7
This affected operating cash flows significantly.
 Since FY09, its cumulative capex is ~INR532b (USD9b) on expansion
programs, but sales volumes remained unchanged at 12.1mt. Projects are
Financial Snapshot (INR Billion) running behind schedule due to mismanagement and typical public sector
Y/E March 2015E 2016E 2017E
procedural bottlenecks. Net debt has increased by INR324b to INR226b.
Net Sales 499.1 562.2 636.5
EBITDA 78.2 90.8 99.7 What needs to be done
Adj PAT 31.9 31.5 29.9  Instead of breaking down the whole project into smaller packages, the PSU
EPS (INR) 7.7 7.6 7.2 would be better off giving turnkey order for full project. Although this may
Growth (%) 66.7 -1.0 -5.4 be slightly expensive initially, the overall project cost will be lower due to
RoE (%) 7.2 6.8 6.1 savings of time, interest and opportunity.
RoCE (%) 7.2 7.1 6.7  Focus should shift to completion of projects and asset sweating.
P/E (x) 12.8 12.9 13.6  There is a need to benchmark its cost structure with peers in the industry.
P/BV (x) 0.9 0.9 0.8 What company did in last five years
EV/EBITDA (x) 8.7 8.1 7.6  SAIL is executing INR720b capex to increase saleable steel capacity from
12.4mtpa to 20.2mtpa. INR532b is already spent.
 Salem steel plant is completely revamped. Many old blast furnaces and
Shareholding pattern (% ) coke oven batteries have been revamped. New CRM is added at Bokaro,
As on Mar-14 Dec-13 Mar-13 While a new 2.4mtpa blast furnace is commissioned at Roorkela. The
Promoter 80.0 80.0 80.0 2.4mtpa new capacity in ISP, Burnpur is near complete.
Dom. Inst 10.9 10.6 11.9
Foreign 6.0 6.4 4.9  Company has access to large captive iron ore mines with huge reserves of 2-
Others 3.1 3.0 3.2 3bt. Current iron ore production is only a fraction of its true potential.
 SAIL has five integrated steel plants in different locations in east and central
parts of India. Each site has sufficient land for future expansions.
Stock Performance (1-year)  These advantages can be capitalized to increase capacity 2-3x through
Brownfield expansion of steel plant and iron ore mines.
Valuation and views with sensitivity on target price
 Saleable steel volumes are expected to post a CAGR of 12% over FY14-17E.
EBITDA per ton is expected to clock a CAGR of 19% to USD96/t due to the
benefit of operating leverage. Thus, EBITDA will post a CAGR of 33% to
INR98.4b during the same period.
 Every 1 USD/t change in steel revenue realization translates into EPS
upgrade of 2-2.5%.
 The stock is valued based on FY16E EV/EBITDA of 6.5x and book value of
capital work in progress (CWIP).
Sanjay Jain (SanjayJain@MotilalOswal.com); +91 22 3982 5412

SAIL
Story in charts
Volume growth at inflection point, margins to improve Earnings growth dragged by rising interest, depreciation
EBITDA per ton (USD) Sales (m tons) Depreciation (U$/t) Net interest (U$/t)
17
300
15
19
45
13
16
12
250
10 11 11 12 11 12 12 11 11 12 25
10
14
9 10
200
11
150
9
5
100
6
-15
218
137
181
261
180
173
141
111
50
44
10
41
94
77
57
87
99
96
4
0 1
-35
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: SAIL, MOSL Source: SAIL, MOSL
Conversion cost (USD/t) has peaked Capex (INR b) cycle has peaked
Labor P&F Others 114
331
322
311
101 95 105
286
285
281
281
273
265
89 90 85
214
208
135
200
196
128
115
176
62
167
60
117
120
160
125
153
130
98
106 57 102
71 59 84
60
76 48 84
86 45 68
81
63 50 83
80
64 44 68
67
63 41 63
68
27
67
69 36 47
60 37 63
70
73
17 14
137
115
113
108
101
2 3
97
1
86
77
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: SAIL, MOSL Source: SAIL, MOSL
Net debt to equity is still less than 1x (INR b) RoIC (%) is unlikely to improve
Debt Cash Net Worth 98.5
500
71.9
375 63.6 60.5
47.9
250 37.2
21.6
125 14.4 9.3 12.1 11.3
9.1
0
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: MOSL, SAIL Source: SAIL, MOSL
16 June 2014 64
SAIL
Company description
Steel Authority of India Ltd (SAIL), a public sector undertaking (PSU), is the largest
steel producer in India, with ~20% market share. Its current capacity of 13mtpa is
vertically integrated from mines to finished steel and is spread across four plants in
the mineral-rich belt of Chhattisgarh, Orissa and Jharkhand. SAIL is totally self-
sufficient in iron ore (captive mines). However, it has to depend on purchase of
coking coal and a large share is imported. It has a wide range of products and is a
large producer of special steel.
With the Government’s stake at 80%, we believe its near term focus with respect to
SAIL will be to improve profitability. Further divestment will depend on market
conditions.
Key assumptions
Y/E March FY14 FY15E FY16E FY17E
Production (m tons) 12.9 13.9 15.9 17.9
Sales (m tons) 12.1 13.1 15.1 17.1
Realization (USD/ton) 640 630 630 630
Coking coal - benchmark fob 151 114 110 110
Raw material cost (USD/tss) 264 236 229 232
Iron ore cost (USD/ton) 18 19 20 20
Coking coal (USD/tss) 177 146 140 135
Others (USD/tss) 68 70 69 77
EBITDA per ton (US$) 57 87 99 96
Target price calculation (INR m)

Year 2011 2012 2013 2014 2015E 2016E
Volumes (m tons) 11.7 11.4 11.1 12.1 13.1 15.1
EBITDA (INR per ton) 6,768 5,618 4,628 3,806 5,981 6,022
EBITDA 79,427 64,041 51,212 45,943 78,170 90,753
Target EV/EBITDA(x) 6.5 6.5
Target EV 508,108 589,895
less: Net Debt (INR m) 27,261 106,983 183,642 225,771 277,337 327,045
add: CWIP 224,220 283,157 361,549 350,289 290,289 215,289
Equity value 521,060 478,140
Target price (INR/sh.) 126 116
16 June 2014 65
SAIL

Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Sales 466.6 450.9 471.2 499.1 562.2 636.5
Change (%) 7.5 -3.4 4.5 5.9 12.7 13.2
EBITDA 64.0 51.2 45.9 78.2 90.8 99.7
EBITDA Margin (%) 13.7 11.4 9.8 15.7 16.1 15.7
Depreciation 16.9 15.3 18.5 24.4 32.6 40.1
EBIT 47.2 35.9 27.5 53.8 58.1 59.6
Interest 7.8 8.5 10.8 15.2 19.5 22.8
Other Income 16.0 9.5 7.4 3.1 2.7 2.3
Extraordinary items -2.6 -2.3 9.6 0.0 0.0 0.0
PBT 52.8 34.6 33.7 41.6 41.3 39.1
Tax 16.9 11.3 7.0 9.8 9.7 9.3
Tax Rate (%) 32.0 32.7 20.7 23.5 23.5 23.7
Reported PAT 35.9 23.3 26.7 31.9 31.5 29.9
Adjusted PAT 37.7 24.8 19.1 31.9 31.5 29.8
Change (%) -23.5 -34.1 -23.0 66.7 -1.0 -5.4
Min. Int. & Assoc. Share 0.0 0.0 0.0 0.0 0.0 0.0
Adj Cons PAT 37.7 24.8 19.1 31.9 31.5 29.9

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 41.3 41.3 41.3 41.3 41.3 41.3
Reserves 361.4 375.2 392.2 414.4 436.3 456.5
Net Worth 402.7 416.5 433.5 455.7 477.6 497.8
Debt 173.6 225.4 295.4 345.4 385.4 425.4
Deferred Tax 17.8 19.0 23.0 24.9 26.8 28.6
Gross Fixed Assets 440.7 451.4 567.7 717.7 877.7 1,037.7
Net Fixed Assets 187.6 183.9 281.7 407.3 534.7 654.6
Capital WIP 283.2 361.5 350.3 290.3 215.3 115.3
Investments 0.7 0.7 0.7 0.7 0.7 0.7
Current Assets 313.5 319.0 334.3 345.4 362.9 412.1
Inventory 139.0 161.7 148.5 157.2 177.1 200.5
Debtors 48.5 45.6 45.2 47.9 53.9 61.0
Cash & Bank 66.6 41.8 69.6 68.1 58.4 75.9
Loans & Adv, Others 59.4 70.0 71.0 72.2 73.5 74.7
Provisions 157.6 169.9 169.9 169.9 169.9 169.9
Total Assets 594.2 660.9 751.9 826.0 889.8 951.8
E: MOSL Estimates
16 June 2014 66
SAIL

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 9.1 6.0 4.6 7.7 7.6 7.2
Cash EPS 13.2 9.7 9.1 13.6 15.5 16.9
Book Value 97.5 100.8 105.0 110.3 115.6 120.5
DPS 2.0 2.0 2.0 2.0 2.0 2.0
Valuation(x)
P/E 10.8 16.4 21.3 12.8 12.9 13.6
Cash P/E 7.4 10.1 10.8 7.2 6.3 5.8
Price / Book Value 1.0 1.0 0.9 0.9 0.9 0.8
EV/Sales 1.1 1.3 1.3 1.4 1.3 1.2
EV/EBITDA 8.0 11.5 13.8 8.7 8.1 7.6
Dividend Yield (%) 2.0 2.0 2.0 2.0 2.0 2.0
RoE 9.7 6.1 4.5 7.2 6.8 6.1
RoCE 10.6 7.2 4.9 7.2 7.1 6.7
Turnover Ratios (%)
Asset Turnover (x) 0.8 0.7 0.6 0.6 0.6 0.7
Leverage Ratios (%)
Net Debt/Equity (x) 0.3 0.4 0.5 0.6 0.7 0.7

Y/E March 2012 2013 2014 2015E 2016E 2017E
Depreciation 16.9 15.3 18.5 24.4 32.6 40.1
Others -16.0 -9.5 -7.4 -3.1 -2.7 -2.3
Interest 7.8 8.5 10.8 15.2 19.5 22.8
(Inc)/Dec in Wkg Cap -28.0 -16.9 24.4 -8.8 -19.9 -23.4
(Inc)/Dec in FA & CWIP -95.2 -89.1 -105.0 -90.0 -85.0 -60.0
(Pur)/Sale of Invt -0.1 0.0 0.0 0.0 0.0 0.0
Others 0.0 0.0 0.0 0.0 0.0 0.0
Inc / (Dec) in Debt -31.1 51.8 70.0 50.0 40.0 40.0
Interest Paid -7.8 -8.5 -10.8 -15.2 -19.5 -22.8
CF from Fin. Activity -32.6 43.1 57.0 28.2 13.5 9.9
Inc/(Dec) in Cash -110.9 -24.9 27.9 -1.6 -9.7 17.6
Closing Balance 66.6 41.8 69.6 68.1 58.4 75.9
E: MOSL Estimates
16 June 2014 67
16 June 2014
Canara Bank
BSE Sensex S&P CNX
25,190 7,534 CMP: INR439 TP: INR560 Buy
Levered to infrastructure reforms

Stock Info RAM at cyclical low | Earnings sensitivity highest
Bloomberg CBK IN
Equity Shares (m) 461.3  Canara bank’s (CBK) focus on growth (~24%+ in FY14) without
improvement in core profitability led to faster capital consumption.
1, 6, 12 Rel. Per (%) 17/56/-19
 Over FY11-14, CBK’s profitability declined (RoA of 0.5% in FY14 v/s 1.3% in
FY11), led by 100bp+ compression in Risk-Adjusted Margins (RAM).
M.Cap. (USD b) 3.4
 While stress increased over FY09/13, in FY14 net stress loan remained flat
at 8.7% of loans –signs of stress loans peaking out.
 Improvement in the economic growth and reforms (CBK’s, infra exposure
Y/E March 2015E 2016E 2017E is at 19%) would lead to better profitability, lower stress addition and
NII 105.1 123.5 151.7 ease BV dilutive capital infusion.
OP 74.6 90.5 114.8
NP ) 27.0 35.3 46.6 What went wrong in five years
EPS (INR) 58.5 76.5 100.9  Moderating economic growth and fall in new investment demand led to
EPS Gr. (%) 10.8 30.7 31.9 slowdown of loan growth and significant rise in stress levels in the system.
BV/Sh (INR) 564.0 622.7 700.1  Stubborn inflation and volatility in INR resulted in tight liquidity conditions
P/E (x) 7.5 5.7 4.3 and high interest rate, further accentuating the stress in the system.
P/BV (x) 0.8 0.7 0.6
What needs to be done
RoE (%) 10.8 12.9 15.3
 Resolution of bottle-necks in infrastructure space and revival of growth
RoA (%) 0.5 0.6 0.6
would lead to better loan growth and ROA (led by fall in credit cost).
 Shareholding of GoI in PSU banks to be brought below/at-least 51%. Access
Shareholding pattern (% ) to foreign capital for PSU banks could be raised from current cap of 20%.
As on Mar-14 Dec-13 Mar-13  Steps to improve governance standards based on Nayak committee
Promoter 69.0 69.0 67.7 recommendations
Dom. Inst 13.1 12.9 13.4
What the bank did in last five years
Foreign 9.1 10.5 12.3
 Continuous change in strategy with the change at the helm of affairs
Others 8.8 7.6 6.7
leading to weak profitability and faster consumption of capital
 Strong growth in infra sector led to higher pressure on asset quality.
Further, low cost deposits growth could not keep pace with the overall
Stock Performance (1-year) deposits leading to decline in CASA ratio (down 550bp+ over FY09-14)
Canara Bank
Sensex - Rebased
525  CBK is highly levered towards infrastructure space (19% of loans) and
reforms in this space will be a significant positive for the company.
425
 Easing G-sec yields will aid earnings as of the overall investments AFS
325
portfolio is 32% and has duration of 3years+.
225
Valuation and view with sensitivity on target price
125
 CBK trades at 0.7x P/BV (below its LPA) and with the economy bottoming
Sep-13
Mar-14
Jun-13
Dec-13
Jun-14
out and reform-oriented actions, we expect a re-rating in the stock. Expect

30%+ PAT CAGR. Maintain Buy.

Canara Bank
Story in charts
Trades at 30% discount to LPA Return ratios expected to have bottomed out (%)
RoA RoE
29.2
26.8 26.4
22.7
20.020.7
18.8 19.1 17.1
13.3 12.9
10.4 10.8
1.5
1.1
1.1
1.0
0.9
1.0
1.2
1.3
0.9
0.7
0.5
0.5
0.6
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
Expect gradual improvement in NIM (%) Earnings highly sensitive to reforms in Infra segment (%)
35.5 60
33.4
18.3 17.5 20.4 40
13.7 17.5 17.5
12.4 13.5
20
-0.1 2.5
-12.1 0
3.1
2.8
2.6
2.5
2.8
2.4
2.2
2.2
3.1
3.0
2.2
2.2
2.1
-20
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY15E
FY16E
Credit cost estimates conservative Net stress loans at INR262b (8.7% of loans)
Credit Cost (%) PCR (%) Aviation, 0.
55.9 52.5 Iron and
3
51.0 Steel, 0.3
NNPA, 2.0
37.9
29.4 30.5 30.5 28.5 SEB, 2.2
25.7 24.4
16.0 15.7 21.2
2.8
1.5
0.9
0.5
0.9
0.7
0.9
0.5
0.6
0.8
0.8
0.9
0.8
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
OSRL, 3.9
Source: MOSL, Company Source: MOSL, Company
16 June 2014 69
Canara Bank
Company description
Canara Bank (among the top 6 banks with a market share of ~5% in deposits and
loans) was incorporated in 1906 at Mangalore and subsequently nationalized, in
1969. The bank is headquartered in Bangalore, Karnataka. The government holds
69% of the equity. As on Mar-14 the bank has a large network of 4700+ branches
and 6300+ ATMs which is geographically well diversified. Its subsidiaries include
Canbank Mutual Fund & Canfin Homes, Canbank Venture Capital Fund and Canbank
Factors.
Pick up in loans and deposits MS in FY14 CASA MS improved marginally in FY14 – decline arrested (%)
6.0 6.5
5.3 5.3
4.5 4.0
3.8 2.8
3.0 1.5
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Strong branch expansion in FY14 Higher opex and provisions led to decline in earnings
EPS (INR) EPS growth (%)
45.8
32.4
23.3
-18.5 -12.5 -18.5

2,469
2,513
2,532
2,578
2,678
2,733
3,046
3,257
3,600
3,728
4,755
51 74 91 74 65 53
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY09
FY10
FY11
FY12
FY13
FY14
16 June 2014 70
Canara Bank

Y/E March 2012 2013 2014 2015E 2016E 2017E
Interest Income 308.5 340.8 395.5 443.6 515.3 616.0
Interest Expense 231.6 262.0 306.0 338.5 391.9 464.4
Change (%) -0.1 2.5 13.5 17.5 17.5 22.9
Net Income 106.2 110.3 128.8 144.4 169.3 203.5
Change (%) 1.0 3.9 16.7 12.1 17.3 20.2
Change (%) -2.4 -0.9 15.4 9.7 21.3 26.9
PBT 40.8 36.7 30.6 34.6 45.2 62.1
Tax 8.0 8.0 6.3 7.6 10.0 15.5
Tax Rate (%) 19.6 21.8 20.4 22.0 22.0 25.0
Change (%) -18.5 -12.5 -15.1 10.8 30.7 31.9
Equity Dividend (Incl tax) 5.7 6.7 5.9 6.3 8.2 10.8
Core PPP* 48.2 44.5 50.4 59.4 72.1 95.1
Change (%) -2.1 -7.6 13.2 17.9 21.4 32.0

Y/E March 2012 2013 2014 2015E 2016E 2017E
Reserves & Surplus 222.5 244.3 291.6 309.5 333.8 366.7
Net Worth 226.9 248.8 296.2 314.1 338.4 371.3
Deposits 3,270.5 3,558.6 4,207.2 4,838.3 5,806.0 7,199.4
Change (%) 11.5 8.8 18.2 15.0 20.0 24.0
of which CASA Dep 796.1 860.6 1,032.8 1,157.5 1,297.3 1,502.6
Change (%) -4.2 8.1 20.0 12.1 12.1 15.8
Borrowings 155.3 202.8 272.3 304.4 309.4 314.4
Other Liabilities & Prov. 88.9 113.3 143.5 173.6 211.0 257.5
Current Assets 281.8 347.1 448.3 469.6 566.4 713.5
Investments 1,020.6 1,211.3 1,268.3 1,458.5 1,677.3 1,979.2
Change (%) 22.0 18.7 4.7 15.0 15.0 18.0
Loans 2,324.9 2,421.8 3,010.7 3,492.4 4,190.9 5,196.7
Change (%) 10.0 4.2 24.3 16.0 20.0 24.0
Fixed Assets 28.6 28.6 66.4 65.6 64.2 62.2
Other Assets 85.8 114.6 125.6 144.4 166.1 191.0
Total Assets 3,741.6 4,123.4 4,919.2 5,630.4 6,664.7 8,142.6

Y/E March 2012 2013 2014 2015E 2016E 2017E
GNPA 40.3 62.6 75.7 86.7 85.8 80.1
NNPA 33.9 52.8 59.7 65.6 61.4 48.0
GNPA Ratio 1.7 2.6 2.5 2.5 2.0 1.5
NNPA Ratio 1.5 2.2 2.0 1.9 1.5 0.9
16 June 2014 71
Canara Bank

Ratios (%)
Y/E March 2012 2013 2014 2015E 2016E 2017E
Interest Spread 2.4 2.1 2.1 2.1 2.1 2.2
RoE 17.1 13.3 10.4 10.8 12.9 15.3
RoA 0.9 0.7 0.5 0.5 0.6 0.6
Fee Income/Net Income 15.4 16.3 13.3 15.1 14.3 13.5
Cost/Income* 45.4 49.7 49.8 49.7 48.3 44.9
Empl. Cost/Op. Exps. 63.6 63.3 60.4 59.8 58.4 57.4
Busi. per Empl. (Rs m) 125.9 135.6 136.1 157.1 181.5 217.4
NP per Empl. (Rs lac) 7.8 6.7 5.0 5.5 7.0 9.0
CASA Ratio 24.3 24.2 24.5 23.9 22.3 20.9
CAR 13.8 12.4 10.6 9.8 9.0 8.1
Tier 1 10.4 9.8 7.7 7.2 6.6 6.0
Valuations
Y/E March 2012 2013 2014 2015E 2016E 2017E
Book Value (INR) 463.8 513.4 519.1 564.0 622.7 700.1
Change (%) 14.6 10.7 1.1 8.6 10.4 12.4
Price-BV (x) 0.9 0.9 0.8 0.8 0.7 0.6
Adjusted BV (INR) 414.1 436.0 435.1 471.7 536.3 632.5
Price-ABV (x) 1.1 1.0 1.0 0.9 0.8 0.7
EPS (INR) 74.1 64.8 52.9 58.5 76.5 100.9
Change (%) -18.5 -12.5 -18.5 10.8 30.7 31.9
Price-Earnings (x) 5.9 6.8 8.3 7.5 5.7 4.3
Dividend Yield (%) 2.5 3.0 2.5 2.7 3.5 4.6
16 June 2014 72
16 June 2014
GAIL
BSE Sensex S&P CNX
Subsidy; gas pipeline underutilization impact returns

Higher gas availability and low/nil subsidy to improve utilization and
profitability
Stock Info
Bloomberg GAIL IN  GAIL’s last 5 year subsidy payout of INR112b (46% of 5-year capex) and
Equity Shares (m) 1,268.5 underutilization of new pipelines has impacted reinvestment and return ratios.
52-Week Range (INR) 446/273  Higher gas availability from domestic/imported source would revive transmission
1, 6, 12 Rel. Per (%) 1/7/12 business. But high feedstock cost a concern in petchem and LPG businesses.
M.Cap. (INR b) 563.6 What went wrong in the five years?
M.Cap. (USD b) 9.4  GAIL’s average subsidy payout in the last 5 years stood at ~INR22b v/s
average PAT of ~INR37b, thereby significantly impacting the bottom-line.
 New pipelines are underutilized due to non-availability of incremental gas.
Financial Snapshot (INR b) On the other hand where LNG volumes could have flown in the pipeline
Y/E March 2015E 2016E 2017E
projects did not complete due to land acquisition issues (Kochi-Bangalore).
Net Sales 604.8 675.9 759.0
EBITDA 75.9 81.5 81.6 What needs to be done?
Adj PAT 40.5 42.3 43.2  Give (a) Lower / eliminate subsidy; (b) Fast track the delayed southern India
EPS (INR) 32.0 33.4 34.1 pipeline project; (c) Boost domestic gas production through remunerative
Gr. (%) 10.0 4.4 2.1 gas pricing and timely E&P approvals and (d) rollout more CGD networks.
BV/Sh. (INR) 235.1 256.8 278.9
RoE (%) 14.2 13.6 12.7
 Signed gas purchase agreement with Sabine Pass, USA (3.5mmt, 2018 start)
RoCE (%) 14.4 14.8 14.2
and booked 50% capacity in Dominion Cove LNG terminal. Also, revived
P/E (x) 13.5 13.0 12.7
5mmt Dabhol LNG terminal and imports LNG from PLNG’s Dahej terminal.
P/BV (x) 1.8 1.7 1.6
 GAIL is doubling its petchem capacity at Pata to 900KTA.
 Increasing CGD network in India through GAIL Gas (100% subsidiary) and
Shareholding pattern (%) JV’s
As on Mar-14 Dec-13 Mar-13 What is the underlying potential?
Promoter 63.4 64.6 64.6  Subsidy reduction will directly increase the retained earnings which if
Dom. Inst 15.5 14.4 15.7 reinvested in setting up strategic pipeline/CGD network shall boost its
Foreign 18.8 18.5 16.9 profitability for the longer term.
Others 2.3 2.5 2.8
 Efficient E&P policies, along with favorable gas prices shall increase pipeline
utilizations and in turn profitability.
 If FY15 subsidy is nil (v/s current estimation of INR14b) then GAIL EPS will
increase by INR7 (18% upside). However this could be negated by lowering
domestic gas allocation for petchem and LPG production leading to higher
feedstock prices as it will have to be replaced by high cost LNG.
 Medium term gas headwinds impacting profitability is a concern and low/nil
subsidy will be a respite. Higher LPG and Petchem prices necessary to
neutralize likely increase in the feedstock prices.
 The stock trades at 13x FY16E EPS of INR33.4. Neutral.

GAIL
Story in charts
Since FY08, GAIL’s Gross block increased 136% whereas PAT Subsidy sharing has remained significant as compared to the
increased 53% as gas pipelines have been underutilized Capex
Gross block (INRb) PAT (INRb) Subsidy (INRb) Capex (INRb)
40 40 62
37 59
36
31 47
26 28 363 43
311
263 33 32
210 221 27
170 176 23 21
18 19
13 13
9
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: PPAC, MoPNG, MOSL Source: OINL, MOSL
Return ratios of GAIL were marred by inefficient subsidy Recent increase in EBIT is contributed by Gas trading (CAGR
regime and higher depreciation (underutilized pipelines) of 33% since FY08), and now accounts for 18% of overall EBIT
RoE (%) RoCE (%) Gas trans EBIT LPG trans EBIT Gas trading EBIT
Petchem EBIT LPG & Liq. HC EBIT INR b
27 26 25 25
21 19
17 38 41
26 29
19
22 26 11 13 13 12
12 7
10 3 3 10 12 13
21 20 20 20 18 18 17 211 3 3 3 1 2
213 2
12 20 23 19 16 16
Source: OINL, PPAC, MOSL Source: Company, MOSL
Non-commensurate retail price increases led to India’s

under recovery bill rising to INR1.6t in FY13 (INR b) GAIL’s 1 year forward P/E stands at 13.4
Petrol Diesel P/E (x) 15 Yrs Avg(x)
INR b
LPG Kerosene 20 5 Yrs Avg(x) 10 Yrs Avg(x)
114 111 108 120 15 12.9 13.3
82 85 87 1,3851,610 1,399
70 90 10 11.5
58 64 1,033 9.3
42 773 780 60
29 461 5
400 494
201 30
93 0
0
Feb-04
Sep-08
Feb-12
Mar-05
Jun-99
Dec-02
Dec-10
Jun-14
Aug-00
Jul-07
Oct-01
May-06
Apr-13
Nov-09
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
16 June 2014 74
GAIL
Company description
GAIL is a major gas transmission, processing, distribution and marketing company in
India, with interests in gas distribution, petrochemicals, LPG, and telecom. It owns
~8,500km of natural gas pipelines, two LPG transmission pipelines of 1,900km,
500KTA petchem capacity, ~1.4mt LPG/other hydrocarbons capacity and over
13,000km of optical fiber cable network. GAIL is also involved in city gas distribution,
E&P and power businesses through its joint ventures.
government with respect to GAIL will be towards improving the profitability.
GAIL India: Key Assumptions

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Brent crude (USD/bbl) 85 70 87 114 110 108 107 105 100
Exchange Rate (INR/USD) 46.1 47.5 46.0 47.9 54.5 60.6 58.0 57.0 57.0
Subsidy (INRb) 17.8 13.3 21.1 31.8 26.9 19.0 14.0 10.5 8.9
Avg. Gas Price (USD/mmbtu) 3.7 3.6 5.0 6.1 6.7 7.7 8.7 8.8 8.8
Natural Gas Transmission
Volumes (mmscmd) 84 107 119 119 105 97 98 106 125
Average Tariff (INR/mscm) 840 829 888 895 983 1,169 1,100 1,125 1,200
LPG Transmission
Volume ('000 MT) 2,744 3,160 3,337 3,362 3,200 3,030 3,300 3,300 3,300
Average Tariff (INR/MT) 1,392 1,415 1,422 1,351 937 1,329 1,329 1,329 1,329
Petrochemicals
Capacity ('000MT) 410 410 420 450 450 450 900 900 900
Utilization (%) 103% 100% 100% 100% 95% 100% 80% 85% 90%
Sales ('000 MT) 423 409 420 448 427 445 720 765 810
Realization (USD/MT) 1,488 1,472 1,546 1,589 1,614 1,616 1,653 1,671 1,639
LPG & liq. HC
Sales ('000MT) 1,401 1,442 1,368 1,439 1,371 1,308 1,410 1,410 1,410
LPG realization (USD/MT) 739 607 778 910 957 936 920 923 899
EPS (INR/sh) 22.1 24.8 28.7 28.8 31.7 31.8 32.0 33.4 34.1
Source: MOSL
16 June 2014 75
GAIL

Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Sales 402.8 473.3 572.5 604.8 675.9 759.0
Change (%) 24.1 17.5 20.9 5.6 11.8 12.3
EBITDA 57.0 62.8 64.4 75.9 81.5 81.6
EBITDA Margin (%) 14.1 13.3 11.2 12.6 12.1 10.8
Depreciation 7.9 9.8 11.8 16.2 16.8 16.9
EBIT 49.1 53.0 52.6 59.7 64.7 64.8
Interest 1.2 2.0 3.7 5.0 6.7 5.9
Other Income 5.5 9.5 11.6 6.1 5.4 6.0
PBT 53.4 60.6 57.1 60.8 63.5 64.8
Tax 16.9 20.4 20.3 20.3 21.2 21.6
Tax Rate (%) 31.6 33.6 35.5 33.3 33.3 33.3
Reported PAT 36.5 40.2 36.9 40.5 42.3 43.2
Adjusted PAT 36.5 40.2 36.9 40.5 42.3 43.2
Change (%) 2.6 10.1 -8.4 10.0 4.4 2.1
Min. Int. & Assoc. Share 0.0 0.0 0.0 0.0 0.0 0.0
Adj Cons PAT 0.0 0.0 0.0 0.0 0.0 0.0

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 12.7 12.7 12.7 12.7 12.7 12.7
Reserves 203.6 229.6 259.2 285.6 313.0 341.1
Net Worth 216.2 242.3 271.9 298.2 325.7 353.8
Debt 53.5 90.6 103.0 100.0 85.0 70.0
Deferred Tax 17.7 23.0 25.7 30.7 36.0 41.4
Net Fixed Assets 158.6 197.1 236.4 300.2 316.7 317.4
Capital WIP 79.4 89.8 81.2 59.0 68.1 68.1
Investments 35.5 37.2 41.0 41.0 41.0 41.0
Current Assets 117.4 122.8 139.7 129.1 127.3 152.8
Inventory 14.2 15.4 21.8 14.1 15.3 16.8
Debtors 21.8 25.5 28.6 30.2 33.8 37.9
Cash & Bank 9.3 23.6 21.8 16.1 8.2 26.5
Loans & Adv, Others 72.1 58.4 67.5 68.8 70.1 71.5
Provisions 43.6 17.9 19.4 19.4 19.4 19.8
Total Assets 287.4 355.9 400.5 428.9 446.7 465.2
E: MOSL Estimates
16 June 2014 76
GAIL

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 28.8 31.7 29.1 32.0 33.4 34.1
Cash EPS 0.0 0.0 0.0 0.0 0.0 0.0
Book Value 170.5 191.0 214.4 235.1 256.8 278.9
DPS 8.7 0.0 0.0 0.0 0.0 0.0
Valuation(x)
P/E 15.0 13.7 14.9 13.5 13.0 12.7
Cash P/E 0.0 0.0 0.0 0.0 0.0 0.0
Price / Book Value 2.5 2.3 2.0 1.8 1.7 1.6
EV/Sales 0.1 0.1 0.1 0.1 0.1 0.1
EV/EBITDA 0.0 0.0 0.0 0.0 0.0 0.0
Dividend Yield (%) 2.0 0.0 0.0 0.0 0.0 0.0
RoE 17.9 17.5 14.3 14.2 13.6 12.7
RoCE 18.9 16.5 13.9 14.4 14.8 14.2
Turnover Ratios (%)
Asset Turnover (x) 1.6 1.5 1.5 1.5 1.5 1.7
Leverage Ratios (%)
Net Debt/Equity (x) 0.2 0.4 0.4 0.3 0.3 0.2

Y/E March 2012 2013 2014 2015E 2016E 2017E
Depreciation 7.9 10.2 11.8 16.2 16.8 16.9
Others 0.0 0.0 0.0 0.0 0.0 0.0
Interest 0.0 0.0 0.0 0.0 0.0 0.0
(Inc)/Dec in Wkg Cap -5.1 -6.4 -11.8 7.4 -0.1 0.6
(Inc)/Dec in FA & CWIP -66.2 -55.0 -42.5 -57.8 -42.4 -17.5
(Pur)/Sale of Invt -9.7 -4.1 -3.8 0.0 0.0 0.0
Others 4.4 4.3 0.0 0.0 0.0 0.0
Inc / (Dec) in Debt 27.1 33.0 12.3 -3.0 -15.0 -15.0
Interest Paid 0.0 0.0 0.0 0.0 0.0 0.0
CF from Fin. Activity 14.5 18.7 -1.8 -17.2 -29.8 -30.1
Inc/(Dec) in Cash -12.0 14.3 -1.8 -5.7 -7.9 18.4
Closing Balance 9.3 23.6 21.8 16.1 8.2 26.5
E: MOSL Estimates
16 June 2014 77
16 June 2014
HPCL
BSE Sensex S&P CNX
25,190 7,534 CMP: INR406 TP: INR477 Buy
Ad-hoc /delayed subsidy impacted profitability

Balance sheet vulnerability likely to reduce with higher profitability
Stock Info
 HPCL’s profitability likely to improve led by lower interest cost and likely higher
Bloomberg HPCL IN
diesel marketing margins
Equity Shares (m) 338.6  Higher cashflow to help reinvestment to improve efficiency and complexity of
52-Week Range (INR) 463/158 marketing and refining businesses respectively
1, 6, 12 Rel. Per (%) -4/69/24
M.Cap. (USD b) 2.3
 HPCL’s gross under-recoveries increased from INR83b in FY06 to INR362b in
FY14 leading to higher debt and interest due to delayed compensation.
 HPCL’s interest costs increased >7x in the last eight years. This increase was
Financial Snapshot (INR b) led by ad-hoc subsidy sharing policy and delayed compensation by the
Y/E Mar 2015E 2016E 2017E government.
Net Sales 2,159 2,278 2,123  Lower than required reinvestment in refining business led to subpar GRM
EBITDA 43.1 45.6 51.8 performance in recent years.
Adj PAT 9,305 11,883 15,976
EPS INR 27.4 35.1 47.1 What needs to be done?
Gr. (%) -46.3 27.7 34.4  Give (a) petroleum pricing freedom, (b) de-regulate LPG and kerosene and
BV/Sh INR 455.8 478.5 509.2 (c) invest in improving refinery complexity.
RoE (%) 6.1 7.5 9.5  Invest in the allied downstream petchem to capture the entire value chain
RoCE (%) 3.9 4.6 6.0 gains.
P/E (x) 14.9 11.7 8.7
P/BV (x) 0.9 0.9 0.8
 Despite weak balance sheet HPCL has been able to expand its retail network
at an adequate pace.
 In JV with Mittal Energy it has commissioned 9mmt grassroots refinery in
Shareholding pattern (%) Bhatinda to capture North Indian petroleum demand growth.
Promoter 51.1 51.1 51.1 What is the underlying potential?
Dom. Inst 22.1 22.6 24.1  Refining margins could improve meaningfully if complexity of the current
Foreign 10.9 10.5 10.1 refineries is increased.
Others 15.9 15.7 14.8  Marketing freedom the diesel marketing could improve marketing business
profitability and take overall return ratios from current single digit to
healthy double digit levels.
 Every increase of INR0.5/ltr in diesel marketing margins increases EPS by
INR15.5/sh.
 Refining business contributes ~40% of the gross margins and every
USD1/bbl increase in HPCL’s GRM increases its EPS by ~INR10/sh.
 Lowering of subsidy, along with some marketing margin increase in diesel
will boost HPCL’s earnings.

HPCL
Story in charts
Non-commensurate retail price increases led to India’s under Ad-hoc subsidy sharing and delays in compensation by the
recovery bill rising to INR1.6t in FY13 (INRb) govt. has impacted RoE (%)
Petrol Diesel INR b 20.0
LPG Kerosene
Total Crude (USD/bbl) - RHS 16.0
114 111 108 120
82 85 87 1,3851,610 1,399 12.0
70 90
58 64 1,033 780 60 8.0
42 773
29 461
400 494
201 30 4.0
93
0
0.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E
Although interest cost has declined from its peak in FY09, it is HPCL’s debt has peaked FY13/14 to INR325b, ~400% higher
still >7 times high from its FY06 levels. than INR67b in FY06
Interest cost (INRb) Gross Debt (INRb)

21 325 325
298
18
17 250
15 228 213
168
8 9 9
105
4 67
2
HPCL’s PAT could increase by 74% (~INR21.3/sh increase in Even at long term P/E of 9.4x, HPCL could see 37% upside on
EPS) by Int. cost reduction and INR0.5/lt marketing margin the likely new FY16 EPS (allowing INR0.5/lt MM)
HPCL stock price
HPCL PAT (INR b) HPCL Price (@ 15Yr avg P/E of 9.4x new EPS)
-0.8
750 P/E (x) - RHS 20
15.5 584
600 15
6.6
48.1 450
10
26.8 300
150 5
0 0
FY14 Base Interest cost Marketing Market share New likely
May-08
May-09
May-10
May-11
May-12
May-13
May-14
Case EPS reduction margin loss (@15%) EPS

(@INR0.5/ltr)
Source: MOSL Source: Company, MOSL
16 June 2014 79
HPCL
Company description
Fortune-500 company, HPCL is a refining and marketing company in India and also
has interests in upstream. It owns 14.8mmt of refining capacity, split across Mumbai
(6.5mmt) and Vishakapatnam (8.3mmt). It has a crude and product pipeline network
of ~2,400km and sells ~30mmt of petroleum products. HPCL also holds a 16.9%
stake in MRPL and 49% stake in 9mmt Bhatinda refinery. HPCL is a state-owned
company, with 51.1% Government of India (GoI) stake.
government with respect to HPCL will be towards improving the profitability.
HPCL: Key Assumptions

Market Sales (MMT) 27.0 29.5 30.3 31.0 31.9 32.8 33.7
YoY (%) 2.9% 9.1% 2.8% 2.1% 3.0% 3.0% 2.5%
GRM (USD/bbl)
HPCL Blended GRM 4.5 5.2 2.1 3.4 4.0 4.0 4.5
Prem/(disc) (USD/bbl) (0.7) (3.0) (5.6) (2.2) (2.5) (2.5) (2.0)
Refinery throughput (mmt)
Total Refinery throughput (MMT) 15.8 16.1 15.8 15.4 15.9 16.0 16.0
YoY (%) -3.1% 1.9% -1.4% -2.6% 2.7% 0.9% 0.0%
Under recoveries Sharing (INRb)
Govt. sharing 61 183 248 152 74 67 56
Net sharing 43.4 0.1 2.3 4.8 3.7 3.3 2.7
Net sharing (%) 25% 0% 1% 1% 2% 2% 2%
Source: MOSL
16 June 2014 80
HPCL

Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Sales 1,781,392 2,065,293 2,231,454 2,158,657 2,278,163 2,123,441
Change (%) 36.1 15.9 8.0 -3.3 5.5 -6.8
EBITDA 34,082 39,424 52,081 43,131 45,646 51,757
EBITDA Margin (%) 1.9 1.9 2.3 2.0 2.0 2.4
Depreciation 17,129 19,315 21,884 24,478 26,368 28,096
EBIT 16,953 20,109 30,197 18,653 19,278 23,661
Interest 16,977 18,377 15,046 14,939 11,356 9,620
Other Income 12,222 12,300 11,004 10,220 9,872 9,881
Extraordinary items -5 714 0 0 0 0
PBT 12,202 13,318 26,155 13,933 17,794 23,922
Tax 3,077 5,699 8,817 4,628 5,911 7,946
Tax Rate (%) 25.2 42.8 33.7 33.2 33.2 33.2
Reported PAT 9,125 7,620 17,338 9,305 11,883 15,976
Adjusted PAT 9,115 9,047 17,338 9,305 11,883 15,976
Change (%) -40.8 -0.7 91.6 -46.3 27.7 34.4
Min. Int. & Assoc. Share 0 0 0 0 0 0
Adj Cons PAT 9,125 7,620 17,338 9,305 11,883 15,976

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 3,390 3,390 3,390 3,390 3,390 3,390
Reserves 127,835 133,874 145,064 151,117 158,835 169,218
Net Worth 131,225 137,264 148,454 154,507 162,225 172,609
Debt 298,312 324,583 325,000 250,000 190,000 180,000
Deferred Tax 30,853 35,984 39,085 40,478 42,257 44,649
Net Fixed Assets 208,496 225,487 268,831 280,354 287,986 289,890
Capital WIP 44,445 51,729 18,000 12,000 8,000 8,000
Investments 103,705 106,269 106,269 106,269 106,269 106,269
Current Assets 354,427 378,962 391,062 348,182 303,373 294,109
Inventory 194,545 164,387 189,876 182,973 193,213 180,768
Debtors 35,652 49,350 56,642 54,794 57,828 53,900
Cash & Bank 2,264 1,471 18,783 11,247 15,148 22,256
Loans & Adv, Others 121,967 163,754 125,762 99,168 37,184 37,184
Provisions 19,836 22,995 21,845 22,938 24,084 25,290
Net Current Assets 103,744 114,345 119,438 46,362 -7,773 -6,903
Total Assets 460,390 497,830 512,538 444,984 394,482 397,257
E: MOSL Estimates
16 June 2014 81
HPCL

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 26.9 26.7 51.1 27.4 35.1 47.1
Cash EPS 77.4 79.5 115.7 99.7 112.8 130.0
Book Value 387.1 404.9 437.9 455.8 478.5 509.2
DPS 8.5 8.5 15.5 8.2 10.5 14.1
Valuation(x)
P/E 15.2 15.3 8.0 14.9 11.7 8.7
Cash P/E 5.3 5.1 3.5 4.1 3.6 3.1
Price / Book Value 1.1 1.0 0.9 0.9 0.9 0.8
EV/Sales 0.2 0.2 0.1 0.1 0.1 0.1
EV/EBITDA 8.7 8.2 5.9 5.5 3.8 3.0
Dividend Yield (%) 2.1 2.1 3.8 2.0 2.6 3.5
RoE 7.1 5.7 12.1 6.1 7.5 9.5
RoCE 3.9 4.2 6.0 3.9 4.6 6.0
Turnover Ratios (%)
Asset Turnover (x) 4.1 4.3 4.4 4.5 5.4 5.4
Leverage Ratios (%)
Net Debt/Equity (x) 2.3 2.4 2.2 1.6 1.2 1.0

Y/E March 2012 2013 2014 2015E 2016E 2017E
Depreciation 17,129 19,344 21,884 24,478 26,368 28,096
Others 0 0 0 0 0 0
Interest 21,392 20,193 15,046 14,939 11,356 9,620
(Inc)/Dec in Wkg Cap -27,301 -30,945 12,219 65,541 58,035 6,237
(Inc)/Dec in FA & CWIP -41,359 -36,807 -31,500 -30,000 -30,000 -30,000
(Pur)/Sale of Invt 6,378 -2,404 0 0 0 0
Others 6,345 5,505 0 0 0 0
Inc / (Dec) in Debt 37,919 37,072 417 -75,000 -60,000 -10,000
Interest Paid -14,836 -22,187 -15,046 -14,939 -11,356 -9,620
CF from Fin. Activity 17,574 11,540 -20,776 -93,192 -75,521 -25,212
Inc/(Dec) in Cash 4,230 -10,670 17,311 -7,536 3,900 7,108
Add: Opening Balance -1,966 12,141 1,471 18,783 11,247 15,148
Closing Balance 2,264 1,471 18,783 11,247 15,148 22,256
E: MOSL Estimates
16 June 2014 82
16 June 2014
Thematic | India PSUs Update | Sector: Oil & Gas
IOC
BSE Sensex S&P CNX
25,190 7,534 CMP: INR336 TP: INR418 Buy
Ad-hoc /delayed subsidy impacted profitability

Profitability to improve led by diesel deregulation, increase in
marketing margin
 On-going subsidy reforms to boost IOCL’s profitability led by lower interest cost
Stock Info
and likely higher diesel marketing margins.
Bloomberg IOCL IN
 Higher cashflow to help reinvestment to improve efficiency and complexity of
Equity Shares (m) 2,428.0 marketing and refining businesses respectively.
1, 6, 12 Rel. Per (%) -2/49/2 What went wrong in the five years?
M.Cap. (INR b) 815.7  IOCL’s gross under-recoveries increased from INR431b in FY06 to INR729b
M.Cap. (USD b) 13.6 in FY14 leading to higher debt and interest due to delayed compensation.
 IOCL’s interest costs peaked in FY13 at INR64b, 4x of the FY08 levels.
 IOCL’s profitability was marred by (a) inefficiencies of the subsidy regime,
Financial Snapshot (INR b) (b) lower GRMs due to lower complexity (the commissioning of Paradip
Y/E March 2015E 2016E 2017E refinery capable of processing heavier crude has been delayed).
Net Sales 4,296 4,264 4,149
EBITDA 189.1 210.9 240.5 What needs to be done?
Adj PAT 71.9 86.4 96.0  Give (a) petroleum pricing freedom, (b) de-regulate LPG and kerosene and
EPS (INR) 29.6 35.6 39.5 (c) expedite and take timely corrective actions for any delay in the mega
Gr. (%) 1.4 20.2 11.1 projects (d) reinvest the earnings in improving refinery complexity.
BV/Sh. (INR) 299.3 322.0 361.5
RoE (%) 10.5 11.7 12.1
 IOCL is commissioning its 11th refinery at Paradip, Odisha with nameplate
RoCE (%) 7.6 8.9 10.1
P/E (x) 12.0 10.0 9.0
capacity of 15mmtpa at ~INR300b.
P/BV (x) 1.2 1.1 1.0  Consistently registering refinery capacity utilization of >100%.
 IOCL has been able to expand its retail network at a pace higher than
before.
Shareholding pattern (%) What is the underlying potential?
 Refining margins could improve meaningfully if complexity of the current
Promoter 68.6 78.9 79.0
refineries is increased.
Dom. Inst 4.8 4.4 4.5
 Marketing freedom the diesel marketing could improve marketing business
Foreign 2.2 2.2 2.0
profitability and improve overall return ratios.
Others 24.4 14.5 14.5
Stock Performance (1-year)  Every increase of INR0.5/ltr in diesel marketing margins increases EPS by
INR2.7/sh.
 Mere interest cost reduction, led by lower subsidy could’ve increased EPS
by INR2.3/sh.
 Lowering of subsidy, along with some marketing margin increase in diesel
will give boost IOCL’s earnings.
 The stock trades at 10x FY16E EPS of INR35.6. Buy.

IOC
Story in charts
Non-commensurate retail price increases led to India’s under Interest cost has remained a key driver of RoE, due to
recovery bill rising to INR1.6t in FY13 (INRb) inefficiencies in current subsidy regime
Petrol Diesel INR b
LPG Kerosene RoE (%)
22 20
1,610 1,399 120 20
1,385
773 90
461 11
400 1,033 780
60 14 7
494
93
201 30
6
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY08 FY09 FY10 FY11 FY12 FY13 FY14
Interest cost peaked in FY13 at INR64b 4x FY08 level led by IOCL’s debt has peaked in FY14 to INR832b, ~120% higher
higher debt due to delayed compensation for subsidies than INR355b in FY08
Interest Cost (INRb) Total Debt (INRb)
64
56 832
754 783
51
40 527
450 446
27 355
16 15
IOCL’s PAT could increase by 17% (~INR3.1/sh increase in Even at long term P/E of 9.6x, IOCL could see 35% upside on
EPS) by Int. cost reduction and INR0.5/lt marketing margin the likely new FY16 EPS (allowing INR0.5/lt MM)
IOCL PAT (INRb) IOCL stock price
-1.9 IOCL Price (@ 15Yr avg P/E of 9.6x new EPS)
2.7 P/E (x) - RHS
600 475 17
2.3 450 12
35.1
30.9 300 7
150 2
FY14 Base Interest cost Marketing Market share New likely
Case EPS reduction margin loss (@15%) EPS
0 -3
(@INR0.5/ltr)
May-08 May-10 May-12 May-14
Source: MOSL Source: Company, MOSL
16 June 2014 84
IOC
Company description
Fortune-500 company, IOC is the largest refining and marketing company in India. It
operates 8 refineries (incl BRPL) with a capacity of 54.2mmtpa and has a 52% stake
in CPCL (11.5mmt refining capacity). The company controls a refining capacity of
65.7 mmtpa. It has a pipeline network of >10,300km (62mmtpa capacity), has
22,372 petrol/diesel outlets and has interests in petrochemicals and upstream oil
and gas. IOC is a Public Sector Company with 78.9% Government stake.
government with respect to IOCL will be towards improving the profitability.
IOCL: Key Assumptions

Conversion (MT to bbl) 7.37 7.37 7.37 7.37 7.37 7.37 7.37
Market Sales Volume (MMT) 72.9 75.7 76.2 75.5 78.0 80.4 82.2
YoY (%) 4% 4% 1% -1% 3% 3% 2%
GRM (USD/bbl) 5.9 3.6 2.2 4.2 4.5 5.0 5.0
Prem/(disc) (USD/bbl) 0.8 (4.5) (5.4) (1.4) (2.0) (1.5) (1.5)
Refinery throughput (mmt) 53.0 55.6 54.7 53.1 55.4 62.3 69.2
YoY (%) 4% 5% -2% -3% 4% 13% 11%
Pipeline throughput (mmt) 67.8 70.3 70.9 70.2 72.5 74.7 76.4
YoY (%) 5% 4% 1% -1% 3% 3% 2%
Under recoveries Sharing (INR b)
Govt. sharing 226 455 533 372 165 147 124
Net sharing 38 0 5 11 9 8 7
Net sharing (%) 9% 0% 1% 1% 2% 2% 2%
Source: MOSL
16 June 2014 85
IOC

Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Sales 4,072.3 4,607.5 4,872.6 4,296.2 4,264.5 4,149.8
Change (%) 32.2 13.1 5.8 -11.8 -0.7 -2.7
EBITDA 180.3 127.4 159.7 189.1 210.9 240.5
EBITDA Margin (%) 4.4 2.8 3.3 4.4 4.9 5.8
Depreciation 53.1 56.9 63.6 69.9 77.1 88.7
EBIT 127.2 70.5 96.1 119.2 133.8 151.8
Interest 58.9 70.8 59.1 55.6 47.8 44.2
Other Income 48.8 45.4 45.3 43.7 41.9 42.3
PBT 40.0 45.0 64.8 107.4 127.9 149.9
Tax -2.7 8.8 30.1 33.4 39.7 49.8
Tax Rate (%) -6.8 19.5 46.4 31.1 31.0 33.2
Reported PAT 42.7 36.3 34.7 74.0 88.2 100.1
Adjusted PAT 119.3 44.5 70.9 71.9 86.4 96.0
Change (%) 52.4 -62.7 59.3 1.4 20.2 11.1
Min. Int. & Assoc. Share -0.4 8.2 1.2 -2.1 -1.8 -4.1
Adj Cons PAT 41.9 52.7 37.1 69.8 84.6 91.9

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 24.3 24.3 24.3 24.3 24.3 24.3
Reserves 579.5 609.9 656.0 702.3 757.5 853.5
Net Worth 603.7 634.1 680.3 726.6 781.8 877.8
Debt 800.2 840.3 885.4 705.3 608.3 561.3
Deferred Tax 59.7 63.3 64.2 70.1 77.3 78.6
Total Capital Employed 1,483.0 1,549.0 1,639.9 1,514.1 1,481.3 1,535.7
Gross Fixed Assets 1,076.3 1,105.3 1,226.6 1,354.3 1,492.2 1,782.1
Net Fixed Assets 645.8 618.0 675.7 733.5 794.3 995.4
Capital WIP 154.5 193.4 268.8 243.8 218.8 43.8
Investments 175.9 178.4 187.0 187.0 187.0 187.0
Current Assets 1,221.8 1,406.1 1,448.9 1,235.6 1,158.9 1,165.2
Inventory 638.5 656.6 730.8 637.8 629.7 609.1
Debtors 115.5 137.8 130.0 147.6 142.7 140.0
Cash & Bank 8.2 98.9 98.6 120.3 76.2 105.6
Loans & Adv, Others 459.6 512.9 489.6 329.9 310.2 310.5
Provisions 154.0 181.8 190.0 192.5 192.2 194.0
Total Assets 1,483.0 1,549.0 1,639.9 1,514.1 1,481.3 1,535.7
E: MOSL Estimates
16 June 2014 86
IOC

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 49.2 18.3 29.2 29.6 35.6 39.5
Cash EPS 39.1 45.2 41.5 57.5 66.6 74.4
Book Value 248.7 261.2 280.2 299.3 322.0 361.5
DPS 5.0 6.2 8.7 9.0 11.0 12.0
Valuation(x)
P/E 12.1 12.0 10.0 9.0
Cash P/E 8.5 6.2 5.3 4.8
EV/Sales 0.3 0.3 0.3 0.3
EV/EBITDA 10.3 7.6 6.6 5.5
Dividend Yield (%) 2.5 2.5 3.1 3.4
RoE 7.2 5.9 5.3 10.5 11.7 12.1
RoCE 9.3 4.6 6.0 7.6 8.9 10.1
Turnover Ratios (%)
Asset Turnover (x) 3.0 3.0 3.1 2.7 2.8 2.8
Leverage Ratios (%)
Net Debt/Equity (x) 1.3 1.3 1.3 1.0 0.8 0.6

Y/E March 2012 2013 2014 2015E 2016E 2017E
Depreciation 49.8 56.9 63.6 69.9 77.1 88.7
Others 0.0 0.0 0.0 0.0 0.0 0.0
Interest 59.0 70.8 59.1 55.6 47.8 44.2
(Inc)/Dec in Wkg Cap -132.2 38.2 50.6 180.4 24.5 1.2
CF from Op. Activity -7.7 205.9 243.8 385.7 244.8 235.5
(Inc)/Dec in FA & CWIP -170.2 -67.9 -196.8 -102.7 -112.9 -114.9
(Pur)/Sale of Invt 39.7 -2.6 -8.5 0.0 0.0 0.0
Others 0.0 0.0 0.0 0.0 0.0 0.0
Inc / (Dec) in Debt 222.7 40.2 45.1 -180.1 -97.0 -47.0
Interest Paid -63.6 -70.8 -59.1 -55.6 -47.8 -44.2
Divd Paid (incl Tax) -28.1 -14.1 -24.7 -25.6 -31.2 0.0
CF from Fin. Activity 131.0 -44.7 -38.7 -261.3 -176.0 -91.2
Inc/(Dec) in Cash -7.2 90.6 -0.3 21.7 -44.1 29.4
Closing Balance 8.2 98.9 98.6 120.3 76.2 105.6
E: MOSL Estimates
16 June 2014 87
16 June 2014
Thematic | India PSUs | Sector: Metals
NMDC
BSE Sensex S&P CNX
25,190 7,534 CMP: INR179 TP: INR220 Buy
Domestic tail winds stronger than global headwinds

Strong margins; 7% volume growth; attractive 5% dividend yield
 NMDC is a key beneficiary of domestic demand-supply gap.

Stock Info
 True potential of underlying asset is yet to be tapped.
Bloomberg NMDC IN
Equity Shares (m) 3,964.7 What went wrong in five years
52-Week Range (INR) 196/93  Slurry pipeline of Essar (customer) was damaged by naxals in Chhattisgarh.
1, 6, 12 Rel. Per (%) 6/7/32 This led to bottlenecks in logistics and affected deliveries of Bailadila
M.Cap. (INR b) 710.5 complex.
M.Cap. (USD b) 11.8  Higher royalties and new forest development tax raised costs.
 Production declined at Kumarswamy mines due to a delay in permits.
 Capital allocation was suboptimal. Large retained profits in fixed deposits
Financial Snapshot (INR Billion)
dragged down RoE.
Y/E March 2015E 2016E 2017E
Net Sales 132.2 137.1 149.4  Financials and valuations
EBITDA 85.5 88.3 97.5 What needs to be done
Adj PAT 71.1 72.5 77.9  Although dividend payout has been raised to address investors’ grievances,
EPS (INR) 17.9 18.3 19.6 yet NMDC has large cash piles on its balance sheet. Company should raise
Gr. (%) 11.2 2.0 7.4
the dividend payout further to enhance RoE and shareholders’ total return.
RoE (%) 22.7 21.4 21.4
 Expedite debottlenecking of logistics.
RoCE (%) 33.2 31.4 31.4
 Ensure that mining permits are renewed well in advance.
P/E (x) 9.8 9.6 9.0
P/BV (x) 2.1 2.0 1.9 What company did in last five years
EV/EBITDA (x) 5.8 5.7 5.2  Reserves at Donimalai mines replenished through further exploration.
 Mechanization of Kumarswamy mines is underway in advanced stages.
Shareholding pattern (% )  1.2mtpa pellet plant set up at Donimalai complex.
As on Mar-14 Dec-13 Mar-13  Bailadila 11B - additional 7mtpa capacity added at Chhattisgarh complex.
Promoter 80.0 80.0 80.0
Dom. Inst 10.6 10.5 11.5
Foreign 6.2 6.1 4.8
 NMDC has access to high quality iron ore reserves of 1.4bt. These assets are
Others 3.1 3.4 3.7 highly underexplored. True reserves are likely to be manifold.
 If logistics bottlenecks are addressed, iron ore production can increase
exponentially.
Stock Performance (1-year) Valuation and views with sensitivity on target price
NMDC
Sensex - Rebased
 Although global seaborne iron ore prices are under pressure due to
200 oversupply, NMDC could raise prices in the domestic market as supply is
170 getting tighter due to closure of mines. Company’s ore is still cheaper for
Indian steel mills. NMDC’s realization is still lower than global peers, while
140
its grade and product mix is superior.
110
 Every INR100/t change in iron ore realization leads to EPS upgrade of 3%.
80
Sep-13
Mar-14
Jun-13
Dec-13
Jun-14
 NMDC is valued based on FY16E EV/EBITDA of 6.5x and book value of

capital work in progress. Dividend yield is attractive at ~5%.
Sanjay Jain (SanjayJain@MotilalOswal.com); +91 22 3982 5412

NMDC
Story in charts
Realization resilient, margins trended down in 4 years… …costs increased due to royalty, CSR
Source: NMDC, MOSL Source: NMDC, MOSL
RoIC (%) has peaked, yet exceptional RoE (%) declined due to increase in cash reserves
Payout ratio is hiked to enhance RoE NMDC is selling largely in domestic market
16 June 2014 89
NMDC
Company description
NMDC is India's largest iron ore producer, with a capacity of 36mtpa. It produces
~30-32mtpa of iron ore from four mining complexes in Chhattisgarh and Karnataka.
In addition to its iron ore operations, NMDC has a diamond mine at Panna (Madhya
Pradesh) and owns a 10.5mw wind power plant in Karnataka. In July 2010, Sponge
Iron India, which has a small sponge iron capacity of 60ktpa, was merged with
NMDC. It is investing INR155b over the next five years to expand the iron ore
production to 50mtpa and forward integrate by setting up a 3mpta steel plant in
Chhattisgarh and 1.2mtpa pellet plant in Karnataka.
With Government’s stake at 80%, we believe its near term focus with respect to
NMDC will be to increase production and address logistic bottlenecks. Further
divestment will depend on market condition.
Key assumption: Sales (mt)

Kirandul, Chhattisagrh Bacheli, Chhattisagrh Donimalai, Karnataka
36.5 37.5
30.6 33.0
30.0 28.6
26.3 25.2 27.3 26.4 10.5
23.8 10.0
6.9 9.5
5.7 6.4 4.2 5.6 5.3 9.4
5.7 13.5 13.5
10.4 11.7 10.8 12.1 12.6 11.7 11.4 12.5
10.7
10.2 11.4 11.4 8.8 9.0 9.4 9.7 11.0 13.0 13.5
7.4
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Target price calculations (INR m)

Y/E March 2011 2012 2013 2014 2015E 2016E
EBITDA per ton 3,284 3,270 2,963 2,548 2,513 2,419
Volumes (m tons) 26.3 27.3 26.3 30.5 34.0 36.5
EBITDA 86,430 89,281 77,838 77,713 85,452 88,296
Target EBITDA multiple 6.5 6.5
Target EV 555,438 573,924
Less: Net Debt (Rs m) -172,281 -202,646 -210,258 -186,572 -201,025 -199,812
Add: CWIP 6,772 19,147 32,808 53,989 75,841 98,570
Equity Value 832,303 872,306
Target price 210 220
16 June 2014 90
NMDC

Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Sales 112.6 107.0 120.6 132.2 137.1 149.4
Change (%) -0.9 -4.9 12.6 9.7 3.6 9.0
EBITDA 89.3 77.8 77.7 85.5 88.3 97.5
EBITDA Margin (%) 79.3 72.7 64.4 64.6 64.4 65.2
Depreciation 1.3 1.4 1.5 1.8 2.0 2.2
EBIT 88.0 76.5 76.2 83.6 86.3 95.2
Interest 0.0 0.0 0.0 0.0 0.0 0.0
Other Income 20.2 22.4 20.9 20.9 20.3 19.3
Extraordinary items -0.5 -4.1 0.5 0.0 0.0 0.0
PBT 107.6 94.8 97.6 104.5 106.6 114.5
Tax 34.9 31.2 33.4 33.4 34.1 36.6
Tax Rate (%) 32.5 32.9 34.2 32.0 32.0 32.0
Reported PAT 72.7 63.6 64.2 71.1 72.5 77.9
Adjusted PAT 73.0 66.3 63.9 71.1 72.5 77.9
Change (%) 12.3 -9.2 -3.6 11.2 2.0 7.4

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 4.0 4.0 4.0 4.0 4.0 4.0
Reserves 240.1 271.1 295.9 322.9 346.7 373.6
Net Worth 244.1 275.1 299.9 326.9 350.7 377.5
Debt 0.0 0.0 0.0 0.0 0.0 0.0
Deferred Tax 1.0 1.0 1.1 1.1 1.1 1.1
Net Fixed Assets 11.9 12.6 12.4 14.6 16.5 18.3
Capital WIP 19.1 32.8 54.0 75.8 98.6 128.5
Investments 2.5 2.5 2.5 2.5 2.5 2.5
Current Assets 233.0 261.0 245.9 256.1 255.5 251.5
Inventory 4.6 6.4 6.8 4.3 4.5 4.9
Debtors 7.4 10.8 14.5 12.7 13.1 14.3
Cash & Bank 202.6 210.3 186.6 201.0 199.8 194.3
Loans & Adv, Others 18.4 33.5 38.0 38.0 38.0 38.0
Provisions 15.0 21.7 12.0 12.0 12.0 12.0
Total Assets 245.1 276.2 301.0 328.0 351.7 378.6
E: MOSL Estimates
16 June 2014 91
NMDC

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 18.4 16.7 16.1 17.9 18.3 19.6
Cash EPS 18.7 16.4 16.6 18.4 18.8 20.2
Book Value 61.6 69.4 75.6 82.4 88.4 95.2
DPS 4.5 7.0 8.5 9.5 10.5 11.0
Valuation(x)
P/E 9.6 10.5 10.9 9.8 9.6 9.0
Cash P/E 9.4 10.8 10.6 9.6 9.4 8.7
Price / Book Value 2.9 2.5 2.3 2.1 2.0 1.9
EV/Sales 4.4 4.6 4.3 3.8 3.6 3.4
EV/EBITDA 5.6 6.3 6.6 5.8 5.7 5.2
Dividend Yield (%) 2.6 4.0 4.8 5.4 6.0 6.2
RoE 33.5 25.5 22.2 22.7 21.4 21.4
RoCE 49.3 37.9 33.7 33.2 31.4 31.4
Turnover Ratios (%)
Asset Turnover (x) 0.5 0.4 0.4 0.4 0.4 0.4
Leverage Ratios (%)
Net Debt/Equity (x) -0.8 -0.8 -0.6 -0.6 -0.6 -0.5

Y/E March 2012 2013 2014 2015E 2016E 2017E
Depreciation 1.3 1.4 1.5 1.8 2.0 2.2
Others -20.2 -22.4 -20.9 -20.9 -20.3 -19.3
Interest 0.0 0.0 0.0 0.0 0.0 0.0
(Inc)/Dec in Wkg Cap -7.1 -9.0 -27.5 11.5 -0.3 -0.7
(Inc)/Dec in FA & CWIP -13.5 -15.8 -22.4 -25.9 -26.7 -33.9
(Pur)/Sale of Invt -1.1 0.0 0.0 0.0 0.0 0.0
Others 0.0 0.0 0.0 0.0 0.0 0.0
Inc / (Dec) in Debt 0.0 0.0 0.0 0.0 0.0 0.0
Interest Paid 0.0 0.0 0.0 0.0 0.0 0.0
Other Income 20.2 22.4 20.9 20.9 20.3 19.3
CF from Fin. Activity 1.1 -10.1 -18.5 -23.2 -28.4 -31.7
Inc/(Dec) in Cash 30.4 7.6 -23.7 14.5 -1.2 -5.6
Closing Balance 202.6 210.3 186.6 201.0 199.8 194.3
E: MOSL Estimates
16 June 2014 92
16 June 2014
Oil India
BSE Sensex S&P CNX
25,190 7,534 CMP: INR597 TP: INR734 Buy
High ad-hoc subsidy led non-remunerative profitability

Favorable pricing, coupled with exploration focus and aggressive
Stock Info
Bloomberg OINL IN
overseas acquisitions shall revive OINL’s returns
Equity Shares (m) 601.1
 Last 5 year subsidy payout of USD5.5b was 5x capex of USD1.1b impacting
investment in exploration and acquisition leading to stagnant production.
1, 6, 12 Rel. Per (%) 2/8/-27
 Mere profit normalization through new gas price and elimination of
M.Cap. (USD b) 6.1 subsidy through pricing reforms could increase OINL’s earnings by 35%.
 In a free pricing scenario, we expect reversal of RoE which have dipped
from ~32% in FY06 to <15% in FY14 and expect RoE to increase to ~24%.
Y/E MAR 2015E 2016E 2017E
 During the last five years, OINL’s net oil realization is down by ~USD7/bbl
Net Sales 109.3 125.1 129.4
led by ad-hoc subsidy policy v/s USD40/bbl increase in international prices.
EBITDA 52.2 62.9 65.0
Net Profit 37.1 43.6 46.2
 Direct and indirect consequences of blockades, bandhs across the
EPS (INR) 61.8 72.6 76.9
operational areas (primarily North-East India) led to oil production decline.
EPS Gr. (%) 24.6 17.5 6.0  OINL’s returns are marred by (a) lower realizations led by ad-hoc subsidy
BV/Sh. (INR) 377.9 417.5 459.5 sharing, (b) lower capex leading to stagnant production.
P/E (x) 9.7 8.2 7.8
P/BV (x) 1.6 1.4 1.3
EV/EBITDA (x) 6.3 5.2 4.8  Give (a) remunerative oil and gas price realization, (b) free hand to
EV/Sales (x) 3.0 2.6 2.4 management with control on operating cashflows, (c) expedite decision
RoE (%) 17.1 18.3 17.5 making on domestic and overseas investments in and (d) actively monitor
and take timely corrective actions for any delay in the large projects.
Shareholding pattern (%) What has company done in last five years?
As on Mar-14 Dec-13 Mar-13  While, the OINL’s was able to get hold of 4% stake in Rovuma1 offshore
Promoter 67.6 68.4 68.4 (Mozambique acquisition) with a bridge loan of USD1.1b, its cumulative
Dom. Inst 8.1 6.9 7.9 subsidy sharing since FY05 at USD5.7b was 3x cumulative capex of USD1.8b.
Foreign 9.3 9.7 7.7
Others 14.9 15.0 15.9 What is the underlying potential?
 Last decade subsidy payout of USD5.5b, if reinvested, could have resulted in
additional production of 10mmt (3x of the current annual production).
Stock Performance (1-year)  Market determined oil and gas realization will add USD1.5b to OINL’s PAT,
Oil India i.e. USD13.5b (@P/E of 9x) increase in MCap v/s current MCap of USD6.2b.
Sensex - Rebased
700
640
 Every USD1/bbl increase in oil net realization increases OINL’s EPS by
580
~INR1.4/sh implying INR12.6/sh increase in fair value @P/E of 9x.
520
 Every USD1/mmbtu increase in gas price increases ONGC’s EPS by
460
400
~INR2.7/sh implying INR24.3/sh @P/E of 9x.
Sep-13
Mar-14
Jun-13
Dec-13
Jun-14

 Likely arms-length gas price, lower subsidy will boost the earnings of OINL.

Oil India
Story in charts
Non-commensurate retail price increases led to India’s under Subsidy burden on OINL resulted in de-linking its realization
recovery bill rising to INR1.6t in FY13 (INR b) from international oil prices, with discount rising to ~54%
Petrol Diesel INR b Brent Crude Price (USD/bbl) Net Realization (USD/bbl)
LPG Kerosene 160
1,610 1,399 120 120
1,385 90
80
773 1,033 780
60
494 461
201 400 30 40
93
0
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: PPAC, MoPNG, MOSL Source: OINL, MOSL
Since FY06, OINL has paid cumulative subsidy of INR283b v/s Non-remunerative pricing and subdued capex has taken a toll
its own capex of INR87b on OINL’s operations with stagnating oil and gas production
Subsidy (INRb) Capex (INRb) 87 Oil Production (mmt) Gas Production (bcm)
79 4.0
74
3.5
33 3.0
15 16 2.5
12 10
2 7 9
1 6 2 5 3 2 6
2.0
Source: OINL, PPAC, MOSL Source: Company, MOSL
Oil India consolidated EPS could increase 29% at rational At long term P/E of 9.4x, OINL could see xx% upside on the
subsidy and gas ~USD8.4/mmbtu likely new EPS
Base Gas @USD8.4/mmbtu OINL Stock Price (INR)
Subsidy @48% Total Stock Price (5 Yr. avg. P/E of 9.5x new EPS)
70.0 P/E (x)
Realization (USD/bbl) 61.8 1000 870 12
93.3
47.8 750 9
44.0 14.9
5.8
59.7 61.8
500 6
49.6
250 3
72.6
59.7 61.8
49.6 0 0
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14
Mar-10
Mar-11
Mar-12
Mar-13
Mar-14
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Nov-09
FY13 FY14 FY15 FY16
16 June 2014 94
Oil India
Company description
Oil India (OIL), established in 1959, is a 'Navratna' stateowned company, engaged in
exploration, development, production and transportation of crude oil and natural
gas in India. OIL has 2P reserves of 944mmboe, ~94% of these located in the north-
east. It owns 1,157km of common carrier cross-country crude oil pipeline, and the
660km product pipeline and the 192km pipeline to Numaligarh refinery.
government with respect to OINL will be towards improving the profitability.
Oil India: Key Assumptions

Year End: March 31 (INR m) FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Exchange Rate (USD/bbl) 45.6 47.9 54.5 60.6 58.0 57.0 57.00
APM Gas Price (USD/mmbtu) 3.9 4.2 4.2 4.2 6.3 6.3 6.3
Brent Crude Price (USD/bbl) 86.7 114.5 110.6 107.8 107.0 105.0 100.0
Taxes & Duties
Royalty rate - Oil (%) 20% 20% 20% 20% 20% 20% 20%
Royalty rate - Gas (%) 10% 10% 10% 10% 10% 10% 10%
Cess (INR/MT) 2,500 2,500 4,500 4,500 4,500 4,500 4,500
Production Details
Oil (mmt) 3.59 3.85 3.70 3.48 3.60 3.63 3.67
Gas (bcm) 2.35 2.63 2.64 2.64 2.77 2.91 3.06
Total (mmtoe) 5.94 6.48 6.34 6.12 6.37 6.55 6.73
Subsidy Sharing (INRb) 32.9 73.5 78.9 87.4 76.8 57.7 48.6
Oil Price Realization (USD/bbl)
Gross 86.1 114.7 109.6 106.4 106.0 104.0 99.0
Upstream Discount 27.6 54.8 56.0 59.3 50.4 38.2 31.8
Net 58.5 59.8 53.6 47.1 55.6 65.8 67.2
EPS (INR/sh.) 48.0 57.3 59.7 49.6 61.8 72.6 76.9
Source: MOSL
16 June 2014 95
Oil India

Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Sales 97,741 95,252 91,267 109,304 125,054 129,418
Change (%) 17.7 -2.5 -4.2 19.8 14.4 3.5
EBITDA 23,776 19,891 8,556 26,916 35,260 35,923
EBITDA Margin (%) 24.3 20.9 9.4 24.6 28.2 27.8
Depreciation 15,263 9,201 11,770 14,544 15,428 14,871

EBIT 8,513 10,690 -3,214 12,372 19,832 21,053
Interest 105 26 688 1,098 925 925
Other Income 19,536 19,570 21,084 18,933 18,623 19,812
Extraordinary items 0 0 0 0 0 0
PBT 27,944 30,234 17,183 30,207 37,530 39,940

Tax 16,550 16,939 14,291 18,298 21,494 22,778
Tax Rate (%) 59.2 56.0 83.2 60.6 57.3 57.0
Reported PAT 11,395 13,295 2,891 11,909 16,036 17,163
Adjusted PAT 34,469 35,893 29,813 37,150 43,640 46,245
Change (%) 19.4 4.1 -16.9 24.6 17.5 6.0

Y/E March 2012 2013 2014 2015E 2016E 2017E
Share Capital 6,011 6,011 6,011 6,011 6,011 6,011
Reserves 171,202 186,103 200,872 221,156 244,983 270,234
Net Worth 177,213 192,115 206,883 227,167 250,995 276,245
Debt 101 10,578 97,827 71,127 71,127 71,127
Deferred Tax 12,799 14,314 15,269 16,933 18,887 20,957
Net Fixed Assets 10,584 14,105 16,592 19,101 21,270 23,146
Capital WIP 45,667 53,534 58,966 76,314 95,159 104,898
Investments 26,142 18,571 114,567 115,676 118,211 120,746
Current Assets 144,421 165,599 160,635 148,094 153,129 167,718
Inventory 5,333 6,443 9,563 6,263 6,815 7,059
Debtors 10,518 9,027 4,673 11,380 13,019 13,474
Cash & Bank 109,355 121,329 117,560 101,613 104,455 118,346
Loans & Adv, Others 19,214 28,800 28,839 28,839 28,839 28,839
Provisions 13,511 17,706 15,466 15,776 16,091 16,413
Total Assets 190,113 217,006 319,979 315,226 341,008 368,329
E: MOSL Estimates
16 June 2014 96
Oil India

Ratios
Y/E March 2012 2013 2014 2015E 2016E 2017E
Basic (INR)
EPS 57.3 59.7 49.6 61.8 72.6 76.9
Cash EPS 65.9 69.1 60.6 72.7 84.2 89.2
Book Value 294.8 319.6 344.2 377.9 417.5 459.5
DPS 19.0 30.0 21.5 24.0 28.0 30.0
Valuation(x)
P/E 12.0 9.7 8.2 7.8
Cash P/E 9.8 8.2 7.1 6.7
EV/Sales 3.6 3.0 2.6 2.4
EV/EBITDA 9.6 6.3 5.2 4.8
Dividend Yield (%) 3.6 4.0 4.7 5.0

RoE 20.7 19.4 14.9 17.1 18.3 17.5
RoCE 27.7 26.0 16.7 17.8 20.1 19.7
Turnover Ratios (%)
Fixed Asset Turnover (x) 2.8 2.5 2.2 2.3 2.4 2.2
Leverage Ratios (%)
Net Debt/Equity (x) -0.6 -0.6 -0.1 -0.1 -0.1 -0.2

Y/E March 2012 2013 2014 2015E 2016E 2017E
Depreciation 5,142 5,671 6,621 6,544 6,986 7,385
Others 0 0 0 0 0 0
Interest -13,509 -14,678 -10,540 -8,765 -8,348 -9,101
(Inc)/Dec in Wkg Cap 3,125 -8,808 -2,826 9,770 610 719
(Inc)/Dec in FA & CWIP -8,599 -12,515 -79,814 -33,000 -35,000 -25,000
(Pur)/Sale of Invt -16,688 7,571 -32,622 -1,109 -2,535 -2,535
Others 11,335 14,768 11,228 9,863 9,273 10,026
CF from Inv. Activity -13,951 9,824 -101,208 -24,246 -28,262 -17,509
Inc / (Dec) in Debt -10,042 10,694 87,249 -26,700 0 0
Interest Paid -68 -26 -688 -1,098 -925 -925
CF from Fin. Activity -25,340 -8,895 71,516 -44,664 -20,737 -21,920
Inc/(Dec) in Cash -8,320 11,975 -3,769 -15,947 2,843 13,891
Closing Balance 109,355 121,329 117,560 101,613 104,455 118,346
E: MOSL Estimates
16 June 2014 97
16 June 2014
Punjab National Bank

BSE Sensex S&P CNX
25,190 7,534 CMP: INR947 TP: INR1,320 Buy
Significantly levered to up-cycle

Stock Info Superior return ratios | Better capitalization
Bloomberg PNB IN
Equity Shares (m) 362.1  PNB’s earnings CAGR of over last five years has been just 2%, led by rising
52-Week Range (INR) 1,068/402 stress levels (net stress loans of 13% highest among comparable banks).
1, 6, 12 Rel. Per (%) -1/45/-4  PNB is highly levered to economic growth and continuous improvement in
M.Cap. (INR b) 342.7 the same can provide significant upside in earnings (led by asset quality).
M.Cap. (USD b) 5.7
Even post factoring elevated credit cost of 1.25% and 1.05% (average of
0.5% over FY05/10) earnings CAGR is expected to be at 30%+.
 Healthy capitalization (Tier I of 8.9%) and RoA’s of 0.7%/0.8% (despite
Y/E March 2015E 2016E 2017E
factoring higher credit cost) is a key positive, turn in asset quality could
NII 176.8 209.4 245.1 drive return ratios higher.
OP 123.6 149.2 176.8 What went wrong in five years
NP 44.0 57.3 67.4
 Moderating economic growth and fall in new investment demand led to
EPS (Rs) 121.5 158.4 186.1
slowdown of loan growth and significant rise in stress levels in the system.
EPS Gr. (%) 31.6 30.4 17.5
 Stubborn inflation and volatility in INR resulted in tight liquidity conditions
BV/Share 1,060 1,200 1,364
and high interest rate, further accentuating the stress in the system.
P/E (x) 7.9 6.0 5.1
 AS-15 related provisions led to significant hit on the BV and profitability.
P/BV (x) 0.9 0.8 0.7
RoE (%) 12.1 14.0 14.5 What needs to be done
RoA (%) 0.7 0.8 0.8  Resolution of bottle-necks in infrastructure space and revival of growth
would lead to better loan growth and ROA (led by fall in credit cost).
 Shareholding of GoI in PSU banks to be brought below/atleast 51%. Access
Shareholding pattern (% ) to foreign capital for PSU banks could be raised from current cap of 20%.
Promoter 58.9 58.9 57.9 What has company done in last five years?
Dom. Inst 18.6 18.5 18.9
 Earnings CAGR over last five years has been just 2%, led by rising stress
Foreign 17.2 17.5 18.0
levels (GNPA rose to 5.3% v/s 1.8% in FY09; OSRL stood at 10.2%). This led
Others 5.2 5.1 5.2 to rise in credit cost to 1.4% in FY14 (35bp in FY08) and impacted PAT.
 Bank has done a commendable work of sustaining margins at 3.5%+ levels
despite higher slippages and volatility in interest rates, driven by benefit of
better liability profile (on back of consolidation in balance sheet growth).
Punjab National Bank What is the underlying potential?

Sensex - Rebased  Strong presence in rich northern region helps PNB to maintain CASA growth
1,080 and NIMs. PNB also has one of the most conservative assumption on
900 employee expenses and chances of negative surprise is limited
720  Tier I is healthy at 8.9% can be utilized to leverage on economic growth.
540 Valuation and views with sensitivity on TP
360  With a 10bp decline in credit cost and 10bp improvement in NIM, RoA/RoE
will improve by 12bp/175bp+ and earnings will see an upgrade of 13%.
Sep-13
Mar-14
Jun-13
Dec-13
Jun-14
 Return ratios to remain healthy at ~0.8% and ROE to be ~14%.

Improvement in growth and in-turn asset quality could significantly drive up
return ratios and re-rating. Buy.
Story in charts
Return ratios have bottomed out, expect to rebound (%) Trading at LPA significant upside potential
RoE RoA PB (x) Peak(x) Avg(x) Min(x)
2.0 1.8
At 25%+ LPA
1.4 1.4 1.3
TP INR1,786
1.2 1.2 1.2 1.5
1.1 1.0 1.1 1.0
0.8 1.0 1.2 0.9
0.7
0.6 At LPA TP
INR1,440
0.5
0.4
26.6
22.6
17.0
16.0
19.6
25.8
26.6
24.5
21.1
16.5
10.2
12.1
14.0
0.0
Aug-05
Aug-10
May-04
May-09
May-14
Nov-06
Nov-11
Feb-08
Feb-13
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
NIMs to be stable; NII growth to rebound (%) Earnings to rebound by asset quality then core PPP (%)
60
39.3
30
23.4 24.1
16.0 18.0 18.4 0
13.6
10.5 10.3 10.7 8.7 9.5
6.2 -30
4.0
3.5
3.4
3.4
3.9
3.5
3.3
3.4
3.7
3.4
3.4
3.2
3.3
-60
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
A large part of the stress came from infra and iron and steel
Conservatively factored higher credit cost segment (% of loans)
2.7 PCR (%) Credit Cost (%) Iron &
Steel, 1.7 NNPA, 2.8
89.5
SEB, 1.4
96.8
69.5
78.6
1.4 1.3
77.3
1.1 1.1 Power -

0.9 0.9
93.3
90.4
0.7 Pvt, 1.8

0.6 0.6
0.3 0.3
55.2
0.1
48.9
53.4
63.3
46.3
47.5
OSRL, 4.7
Aviation, 0.
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
16 June 2014 99
Company description
Punjab National Bank (PNB) has a strong presence in northern and central India and
a network of over ~6200 domestic branches. Of the overall braches 62% is located in
semi-urban and rural areas. PNB was the second largest state-owned bank in FY12,
however with rise in stress levels bank consolidated its loan book which led to fall in
market share and is now fourth largest state-owned bank in terms of balance-sheet
and third largest in terms of profitability. Strength of PNB is in its strong liability
franchise (CASA ratio of 38%+) and strong NIMs – best among peers.
Over last two years PNB consolidated its loan book and
reduce bulk deposits which led to fall in market share (%) SA market share holding up well (%)
Loans (LHS) Deposits (RHS) CA SA
6.0 8.5
5.5 7.0
5.0 5.5
4.5 4.0
4.0 2.5 FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Earnings has declined over last two years led by increasing

Branch expansion gained pace post FY09 stress levels in the balance-sheet
EPS (INR) EPS growth (%)
50.9
31.6 33.0
26.4
13.0
6,200
7.0
5,874
7.0
5,670
2.1 2.9
4,972
-6.7
4,951
4,427
4,264
4,119
4,066
4,042
4,022
-31.3
42 45 46 49 65 98 124 140 144 134 92
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
16 June 2014 100


Y/E March 2012 2013 2014 2015E 2016E 2017E
Interest Income 364.8 418.9 432.2 480.9 558.5 663.0
Change (%) 13.6 10.7 8.7 9.5 18.4 17.1
Net Income 176.2 190.7 207.2 227.6 265.1 306.3
Change (%) 14.2 8.3 8.7 9.8 16.5 15.5
Change (%) 17.2 2.8 4.4 8.6 20.7 18.5
PBT 70.4 65.2 46.9 62.8 81.9 96.3
Tax 21.5 17.7 13.5 18.9 24.6 28.9
Tax Rate (%) 30.6 27.2 28.7 30.0 30.0 30.0
Change (%) 10.2 -2.8 -29.6 31.6 30.4 17.5
Core PPP* 97.6 100.0 103.2 112.2 137.5 164.9
Change (%) 18.4 2.5 3.2 8.7 22.5 19.9

Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Worth 278.2 326.8 359.0 398.0 448.5 508.2
Deposits 3,795.9 3,915.6 4,514.0 5,191.1 6,177.4 7,351.1
Change (%) 21.3 3.2 15.3 15.0 19.0 19.0
of which CASA Dep 1,341.3 1,533.4 1,728.7 1,972.3 2,250.8 2,569.4
Change (%) 11.5 14.3 12.7 14.1 14.1 14.2
Borrowings 372.6 396.2 480.3 481.3 504.7 532.6
Current Assets 288.3 271.3 452.2 445.6 478.1 519.1
Investments 1,227.0 1,299.0 1,437.9 1,653.5 1,901.6 2,186.8
Change (%) 28.9 5.9 10.7 15.0 15.0 15.0
Loans 2,937.7 3,088.0 3,492.7 4,016.6 4,819.9 5,783.9
Change (%) 21.3 5.1 13.1 15.0 20.0 20.0
Fixed Assets 31.7 33.6 34.2 35.0 35.1 34.6
Other Assets 97.2 97.6 87.3 96.0 105.6 116.2
Total Assets 4,581.9 4,789.5 5,504.2 6,246.7 7,340.3 8,640.5

Y/E March 2012 2013 2014 2015E 2016E 2017E
GNPA 87.2 134.7 188.8 214.9 221.2 243.8
NNPA 44.5 72.4 99.2 96.4 81.2 73.2
GNPA Ratio 1.4 4.3 5.3 5.2 4.5 4.1
NNPA Ratio 1.5 2.3 2.8 2.4 1.7 1.3
16 June 2014 101


Ratios (%)
Y/E March 2012 2013 2014 2015E 2016E 2017E
Interest Spread 3.4 3.2 3.1 3.0 3.1 3.0
RoE 21.1 16.5 10.2 12.1 14.0 14.5
RoA 1.2 1.0 0.6 0.7 0.8 0.8
Cost/Income* 39.7 42.8 45.1 45.7 43.7 42.3
Empl. Cost/Op. Exps. 67.5 69.5 69.7 68.7 67.7 66.8
Busi. per Empl. (Rs m) 98.9 108.5 114.1 126.0 142.7 164.6
NP per Empl. (Rs lac) 7.9 7.5 5.1 6.4 8.1 9.2
CASA Ratio 35.3 39.2 38.3 38.0 36.4 35.0
CAR 12.6 12.7 11.5 10.9 10.2 9.5
Tier 1 9.3 9.8 8.9 8.6 8.2 7.9
Valuations
Y/E March 2012 2013 2014 2015E 2016E 2017E
Book Value (INR) 777.4 884.1 952.6 1,059.9 1,199.8 1,364.3
Change (%) 22.9 13.7 7.7 11.3 13.2 13.7
Price-BV (x) 1.2 1.1 1.0 0.9 0.8 0.7
Adjusted BV (INR) 692.0 751.0 774.5 886.9 1,054.0 1,232.9
Price-ABV (x) 1.4 1.3 1.2 1.1 0.9 0.8
EPS (Rs) 144.0 134.3 92.3 121.5 158.4 186.1
Change (%) 2.9 -6.7 -31.3 31.6 30.4 17.5
Price-Earnings (x) 6.6 7.1 10.3 7.9 6.0 5.1
Dividend Yield (%) 2.3 2.8 1.0 1.3 1.7 1.9
16 June 2014 102

16 June 2014
Thematic | India PSUs | Sector: Utilities
Power Grid Corporation

BSE Sensex S&P CNX
25,190 7, 534 CMP: INR132 TP: INR154 Buy
Robust capitalization, focus on T&D to drive growth

Capex > capitalization could lead to cash flow mismatch, fund raising
Stock Info  PGCIL has consistently meet its capex guidance, while growth in
Bloomberg PWGR IN capitalization was bit muted over last 3 years.
Equity Shares (m) 5,231.6  CWIP of INR500b+ as at March 2014 would drive INR200b+ pa
52-Week Range (INR) 141/87 capitalization in FY15/16E each.
1, 6, 12 Rel. Per (%) 6/11/-10
 Stock trades at discount to LT average (11x on FY16E basis, vs LT average
of 16x), valuations could catch up.
M.Cap. (USD b) 11.6
Financial Snapshot (INR b)  PGCIL’s capex moved up from INR100b pa to INR200b+ pa, but
Y/E March 2015E 2016E 2017E capitalization remained muted at INR150b pa in last 3 years.
Sales 176.0 208.6 241.0  Regulatory headwinds in the form of removal of STOA charges and
EBITDA 149.6 178.3 206.1 tightening norms in new regulations FY15-19E.
NP 49.3 60.1 70.2  Higher capex > capitalization led to dilution in FY11 and recently in FY14.
EPS (INR) 9.4 11.5 13.4
EPS Gr. (%) 13.5 21.9 16.8 What needs to be done?
BV/Sh. (INR 72.0 79.5 88.2  Conversion on CWIP on the books to generating assets. As at FY14, the
RoE (%) 13.7 15.2 16.0 CWIP represents highest value of projects under construction (rest being
RoCE (%) 8.4 9.1 9.3 inventory) and thus capitalization is expected to pick up.
Payout (%) 35.0 35.0 35.0  Measured growth as new business opportunity like competitively bid
Valuations projects may dent profitability.
P/E (x) 14.8 12.1 10.4
P/BV (x) 1.9 1.7 1.6
 Rapidly grown asset base by 2x from FY10-14 levels. Consistently meeting
EV/EBITDA 10.9 9.8 9.0
Div. Yield 2.0 2.5 2.9
capex guidance.
 PGCIL has also got success in competitively bid projects, which would be
Shareholding pattern (%) next growth driver.
What is the underlying potential?
Promoter 57.9 57.9 69.4
 13th plan inter-state T&D capex is INR1.35t (vs INR1.25t in 12th plan).
Dom. Inst 8.5 8.6 7.8
Possible upwards revision could be led by changing focus of GoI on T&D
Foreign 26.5 25.7 14.2
Others 7.1 7.8 8.6
sector.
 CWIP of INR500b+ bodes well for capitalization of INR200b+ in FY15E, 16E
Stock Performance (1-year) each.
Power Grid Corp. Valuation and views with sensitivity on TP
Sensex - Rebased
160  PGCIL trades at PER of 12.1x and P/B of 1.7x on FY16E basis, vs LT average
140 of 16x. 16x PER on FY16E EPS would mean TP of INR183/sh
120
 10% higher capitalization (INR220b, vs INR200b assumed) leads to earnings
upgrade of ~2%.
100
80 Financials and valuations
PGCIL is expected to report earnings CAGR of 14% over FY14-16E.
Sep-13
Mar-14
Jun-13
Dec-13
Jun-14

Story in charts
Capex momentum remains strong (INR b) Capitalization expected to inch up (INR b)
200 200 205

172
159
225 225 225 141
200 220
178
137
106 74
25 26 24 32 41 63 66 81 41 60 37 36
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Capex momentum however remains strong (INR b) Consultancy/Telecom division to aid growth (INR m)
Consultancy work Telecom division
RAB to grew 2x % of Trans Business Profits
from FY13-17 3,000 8.8 10%
8.5 8.2 7.9
7.6
2,000 6.5 6.8 6.2 8%
3.8
1,000 5%
5.2
0 3%
76 83 101 113 136 178 215 263 323 383 444
-1,000 0%
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Robust PAT growth driven by strong core growth (INR b) Return ratios too look up (%)
RoE RoCE
45 Net profit Gr (% YoY)
16.6 16.0
15.1 14.8 15.1
31 14.3
25 25 14.0 13.6 13.7
22
17 18 17 13.0
16 10 11.7
10.6
1 9.3 9.3 9.3 9.3
8.6 9.2 8.6 8.4 9.1
8.6
9 11 16 20 23 25 33 41 42 49 60 70
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
16 June 2014 104

Company description
PGCIL is a central transmission utility (CTU) with a mini-navratna status, which owns
and operates most of India's interstate and inter-regional power transmission
system. It has been identified as a nodal agency by the Government to set up inter-
regional transmission capacity in India.
With government stake at 58%, we believe that offer for sale possibility is limited;
more so given that PGCIL may need growth capital depending on the business
outlook.
16 June 2014 105


Y/E March 2010 2011 2012 2015E 2016E 2017E
Net Sales 71,275 83,887 100,353 195,046 228,305 268,826
Change (%) 8 18 20 22 17 18
EBITDA 58,933 70,513 83,824 169,907 199,394 235,579
EBITDA Margin (%) 82.7 84.1 83.5 87.1 87.3 87.6
Depreciation 19,797 21,994 25,725 51,515 60,540 70,396
EBIT 39,136 48,519 58,098 118,392 138,855 165,183
Interest 15,432 17,339 19,432 38,485 44,442 53,218
Other Income 3,759 7,111 7,497 1,871 1,506 1,416
Extraordinary items -963 -44 -187 0 0 0
PBT 26,263 38,230 45,976 81,777 95,919 113,381
Tax 5,854 11,278 13,427 23,156 27,160 32,104
Tax Rate (%) 22.3 29.5 29.2 28.3 28.3 28.3
Reported PAT 20,409 26,951 32,550 58,622 68,759 81,277
Adjusted PAT 23,031 25,400 33,199 58,622 68,759 81,277
Change (%) 17 10 31 21 17 18

Y/E March 2010 2011 2012 2015E 2016E 2017E
Share Capital 42,088 46,297 46,297 46,297 46,297 46,297
Reserves 117,331 167,373 188,319 283,833 328,561 381,432
Net Worth 159,419 213,670 234,617 330,131 374,859 427,729
Debt 344,168 408,828 520,004 872,101 999,138 1,129,572
Deferred Tax 7,035 11,467 16,009 36,592 46,219 57,597
Total Capital Employed 534,711 657,415 794,080 1,262,274 1,443,665 1,638,348
Gross Fixed Assets 432,023 503,518 644,518 1,174,518 1,374,518 1,589,518
Net Fixed Assets 320,613 372,240 487,514 888,383 1,027,844 1,172,448
Capital WIP 204,222 266,246 314,789 414,789 459,789 504,789
Investments 14,532 13,651 11,846 6,432 4,693 4,694
Current Assets 96,273 105,171 118,485 144,780 161,240 183,760
Inventory 3,449 3,815 4,674 9,084 10,633 12,521
Debtors 22,149 31,621 23,370 40,078 46,912 55,238
Cash & Bank 32,776 36,801 21,333 -3,066 -6,576 -7,662
Loans & Adv, Others 37,899 32,935 69,108 98,684 110,271 123,663
Curr. Liabilities 0 0 0 0 0 0
Provisions 0 0 0 0 0 0
Net Current Assets -4,656 5,279 -20,069 -47,331 -48,661 -43,583
Total Assets 534,711 657,415 794,080 1,262,274 1,443,665 1,638,348
E: MOSL Estimates
16 June 2014 106


Ratios
Y/E March 2010 2011 2012 2015E 2016E 2017E
Basic (INR)
EPS 5.5 5.5 7.2 12.7 14.9 17.6
Cash EPS 9.6 10.6 12.6 23.8 27.9 32.8
Book Value 37.9 46.2 50.7 71.3 81.0 92.4
DPS 0.0 0.0 0.0 0.0 0.0 0.0
Valuation(x)
P/E 20.7 20.7 15.8 8.9 7.6 6.5
Cash P/E 11.9 10.7 9.0 4.8 4.1 3.5
Price / Book Value 3.0 2.5 2.2 1.6 1.4 1.2
EV/Sales 4.4 4.4 10.2 7.2 6.7 6.2
EV/EBITDA 5.3 5.3 12.2 8.2 7.7 7.1
Dividend Yield (%) 1.3 1.5 1.9 3.4 0.0 0.0
RoE 13.4 14.4 14.5 18.8 19.5 20.3
RoCE 7.9 8.1 8.0 10.1 10.3 10.7
Turnover Ratios (%)
Asset Turnover (x) 0.1 0.1 0.1 0.2 0.2 0.2
Leverage Ratios (%)
Net Debt/Equity (x) 2.2 1.9 2.2 2.6 2.7 2.6

Y/E March 2010 2011 2012 2015E 2016E 2017E
Depreciation 19,797 21,994 25,725 51,515 60,540 70,396
Others 0 0 0 0 0 0
Interest 15,432 17,339 19,432 38,485 44,442 53,218
Direct Taxes Paid 5,854 11,278 13,427 23,156 27,160 32,104
(Inc)/Dec in Wkg Cap 13,141 -5,910 9,881 -111 -2,180 -6,164
(Inc)/Dec in FA & CWIP -100,487 -135,645 -189,543 -230,000 -245,000 -260,000
(Pur)/Sale of Invt 1,396 882 1,805 1,804 1,739 0
Others 0 0 0 0 0 0
Inc/(Dec) in Net Worth 163 36,719 0 0 0 0
Inc / (Dec) in Debt 61,438 68,441 115,718 131,967 136,663 141,813
Interest Paid 15,432 17,339 19,432 38,485 44,442 53,218
Divd Paid (incl Tax) 13,684 17,528 21,563 38,075 44,659 52,789
CF from Fin. Activity 38,799 78,396 84,683 72,994 68,190 60,189
Inc/(Dec) in Cash 8,488 4,024 -15,467 -6,691 -3,510 -1,085
Add: Opening Balance 24,289 32,776 36,801 3,625 -3,066 -6,576
Closing Balance 32,776 36,801 21,333 -3,066 -6,576 -7,662
E: MOSL Estimates
16 June 2014 107

16 June 2014
Union Bank of India

BSE Sensex S&P CNX
25,190 7,534 CMP: INR227 TP: INR290 Buy
Balance sheet consolidation to improve core parameters

Stock Info Earnings at cyclical low | Expect gradual recovery
Bloomberg UNBK IN
Equity Shares (m) 630.3  In FY09-14, Union Bank (UNBK) core performance weakened and asset
52-Week Range (INR) 260/97 quality deteriorated in lieu of weak macro-economic environment.
1, 6, 12 Rel. Per (%) 20/75/-24  The new management key focus areas are a) to consolidate loan book
M.Cap. (INR b) 143.0 (+10% YoY) b) focus on profitability and c) conserve capital.
M.Cap. (USD b) 2.4
 Sensitivity of earnings to risk-adjusted NIMs has increased significantly.
With every (1) 10bp NIM expansion, earnings could see an upgrade of
~12%, and (2) 10bp decline in credit cost, earnings increase by ~9%.
Y/E March 2015E 2016E 2017E What went wrong in five years
NII 87.4 101.5 121.2  Moderating economic growth and fall in new investment demand led to
OP 53.5 59.9 72.4 slowdown of loan growth and significant rise in stress levels in the system.
NP 17.0 21.8 29.1  Stubborn inflation and volatility in INR resulted in tight liquidity conditions
EPS (INR) 26.8 34.4 46.0
and high interest rate, further accentuating the stress in the system.
EPS Gr. (%) 0.1 28.3 33.9
 AS-15 related provisions led to significant hit on the BV and profitability.
BV/Sh. 289.5 317.9 355.9
P/E (x) 8.5 6.6 4.9 What needs to be done
P/BV (x) 0.8 0.7 0.6  Resolution of bottle-necks in infrastructure space and revival of growth
RoE (%) 9.6 11.3 13.7 would lead to better loan growth and ROA (led by fall in credit cost).
RoA (%) 0.5 0.5 0.6  Shareholding of GoI in PSU banks to be brought below/atleast 51%. Access
to foreign capital for PSU banks could be raised from current cap of 20%.
 Steps to improve governance standards based on Nayak committee
Shareholding pattern (% ) recommendations
What the bank did in last five years
Promoter 60.1 60.1 57.9
 Aggressive growth during FY09-11 (27% CAGR) especially in SME and
Dom. Inst 16.6 17.0 18.0
agriculture segment led to significant increase in stress loans with a lag (net
Foreign 8.6 8.9 10.7
Others 14.7 14.0 13.4
stress loans at 7.6% v/s 3.4% in FY09).
 Loan growth was above industry average (19% CAGR over FY09.14), but
core profitability weakened (led by asset quality) to 1.1% v/s 1.6% in FY09.
Stock Performance (1-year) What is the underlying potential

 Very strong presence in SME segment especially west and central region
Union Bank
Sensex - Rebased
of the country.
310  Low hanging fruits like operating leverage, fees improvement and
260 improvement in CA balances available to improve profitability.
210 Valuation and view with sensitivity on target price
160  UNBK trades at 0.7x (40% below LPA), with improving macro conditions
110
and policy reform setting in, we expect a re-rating in the stock.
60
 We expect earnings CAGR of 14% over FY14-16 (flat over FY09-14).
Sep-13
Mar-14
Jun-13
Dec-13
Jun-14
Sensitivity of earnings to risk-adjusted NIMs has increased significantly.

With every (1) 10bp NIM expansion, earnings could rise by ~12%, and (2)
10bp decline in credit cost, earnings could see an upside of ~9%. Buy

Union Bank of India
Story in charts
Trades at 40%+ discount to LPA Return ratios to show gradual improvement (%)
PB (x) Peak(x) Avg(x) Min(x) RoE RoA
2.2 At Peak TP 1.3 1.2 1.2 1.2
1.7 INR568 1.1
1.7 1.0
0.8 0.9
1.2 1.1 0.7 0.7
0.5 0.5 0.5
0.7 0.7 At 25%+ LPA
0.4 TP INR435
30.5
25.0
18.7
19.2
26.8
27.2
26.2
20.9
14.8
15.0
10.4
11.3
9.6
0.2
Aug-05
Aug-10
May-04
May-09
May-14
Nov-06
Nov-11
Feb-08
Feb-13
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
Expect gradual improvement in margins (%) Core PPP and earnings growth of 15/20%+ over FY15/16
3.3 3.3
3.2 90
3.0 3.0
2.9 2.9 2.8 48.3 60
2.8
2.6 2.5 2.5 2.6 30
33.6
15.9 18.9 17.4

9.3 11.0 10.9
16.2 0
8.7 8.3 9.9 4.5
-30
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
PCR stabilized over FY12-14; credit cost elevated Net stress loans at INR177b (7.6% of loans)
2.3 PCR (%) Credit Cost (%)
SEB, 1.5
NNPA, 2.3
60.3
0.9 0.9 0.9 0.8 1.0 1.0 0.8

0.6 0.6 0.6 0.6
0.3
64.0
92.3
83.1
63.9
50.2
44.5
46.9
44.2
45.3
48.1
67.9
48.5
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
OSRL, 3.9
16 June 2014 109

Union Bank of India
Company description
Union Bank (UNBK) is a Public Sector Unit with 60% Share Capital held by the
Government of India and a balance sheet size of INR3.5t.The bank has a network of
3800+ branches and 6400+ ATMs. UNBK has a workforce of 33,806 employees as of
FY14. Also, the bank is focusing on increasing the issuance of debit cards (13.5m as
on FY14), thus increasing alternative delivery mode transactions.
Balance-sheet consolidation led to decline in MS in FY14 (%) SA MS holding well despite rising competition (%)
4.0 4.0
3.5
3.5
3.0
3.0
2.5
2.5 2.0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Gradually gaining scale (branches) Earnings impacted by higher credit cost (%)
EPS (INR) EPS growth
3,511
3,871
3,201
3,016
2,805
64.1
2,558
2,361
2,206
2,082
2,051
2,020
28.8 25.3 24.5 20.2

11.6
1.0 -3.6
-14.5 -18.5 -25.7
15 16 13 17 27 34 41 40 32 36 27
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
16 June 2014 110

Union Bank of India

Y/E March 2012 2013 2014 2015E 2016E 2017E
Interest Income 210.3 251.2 293.5 317.2 352.5 413.5
Change (%) 9.3 11.0 4.5 10.9 16.2 19.4
Net Income 92.4 100.9 107.0 117.1 133.7 156.5
Change (%) 11.9 9.2 6.0 9.4 14.2 17.1
Change (%) 22.0 6.3 -6.5 2.5 12.1 20.9
PBT 27.1 30.6 20.7 22.6 29.0 38.8
Tax 9.3 9.1 3.7 5.7 7.3 9.7
Tax Rate (%) 34.1 29.6 17.9 25.0 25.0 25.0
Change (%) -14.5 20.9 -21.5 0.1 28.3 33.9
Core PPP* 39.7 42.2 37.2 38.7 44.6 56.4
Change (%) 24.1 6.3 -11.8 3.9 15.2 26.6

Y/E March 2012 2013 2014 2015E 2016E 2017E
Net Worth 146.3 173.0 184.8 198.3 215.8 239.4
Deposits 2,228.7 2,637.6 2,976.8 3,304.2 3,832.9 4,676.1
Change (%) 10.1 18.3 12.9 11.0 16.0 22.0
of which CASA Dep 697.1 816.3 878.0 998.4 1,135.6 1,331.8
Change (%) 8.4 17.1 7.6 13.7 13.7 17.3
Borrowings 179.1 238.0 293.2 313.0 342.9 375.1
Current Assets 156.8 162.1 230.7 208.1 237.1 310.9
Investments 623.6 808.3 937.2 1,049.7 1,217.7 1,461.2
Change (%) 6.8 29.6 16.0 12.0 16.0 20.0
Loans 1,778.8 2,081.0 2,291.0 2,566.0 2,950.9 3,541.0
Change (%) 17.8 17.0 10.1 12.0 15.0 20.0
Fixed Assets 23.4 24.8 26.1 28.1 30.1 32.1
Other Assets 39.5 45.1 52.7 63.3 75.9 91.1
Total Assets 2,622.1 3,121.3 3,537.8 3,915.1 4,511.6 5,436.3

Y/E March 2012 2013 2014 2015E 2016E 2017E
GNPA 54.5 63.1 95.6 99.9 98.5 95.2
NNPA 30.3 33.5 53.4 54.6 51.1 45.1
GNPA Ratio 3.0 3.0 4.1 3.8 3.3 2.7
NNPA Ratio 1.7 1.6 2.3 2.1 1.7 1.3
16 June 2014 111

Union Bank of India

Ratios (%)
Y/E March 2012 2013 2014 2015E 2016E 2017E
Interest Spread 3.0 2.7 2.5 2.4 2.5 2.5
RoE 14.8 15.0 10.4 9.6 11.3 13.7
RoA 0.7 0.7 0.5 0.5 0.5 0.6
Fee Income/Net Income 17.9 17.4 19.3 18.6 17.9 17.2
Cost/Income* 43.1 44.7 51.2 54.3 55.2 53.7
Empl. Cost/Op. Exps. 62.2 61.1 60.3 59.0 57.5 57.2
Busi. per Empl. (Rs m) 122.3 137.2 147.7 157.7 171.9 195.8
NP per Empl. (Rs lac) 5.8 6.8 5.0 4.8 5.9 7.6
CASA Ratio 31.3 31.0 29.5 30.2 29.6 28.5
CAR 11.9 11.5 10.8 10.5 9.8 8.9
Tier 1 8.4 8.2 7.5 7.4 7.1 6.5
Valuations
Y/E March 2012 2013 2014 2015E 2016E 2017E
Book Value (INR) 235.9 262.9 267.4 289.5 317.9 355.9
Change (%) 11.7 11.4 1.7 8.3 9.8 11.9
Price-BV (x) 1.0 0.9 0.8 0.8 0.7 0.6
Adjusted BV (INR) 197.5 223.6 208.1 228.9 261.1 305.8
Price-ABV (x) 1.1 1.0 1.1 1.0 0.9 0.7
EPS (Rs) 32.3 36.0 26.8 26.8 34.4 46.0
Change (%) -18.5 11.6 -25.7 0.1 28.3 33.9
Price-Earnings (x) 7.0 6.3 8.5 8.5 6.6 4.9
Dividend Yield (%) 3.5 3.5 1.8 1.8 2.3 3.0
16 June 2014 112

NOTES
16 June 2014 113

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Thematic | June 2014

New reins, new reign!

India PSUs: New reins, new reign!

Prices as on 16 June 2014

PSU top companies - A PSUs A force to reckon with

Restructure or retire? A ‘SECURE’ framework can turnaround PSUs

Profitability at bottom Valuations attractive

Valuation table: Our top picks in PSU’s

Source: MOSL, Capitaline Source: MOSL, Capitaline

PB (x) 2.4 2.3 2.3

PSUs have dominated position within respective industries

Source: MOSL, Capitaline

Strong professional management

Immunology • Hind Photofilms OMCs (BPCL, HPCL, IOCL)

PSUs: A force to reckon with

 Indian PSUs have developed a formidable franchise, with leadership positions in

Number of PSUs in India

Growth in central PSUs in India*

Source: MOSL, Department of Public Enterprises

Have built a formidable franchise, with leadership in multiple sectors

PSUs have significant market share across sectors (%)

Source: Kowalski, P. et al. (2013), OECD publishing

China India Russia UAE Malaysia

12,000 13% India 16.0 4.3 75.0 22.0

Performance has deteriorated in last five years

Several PSUs have underperformed

Source: MOSL, Department of Public Enterprises

The average contribution of Significant deterioration in performance in last five years

Profitability and growth have bottomed-out

Against a decline in PSUs’ aggregate sales in FY14, MOSL estimates indicate 4%

Source: MOSL, Capitaline Source: MOSL, Capitaline

Source: MOSL, Capitaline Source: MOSL, Capitaline

Stark contrast in performance within PSUs

Consumer-centric and Manufacturing PSUs have consistently underperformed.

PSUs’ performance by sector (FY04-14)

Utilities 21.1 17.8 20.9

Oil & Gas 17.2 10.6 14.9

Capital Goods 13.5 15.3 13.1

Metals 9.9 9.5 13.3

Chemicals & Fertilizers 9.7 10.1 4.5

Misc 7.0 -4.0 3.7

Source: MOSL, Capitaline

Profit concentration is significant among PSUs. The top-10 profit-making PSUs

ONGC NTPC Air India CPRL Hindustan

Listed PSUs performance vis-à-vis market

Source: MOSL, Capitaline

Change in guard a possible trigger for turnaround

 Corporate India is replete with examples of transformation in companies’ fortunes

Leadership changes often transform companies’ performance

Source: Bloomberg, Company, MOSL Source: Bloomberg, Company, MOSL

Change in management #3: TCS

Source: Bloomberg, Company, MOSL

Change in management #4: Titan Change in management #5: Zee

Source: Bloomberg, Company, MOSL Source: Bloomberg, Company, MOSL

This should apply to politics as well, and hence, to PSUs

Taking inspiration from Gujarat

Gujarat tops the ten states with profit making PSUs

Net profit/loss, FY10, INR b Total capital employed, FY10, INR b

Source: National survey on state level public enterprises, 2009-10; MOSL

Andaman 235.8 Punjab 15,060

Source: National survey on state level public enterprises, 2009-10; MOSL

Sales CAGR 2004-14 (%) Avg PAT margin 2004-14 (%)

Gujarat State Fertilizers 9.9 9.3