India | Oil & Gas

8 April 2011

Sector Update/Rating Changed

Oil & Gas

Crude, Cairn and PSUs Heady Cocktail
Neutral/negative outlook, no sharp spike likely in crude Political uncertainties across the MENA region have driven up crude prices by 47% during the last six months. Conflicting forces are at play in crude; the recent Libyan oil supply shock has easily overshadowed the Japanese demand dilemma. In our view, the aftereffects in Japan are not only in terms of a lower direct demand, but also the supply chain disruption in Chinese trade linkages. While China sends 8% of its overall exports to Japan, it imports a higher 13% (from Japan), comprising mainly of critical equipment required for its industrial activity. But as we move to H2CY11, these opposing forces are likely to reverse their roles; supply concerns would ease while the Japanese reconstruction effort would perk up the demand. However, as seen currently, with the supply issue being of a much higher magnitude, crude is likely to cool off in H2CY11 with easing of supply concerns. The possibility of a super spike in crude prices is now reasonably low, in our view. A super spike would require a significant disruption in physical oil supply of big nations such as Saudi Arabia. The kingdom currently supplies 9.7mnbpd of oil, contributing 12% to the global supplies. Importantly, Saudi holds a spare capacity of 3.2mnbpd, which along with other OPEC spare capacity would be largely sufficient to compensate for any loss of oil supply. Given the political dynamics and the importance of oil for Saudi, we are tempted to rule out a significant political turmoil in the Arabian nation in the short to medium term. Thus, we expect crude to stabilize at USD110-115/bbl in Q2CY11. Downgrade Cairn to Reduce on unfavorable risk-reward The Union Cabinets decision to refer the Cairn-Vedanta deal to a ministerial panel comes as another dampener which might extend the overhang on the stock. We had upgraded Cairn in Feb11 to Accumulate driven by a favorable risk reward as an upside potential existed in either of the approval outcomes. With the stock rallying to the current levels, we believe that the risk-reward for investors has reversed and thus, we downgrade Cairn to Reduce with a potential under-performance in store. We reiterate that the stock may still gain 3-5% from these levels on newsflows. However, with the deal price at INR355/share and crude poised to stabilize and cool off, especially in H2CY11, Cairn may see some under-performance vis--vis the market. Maintain Accumulate on PSU upstreams We continue to back the Indian oil PSUs after the recent crude price driven correction. We maintain our Accumulate ratings for ONGC and Oil India with potential upsides of 6-9%, despite the recent investor interest in these stocks. In our view, at these levels, oil PSUs are factoring in FY12 under-recoveries of INR950-1,000bn. We maintain our TP of INR325/share for ONGC and INR1,430/share for Oil India, derived by assigning at an EV/EBITDA of 5.5x. Key Financials
Company ONGC Oil India Cairn India Rating Accumulate Accumulate Reduce Mcap INR bn USD mn 2,496 323 654 55,467 7,178 14,533 CMP (INR) 298 1,347 351 Target (INR) 325 1,430 360 Upside (%) 9.1 6.2 2.6 P/E (x) FY10 13.1 11.8 63.6 FY11E 9.8 9.1 10.7 FY12E 10.7 9.6 6.9 EV/EBITDA (x) FY10 5.3 6.3 87.2 FY11E 4.6 4.9 7.8 FY12E 4.5 4.7 4.6 FY10 19.1 19.0 3.1 ROE (%) FY11E 23.2 21.7 15.5 FY12E 18.7 18.0 19.6

Gross under-recoveries
1,200 1,000 (INRbn) 800 600 1,033 771 461 781 1,058 400 200 0 FY08 FY09 FY10 FY11EFY12EFY13E Under-recoveries (LHS) Source: PPAC; Elara Securities Estimates Brent (RHS) 729 100 80 (USD/bbl) 60 40 20 0

Global Markets Research

Cairn India stock price Vs. Brent

400 (INR/Share) 300 200 100 0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Cairn (LHS) Source: Bloomberg Brent (RHS) 200 150 100 50 0

(USD/bbl)

ONGC, Oil India & Cairn stock performance

150 140 130 120 110 100 90 80 Jun-10 Aug-10 Jan-11 Feb-11 Apr-10 Dec-10 May-10 Nov-10 Mar-11 Apr-11 Jul-10 Sep-10 Oct-10 (Rebasedcto 100)

Sensex ONGC Source: Bloomberg

Cairn India Oil India

Source: Company, Elara Securities Estimate

Alok Deshpande alok.deshpande@elaracapital.com +91 22 4062 6804

Elara Securities (India) Private Limited

India Oil & Gas

Cairn India Financials

Income Statement (INR mn) Revenue EBITDA Non operating Income OPBITDA Depreciation & Amortization EBIT Interest Expenses PBT Taxes Adjusted PAT Reported PAT Balance Sheet (INR mn) Share Capital Reserves Borrowings Deferred Tax (Net) Total Liabilities Gross Block Accumulated Depreciation/Depletion Net Block Capital Work In Progress Investments Net Working Capital Goodwill Other Assets Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Working Capital Changes Operating Cash Flow Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E (x) EV/EBITDA (x) EV/Sales (x) Price/Book (x) Dividend Yield (%)
Source: Company, Elara Securities Estimate

FY10 16,230 7,720 4,078 11,797 1,485 10,312 148 10,164 (348) 10,512 10,512 FY10 18,970 319,714 34,007 4,453 377,144 100,188 2,259 97,929 17,124 8,928 253,193 377,174 FY10 4,252 (8,357) (4,105) 46,488 (50,594) (9,461) 4,078 (55,977) FY10 13.3 4.1 30.8 47.6 64.8 0.0 3.1 2.8 5.5 30.8 0.0 63.6 87.2 41.5 2.0 0.0

FY11E 103,016 83,097 1,765 84,862 8,997 75,865 3,601 72,264 9,932 62,332 62,332 FY11E 18,970 382,046 27,007 4,453 432,476 143,062 6,705 136,357 17,124 25,802 253,193 432,476 FY11E 65,013 558 65,571 42,874 22,697 (7,031) 1,765 17,432 FY11E 534.7 976.4 493.0 80.7 60.5 (0.1) 15.5 17.7 32.7 493.0 0.0 10.7 7.8 6.3 1.7 0.0

FY12E 153,410 122,069 802 122,871 11,247 111,624 3,781 107,843 10,247 97,597 97,597 FY12E 18,970 479,642 20,007 4,453 523,072 160,085 6,968 153,117 17,124 99,638 253,193 523,072 FY12E 97,058 1,840 98,898 17,023 81,875 (7,000) 802 75,677 FY12E 48.9 46.9 56.6 79.6 63.6 (0.3) 19.6 21.5 51.2 56.6 0.0 6.9 4.6 3.7 1.3 0.0

FY13E 146,648 113,346 3,072 116,418 12,934 103,484 3,857 99,628 10,380 89,248 89,248 FY13E 18,970 568,890 13,007 4,453 605,320 161,492 9,182 152,310 17,124 182,694 253,193 605,320 FY13E 88,390 4,346 92,736 1,407 91,329 (7,000) 3,072 87,401 FY13E (4.4) (7.1) (8.6) 77.3 60.9 (0.3) 15.2 17.2 46.9 -8.6 0.0 7.5 5.0 3.9 1.1 0.0

Revenue & margins growth trend

200 150 (INR bn) 47.6 (%) 100 50 0 FY10 FY11E Revenue (LHS) EBITDA Margin (RHS) FY12E FY13E EBITDA (LHS) 50 25 0 80.7 79.6 77.3 100 75

Source: Company, Elara Securities Estimate

Adjusted profits trend

120 100 (INR bn) 80 60 40 20 0 FY10 FY11E FY12E FY13E 11 62 98 89

Source: Company, Elara Securities Estimate

Return ratios
25 20 15 10 5 0 3.1 2.8 FY10 FY11E ROE (%) FY12E FY13E 17.7 19.6 15.5 15.2 21.5 17.2

ROCE (%)

Source: Company, Elara Securities Estimate

Elara Securities (India) Private Limited

Oil&Gas

ONGC Financials
Income Statement (INR mn) Revenue EBITDA Non operating Income OPBITDA Depreciation & Amortization EBIT Interest Expenses PBT Taxes Adjusted PAT Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Borrowings Deferred Tax (Net) Liability for abandonment Minority Interest Total Liabilities Gross Block Accumulated Depreciation Net Block Capital Work In Progress Goodwill Investments Net Working Capital Other Assets Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Working Capital Changes Operating Cash Flow Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E (x) EV/EBITDA (x) EV/Sales (x) Price/Book (x) Dividend Yield (%)
Source: Company, Elara Securities Estimate

FY10

FY11E

FY12E

FY13E

Revenue & margins growth trend

1,500 1,000 500 0 35.0 43.7 40.3 40.0 (%) 39.2 42.6 45.0

FY10 21,389 992,678 62,669 102,912 174,590 16,432 1,370,670 2,023,306 1,176,937 846,369 165,222 95,386 51,593 203,687 8,413 1,370,670 FY10 270,937 25,956 296,893 313,466 (16,573) (21,727) 36,186 (2,113) FY10 (2.7) 6.6 (3.8) 43.7 19.1 (0.2) 19.1 28.4 22.7 (2.0) 8.0 13.1 5.3 2.3 2.5 2.7

FY11E 42,777 1,073,253 222,446 114,146 174,590 19,814 1,647,026 2,204,652 1,319,798 884,853 203,066 111,108 51,593 387,993 8,413 1,647,027 FY11E 427,300 (18,444) 408,856 256,067 152,790 (37,397) 59,766 175,158 FY11E 25.4 15.8 31.2 40.3 20.3 (0.2) 23.2 28.0 30.2 33.3 16.0 9.8 4.6 1.9 2.2 5.4

FY12E 42,777 1,235,628 217,446 124,537 174,590 23,277 1,818,255 2,415,778 1,475,833 939,945 226,566 111,108 51,593 480,629 8,413 1,818,255 FY12E

FY13E 42,777 1,413,772 202,446 134,767 174,590 27,047 1,995,400 2,572,245 1,651,798 920,447 250,066 111,108 51,593 653,772 8,413 1,995,400 FY13E

Adjusted profits trend

300 250 (INR bn) 200 150 100 50 0 FY10 FY11E FY12E FY13E

Source: Company, Elara Securities Estimate

Return ratios
35 30 25 20 15 10 FY10 FY11E ROE (%) FY12E FY13E ROCE (%) 19.1 23.2 18.7 17.5 28.4 28.0 23.2 24.1

367,162 386,431 (760) (40,029) 366,402 346,401 234,626 179,967 131,775 166,434 (87,117) (100,817) 47,218 50,977 91,877 116,595 FY12E 0.3 (2.7) (8.8) 39.2 18.7 (0.2) 18.7 23.2 27.9 (7.6) 8.0 10.7 4.5 1.8 2.0 2.7 FY13E 3.7 12.8 4.9 42.6 19.2 (0.3) 17.5 24.1 29.7 6.5 8.0 10.0 4.0 1.7 1.7 2.7

Source: Company, Elara Securities Estimate

Elara Securities (India) Private Limited

Oil & Gas

3

1,017,605 1,276,342 1,279,544 1,326,574 444,393 514,720 501,053 565,084 52,976 59,766 47,218 50,977 497,369 574,485 548,271 616,061 187,391 194,524 196,408 209,791 309,978 379,961 351,863 406,270 5,564 5,500 5,500 9,508 304,414 374,461 346,363 396,762 107,138 112,338 103,909 138,538 197,276 262,123 242,454 258,224 (3,240) (3,382) (3,463) (3,770) 194,035 258,741 238,991 254,454

(INR bn)

FY10 FY11E FY12E FY13E Revenue (LHS) EBITDA (LHS) EBITDA Margin (RHS) Source: Company, Elara Securities Estimate

India Oil & Gas

Oil India Financials

Income Statement (INR mn) Revenue EBITDA Non operating Income OPBITDA Depreciation & Amortization EBIT Interest Expenses PBT Taxes Adjusted PAT Extra-ordinaries Reported PAT Balance Sheet (INR mn) Share Capital Reserves Borrowings Deferred Tax (Net) Other Liabilities Total Liabilities Gross Block Accumulated Depreciation Net Block Capital Work In Progress Investments Net Working Capital Other Assets Total Assets Cash Flow Statement (INR mn) Cash profit adjusted for non cash items Working Capital Changes Operating Cash Flow Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios Net Debt/Equity (x) ROE (%) ROCE (%) Per Share data & Valuation Ratios Diluted EPS (INR/Share) EPS Growth (%) DPS (INR/Share) P/E (x) EV/EBITDA (x) EV/Sales (x) Price/Book (x) Dividend Yield (%)
Source: Company, Elara Securities Estimate

FY09 72,414 32,672 9,372 42,044 7,480 34,563 87 34,476 12,253 22,223 606 21,617 FY09 2,140 91,170 565 8,998 15 102,888 83,003 40,828 42,175 3,186 4,887 52,640 102,888 FY09 29,506 195 29,701 8,496 21,205 (8,783) 5,470 17,892 FY09 19.1 28.7 20.8 45.1 29.9 (0.6) 23.2 36.8 101.0 20.8 35.7 13.3 7.2 3.2 3.5 2.6

FY10 79,056 37,084 9,542 46,626 7,638 38,988 37 38,951 12,846 26,105 26,105 FY10 2,405 135,232 375 10,209 19 148,240 94,640 48,466 46,174 3,289 8,594 90,185 148,241 FY10 25,453 (12,816) 12,637 15,166 (2,529) 17,717 9,542 24,729 FY10E 9.2 13.5 20.8 46.9 33.0 (0.6) 19.0 28.2 113.8 12.6 39.8 11.8 6.3 3.0 2.4 3.0

FY11E 89,454 47,968 12,274 60,242 7,821 52,421 39 52,382 16,854 35,528 35,528 FY11E 2,405 161,195 213 10,209 19 174,040 117,366 51,715 65,651 3,289 8,594 96,506 174,040 FY11E 30,330 (2,412) 27,918 22,809 5,109 (9,767) 8,567 3,909 FY11E 13.2 29.4 36.1 53.6 39.7 (0.5) 21.7 32.0 147.8 29.9 39.8 9.1 4.9 2.6 2.0 3.0

FY12E 104,016 48,940 11,806 60,746 9,499 51,247 10 51,237 17,421 33,817 33,817 FY12E 2,405 185,447 50 10,209 19 198,129 149,252 58,748 90,504 3,289 8,594 95,742 198,129 FY12E 29,053 6,260 35,314 31,886 3,428 (9,738) 11,806 5,496 FY12E 16.3 2.0 -4.8 47.1 32.5 (0.5) 18.0 27.3 140.6 -4.8 39.8 9.6 4.7 2.2 1.7 3.0

Revenue & margins growth trend

150 100 45.1 50 0 FY09 FY10 FY11E FY12E Revenue (LHS) EBITDA Margin (RHS) EBITDA (LHS) 45 40 53.6 55 47.1 50 (%) 36 26 22 34 FY10 FY11E FY12E 28.2 32.0 27.3 19.0 21.7 18.0 FY10 ROE (%) FY11E FY12E ROCE (%)

Source: Company, Elara Securities Estimate

Adjusted profits trend

40 35 30 25 20 15 10 5 0 FY09

Source: Company, Elara Securities Estimate

Return ratios
40 30 20 10 0 FY09 23.2 36.8

Source: Company, Elara Securities Estimate

(INR bn)

(INR bn)

46.9

Elara Securities (India) Private Limited

Oil&Gas

Crude - Which way to go?

With political issues creating a significant uncertainty in the MENA region, crude has rallied by nearly 47% during the last six months. The region being the epicenter of oil supply, it is apparent that crude prices are capturing a huge geopolitical premium in the current price levels. We try and predict the possible direction that crude prices may take over the next two to three quarters, given the background of the MENA political concerns as well as the recent disaster in Japan.

Crude already builds in geopolitical premium As in the case of stocks, in our view, the current crude price levels not only factor in the loss of oil supply from Libya, but also a potential production loss from some of its neighboring countries. Libya produces about 1.7mnbpd or 2% of the global supplies, but looking at the rally in crude prices, it is evident that the price is capturing the risk of supply losses from the neighboring nations to a large extent. Libya along with neighbors Nigeria, Algeria and Egypt contributes 6.1mnbpd or 7.5% to global oil supplies.

In the absence of the MENA crisis, we believe that the recent Japanese earthquake would have proven to be a huge demand shock for the oil world. However, with the increasingly strong newsflow on the political turmoil in Libya, the potential demand damage from the Japanese earthquake has clearly been overshadowed. It is also for the very same reason that oil prices managed to hold their own at ~USD115/bbl levels (Brent) and then climb more recently to USD120/bbl despite the potential demand impact in Asia. In our opinion, these two conflicting forces, currently at work, are also sources of strength for oil prices. However, we also believe that a reversal in these phenomena is likely to create a stable price trend in the short term with oil price returning to normalized levels in the medium to long term. Chinese connection Real threat for demand growth The devastating aftereffects of the Japanese earthquake and Tsunami go beyond the disturbance in the direct consumption in Japan. First, in terms of the direct impact, Japan still remains the third largest economy in the world (despite China surpassing it) hence the demand shock through this natural calamity will undoubtedly hurt the Asian demand scenario. Second and perhaps a more important reason is the impact that China would feel in the short to medium term. China accounts for nearly 40% of the Asian oil demand and 10.4% of the global consumption. As the China-Japan trade relations are extremely prolific, the impact on Japan seems more dangerous if one looks at the degree of supply chain disruption. In 2010, roughly 8% (~USD120bn) of Chinese exports were to Japan and a demand shock in Japan may cause a short term blip in these Chinese exports leading to a shorter term slowdown in the Chinese industrial activity. Further damage may come from the reduction in Japanese imports to China across the value chain, including critical industrial equipment. In 2010, roughly 13% (~USD160bn) of the Chinese imports were from Japan.

Possibly the latter. Though volatility remains a significant risk, we try to forecasts oil prices during the remainder of 2011 based on fundamental issues that the oil world confronts today. To start with, in the short term, the possibility of a super spike is reasonably low in our view. Such a spike from here will need a significant physical disruption in the global oil supply. Looking at the supply contributions from various nations, only a disruption from a big contributor such as Saudi Arabia will trigger a super spike in our opinion. Saudi currently supplies 9.7mnbpd of oil, contributing around 12% of the global supply. More importantly, Saudi holds a spare capacity of 3.2mnbpd, which, along with other OEPC spare capacity, will largely be sufficient to compensate for the loss of supply from other nations. However, considering the political dynamics and importance of oil for Saudi, we are tempted to rule out a significant political turmoil in Saudi in the short to medium term. As a result, we expect oil to stabilize between USD110-115/bbl levels in Q2CY11. In H2CY11, we believe that the opposing demand-supply forces (influencing currently) may reverse to gradually bring out the crude price levels to more normalized levels. As the whole Japanese reconstruction process begins, it is likely to trigger a demand pick-up. However, as seen currently, the events in the MENA region are of a higher impact, and we expect the unrest here to settle down as we move into the second half of 2011, causing a release of oil supply. This scenario would have a calming effect on crude prices, in our view. For our estimates, we assume crude prices of ~USD92/bbl for the second half. For stocks such as Cairn, our long-term price for crude remains at USD85/bbl a level which OPEC has repeatedly stated as comfortable range for both consumers as well as suppliers.

Elara Securities (India) Private Limited

Oil & Gas

5

MENA, Japan - Opposite forces at work

Super spike or a pullback?

India Oil & Gas

Downgrade Cairn on unfavorable risk-reward

The Union Cabinets move to defer decision on the CairnVedanta deal comes in as another dampener, and is likely to extend the overhang that has prevailed for the Cairn stock since the deal announcement in August 2010. We had upgraded Cairn in February 2011 to an Accumulate (TP of INR360/share) driven by a favorable risk-reward scenario at price levels of around INR310/share. Our call was based on upside triggers from those price levels in both scenarios deal getting approved and vice-versa. The royalty and cess issues continue to create uncertainties even now and these are likely to be solved separately as per the media statements from the Oil Ministry officials. Cairns stock since then has rallied to the current levels, forcing us to believe that the risk-reward for investors has reversed. We thus downgrade Cairn to a Reduce rating with a potential under-performance in store. We reiterate that Cairn may still gain 3-5% from these levels on both the possible approval outcomes. Yet with the deal price capped at INR355/share and crude likely to stabilize and cool off in the second half of 2011, the stock may see some underperformance vis--vis the market. Core valuation closer to current levels We maintain our TP of INR360/share on Cairn based on our weighted average valuation methodology. We assign a 20% weightage each for relative valuation and Cairns crude correlation dynamics while the asset-based valuation gets the remaining 60% weightage. Our assetbased NPV gives us a value of INR330/share, indicating higher valuations at current levels. For relative valuation, we discount our steady state FY13 EPS of INR47 by one year and apply a P/E of 8x. Lastly, crude correlation analysis gives an INR450/share valuation. Combining these three methods, we arrive at our target price of INR360/share for Cairn India. Exhibit 1: Cairn Impact of the deal overhang
600 500 400 300 200 100 0 Jan-07 Jan-08 Jan-09 Jan-10 Sep-07 Sep-08 Sep-09 May-07 May-08 May-09 May-10 Sep-10 Jan-11
Cairn losing out on substantial crude corelated upside due to the deal overhang

Back beaten down oil PSUs despite heavy under-recoveries

With the current crude price levels of ~USD122/bbl, the OMCs losses can be as high as INR1,800bn annually. At these levels, the loss on petrol stands at INR4.5/litre, diesel at INR13/litre, LPG at INR270/cylinder and kerosene at INR24/litre. However, assuming a normalized crude price of USD95/bbl for FY12, we arrive at FY12 under-recovery estimate of INR1,058bn. Exhibit 2: Under-recoveries details products and subsidy sharing
FY09 Crude price Under-recoveries (INRmn) IOC BPCL HPCL Total Subsidy Allocation (INRmn) Upstream share Oil Bonds/ Cash Compensation OMCs Total Subsidy Allocation (%) Upstream share Oil Bonds/ Cash Compensation OMCs Total Upstream sharing (INRmn) ONGC OIL GAIL Total Upstream sharing (%) ONGC OIL GAIL Total 85.5 5.3 9.2 100.0 80.1 10.7 9.2 100.0 81.3 10.9 7.8 100.0 81.0 11.0 8.0 100.0 81.0 11.0 8.0 100.0 273,740 16,940 29,320 320,000 115,543 15,488 13,267 144,299 211,535 28,279 20,388 260,202 285,671 38,795 28,214 352,681 196,709 26,714 19,428 242,851 31.0 69.0 100.0 31.3 56.5 12.2 100.0 33.3 46.8 19.8 100.0 33.3 50.0 16.7 100.0 33.3 50.0 16.7 100.0 320,000 712,920 1,032,920 144,299 260,000 56,211 460,510 260,202 365,489 154,919 780,610 352,681 529,021 176,340 1,058,043 242,851 364,276 121,425 728,552 584,463 213,109 235,350 1,032,922 258,790 99,404 102,314 460,510 433,374 176,216 171,020 780,610 587,214 238,060 232,769 1,058,043 404,346 163,924 160,281 728,552 86.2 FY10 69.8 FY11E 86.4 FY12E 95.0 FY13E 85.0

Source: PPAC; Elara Securities Estimates

Maintain Accumulate on upstream PSUs We continue to back the Indian oil PSUs after these stocks were beaten down with the surge in crude prices driving under-recoveries to unbearable levels. Within our coverage, we maintain our Accumulate ratings for ONGC and Oil India given the potential upside of 6-9%, despite the recent investor interest in these stocks. In our view, at these levels, oil PSUs are factoring in underrecoveries of INR950-1,000bn for FY12. We maintain our target price of INR325/share for ONGC, implying an upside of 9%. We arrive at our TP by assigning an EV/EBITDA of 5.5x for ONGCs standalone operations, an EV/bbl of USD10/bbl for OVL and valuing MRPL at an EV/EBITDA of 6x. For Oil India, our TP remains at INR1,430/share, assigning an EV/EBITDA of 5.5x. In terms of a downside protection, Oil India offers a better bet for investors with a lower leverage to subsidy sharing and higher cash/market cap ratio. Nearly 26% of Oil India market cap comprises of cash.
Elara Securities (India) Private Limited

160 140 120 100 80 60 40 20 0

Cairn's Actual Price Cairn's implied crude correlated price Brent

Source: Bloomberg; Elara Securities Estimates

Elara Securities (India) Private Limited Disclosures & Confidentiality for non U.S. Investors
The Note is based on our estimates and is being provided to you (herein referred to as the Recipient) only for information purposes. The sole purpose of this Note is to provide preliminary information on the business activities of the company and the projected financial statements in order to assist the recipient in understanding / evaluating the Proposal. Nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved) and should consult its own advisors to determine the merits and risks of such an investment. Nevertheless, Elara or any of its affiliates is committed to provide independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Elara or any of its affiliates have not independently verified all the information given in this Note and expressly disclaim all liability for any errors and/or omissions, representations or warranties, expressed or implied as contained in this Note. The user assumes the entire risk of any use made of this information. Elara or any of its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for or solicit investment banking or other business from any company referred to in this Note. Each of these entities functions as a separate, distinct and independent of each other. This Note is strictly confidential and is being furnished to you solely for your information. This Note should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This Note is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Elara or any of its affiliates to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. Upon request, the Recipient will promptly return all material received from the company and/or the Advisors without retaining any copies thereof. The Information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This Information is subject to change without any prior notice. Elara or any of its affiliates reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Elara is under no obligation to update or keep the information current. Neither Elara nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This Note should not be deemed an indication of the state of affairs of the company nor shall it constitute an indication that there has been no change in the business or state of affairs of the company since the date of publication of this Note. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Elara Securities (India) Private Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed to Elara Securities (India) Private Limited / the company.

Disclaimer for non U.S. Investors

The information contained in this note is of a general nature and is not intended to address the circumstances particular individual or entity. Although we endeavor to provide accurate and timely information, there can guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the No one should act on such information without appropriate professional advice after a thorough examination particular situation. of any be no future. of the

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Elara Securities (India) Private Limited Disclosures for U.S. Investors

The research analyst did not receive compensation from Cairn India Limited, Oil & Natural Gas Corporation Limited and Oil India Limited. Elara Capital Inc.s affiliate did not manage an offering for Cairn India Limited, Oil & Natural Gas Corporation Limited and Oil India Limited. Elara Capital Inc.s affiliate did not receive compensation from Cairn India Limited, Oil & Natural Gas Corporation Limited and Oil India Limited in the last 12 months. Elara Capital Inc.s affiliate does not expect to receive compensation from Cairn India Limited, Oil & Natural Gas Corporation Limited and Oil India Limited in the next 3 months.

Disclaimer for U.S. Investors

This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its completeness, accuracy or adequacy and it should not be relied upon as such. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investors currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Certain statements in this report, including any financial projections, may constitute forward-looking statements. These forward-looking statements are not guarantees of future performance and are based on numerous current assumptions that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these forward-looking statements and financial information.

Elara Securities (India) Private Limited

India
Elara Securities (India) Pvt. Ltd. Kalpataru Synergy, 6th Level, East Wing, Opp Grand Hyatt, Santacruz East, Mumbai 400 055, India

Europe
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Tel : +91 22 4062 6868

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Harendra Kumar
Sales Joseph K. Mammen Jonathan Camissar Anuja Sarda David Somekh Nikhil Bhatnagar Samridh Sethi Amit Mamgain Koushik Vasudevan Nirav Shah Prashin Lalvani Saira Ansari Sales Trading & Dealing Ananthanarayan Iyer Dharmesh Desai Manoj Murarka Vishal Thakkar India India India India +91 98334 99217 +91 98211 93333 +91 99675 31422 +91 98694 07973 ananthanarayan.iyer@elaracapital.com +91 22 4062 6856 dharmesh.desai@elaracapital.com manoj.murarka@elaracapital.com vishal.thakker@elaracapital.com +91 22 4062 6852 +91 22 4062 6851 +91 22 4062 6857 Global Head Sales & Trading London London London New York New York New York India India India India India +44 78 5057 7329 +44 79 1208 7272 +44 77 3819 6256 +1 646 808 9217 +1 718 501 2504 +1 718 300 0767 +91 98676 96661 +91 98676 96668 +91 90040 27862 +91 98334 77685 +91 98198 10166 joseph.mammen@elaracapital.com jonathan.camissar@elaracapital.com anuja.sarda@elaracapital.com david.somekh@elaracapital.com nikhil.bhatnagar@elaracapital.com samridh.sethi@elaracapital.com amit.mamgain@elaracapital.com koushik.vasudevan@elaracapital.com nirav.shah@elaracapital.com prashin.lalvani@elaracapital.com saira.ansari@elaracapital.com +44 20 7467 5578 +44 20 7299 2575 +44 20 7299 2577 +1 212 430 5872 +1 212 430 5876 +1 212 430 5873 +91 22 4062 6843 +91 22 4062 6841 +91 22 4062 6842 +91 22 4062 6844 +91 22 4062 6812

Head - Institutional Equities & Global Research

harendra.kumar@elaracapital.com

+91 22 4062 6871

Research Abhinav Bhandari Aliasgar Shakir Alok Deshpande Anand Shah Himani Singh Mohan Lal Pankaj Balani Pralay Das Ravindra Deshpande Ravi Sodah Sumant Kumar Surajit Pal Pooja Sharma Sreevalsan Menon Gurunath Parab Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Analyst Associate Editor Production Construction, Infrastructure Mid caps Oil & Gas Paints, Fertilizers FMCG, Hotels, Hospitals Media & Retail Derivative Strategist Information Technology, Telecom Metals & Cement Cement FMCG Pharmaceuticals, Real Estate Construction, Infrastructure abhinav.bhandari@elaracapital.com aliasgar.shakir@elaracapital.com alok.deshpande@elaracapital.com anand.shah@elaracapital.com himani.singh@elaracapital.com mohan.lal@elaracapital.com pankaj.balani@elaracapital.com pralay.das@elaracapital.com ravi.sodah@elaracapital.com sumant.kumar@elaracapital.com surajit.pal@elaracapital.com pooja.sharma@elaracapital.com sreevalsan.menon@elaracapital.com gurunath.parab@elaracapital.com +91 22 4062 6807 +91 22 4062 6816 +91 22 4062 6804 +91 22 4062 6821 +91 22 4062 6801 +91 22 4062 6802 +91 22 4062 6811 +91 22 4062 6808 +91 22 4062 6817 +91 22 4062 6803 +91 22 4062 6810 +91 22 4062 6819 +91 22 4062 6813 +91 22 4062 6815

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