pinc indian refinery scenario

S E C T O R R E P O R T

INDIAN REFINERY

07 December, 2011

Satish Mishra+91-22-6618 [email protected]

Urvashi Biyani+91-22-6618 [email protected]

RESEARCHRESEARCHRESEARCHRESEARCHRESEARCH

LOOKING INTO A ROBUST FUTURELOOKING INTO A ROBUST FUTURE

Contents

Executive Summary .................................................................................................................2

GRM to Stabilise going forward ................................................................................... 5

Brief snapshot of GRM Dynamics ................................................................................ 6

What lies ahead .......................................................................................................... 8

Indian GRM should trade at a premium in future ......................................................... 13

India - gaining prominence in Asian refining space .................................................... 15

Global demand scenario ........................................................................................... 18

Global capacity scenario ........................................................................................... 21

Are the upcoming refineries suitably configured?....................................................... 23

Global crude supply scenario .................................................................................... 24

Crude price outlook ................................................................................................... 27

Snapshot of current scenario ..................................................................................... 30

Companies

Mangalore Refinery & Petrochemicals ................................................................. 32

Chennai Petroleum Corporation ........................................................................... 45

Essar Oil .............................................................................................................. 54


Sector Summary

TP (Rs)

KEY FINANCIALS

Company

Mangalore Refinery (MRPL) 62 109 5.9 3.6 8.7 5.7 1.4 1.2 17.2 22.4 88 BUYChennai Petroleum (CPCL) 185 28 6.4 6.0 5.7 5.4 0.7 0.6 12.0 11.8 215 ACCUMULATEEssar Oil (EOL)* 69 94 4.0 3.6 5.1 4.6 1.0 0.9 21.6 20.7 NA NA

RatingROE (%)P/B (x)P/E (x)EV/EBIDTA (x)CMP

(Rs)Mcap

(Rs bn) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E

* ESSAR OIL’s number is bloomberg estimate

RESEARCHRESEARCHRESEARCHRESEARCHRESEARCHSE

CTO

R O

VER

VIEW

REFINERY SECTOR

COMPLEXITY AND SCALE ADDING PROMINENCEThe oil demand has stagnated in the mature markets specially in the USand Europe owing to global economic meltdown, promotion of fuelsubstitutes, intensive focus on energy efficiency and sustainableenvironment. However, in the long term oil demand led by non-OECDcountries, specifically China and India should compensate for the slackin oil demand from OECD countries. Indian players are adding refiningcapacity to match the robust local demand and improving their complexityfor better refined products to meet the prescribed environmental friendlyspecifications. We are positive on the Indian refining sector and initiatecoverage on it with a BUY on MRPL and an ACCUMULATE on CPCL.

DEMAND DRIVEN BY NON-OECD COUNTRIES: Out of total incremental demandof 5mb/d (CAGR 1.4%) by FY15, non-OECD countries are likely to account for6.2mb/d more than compensating the decline of 1.2mb/d in OECD countries.China and India should be the major driver with contribution of 2.9mb/d.

CAPACITY FOLLOWING DEMAND: With future incremental demand comingfrom non-OECD, ~95% of upcoming capacity of 6.7mb/d to 99.5mb/d by FY15 islocated in the region. China and India lead the group with 3.2mb/d of upcomingcapacity (2.3mb/d and 0.9mb/d respectively).

IMPROVEMENT IN COMPLEXITY: Matching with the rising demand for middledistillate and better auto fuels, Indian companies are revamping their facilitiesalong with capacity addition. Average Nelson complexity index is likely to increasefrom the current levels of 6-7 to 9-10 in next 1-2 years. Higher proportion of gasoilagainst Singapore benchmark makes a case for relative improvement in the future.

SINGAPORE GRM TO MODERATE: We expect Singapore GRM to stabilisebetween USD6.0/bbl to USD7/bbl after trading strong in 9mCY11. However, Gasoilspread is expected to remain strong which should support Indian players’ GRM.

CONCERNS: Current global economic uncertainty remains the major risk asvolatility in crude oil price, international GRM and USD-INR exchange rate mayfalter the performance substantially. Delay in project commissioning can impactthe performance.

VALUATIONS AND RECOMMENDATION

We are positive on the Indian refining sector and we initiate our coverage on purerefining companies, with a 'BUY' rating on MRPL and an 'ACCUMULATE' on CPCL.Essar Oil is also set to benefit with increasing refining capacity and complexityimprovement, however, we are currently not rating the company.

07 December 2011

Sector View - Positive

Satish Mishra +91-22-6618 [email protected]

Urvashi Biyani +91-22-6618 [email protected]

MRPL (Rs mn) FY12E FY13E FY14ENet Sales 513,116 561,257 586,247EBITDA Margin (%) 1.7 5.0 7.0

Net Profit 4,749 12,580 19,188YoY (%) (59.6) 164.9 52.5

EPS (Rs) 2.7 7.1 10.9

CPCL (Rs mn) FY12E FY13E FY14ENet Sales 438,437 422,789 374,617EBITDA Margin (%) 0.8 3.1 3.7

Net Profit 1,727 4,835 5,118YoY (%) (66.2) 180.0 5.8

EPS (Rs) 11.6 32.4 34.3

Essar Oil*(Rs mn) FY12E FY13E FY14ENet Sales 540,240 626,540 723,968EBITDA Margin (%) 5.9 8.0 7.6

Net Profit 9,237 18,903 20,832YoY (%) NA 104.6 10.2

EPS (Rs) 6.7 13.6 14.9

For rating objective and disclaimer, please refer to last page of the reportPINC Research reports are also available on Reuters, Thomson Publishers and Bloomberg PINV <GO> 1

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Dec-10 Mar-11 Jun-11 Aug-11 Nov -11

OIL&GAS BSE (Rebased)

[email protected]


EXECUTIVE SUMMARYINDIAN REFINING SECTOR:GAINING IMPORTANCE IN THE ASIAN REFINING SPACEIndia, with a capacity of 193mmtpa, currently accounts for ~13% in refining capacityand ~12% of consumption in Asia. In the last decade, export's proportion hasincreased from ~8% to ~29%. Throughput capacity is set to increase by ~25% to240mmtpa by FY15, making India an important player in the Asian refinery map.

Strong domestic demand: Consumption of petroleum products has shown a CAGR of4.1% despite gloomy environment. Demand is expected to remain robust at ~6% mainlydriven by auto fuels. Strong domestic demand is resulting in ~80% in-house consumption ofupcoming capacities.

Improvement in complexity: Indian players are spending on improving their complexity toincrease their yield, meet the demand of upgraded products and to increase usage of lowcost sour/ heavy crudes. Average Nelson complexity index is set to increase from currentlevel of 6-7 to 9-10 in the next 1-2 years.

Product slate favoured towards middle distillate: To meet the future requirement,companies are increasing their middle distillate proportion and are upgrading auto fuelsquality to Euro III/Euro IV norms. This further puts Indian players in an advantageous positionas their average Diesel proportion in product is ~40% against Singapore benchmark's 16%.Robust Gasoil demand scenario across the globe augurs well for domestic players.

No major under-recovery risk: With rising crude prices and depreciating rupee, IndianOMCs are under risk of increasing under-recovery. In this report we are talking about purerefiners without marketing setup and hence there is no major under-recovery risk.

Increasing refining throughput capacity and higher consumption contribution fromstruggling US and Europe, coupled with gloomy macro environment across globecan result in unfavourable demand-supply scenario in near future. However, robustAsian demand, improving complexity and favourable product mix are some of thepositives for the Indian players. We are positive on the Indian refining sector and weinitiate our coverage on pure refining companies, with a 'BUY' rating on MRPL andan 'ACCUMULATE' rating on CPCL.

Robust domestic demandleading to increase inrefining capacity...

Higher middle distillate yieldpromises better marginsfor Indian players ...

[email protected]


MRPL: BUY, TP - RS88 (42% UPSIDE)Agressive capex plan of ~Rs154bn from FY11 to FY14Capacity increase by ~30% to 15.4mmtpa and Nelson complexity improvement from~6 to ~10Distillate yield improvement from ~72% to ~78% (Diesel contribution - 45%) anddecrease in Fuel oil proportion from ~16% to <5%EBITDA and PAT to clock a CAGR of 26% and 18%respectively from FY11 to FY14Concern over delay in project commissioning, volatility in crude price/ international GRM/INR-USD exchange rateAt CMP of Rs62, MRPL is trading at PER of 8.7x & 5.7x and EV/ EBITDA of 5.9x &3.6x for FY13E and FY14E respectively

COMPANIES SUMMARY

1-year forward P/E Band 1-year forward EV/EBITDA

10x13x

16x19x

7x 4x

6x

8x

10x

12x

CPCL: ACCUMULATE, TP - RS215 (16% UPSIDE)Capex plan of ~Rs40bn from FY11 to FY14Capacity increase by 0.6mmtpa to 12.1mmtpa and Euro IV upgradationCurrent distillate yield of ~69% with Diesel contributing ~36%, residual up-gradationproject in pipeline to increase distillate yield to ~77%, awaiting environmental approvalsEBITDA to clock a CAGR of 4% and PAT to remain flat from FY11 to FY14Concern over delay in project commissioning, volatility in crude price/ international GRM/INR-USD exchange rateStrong dividend history with payout ratio in the range of 35-40%At CMP of Rs185, CPCL is trading at PER of 5.7x & 5.4x and EV/ EBITDA of 6.4x &6.0x for FY13E and FY14E respectively


4x6x8x

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4x6x8x

12x10x

0

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80

120

160

Apr-06 Sep-07 Jan-09 Jul-10 Dec-11-

75,000

150,000

225,000

300,000

Apr-06 Sep-07 Jan-09 Jul-10 Dec-11

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100

200

300

400

500


-

75,000

150,000

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[email protected]


Source: Bloomberg, PINC Research

Mcap Curr EV EBIDTA Margins (%) EV/EBIDTA P/E (x) P/B (x) ROE (%)

(USD mn) (USD mn) CY12/FY13E

CY13/FY14E

CY12/FY13E

CY13/FY14E

CY12/FY13E

CY13/FY14E

CY12/FY13E

CY13/FY14E

CY12/FY13E

CY13/FY14E

Global comparison

VALUATION COMPARISON

In order to compare standalone refineries like MRPL, CPCL and Essar Oil, we have includedIndian Oil refining and marketing companies (OMC's) like HPCL, BPCL, IOCL and RIL (IntergratedOil& Gas Company) in the overall Indian average. For the global average, we have build a diversifiedportfolio which includes refineries across different regions like Asia, US, Japan and Europe. Whatwe can see is that Indian refiners are trading at a premium to global refiners based on EV/ EBITDAmultiple for FY13E and FY14E. We believe that these premium valuations are justified on accountof expectation of higher average ROE for our universe at ~15% vs global average of ~13%. Recentcorrection in stock prices further provides an investment opportunity.

Company Name

SK Innovation 14,195 13,516 6.3 6.6 3.8 3.6 6.3 5.8 1.0 0.9 17.0 15.7GS Holdings 5,031 5,535 25.8 27.3 5.2 4.7 5.5 5.1 0.8 0.7 16.8 15.6S-Oil Corp. 11,456 14,173 7.7 7.7 7.0 7.0 8.2 8.0 2.0 1.7 26.5 23.0Thai Oil 4,141 5,421 6.9 7.1 6.2 5.9 8.7 8.3 1.4 1.3 17.2 16.5Showa Shell Sekiyu 2,526 6,735 2.4 2.7 7.8 7.2 9.7 8.4 0.7 0.6 10.2 7.8Idemitsu Kosan 4,278 14,963 4.7 4.8 5.8 5.8 5.6 5.6 0.5 0.5 11.3 10.3JX Holdings 15,860 44,335 4.9 5.3 6.7 6.3 6.7 6.4 0.6 0.6 10.3 9.8Delek US Holdings, Inc. 633 869 6.4 8.4 2.9 3.0 5.3 6.9 0.8 0.7 15.8 10.9Tesoro Corp. 3,379 4,157 5.7 4.8 2.8 3.1 5.8 6.6 0.8 0.7 12.9 9.9Valero Energy Corporation 12,381 17,216 4.5 4.1 3.0 3.2 5.4 5.5 0.6 0.6 12.8 10.7Western Refining Inc. 1,156 1,816 8.0 6.8 2.5 2.7 4.5 4.8 1.1 0.8 24.5 21.2Galp Energia SGPS 13,752 18,367 7.5 7.7 10.8 9.5 19.0 17.4 3.0 2.6 14.8 14.9Neste 3,031 6,257 4.3 4.6 6.5 5.8 8.9 7.0 0.8 0.8 9.4 11.0Petroplus 415 1,968 1.7 2.1 4.7 3.5 7.9 0.3 0.2 (7.5) 2.5Saras 1,539 2,287 3.2 3.8 5.0 4.0 17.6 12.0 0.9 0.8 5.5 7.8PKN Orlen 5,136 8,821 4.5 4.8 6.1 5.7 9.1 8.7 0.6 0.6 6.4 7.1AVERAGE 6.5 6.8 5.4 5.1 8.4 7.8 1.0 0.9 12.7 12.2MEDIAN 5.3 5.1 5.5 5.2 6.7 6.9 0.8 0.7 12.8 10.8MRPL 2,119 2,348 5.0 7.0 5.9 3.6 8.7 5.7 1.4 1.2 15.5 21.4CPCL 536 1,481 3.1 3.7 6.4 6.0 5.7 5.4 0.7 0.6 12.0 11.8EOL 1,881 4,183 8.0 7.6 4.4 4.0 5.3 4.8 1.0 0.9 21.6 20.7HPCL 1,927 7,836 2.8 2.9 9.0 8.0 5.8 5.2 0.7 0.6 11.2 11.6BPCL 3,931 8,017 3.0 3.3 7.6 6.5 9.9 8.2 1.2 1.1 11.6 12.4IOCL 12,675 22,416 4.7 4.8 6.2 5.8 7.0 6.3 1.0 0.9 13.8 13.7RIL 51,853 61,983 13.7 14.5 7.9 7.2 11.0 10.0 1.3 1.2 13.0 13.6AVERAGE 5.8 6.3 6.7 5.9 7.6 6.5 1.0 0.9 14.1 15.1MEDIAN 4.7 4.8 6.3 5.9 7.0 5.6 1.0 0.9 13.0 13.6

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Singapore GRM Crude price

GRM TO STABILISE GOING FORWARDHistorically crude price and refining margins have moved together signifying crude as theproxy for end consumer demand. This has been true over the last few months as well withGRM hovering at highs of USD9-10/bbl inline with high crude prices.

To that extent, one could argue that outside of geopolitics, any demand led correction incrude prices could also have an impact on refining margins.

As we move forward, we expect GRM to moderate to the level of USD6-7/bbl assumingrelatively weaker economic environment. We do not view the run-up in Singapore GRM in9mCY11 as an indication of structural uptrend in refining cycle due to key concerns ofsurplus refining capacity and slowdown in oil demand.

Although Asian refining operating rates have typically been stronger than global averages,rates fell from a peak of ~89% in CY05 to ~82% in CY09. Even though it recovered in CY10/CY11, we expect utilisation rates to gradually slow-down, however, due to upcoming capacitytimeline; it should be at ~85% in CY12/CY13. As we move into CY14, surplus refiningcapacity will cause rates to fall further, which will in turn impact GRM as we expect it tostabilize at USD6/bbl.

GRM moved along with crude price historically


Jul-0

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Operating rates to drive GRM

Source: IEA, Bloomberg

82.0%82.0%

85.3%85.5%84.2%

80.6%

87.5% 88.5%86.1% 85.8% 85.1%

81.7%83.9%

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2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E 2015E70.0%

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85.0%

90.0%

Singapore GRM (US$/bbl) Asia capacity utilisation rate, RS

Singapore GRM to stabilisein the range of $6-7/bbl...

Asian capacity utilisation toremain strong at ~85% tillCY13...

INDIAN REFINERY SECTOR

[email protected]


At it’s peak in H1FY12(Avg $8.3/bbl)

Singapore GRMIncremental demand -5.1mb/d (2011-15)

Incremental capacity -6.7mb/d (2011-15)

Incremental Middle Distillatedemand - 3.6mb/d

Indian GRMProduct slate skewed towards

diesel (40% weight)Strong domestic demand -

0.8mb/d (2011-15)

Refinery Complexityenhancement

Gasoline crack (32%, Avg $16/bbl)Gasoil crack (16%, Avg $18.7/bbl)Kero/Jet crack (19%, Avg $19.8/bbl)

BRIEF SNAPSHOT OF GRM DYNAMICS

In future, we expect Singapore GRM to moderate to the level of USD6-7/bbl on the back ofexcess refining capacity. However, strong demand from Asian countries especially Chinaand India, along with capacity rationalisation should provide support to GRM. We believethat diesel cracks should hold its strength as demand for middle distillate remains robusteven after taking into consideration increase in global upgradation capacity. Overall, weexpect India to trade at a premium to Singapore GRM on account of Indian product slatelargely skewed towards diesel and Indian refiners are incurring huge capex to improve theirrefinery complexity standards.

Asia Pacific 3.2mb/dMiddle East 1.1mb/dSouth America 0.9mb/d

Non-OECD (+) 6.2 mb/dOECD (-)1.1mb/d

Transportation (60%, ~6-7% CAGR)Chinese industrial demand (~4-5% CAGR)Shift towards ULSDStrict Marine bunker sulphur specs.

Transportation demand (CAGR 6-8%)Other products (~5%)

Current Avg. complexity (6-7x)Future shift towards 9-10x

Source: PINC Research ($ - USD)

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SINGAPORE GRM PEAKED IN CY11GRM driven by transportation fuel demand especially gasolineStrong Singapore GRM in CY11 was mainly led by gasoline cracks (Gasoline constitute32% in GRM), while most Indian refiners produce 30-40% diesel and 12-20% gasoline. Therelative strength in gasoline cracks therefore helps benchmarks more than it helps IndianGRM (with a resultant apparent company margin underperformance).

Spike in cracks in CY11 a function of other one-off eventsLibyan crude cut: With gradual recovery of refineries post the earthquake and Formosafire incident, margins should see some corrections. Also, for Libya, many observers seeexports reaching 0.8mbpd by year-end and full production by end-2012, accordinglySaudi Arabia to adjust production downwards.

Japanese Earthquake: According to IEA assumptions, Japanese Earthquake resultedin loss of 10 GW of nuclear capacity, requiring an average 170kb/d of additional oil-fireddemand. Out of Japan's total refining capacity of 4.6mbpd, around 1.7mbpd had shutdown. However, Refining capacity in Japan has gradually recovered and this should putsome pressure on margins.

Formosa fire: In Taiwan, Formosa's 540kb/d Mailiao plant had been closed since theend of July, when the seventh fire in a year broke out at the facilities. After shutdownsranging from one to four months at various facilities, FPCC restarted all its facilitiesduring August and September.

Gasoline drives Singapore GRM to its peak

Source: Bloomberg

Transportation fuel (~67% of product) leads the rally

Source: Bloomberg

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Gasoline Jet-Kero Diesel

Libya crude cut, Japaneseearthquake and Formosa firesupported GRM in CY11...

[email protected]


WHAT LIES AHEADNon-OECD demand to compensate for slack OECD demandOECD demand to remain sluggish

Recently, IEA cut global oil demand estimates by 380 kb/d for 2011 and by 700 kb/d for2012 in last four months, with lower than expected Q311 readings in the US, China andJapan and a downward adjustment to global GDP growth assumptions. In the long term,strong demand from non-OECD provides some offsetting support. Global oil demand isexpected to rise to reach 94.3mb/d (+5.1mb/d, 1.4%CAGR) by 2015 led by non-OECDdemand especially China and India (2.9mb/d).

Non-OECD requirement led by China to provide support

In the last two years, Chinese oil demand has grown strongly led by consumption in diesel,which accounts for 35% of total Chinese demand. We estimate that despite the refinerycapacity additions in China, oil demand growth in the country will continue to outstripincremental product supply growth atleast in near term (2012/13), thereby keeping thedomestic demand-supply balance on the edge, particularly for distillates.

Oil demand led by Non-OECD (2009-2012)

Source: IEA, PINC Research

Revisions to GDP forecasts (%)


2010 2011E 2012E

Global Aug 5.1 4.2 4.4

Oct 5.1 3.8 3.9

OECD Aug 3.1 2.3 2.6

Oct 3.1 1.7 1.9

Non-OECD Aug 7.3 6.5 6.5

Oct 7.3 6.4 6.2

30.0

35.0

40.0

45.0

50.0

2009

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3Q10

4Q10

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4Q12

mb/dTotalOECD TotalNon-OECD

Chinese oil demand growth (CY09-CY12)


Chinese incremental oil demand vs capacity


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4Q12

mb/d

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1.2

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E

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E

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mb/d

Demand Capacity

CAGR 8%

[email protected]


Refinery closures and delays to offset excess capacitySurplus refining capacity to weigh upon demand

China and India are expected to add 3.3mb/d over the next few years to the current capacityof ~14.4mb/d which is much more than incremental demand expected over the forecastperiod of 2.9mb/d. This, we believe, will result in excess capacity in Asian markets andwould exert pressure on margins. However, actual refinery capacity additions have alwaysbeen 20-30% lower than estimates in last three years as slippage in new projects is becomingcommon owing to logistics, delays in acquiring land, obtaining clearances/permits andsome tightness in engineering chain.

Capacity rationalisation and delays to offset excess capacity

Though we anticipate a refining capacity addition of 6.7mb/d over 2011-15e, ~3.5mb/d ofcapacity addition is expected at the end of forecasted period in 2014/15. However, theseprojects are largely big ticket capacity expansion projects announced in Middle East (SaudiArabia's Jubail and UAE's Ruwais refinery slated for 2014), which are currently at very initialstages of expansion and run a high risk of delays even beyond 2015. Weak operatingenvironment and rising costs forced several refiners worldwide to close their refineries duringCY09-10, both temporarily and permanently.

Incremental excess capacity over demand

Source: IEA, OPEC, PINC Research

Refining Capacity Additions - World


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Refinery closures may salvage GRMOECD North America Total N. American shut-down amount to 330kb/d.

OECD Europe Total 270kb/d has been permanently shut. In Feb 2010, French Oil majorTotal announced it will permanently shut Dunkirk plant. ConocoPhilips refinery(260kb/d) could still be closed due to poor economics.

OECD Pacific Region dominated by Japan where since 2009, nearly 400kb/d of capacityhas either been shut or scheduled to close before 2011, and a further740kb/d reduction has been announced.


Refinery closures, anongoing phenomena tosupport GRM...

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Strong demand to support diesel cracksIn terms of volume, the largest increase in future demand is projected for middle distillate,with an increase of almost 3.6mb/d by 2015, from 2009 levels. This is because diesel isused in a wide range of growth sectors, including the key transport and industry sectors.

More than half of incremental demand is from the middle distillates while theyaccount for only ~30% in the current distillate mix.

Demand patterns point to a further move towards middle distillatesOverall, the medium-term outlook is for a sustained requirement to produce more middledistillates as a large distillate deficit opens up in the Asia-Pacific. However, a continuingsurplus for naphtha/gasoline implies gasoline/naphtha price weakness and a balance forresidual fuels relative to crude oil. This deficit should keep the middle distillate market tightin Asia, lending strength to GRM. However, the relative strength in diesel cracks would helpIndian GRM more than Singapore GRM.

Total incremental demand (2009-2015) - 6.5mb/d


Cumulative oil product demand growth


0.5

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Ethane/LPG

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Gasoline

Jet/kerosene

Gasoil/diesel

Residual fuel

Other

mb/d-2.0

1.0

4.0

7.0

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2010 2011 2012 2013 2014 2015

mb/d

Naphtha/ Gasoline Gasoil/ Kero Other Fuel oil

Expected surplus/deficit of incremental product output (CY10-CY15)

Source: OPEC, IEA, PINC Research

-0.8

-0.4

0

0.4

0.8

Asia-Pacific US & Canada Europe Total World

mb/dGasoline/ Naphtha Middle distillates Residual fuel Other prodcuts

Strong demand for Middledistillate across the globe...

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Key drivers determining middle distillate demand1) Robust demand from transportation sector in emerging economies

Diesel accounts for almost 35-40% of consumption in China and India. China's dieselconsumption currently is ~3.2mb/d, more than 60% of which comes from transportationindustry. Oil demand in transportation sector is expected to grow at 6.5% and 7.2% annuallyfor China and South Asia, thus making a case for relative demand strength in emergingeconomies.

2) Demand also driven by construction and industrial activity

Given the multiple usage of gasoil, rising construction and industrial activities driven bystrong GDP growth rate in China will fuel the diesel demand.

Chinese middle distillate demand trend

Source: BP Statistics, OPEC, PINC Research

Oil demand in road transportation (mboe/d)

Source: BP Statistics, OPEC, PINC Research

2010 2020 Abs. CAGR

OECD 20.0 19.5 (0.5) (0.3)%

Latin America 2.0 2.3 0.3 1.4%

Middle East & Africa 1.4 1.8 0.4 2.5%

South Asia 1.1 2.2 1.1 7.2%

Southeast Asia 2.1 2.7 0.6 2.5%

China 2.4 4.5 2.1 6.5%

OPEC 2.8 3.7 0.9 2.8%

Developing countries 11.8 17.1 5.3 3.8%

Transition economies 1.4 1.7 0.3 2.0%

33%34%

34% 34% 34%

36% 36% 37%

40%39%39%

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Middle distillates % share of middle distillate

China's Diesel Demand by Sector before 2020 (Unit: million tons)Sectors Transp. Agri Industry Const. Others Total1980 316 749 457 77 64 1,663

2008 7,652 2,084 1,915 482 1,750 13,883

AnnualGrowthRate1980-2008 12.1% 3.7% 5.3% 6.8% 12.5% 7.9%2015 11,833 2,815 2,338 732 2,304 20,021

2020 13,895 3,099 2,495 838 2,587 22,915

AnnualGrowthRate2008-2020 5.1% 3.4% 2.2% 4.7% 3.3% 4.3%

Source: Industry, PINC Research

Demand for Diesel expectedto clock a CAGR of 4.3%over the next decade...

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3) Shift towards stringent sulphur specifications to drive demand for ULSD

Europe's attempt to reduce sulfur content in its road fuels, and its "dieselisation" of its carfleet, has long marked the region out as a premium place for ULSD (Ultra-low sulphurdiesel). Today, Europe's current road diesel to gasoline consumption ratio is 2x and isforeseen to reach 2.5x by 2015.

In order to meet this requirement, a total increase of 6.2mb/d of desulphurization capacitywill be added globally by the end of 2015. Most of the new capacity is likely to be added inAsia and the Middle East, with 2 mb/d and 1.9 mb/d respectively.

The retail price advantage of diesel over gasoline is likely to continue (diesel is currently~25-30% cheaper) because of sales tax differentials.

Globally, the current aim is to produce fuels with sulphur content below 10ppm, consequently,refiners worldwide are investing heavily to comply with such quality specifications.

4) Stricter marine bunker sulphur specificationsMarine diesel demand to surge owing to change in marine bunker sulphur specifications -International Maritime Organisation (IMO) has proposed a reduction in sulphur content inbunkers from 4.5% to 0.5% gradually by 2020. Realistically, to achieve 0.1% sulphur wouldrequire a move from using fuel oils to using diesel (Bunkers currently make up about 30% ofworld fuel oil market and % of global petroleum consumption)

Diesel cars in use (% of total vehicle fleet) **

Source: ACEA (** Select European countries include France, Germany, Italy, Spain & UK), OPEC, PINC Research

Upgradation capacity addition by Region

10

18

26

34

42

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

%

0.0 0.8 1.6 2.4 3.2 4.0

US & Canada

Latin America

Africa

Europe

FSU

Middle East

Asia-Pacific

mb/d

Conv ersion (4.1mb/d) Desulphurization(6.2mb/d) Octane units (1.6mb/d)

Petrol Diesel

RSP Ex - Tax Ex - TaxPrice Taxes RSP Price Taxes

India 63.7 37.7 26.0 41.3 33.7 7.6France 97.0 41.6 55.4 71.3 43.0 28.3German 98.2 40.2 58.0 75.0 44.6 30.4Italy 98.5 45.2 53.3 75.4 47.6 27.8Spain 85.2 43.6 41.6 68.9 46.5 22.4UK 98.7 40.1 58.6 84.6 42.5 42.2Japan 82.5 47.4 35.1 71.9 50.3 21.6Canada 58.1 41.0 17.1 57.1 43.6 13.5USA 43.6 38.8 4.8 46.6 41.0 5.6Thailand 60.7 35.6 25.1 43.3 35.6 7.7Pakistan 41.8 33.5 8.4 46.7 36.4 10.3

Source: IEA, Indianpetro, OPEC, PINC Research

Country Region 2010 2015

US & Canada 15 15

Latin America 1,270 460

Europe 15 10

Middle East 1,820 460

FSU 490 130

Africa 3,260 2,210

Asia-Pacific 480 260

Increasing demand for highquality Diesel...

RSP as on June 2011 On-road diesel sulphur content

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INDIAN GRM SHOULD TRADE AT A PREMIUM IN FUTUREIndia's product slate captures the growing diesel demand

With demand growth most likely driven by Asian diesel consumption, complex refiners inIndia can continue to see higher margins and high operating rates, which should help Indianrefining stocks (skewed heavily towards diesel production).

Arab light-heavy spread to recover

Currently, the price differential is USD3.8/bbl much below the peak of USD10/bbl in 2008.High demand for middle distillate and low demand for fuel oil in cargo and bunker market willlead to modest recovery in Light-Heavy spreads. As Indian refiners upgrade themselves toprocess heavier crudes, a recovery in Light-Heavy spread will benefit Indian GRM.

Indian product slate

Source: PPAC, Bloomberg, PINC Research

Asian product slate

Source: PPAC, Bloomberg, PINC Research

Others11%

LPG5% Naphtha

10%

Gasoline13%

Jet/kerosene9%

Diesel/VGO40%

Fuel oil23%

Fuel oil23%

LPG3% Naphtha

7%

Gasoline32%

Jet/kerosene19%

Diesel/VGO16%

Light-heavy spread to recover


Q311

Q211

Q111

Q410

Q310

Q210

Q110

Q409

Q309

Q209

Q109

Q408

Q308

Q208

Q108

$/bbl

0.0

2.5

5.0

7.5

10.0Singapore GRM Arab Light-Heav y spread

Increasing Light-Heavyspread to benefit IndianRefiners...

[email protected]


Refinery complexity standards have improved

Indian refineries have undertaken massive investments in lieu of the worldwide trend of therequirement of not only capacity expansions/ revamps, but maximization of distillates, theirquality improvement and upgrading the lower value bottom products. As a result, the refineriesin India are incurring capex to improve their Nelson complexity from 6-7x to 9-10x.

Nelson Complexity (NCI) for existing and upcoming refineries

C - Current Capacity B - Brownfield expansion G - Greenfield Expansion

0

4

8

12

16

IOC

(C -

54m

mt)

BPCL

(C -

22m

t)

HPCL

(C -

15m

mt)

MRP

L (C

- 11

.8m

mt)

CPCL

(C -

12m

mt)

EOL

(C -1

1mm

t)

RIL

(C -

33m

mt)

RPL

(SEZ

) (C

- 27m

mt)

Cals,

Hald

ia (G

- 5m

mt)

NOCL

, Cud

dalor

e (G

-6m

mt)

IOC,

Par

adip

(G -

15m

mt)

BPCL

, Bina

(G -

6mm

t)

HPCl

, Bha

tinda

(G -

9mm

t)

MRP

L (B

- 3m

mt)

EOL

(B -

7mm

t)

NCI

Avg. 6-7x

Avg. 9-10x


Average complexity toincrease from 6-7x to 9-10xin next 1-2 years...

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INDIA - GAINING PROMINENCE IN ASIAN REFINING SPACEIndia's share in Asian refining industry has been consistently growing post liberalisation in1991 led by share in demand increasing to 12% from 9% and capacity increasing to 13%from 7% in 1995. We expect the trend to continue as more capacities are being added andstrong demand is emerging from transportation sector.

Export as % of production has risen to 29% in 2011 from 8% in 2001. India is running intosurplus (54mmt) of petroleum products like MS, diesel, ATF and Naphtha which are exportedto developed and other Asian markets where emission norms are becoming more stringent.This surplus is expected to increase to only 64mmt by 2015.

Given the product supply growth at 5.7% annually for the next four years, our calculationssuggest that consumption will not be a problem as domestic demand remains strong at6.2% CAGR which means that ~80% of incremental supply (49mmt) will be consumedinternally, thus providing immunity from soft global products market.

Indian Refinery capacity as % of Asia

Source: BP Statistics, PINC Research

Indian consumption as % of Asia


0

1

2

3

4

5

1995

1997

1999

2001

2003

2005

2007

2009

mb/d

0%

4%

8%

12%

16%

20%India Ref Cap. % of Asia, RS

0

1

2

3

4

5

1995

1997

1999

2001

2003

2005

2007

2009

mb/d

0%

5%

10%

15%

20%

India Consm % of Asia, RS

Export as % of production

Source: PPAC, Crisil Research, PINC Research

Indian product surplus


29%27%25%

27%24%

0

15

30

45

60

2007 2008 2009 2010 2011

MMT

0%

6%

12%

18%

24%

30%

MS NaphthaATF HSDFO/LSHS OthersEx port as % of prod., RS

(25.0)

(5.0)

15.0

35.0

55.0

75.0

2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

MMT

LPG MS Naphtha ATF/ SKO HSD FO/LSHS Others

[email protected]


Domestic demand intact, despite soft global marketStrong consumption of middle distillate

Petroleum product consumption in India has grown at an average of 4.1% to 2.8mb/d (142mmt)from 2007 to 2011 and is expected to remain strong till 2015 (CAGR - 6.2%) driven by robustdemand for middle distillate (CAGR-7.6%).

Transportation fuel to lead the pack

Demand for petroleum products is robust led by transportation sector especially dieseldriven by strong sales in car and motorcycles which are historically growing at a CAGR of12% and 16% respectively. As a result, share of transportation fuels in total consumption isexpected to accelerate from 47% in 2007 to 61% in 2015.

Domestic distillate-wise demand


121 129 134 138 142 150 159169

180

0

40

80

120

160

200

2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

MMT

Light distillates Middle distillates Heav y distillates Others Total consumption

Transportation fuel as % of total consumption

61%60%59%57%56%54%

51%49%47%

0

25

50

75

100

125

2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

MMT


Domestic demand to clocka CAGR of 6.2%...

Proportion of transportationfuel to increase inconsumption mix...

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Demand for other products expected to remain strong

In India, transport fuels are clearly leading the growth due to the rapid expansion of personalvehicles and increasing volume of freight. LPG is also forecast to rise as we switch fromtraditional fuels and kerosene to LPG. Shift to natural gas has led to decline in naphthademand, however, in the petrochemicals sector, the usage of naphtha is likely to increase,as it offers a higher product yield than natural gas. Natural gas contains only a small proportionof the higher carbon fractions required for producing petrochemicals.

Refinery capacity expansion to cater to increasing demandIndia's installed refinery capacity as of 2011 is around 3.9mbpd (~193mmt) and this isexpected to go up by about 0.9mbpd (46mmt) by 2015.

Capacity utilization in India has been highest and this will continue to be ~95% to 100%considering the domestic demand for transportation fuel and high quality products thatcomply with international emission standards is expected to be robust.

Demand for other products

Source: Crisil Research, PINC Research

Refinery Utilisation in India

Source: PPAC, Company, PINC Research

Capacity Additions in IndiaUpcoming capacity MMT Comm Date NCI

IOC, Paradip 15 Q1 FY13 13.0

HPC, Bhatinda 9 Q3 FY12 9.6

MRPL, Mangalore 3 Q1 FY13 9.1

EOL, Jamnagar 7 Q2 FY12 11.8

Spice Refinery, Haldia 5 Q4 FY11 11.2

NOCL, Cuddalore 6 Q4 FY12 8.7

96% 95%101%

88%101% 102%

0

60

120

180

240

FY06 FY07 FY08 FY09 FY10 FY11P

MMT

0%

30%

60%

90%

120%Crude Thru Capacity % Utilisation, RS

CAGR CAGR Consump.FY07-11 FY11-15 MMT Remarks

MS 11.2% 6.6% 35 Includes replacement of 3mmt by cheaper CNG in 2015

HSD 8.5% 8.6% 100 Diesel prices are ~35% cheaper than petrol

ATF 6.3% 9.5% 13 Driven by growth in air travel market

Naphtha -6.3% 8.6% 25 Driven by petchem segment

LPG 7.2% 3.6% 12 LPG penetration to increase from ~50% to 56% in 2015

SKO -1.6% -1.3% 9 Govt. policy to surrender kerosene for new LPG connection

Product

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GLOBAL DEMAND SCENARIODemand led by Non-OECDAn incremental 5.1mb/d is expected to add up to current oil consumption of ~89.2mb/d(CAGR - 1.4%) by 2015 which is mainly driven by Non-Oecd (China, India, Africa, ME andS. America) on account of favourable demographics, urbanisation and industrialization inemerging markets. Essentially this means that over two-thirds of this growth will come fromdeveloping regions such as Asia, with China witnessing the largest expansion.

China - a major growth driver

Out of the total incremental demand of 5.1mb/d, it is widely expected that 2.1mb/d iscontributed from China. The share from China has increased to 33% of the total Asiandemand and 10% of the world demand.

Demand for transportation fuels led by huge population and rising per capita income inurban areas, will continue to be the main driver for oil consumption growth.

Incremental Demand breakup


Demand breakup (region-wise)


-1.1

6.2

5.1

-2.0 0.0 2.0 4.0 6.0 8.0

OECD

Non-OECD

Total Demand

mb/d

-0.6-0.4

-0.1-0.3

0.12.1

1.41.1

1.00.7

-1.5 -0.5 0.5 1.5 2.5mb/d

Africa

Middle East

Latin America

Other Asia

ChinaEurope

FSU

Pacific

Europe

North America

Chinese consumption as % of World


Middle dist. as % of total Chinese Consump


0.0

1.0

2.0

3.0

4.0

5.0

1995

1997

1999

2001

2003

2005

2007

2009

mb/d

20%

26%

32%

38%

44%

50%Middle distillates % of total consm, RS

0.0

2.0

4.0

6.0

8.0

10.0

1995

1997

1999

2001

2003

2005

2007

2009

mb/d

0%

3%

6%

9%

12%

15%

Chinese oil consump. Share of World, RS

[email protected]


OECD demand maturesDemand for gasoline is likely to reduce in long-term following high retail prices and the shiftto more efficient, smaller cars. Further, industrial demand for oil is also under threat from 1)high oil prices and 2) large US natural gas supplies

OECD's oil demand averaged ~46mb/d in 2011, up 400kb/d from 2009 levels, but projectedto resume its structural decline to the tune of 1.1mb/d by 2015. OECD oil demand has beenon a structural decline since 2005 and has already lost almost 1.4mb/d in the last four yearsalone. However, the drop was very significant in 2009 due to global economic crisis which isnow gradually shrinking to 44.7mb/d by 2015.

Demand shift towards middle distillateLooking at the product categories as a whole, the future demand trend emphasizes a shifttowards middle distillates and light products. Transportation fuel (2/3rd of incremental oildemand) provide impetus to demand growth primarily road transportation, followed by aviation.

Product-wise demandGasoline Growth rate is low because of the higher share of North America and

Europe in total gasoline demand (56% in 2009). Therefore, demand declinesin these regions have a large impact on the global picture, offsettingincreases in other regions with 1%-4% growth rates.

Diesel for transport Growing most rapidly in emerging markets and tightening qualityspecifications especially in Europe

Gasoil for heating Negatively impacted by the shift towards the increased use of natural gasfor heating and electricity.

Jet fuel for aviation Driven by growth in air travel market mainly in developing countries

Kerosene for heating Will continue to be displaced by alternative fuels in most regions

Naphtha Driven mainly by petrochemicals, volume increases in Asia, albeit from alower base more than compensating for the stagnant demand in OECDregions.

Source: IEA. OPEC, PINC Research

OECD Oil Demand


44.744.949.3 47.6 45.6 46.2 45.8 45.6 45.5

0.0

15.0

30.0

45.0

60.0

2007 2008 2009 2010 2011 2012 2013 2014 2015

mb/d

North America Europe Pacific Total OECD demand

Structural decline in OECDdemand due to economicconcerns and increasinggas supply...

Demand for Diesel toremain robust...

[email protected]


Globally, Gasoil for transport purposes (CAGR- 2%) and naphtha for petrochemicals (CAGR-2%) will drive the demand for middle and light products.

Product-wise demand, 2009

Source: OPEC, PINC Research

Product-wise demand, 2015

Source: OPEC

Other9.3

Ethane/LPG8.5

Naphtha5.5

Gasoline21.2

Jet/kerosene6.3

Gasoil/diesel24.3

Residual fuel9.5

Other9.8

Ethane/LPG9.0

Naphtha6.2

Gasoline22.4

Jet/kerosene6.8

Gasoil/diesel27.4

Residual fuel9.4

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GLOBAL CAPACITY SCENARIOCan the refining capacity addition match with increasing Asiandemand?Global CDU capacity is expected to increase by 6.7mb/d to 99.5mb/d (CAGR - 1.8% and95% of this in the non-OECD), with further additions in upgrading (4.2mb/d) anddesulphurisation (6.2mb/d) by 2015.

Largest increase comes from China followed by other Asian countries (India specifically -0.9mb/d and Middle East - 1.1mb/d).

Middle Eastern capacities is heavily biased towards end of the forecast period, with theexpected commissioning of two mega power projects, namely Jubail in Saudi and Ruwais inUAE, adding some 800kb/d in 2014/15.

Refinery shut-downs in developed markets

Refineries in developed markets are facing tough times as domestic demand is dwindling,from 49.3mb/d in 2007 to 45.8mb/d in 2011 and is further expected to shrink by 1.2mb/d by2015, as energy efficiency and demographics shift continue. Uptill now, these refiners haveremained competitive by exporting surplus products to energy-hungry, developing neighbors,but have since seen steady declines as global recession and slump in oil demand coincidedwith a glut of new regional refining capacity. Thus, refiners had to drastically cut runs tosustain profitability and have announced closures and capacity reductions.

Refinery closures may offset excess capacityOECD North America Total N. American shut-down amount to 330kb/d.

OECD Europe Total 270kb/d has been permanently shut. In Feb 2010, French Oil majorTotal announced it will permanently shut Dunkirk plant. ConocoPhilips refinery(260kb/d) could still be closed due to poor economics.

OECD Pacific Region dominated by Japan where since 2009, nearly 400kb/d of capacityhas either been shut or scheduled to close before 2011, and a further740kb/d reduction has been announced.


Capacity increase mostly innon-OECD with Chinacontributing ~1/3rd...

Total incremental capacity - 6.7mb/d


0.6

0.9

0.7

1.1

0.2

2.3

0.9

3.2

0.0 0.8 1.6 2.4 3.2 4.0

Total North America

Total S. & Cent. America

Total Europe & Eurasia

Total Middle East

Total Africa

China

India

Total Asia Pacific

mb/d

Refinery closures anongoing phenomena tosupport GRM...

[email protected]


Refinery Utilisation rates to slow down

Between 2011 and 2015, global oil demand is expected to increase at a CAGR of 1.4%,whereas global refining capacities are likely to increase at a CAGR of 1.8% during the sameperiod. Hence, refinery capacity additions outpace expected demand growth in 2010-2015period and global capacity utilisation rates are expected to fall to ~80%.

Utilisation rates in mature OECD market will remain weak till further capacity is shut, whilenon-OECD, and in particular growth centres of ME, China and Latin America, manage tokeep rates relatively stable.

In Asia, where significant capacities are added, less complex refiners will struggle to sourcecrude resulting in slightly lower utilization rates compared to current excess rates.

Global refinery runs


70%

75%

80%

85%

90%

2006 2007 2008 2009 2010

America Europe Middle East Africa Total Asia Pacific

Global capacity utilisation todecline from CY14 due toincremental capacity ...

Refinery Utilisation %


81%81%83%84%85%82%80%

84%85%85%86%85%83%81%

50.0

65.0

80.0

95.0

110.0

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

E

2012

E

2013

E

2014

E

2015

E

mb/d

50%

60%

70%

80%

90%Capacity Utilisation, RS

[email protected]


ARE THE UPCOMING REFINERIES SUITABLYCONFIGURED?India's refinery configuration has a fairly good share of cracking capacity. In mid-2010, India'sratio of combined cracking to CDU was 43%, much higher than Japan and Asia-Pacific butlower than the share in US (55%). The second characteristic of India's configuration is thatIndia has sharply increased its hydrotreating/ hydrorefining capacity in recent years to addressthe tightening specifications for diesel and to a lesser extent, gasoline.

A total of 4.3 mb/d of new conversion capacity will be added to the existing global refiningbase in the period 2010-2015, driven primarily by expanding diesel demand, most of thiscapacity will come from hydro-cracking units (1.7 mb/d), followed by coking (1.5 mb/d) andFCC units (1 mb/d).

The Asia-Pacific region comprises the largest concentration of existing conversion projects,with some 1.3 mb/d set to be located in the region. This reflects the general demand growthfor light products, including gasoline, and the need to incrementally process mainly mediumsour crude oils.

Global comparison of Refinery configurationmb/d China Japan India Asia-Pacific US

CDU 10.98 4.45 3.75 28.77 17.76

FCC/RCC 2.60 0.91 0.73 5.40 5.66

Hydrocracking 1.02 0.15 0.33 2.06 1.68

VBR/TC 0.26 0.00 0.17 0.81 0.03

Coking 1.32 0.12 0.39 1.95 2.42

Cat reforming 0.79 0.75 0.28 3.06 3.58

HDT, hydrorefining 3.17 2.57 1.26 9.32 13.93

FCC/RCC-to-CDU ratio 24% 20% 20% 19% 32%

HDC-to-CDU ratio 9% 3% 9% 7% 9%Cracking-to-CDU ratio 47% 26% 43% 35% 55%

Reforming-to-CDU ratio 7% 17% 8% 11% 20%HDT/HDR-to-CDU ratio 29% 58% 34% 32% 78%

Start of 2010 data.'VBR = visbreaking; 'TC = thermal cracking. 'HDT = hydrotreating.Source: FACTS Global Energy and Oil & Gas Journal (US data), PINC Research

Upgradation capacity addition by Region


Conversion capacity addition by Region


0.0 0.8 1.6 2.4 3.2 4.0

US & Canada

Latin America

Africa

Europe

FSU

Middle East

Asia-Pacific

mb/d

Conv ersion (4.1mb/d) Desulphurization(6.2mb/d) Octane units (1.6mb/d)

0.0

0.4

0.8

1.2

1.6

US &Canada

LatinAmerica

Africa Europe FSU MiddleEast

Asia-Pacific

mb/d

Coking FCC HCC

Increasing demand ofAuto fuels resulting inrefinery upgradation...

[email protected]


GLOBAL CRUDE SUPPLY SCENARIOGlobal oil supply is expected to increase from ~89.3 mb/d to ~94.2 mb/d by 2015, a netincrease averaging +1.2 mb/d annually. Incremental supplies are evenly split between OPECcrude (1.7mb/d), OPEC gas liquids (1.4mb/d) and non-OPEC total oil (1.8mb/d).

1. Non-OPEC supply will be mainly from high cost areas, for example, Canada (+1.3MBD), Brazil (+1.0 MBD) and the US (+0.5 MBD). Russian ESPO Blend will be adominant supply of crude oil in Asia, particularly the Northern Asia region after theESPO Phase 2 pipeline completes by 2013.

2. While OPEC crude is subject to quotas NGL production is not. Rapid natural gasdevelopments drive OPEC natural gas liquid (NGL) and condensate supply higher by1.4 mb/d to 7.3 mb/d in 2015, based on major expansion from the UAE, Qatar, Iran andSaudi Arabia.

Non-OPEC supply adds 1.8mb/d (CAGR 0.8%)


OPEC supply adds 1.7mb/d (CAGR 1.4%)


OPEC NGL adds 1.4mb/d (CAGR 5.6%)


OPEC spare capacity to stabilise at 5-6% of global demand


48

50

52

54

56

2007 2008 2009 2010 2011 2012 2013 2014 2015

mb/d

26

28

30

32

34

2007 2008 2009 2010 2011 2012 2013 2014 2015

mb/d

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013 2014 2015

mb/d

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013 2014 2015

mb/d

0%

2%

4%

6%

8%

Incremental supplies comingevenly from OPEC, Non-OPEC and OPEC-NGL ...

[email protected]


Global Oil supply should become slightly lighter but sourer by CY15Output will become lighter as weighted average API rises from 33.2 to 33.5 as productionrises in Latin America, Middle-East and FSU combined with production decline in North seaoil. In terms of sulphur content, as more barrels of Canadian bitumen production reach themarket, available feedstock become sourer, reaching 1.14%. (IEA)

India's diversification towards African crudeIn 2011, only 18% of India's crude requirements were met by domestic production. Over 60-70% of the supply is met by Middle-Eastern crude which is mainly heavy and sour in nature.

Africa is also of reasonable importance as a source of crude oil for India, supplying 10-15%of requirements. Nigeria is the main African source, responsible for ~80% of African crudeimports.

Current gravity and sulphur


N. America

S. America

Europe

Middle EastAfrica

Asia Pacific FSU

20

25

30

35

40

0 0.4 0.8 1.2 1.6 2

Sulphur

API

Crude sources CY08 (%)

*Includes crude sources for PSU refineries only Source: India Srategy paper on crude supply, PINC Research

Crude sources CY11 (%)

ME79

West Africa9

Africa (Others)4

Black sea & Far East9

ME74

West Africa14

Black sea & Far East5

Africa (Others)7

Global crude basket tobecome lighter and sourergoing forward ...

[email protected]


Projects Undertaken by PSUs to process HS crudeIndian refiners are investing in order to upgrade refineries so as to handle high sulphur crudein future as the capability to handle such feed stocks will provide the refiners a tool toleverage the cost aspect of the profit equation, considering the fact that crude purchaseaccounts for a major portion of the operating expenses of a refinery.

IOC Gujarat Refinery Coking Unit (3700 TMTPA), Diesel Hydro-treatment Unit (2200 TMTPA),Hydrogen Generation Unit (68 TMTPA) and Sulphur Recovery Units (2x300ton per day)

Haldia Refinery Hydrocracking Unit (1700 TMTPA), Hydrogen Generation Unit (75 TMTPA),Sulphur Recovery Units (2x300 ton per day)

BPCL Mumbai Refinery "Refinery Modernization Project (RMP)" in 2005 to process up to 6 MMTPAof HS crude

Kochi Refinery Phase II (to 9mmtpa), to process about 63% HS crude (Current - 53% HScrude).

HPCL Visakh Refinery Upgrading & secondary processing facilities to enhance High Sulphur Crudeprocessing

CPCL Residue upgrading CDU/VDU revamp is planned to increase HS CrudeProcessing

MRPL Phase-Ill expansion along with installation of high severity FCC, DelayedCoker Unit along with Coker Hydrotreater Unit and Gas OilHydrodesulphurisation Units.


Indian plaers positionedto benefit with increasingsweet-sour spread...

[email protected]


CRUDE PRICE OUTLOOKEmerging markets in much better shapeNet oil demand is expected to grow by 5mb/d during 2011-2015 (1.4% annually). Demand ismainly driven by non-OECD countries, with China alone accounting for 39% of the total andother Asia a further 27%. OECD demand contracts by 1.2mb/d (-0.7% annually) led byslowing growth in North America and Europe region.

OPEC remains a driving force of crude supplyWe believe OPEC could support prices should they fall below its desired level (USD90/bb).Saudi's production has risen by nearly 2mb/d since the beginning of 2010 and we believethe kingdom would be willing to cut production by a similar amount to support prices.

Growth in global oil demand

Source: Company, PINC Research

0.0

25.0

50.0

75.0

100.020

07

2008

2009

2010

2011

2012

2013

2014

2015

mb/d

Total OECD demand Total Non-OECD demand

Saudi Arabia makes up for Libyan crude cut


0.0

2.5

5.0

7.5

10.0

2009

2010

4Q1

0

1Q1

1

2Q11

Apr

11

May

11

Jun

11

Jul

11

Aug

11

Sep

t 11

mb/d Liby a Saudi

Strong demand in emergingmarket supporting crudeprices...

OPEC maintains musclepower on crude pricing...

[email protected]


OPEC spare capacity to normaliseOPEC spare capacity to set a ceiling so as to cap oil price spike in the medium term.

Although 2011 and 2012 will remain a tight market in terms of oil supply, we see sparecapacity returning to more normalized levels of ~5% of demand by 2015 (considering Libyanproduction resumes).

OPEC to maintain its control over pricesOPEC accounts for 35-40% of global crude oil production and more than 60% of world'sproven reserves. OPEC countries have frequently indicated that the lowest crude oil pricewith which they are comfortable is USD70-80/bbl so as to maintain their annual budgets.

OPEC spare capacity to stabilise at 5-6% of global demand


0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013 2014 2015

mb/d

0%

2%

4%

6%

8%

Break-even prices for OPEC

Source: Apicorp, 2011, PINC Research

Algeria

Angola

Ecuador

Iran

Iraq

Kuw ait

Liby a

Nigeria

Qatar

Saudi UAE Venezuela

40

60

80

100

120

0.00 4.00 8.00 12.00Petroleum production (mb/d)

Fisc

al br

eak-

even

pric

e ($

/bbl)

OPEC spare capacity tostabilise at ~5% post Libyanproduction...

OPEC countries budgetsuggest crude price bottomat ~USD70-80/bbl...

[email protected]


Non-OPEC supplyNon-OPEC is the key to increase in supply levels as OPEC is the marginal supplier andtries to adjust the supply to match the requirements in the market. However, increases inNon-OPEC supply (+1.8mb/d by 2015) are likely to lag behind our estimates of 1.2-1.5 mb/d increase in global demand annually.

Seaway reversal leads to a sharp contraction in WTI-Brent spreadThe main reason for this was the sale of ConocoPhillips' Seaway pipeline to Enbridge andthe subsequent decision to reverse it. Seaway could add a potential 0.3-0.4mb/d offtakefrom Cushing by 2013, with the initial 0.15mb/d being shipped by Q2 2012. While this maynot seem to be very huge in terms of quantity, what it does is unlock the perception thatCushing is entirely land locked with no infrastructure to move crude out to the Gulf Coast.

We believe that oil prices will average USD100/bbl in the medium term. However, we alsosee an increased possibility of wide swings of upto USD10/bbl either side of this level as oilinvestors react to political and economic market developments which continue to face muchuncertainty.

Non OPEC supply adds 1.8mb/d (CAGR 0.8%)


48

50

52

54

56

2007 2008 2009 2010 2011 2012 2013 2014 2015

mb/d

WTI - Brent spread


-10

0

10

20

30

Jan-

00

Sep-

11

Jun-

11

Apr-1

1

Jan-

11

Nov-

10

Aug-

10

Jun-

10

Mar

-10

Jan-

10

Oct-0

9

Jul-0

9

May

-09

Feb-

09

Dec-

08

Sep-

08

Jul-0

8

Apr-0

8

Feb-

08

$/bbl

Incremental contributionfrom Non-OPEC remainsequivalent to OPEC ...

Reducing WTI-Brent spreadsuggests crude pricestabilising at USD100/bbl...

[email protected]


SNAPSHOT OF CURRENT SCENARIOSingapore GRM YTD stands at USD8/bbl driven by transportation fuel cracks. However, forthe first time in the month of November after a long significant uptrend, we are beginning tosee signs of weakness as gasoline has started to give up its strength at ~USD1.3/bbl downfrom an average of USD15.3/bbl YTD.

Naphtha crack Gasoline crack

Gasoil/Diesel crack Fuel Oil crack

OECD demand China demand

Other Asia demand Non-OECD demand

Source: IEA, Bloomberg, PINC Research

Global Oil demand in 2Q/3Q CY11 has been quite low in the last few quarters. Global oildemand growth estimates by IEA are being consistently downgraded in the last few months.

40

42

44

46

48

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

mb/d

8

8.7

9.4

10.1

10.8

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

mb/d

9.5

10

10.5

11

11.5

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

mb/d

3638

4042

4446

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

mb/d

-10

-5

0

5

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct-1

1

Nov-

11

$/bbl

0

8

16

24

32

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct-1

1

Nov-

11

$/bbl

15

20

25

Jan-

11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct-1

1

Nov-

11

$/bbl

-20

-15

-10

-5

0

5Ja

n-11

Feb-

11

Mar

-11

Apr-1

1

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct-1

1

Nov-

11

$/bbl

Mangalore Refinery & Petrochemicals

Chennai Petroleum Corporation

Essar Oil

C O M P A N I E S

MANGALORE REFINERY & PETROCHEMICALS


BUYCMP Rs62TP Rs88

INIT

IATI

NG

CO

VER

AGE

07 December 2011



GETTING BIGGER AND BETTERMRPL, a Mini-Ratna PSU is undertaking series of projects which shall makeit to the league of complex refineries. Capacity addition of ~30% along with~67% enhancement in complexity index should boost the future profitability.Full impact of ongoing capex should materialise in FY14 with partial benefitcoming in FY13. We initiate our coverage on MRPL with a BUY rating.

Ramp-up in Capacity: MRPL is expanding its throughput capacity from 11.8mmtpato 15.4mmpta with CDU/VDU revamp in phase-I refinery (+0.6mmtpa) andinstallation of new phase-III refinery (+3mmtpa).

Improvement in complexity: Post phase-III refinery, MRPL’s Nelson complexityindex should increase from ~6 currently to ~9. It will improve further to ~10 postcommissioning of ongoing polypropylene project. Distillate yield should increaseto ~78% with reduction in bottom products. HSD, a high demand productinternationally should contribute ~45% in the product.

Multiple incremental capex: MRPL is putting a Polymerization unit to convertthe Propylene produced in PFFC into high margin Polypropylene. With increasingcapacity and to decrease its dependence on Mangalore port, MRPL is setting up aSingle Point Mooring (SPM) facility with an objective to receive crude oil in VLCCtankers. Advantage of economies of scale, access to high acidic cheaper Africancrude and savings in demurrage should provide an advantage.

Concerns: Delay in refinery-III commissioning beyond Mar’12, undiversified crudesourcing portfolio (ME ~90%, Iran ~60%), volatility in crude oil price/ internationalGRM/ USD-INR exchange rate in the current weak global environment may impactthe earnings substantially.

VALUATIONS AND RECOMMENDATIONWe expect EBITDA to clock a CAGR of ~26% from FY11 to FY14 despite ~58%de-growth in FY12 (on accounts of rupee depreciation). PAT is likely to show CAGRof ~18% for the same period due to higher depreciation and interest cost. At theCMP of Rs62, the stock is trading at P/E of 8.7 & 5.7 and EV/EBITDA of 5.9x and3.6x for FY13 and FY14 respectively. We initiate coverage on MRPL with a ‘BUY’rating and a target price of Rs88 based on 7.5x FY13E EV/EBITDA.

STOCK DATA

RELATIVE PERFORMANCE

Market cap Rs109bnBook Value per share Rs37Shares O/S (F.V. Rs10) 1762mnFree Float 11.4%Avg Trade Value (6 months) Rs62mn52 week High/Low 85/55Bloomberg Code MRPL INReuters Code MRPL.BO

PERFORMANCE (%)

1M 3M 12MAbsolute (2.2) (9.5) (14.8)Relative 2.2 (7.6) 1.3

32

Initiating CoverageSector: Oil & GasBSE Sensex: 16,805

40

55

70

85

100

Dec-10 Mar-11 Jun-11 Aug-11 Nov -11

MRPL BSE (Rebased)

KEY FINANCIALS (Rs mn)

KEY RATIOS

FY10 FY11 FY12E FY13E FY14ENet Sales 319,452 389,567 513,116 561,257 586,247 YoY Gr. (%) (16.5) 21.9 31.7 9.4 4.5 EBITDA 19,253 20,482 8,653 28,158 41,239 EBITDA Margin (%) 6.0 5.3 1.7 5.0 7.0 Net Profit 11,122 11,765 4,749 12,580 19,188 YoY Gr. (%) 4.7 5.8 (59.6) 164.9 52.5

Dil. EPS (Rs) 6.3 6.7 2.7 7.1 10.9 ROCE (%) 23.7 22.5 7.9 15.5 21.4 RoE (%) 21.5 19.4 7.1 17.2 22.4 PER (x) 9.8 9.3 23.0 8.7 5.7 EV/Net sales (x) 0.3 0.3 0.3 0.3 0.3 EV/EBITDA (x) 5.3 4.9 18.2 5.9 3.6

[email protected]

RESEARCHRESEARCHRESEARCHRESEARCHRESEARCH Mangalore Refinery & Petrochemicals

COMPANY BACKGROUNDMangalore Refinery and Petrochemicals Limited (MRPL) was incorporated in 1988 as a JVbetween HPCL and AV Birla Group at Mangalore, Karnataka. Phase-I refinery with capacityof 3.69mmtpa got commissioned in Mar’ 96 and the phase-II came on-stream in Sept’ 99 toincrease the total capacity to 9.69mmtpa. Initial journey of MRPL was thorny as deterioratingfinancials resulted in mounting losses and Debt/Equity climbed closer to ~10 in 2003. Lateron ONGC came as a savior as it bought AV Birla Group’s stake in 2003. Subsequently, withdebt restructuring and capital infusion, MRPL had a turnaround and currently has the Mini-Ratna status. MRPL bagged the Petrofed ‘Refinery of the Year’ Award honoring performancein petroleum refining in India (operational efficiency, along with safety and environmentalnorms) during the year 2009-10.

Currently, ONGC and HPCL hold 71.62% and 17% stake respectively in MRPL. In 2011,through de-bottlenecking, MRPL increased its nameplate capacity to 11.82 mmtpa and hasNelson index of 6.0, which is better than India’s average.

PRODUCT PORTFOLIO

MRPL has operated consistently at higher capacity utilisation for the last six years averagingat ~125%. The refinery is designed to have maximum of middle distillate of ~55% with totaldistillate yield of ~72%. It also exports ~40% of its products mainly Naphtha, FO, MixedXylene and ATF.

CRUDE SOURCING PORTFOLIO

The company has the capability to process light to heavy and sour to sweet Crudes with APIgravity ranging from 24 to 46. However, the current crude souring portfolio is highly dependenton Iran. Around 3/4th of the current portfolio are high Sulphur crude.

Contribution (%) of different products


HSD43.2

FO15.9

Bitumen2.6

Sulfur0.4

Fuel & Losses6.6LPG2.4

MS9.5

Naptha7.4

Mixed Xylene0.7SKO

2.5ATF9.3

Current crude sourcing contracts for MRPLCompany Quantity (mn MT)

National Iranian Oil company 7 mmt +/- 10%Abu Dhabi National Oil Company 2 mmt +/- 10%Saudi Arabian Oil Company 1 mmt +/- 10%Kuwait Petroleum Corporation 1 mmt +/- 5%ONGC 1.6 mmt +/- 10%Spot Market Remaining


Shareholding pattern

(in %) Sep-11

Promoter 88.6

FII 1.3

DII 2.2

Others 7.9

Product slate designed forhigher middle distillate ...

Crude sourcing is donemostly from Middle-East(~90% of requirement)...

[email protected]


STRATEGY IN RIGHT DIRECTION

Robust demand in Asia is resulting in capacity addition of refineries in India and Chinaregion. To remain competitive and to match with future requirements of increasing demandfor Middle (HSD) and light distillate (MS) products, existing facilities are upgrading themselves.Spread between sweet/sour and light/heavy is resulting in spurt of complex refineries. MRPL'scurrent capex is in line with future requirement as there will be an increase in distillate yieldalong with ~30% capacity addition.

MRPL is implementing various projects to increase its capacity and improve its distillateyield. Capacity of phase-I refinery will be increased by ~0.6 mmtpa through de-bottlenecking(under hook-up) and 3 mmtpa of new capacity will be added under phase-III refinery. Thecompany is adding new value added and high demand product like Polypropylene into itsportfolio. Due to under penetration and robust GDP growth, demand for petrochemical productsis expected to remain robust in India. These projects will take total capacity of MRPL to15mmtpa with Nelson index improving from 6 to ~10. Distillate yield is also expected toincrease from ~72% to ~78%. It is also setting up a Single Point Mooring (SPM) facility inthe sea of Mangalore Port area with an objective to receive cheaper high TAN crude oil inVery Large Crude Carrier (VLCC) tankers. Along with GRM advantage, SPM will also helpMRPL in diversifying its crude sourcing basket which is currently highly dependent on Iran.

Snapshot of on-going projects

Current Facility

Phase III Refinery Project Polypropylene Project SPM Project

Capacity additionand

Improvement in yield

New Value addedproduct

Increased usage ofcheaper Crude

Improvement in GRM &higher profitability

Capacity - 15.4 mmtpaComplexity - 9.9

Distillate Yield - 78%

Capacity - 11.8 mmtpaComplexity - 6.0

Distillate Yield - 72%


Capacity increase by ~30%and Nelson complexity indeximprovement by ~67%...

Full benefits of all theongoing project to startfrom FY14 ...

[email protected]


DETAILS OF UPCOMING PROJECTS

CDU/VDU-I Revamp

Revamp of phase-I refinery to increase efficiency and improvement in yield to match Euro-IVrequirements got commissioned in Oct'11. Modifications should also result in higherthroughput to the extent of ~0.6 mmtpa from phase-I refinery. Total capex incurred in CDU/VDU-I revamp is Rs2.4bn.

Phase III Refinery Project

MRPL is currently implementing Phase III Refinery Project at its Mangalore facility. Theobjective of this project is:

Increasing refining capacity to 15.4mmtpa

To be able to process more of low price high Sulphur/high acid, heavy crude oils

Increasing distillate yield

Producing value added products like Propylene and Paraxylene

Up-gradation of its total diesel pool to superior (Euro III/ IV) grade

Upgrading low value Fuel oils

The project will result in decreased production of products like Naphtha and Fuel oil forwhich demands are steadily declining since Fertiliser and Power sector have reduced theconsumption of these fuels and are moving towards efficient and cost effective Natural gasoptions. The estimated capex for the project is Rs122bn and planned Debt/Equity is 2:1.Around 88% of the total capex will be incurred in INR hence cost over run is not expecteddue to recent rupee depreciation. MRPL will also get tax benefit u/s. 80-IB of the income taxfor the incremental profits coming through phase-III, if they are able to commission theproject before Mar'12.

Along with these units there will also be facilities like Hydrogen generating unit, Captive powerplant, hydrotreating unit and other offsite facilities. Post phase-III refinery, complexity should becloser to 9.0 (current is ~6.0) and after Polypropylene project it should be around 9.9.

The Project has achieved an overall progress of 88.5% as on 15th Oct, 2011. Progress hasbeen expedited keeping in mind the target of commissioning before Mar'12 and themanagement is confident of commissioning of major equipments in time.

Polypropylene project

MRPL is putting Petrochemical FCC unit of 2.2 mmpta capacity under Phase-III expansion.This has been designed to maximize the production of Propylene and should generate 450ktpa of Polymer grade Propylene. The Polypropylene project under implementation will havea Polymerization unit that will convert the Propylene produced in PFFC into Polypropylene(PP). Margins for MRPL will improve as a result of this value added products.

Major equipments of Phase III Project:Description of New Equipments Capacity

Petro FCCU, incl Propylene recovery utility (PRU) PFCCU : 2.2 mmtpa

PRU : 0.35 mmtpa

Delayed Coker Unit, DCU 3.0 mmtpa

FCC Naphtha Splitter Unit 0.55 mmtpa

Diesel Hydrotreater Unit, DHDT 3.7 mmtpa

CDU/VDU 3 mmtpa + LPG TRT + ATF Merox


Capacity addition by 3mmtpato 15.4mmtpa, withimprovement in yield...

Complexity improving from~6 to ~10 resulting in highervalue added products...

[email protected]


Robust GDP growth and lower per capita consumption for petrochemicals are expected toresult in strong growth of Polypropylene in India. Its wide range of usage like Molding products,Film & sheet, Fiber, pipes etc ensures demand from national as well as international market.As per various industry reports, global market for PP is expected to grow at 3-4% and Indianmarket is likely to grow at 10-12% in the coming years. Expected capex for PP project is~Rs18bn and is likely to get commissioned by end of FY13.

Single Point Mooring Project

MRPL is setting up a Single Point Mooring (SPM) facility in the sea of Mangalore Port areawith an objective to receive crude oil in Very Large Crude Carrier (VLCC) tankers. Thisproject will help the company in the following ways:

Lower freight cost due to economies of scale

Access to high acidic cheaper African crude

Lower dependence on the existing Mangalore port which is already congested and willnot be able to handle additional traffic post expansion and hence savings in demurrage

VLCC has capacity of 280-300 TMT against the current Aframax tankers capacity of 80-90TMT.

Prices and spread of Propylene and Polypropylene (USD/ mt)


Addition in margins withhigher value addedproducts...

Lower dependency onMangalore port and accessto cheaper crude...

0

500

1000

1500

2000

2500

Jan-

08

Apr-0

8

Jul-0

8

Oct-0

8

Jan-

09

Apr-0

9

Jul-0

9

Oct-0

9

Jan-

10

Apr-1

0

Jul-1

0

Oct-1

0

Jan-

11

Apr-1

1

Jul-1

1

Oct-1

1

Poly propy lene Propy lene Naphtha


0

45

90

135

180

Nov

09

Jan

10

Mar

10

May

10

Jul

10

Sep

10

Nov

10

Jan

11

Mar

11

May

11

Jul

11

Sep

11

Middle East/East (VLCC) West Africa/East (VLCC) Indonesia/US West Coast (Aframax ) Mediterranean/North-West Europe (Aframax )

Charter Rates Nigerian Crude spread to Brent (USD/bbl)


-1.5-1.0-0.50.00.51.01.52.02.53.03.54.0

05/Jul/11 05/Aug/11 05/Sep/11 05/Oct/11

Bonny Light Dated - Brent Dated Escravos Dated - Brent DatedForcados Dated - Brent Dated

[email protected]


Change in Product Mix after implementation of Projects


-

12.0

24.0

36.0

48.0

LPG MS

Napt

ha

Mixe

d Xy

lene

Prop

ylene

SKO

ATF

HSD

FO

Bitu

men

Petc

oke

Sulfu

r

Fuel

& Lo

sses

Current Mix (%) Mix in FY15 (%)

The company has received all necessary clearances from the Ministry of Environment andother Govt. bodies for the Project. Expected capex for SPM project is ~Rs11.5bn and islikely to get commissioned in FY14. Management is confident of saving in the range of~USD0.5/bl at gross profit after implementation of SPM project.

IMPROVEMENT IN PRODUCT SLATE

With implementation of Phase-III refinery project and Polypropylene project the distillateyield for MRPL is expected to increase substantially from ~72% levels to ~78%. Nelsenindex will increase from 6 currently to ~10 after these expansions. Resultantly, substantialincrease in profitability for MRPL is expected.

Proportion of Fuel oil should decrease sharply post capex from ~15% currently to <5% withincreasing proportions of better margin products. Another important feature of future slate isthat HSD should contribute ~45%. We have discussed in our industry section that GRM fornext few years should be driven by high quality Diesel and therefore MRPL is well positionedto take advantage of the situation. In coming years MRPL's GRM should trade at significantpremium to Singapore GRM which has slate skewed towards MS (HSD is ~16% and MS is~32% in slate).

Summary of up-coming projectsProject Capex Improvement in Completion Current Status

(Rs bn) complexity schedule (work completed(Nelson Index) as on 15 Oct 11)

CDU/VDU-I Revamp 2.4 - Oct'11 Hooked up

Phase III Refinery Project 122 6.0 to 8.9 Mar'12 88.4%

Polypropylene project 18 8.9 to 9.9 Mar'13

SPM Project 11.5 - Mar'13 46.9%


Complexity to increase from6 to 10 post implementationof all ongoing projects...

Distillate yield to increasefrom 72% to 78% andreduction in FO by ~10%...

[email protected]


ROBUST PAST PERFORMANCEConsistent higher capacity utilisation

MRPL had a name plate capacity of 9.69 mmtpa till FY10 which they have always operated atan average capacity utilization of ~125%. In FY11, the name plate capacity is increased to11.82 and then also Utilisation level is expected to remain at ~110%. The company is consistentlyworking on improving energy efficiency as can be seen in the declining trend of Refinery EnergyIndex (MBTU/BBL/NRGF). In FY10, MRPL bagged the Petrofed 'Refinery of the Year' Awardhonoring their operational performance among Refineries in India and was ranked 1st in "Mostconsistent safety performer in Refineries" for the year by Oil Industry Safety directorate.

Diversified Product marketing

MRPL exports around 40% (revenue wise 30-35%) of its products mostly Naphtha, MixedXylene, ATF and FO. In domestic market, sales are mostly done through Oil marketing companies(OMC). Company also does direct sales of small quantity in Karnataka and its adjoining states.

MRPL is the sole supplier to State Trading Corporation, Mauritius and supplies 1.1 mmtpa(agreement is upto Jun'13). It has formed a JV with Shell for marketing of ATF. Post decontrolof Petrol in June'10, MRPL has worked out its Retail Business plan to set up 122 outlets.However, in the current environment of high crude prices they follow a cautious approach.Currently, MRPL is operating two retail outlets (branded as HiQ) in Karnataka. The thirdoutlet at Mangalore is under construction.

Capacity Utilisation and Crude Throughput


Distillate Yield and Operational Efficency


Gross Revenue Breakup


Sales Quantity Breakup


0.0

1.0

2.0

3.0

4.0

Q1FY08

Q3FY08

Q1FY09

Q3FY09

Q1FY10

Q3FY10

Q1FY11

Q3FY11

Q1FY120%

50%

100%

150%

200%Throghput (mmt) Cap Utilization (%)

-

20.0

40.0

60.0

80.0

FY07 FY08 FY09 FY10 FY1154.0

57.0

60.0

63.0

66.0Fuel&Loss (%) Distillate Yield (%) Energy Index , RHS

33.330.727.2

36.130.1

66.769.372.869.963.9

-

20.00

40.00

60.00

80.00

FY07 FY08 FY09 FY10 FY11

Ex port Domestic

40.647.237.8 36.9 41.6

52.859.4 62.2 63.1

58.4

-

20.0

40.0

60.0

80.0

FY07 FY08 FY09 FY10 FY11

% Ex port % Domestic

Consistent capacityutilisation of more than100%...

Strong export presenceaugur well for increasingthroughput capacity...

[email protected]


Location advantage for MRPL- Cushion from future upcoming capacity in IndiaNo distribution network can pose some challenge to MRPL, as all OMCs in India are addingcapacity. However, none of the new capacities are coming in the vicinity of MRPL. So webelieve that in the current scenario of robust demand for auto fuels, OMCs will keep sourcingfrom MRPL as it will be freight advantageous for them. It can be seen from the chart belowthat most of the existing and upcoming facilities are concentrated on eastern coast andCentral & Northern India.

ROBUST FINANCIALS TO SUPPORT AGGRESSIVE CAPEX PLANMRPL is incurring an aggressive capex of ~Rs160bn, which will increase the gross block to3x from ~Rs76bn (in FY11) to ~Rs230bn by FY14. As of Mar'11, the company has Net Debt/equity at around zero, which provides significant leverage to the company. Around 70% ofthe upcoming capex will be funded through debt and even at peak debt levels, Net Debt/Equity for MRPL should be below 1.0.Strong cash flow from operations (CFO) further supportsMRPL's capex plan. In the last five years it has generated CFO of ~Rs100bn.


Supporting Debt/Equity ratio


Strong cashflow from operations


BHATINDA(9.0) PANIPAT

(12.0+3.0)

MATHURA(8.0)

BARODA(13.7)

BINA(6.0)

BARAUNI(6.0)

BONGAIGAON(2.35)

DIGBOI(0.65)

GUWAHATI(1.0)

NUMALIGARH(3.0)

JAMNAGAR(RIL 33.0+29.0)ESSAR 10.5+3.5

MUMBAI(BPC 12.0)(HPC 5.5+2.4)

MANGALORE(11.8+3.6)

KOCHI(7.5+2.0)

HALDIA(6.0+1.5)

PARADEEP(15.0)

VISAKH(7.5+0.8)

TATIPAKA(0.08+0.08)

CHENNAI(10.5+0.6)

NARIMANAM(1.0)

-

70

140

210

280

FY06

FY07

FY08

FY09

FY10

FY11

FY12

E

FY13

E

FY14

E

FY15

E

FY16

E

(0.6)

-

0.6

1.2

1.8Gross Block (Rs bn) Net Debt/ Equity

-

20

40

60

80

FY06

FY07

FY08

FY09

FY10

FY11

FY12

E

FY13

E

FY14

E

FY15

E

FY16

E

Capex (Rs bn) CFO (Rs bn)

No other refineries in thevicinity provide locationaladvantage despite OMCsincreasing capacity...

[email protected]


Increasing throughput


Substantial jump in GRM


EBITDA trend - jump after capex


PAT trend - jump after capex


-

6.0

12.0

18.0

24.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12

E

FY13

E

FY14

E

FY15

E

FY16

E

-

40

80

120

160Throughput (mn MT) Capacity Utlzn (%), RHS

(8.0)

(4.0)

-

4.0

8.0

12.0

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FY07

FY08

FY09

FY10

FY11

FY12

E

FY13

E

FY14

E

FY15

E

FY16

E

GRM (USD/bl) Prem./ (Dis.) to SingaporeSingapore GRM

-

12.0

24.0

36.0

48.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12

E

FY13

E

FY14

E

FY15

E

FY16

E

(100.0)

(50.0)

-

50.0

100.0

150.0

200.0

250.0EBITDA (Rs bn) EBITDA Grow th (%)

-

7.0

14.0

21.0

28.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12

E

FY13

E

FY14

E

FY15

E

FY16

E

(120.0)

(60.0)

-

60.0

120.0

180.0PAT (Rs bn) PAT Grow th (%)


PERFORMANCE TO IMPROVE POST CAPEX

MRPL should commission the Phase-III Refinery by Mar'12 with which the throughputnameplate capacity will increase to 15.4 mmtpa. Favourable slate and robust demand augurthat company should be able to achieve 100% utilization level in FY14.

After commissioning of all ongoing projects, Nelson index will increase from current levels of~6 to ~10. With increase in value added products we expect GRM to improve substantiallyand achieve level of 9/9.5 by FY14/FY15. However, GRM will also depend on prevailinginternational environment in future years.

GROWTH IN PROFITABILITY

The profitability of the company is expected to surge post implementation of on-going projects.We expect EBITDA to grow at a CAGR of ~26% from FY11 to FY14 despite 35-40% de-growth in FY12 (on accounts of rupee depreciation). PAT is likely to clock a CAGR of ~17%for the same period due to higher depreciation & interest cost and ~37% YoY de-growth inFY12.

GRM to trade at a premiumto Singapore GRM postFY13...

[email protected]


Improvement in Margins


Returns to increase


-

2.0

4.0

6.0

8.0

10.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12

E

FY13

E

FY14

E

FY15

E

FY16

E

EBITDA Margin (%) PAT Margin (%)

5.0

15.0

25.0

35.0

45.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12

E

FY13

E

FY14

E

FY15

E

FY16

E

ROCE (%) ROE (%)


IMPROVING RETURNS

Post commissioning of Phase-III refinery (expected by end of FY12) and other two projectsthat is SPM & Polypropylene project (likely to be on-stream from FY14), margins shouldimprove substantially for MRPL. EBITDA margin should see a significant spurt as Nelsonindex for MRPL is increasing from ~6 to ~10. We expect ROCE and ROE to stabilise at~20% post commissioning.

LIKELY BENEFITS - NOT YET FACTORED IN VALUATIONS

Tax benefit u/s 80-IB: If MRPL commission the Phase-III refinery before Mar'12 they willget tax benefit under section 80-IB of the income tax. As a result there will be a tax holidayfor seven years for the incremental earnings coming from the incurred capex. There will bea capacity addition of 3mmtpa (+25%) and improvement in GRM for the complete facility. Alltogether effective tax rate should come to around ~24% and there may be substantialincrease of 12-14% in PAT.

Sales Tax deferment benefit: MRPL is in talks with Karnataka State Govt. for benefitsrelated sales tax deferment, concession on CST and concession on entry tax. If thesebenefits come in, there may be boost to GRM.

We have not factored benefits due to above mentioned factors; however, management isconfident of commissioning of CDU/VDU of Phase-III refinery by Mar'12. For other benefitswe are awaiting for the clarity from the state government.

ROCE/ ROE to stabalise at~20% post commissioningof all projects...

Income tax and sales taxdeferal benefit to boost theprofitability...

[email protected]


1 year forward EV/EBITDA


1 year forward P/E


1 year forward P/Book Value


Assumptions




Phase-III refinery is likely to get commissioned by Mar'12 and other two projects (Polypropyleneand SPM) should come on-stream by end of FY13. Hence full impact of all ongoing projectsis expected only by FY14. We expect EBITDA to clock a CAGR of 27% from FY11 to FY14despite 58% de-growth in FY12 on accounts of rupee depreciation. PAT is likely to show aCAGR of ~18% for the same period due to higher depreciation and interest cost.

At the CMP of Rs62, the stock is trading at P/E of 8.7x & 5.7x, EV/EBITDA of 5.9x and3.6x and P/B of 1.4x and 1.2x respectively for FY13 and FY14.

We initiate coverage on MRPL with 'BUY' rating and a target price of Rs88 based on7.5x FY13E EV/EBITDA multiple. We have given slight premium to multiple (average1-yr forward EV/EBITDA for last 5 years is 7.4x) as full benefits are coming in FY14.At our target price, EV/EBITDA for FY14 will be 4.8x and P/E will be 12.3x and 8.1xfor FY13E and FY14E respectively.

Even on DCF, with cost of equity of 13.7% and terminal growth rate of 0%, fair value for FY13stands at Rs92/ share.

10x13x16x19x

7x

0

40

80

120

160


FY10 FY11 FY12E FY13E FY14E

Capacity (mmtpa) 9.69 11.82 12.12 13.92 15.42

Throughput (mmtpa) 12.45 12.64 12.91 14.62 16.04

Capacity Utilsn (%) 128.5 106.9 106.5 105.0 104.0

Singapore GRM(USD/bbl) 3.56 5.15 7.50 6.50 6.00

MRPL GRM (USD/bbl) 5.23 5.83 3.00 6.50 8.50

INR-USD 47.5 45.6 48.0 47.0 46.0

Brent (USD/bbl) 69.8 86.8 110.0 100.0 90.0

4x

6x

8x

10x

12x

-

40

80

120

160


1.0x

1.5x

2.0x

2.5x

3.0x

We initiate coverage with a‘BUY’ rating with an upside of42% in 1 year...

-

75,000

150,000

225,000

300,000


[email protected]


RISK AND CONCERNS

Delay in project: Project costs have already increased due to delay in execution. Anyfurther delays will severely impact the returns. Missing the income tax benefits u/s 80-IB willbe a major drag.

Un-diversified crude sourcing portfolio: Currently, MRPL sources most of its cruderequirements from Middle-East (~90%) with major dependency on Iran (to the extent of~60%). Any issue in sourcing from these regions may impact their throughput.

No supporting marketing setup: MRPL sells ~65% of products in domestic market mostlythrough OMCs. In the current scenario when all OMCs are adding capacity over the next2-3 years there can be increased competition. However, high demand for auto fuels and thelocation advantage which MRPL has provide some cushion against the risk.

Macro uncertainties may deter the performance: Uncertainties over global economy maycause volatility in crude oil price, international GRM and USD-INR exchange rate, whichmay impact the earnings substantially. H2FY12 results are likely to be muted on account ofdepreciating rupee.

Phase III commissioningbeyond Mar’12 will be amajor setback...

Global economic uncertaintymay impact earningssubstantially...


Year Ended March (Figures in Rs mn)

Mangalore Refinery & PetrochemicalsRESEARCHRESEARCHRESEARCHRESEARCHRESEARCH


10x

[email protected]

13x16x19x

7x 4x

6x

8x

10x

12x

44

INCOME STATEMENT FY10 FY11 FY12E FY13E FY14ENet sales 319,452 389,567 513,116 561,257 586,247 Growth (%) (16.5) 21.9 31.7 9.4 4.5 Total Expenditure 304,199 371,121 506,463 535,299 547,207 Gross Profit 20,102 25,528 14,606 34,125 47,657 Growth (%) (35.3) 27.0 (42.8) 133.6 39.7 EBITDA 19,253 20,482 8,653 28,158 41,239 Growth (%) (8.9) 6.4 (57.8) 225.4 46.5 Other income 2,712 1,848 3,990 2,604 2,718 Depreciation 3,893 3,914 3,974 8,490 11,082 EBIT 18,071 18,416 8,669 22,273 32,875 Interest paid 1,155 1,043 1,736 3,636 4,448 PBT 16,916 17,373 6,933 18,637 28,427 Total tax 5,795 5,608 2,184 6,057 9,239 Net Profit 11,122 11,765 4,749 12,580 19,188 Growth (%) 4.7 5.8 (59.6) 164.9 52.5 Diluted EPS (Rs) 6.3 6.7 2.7 7.1 10.9 Growth (%) 4.7 5.8 (59.6) 164.9 52.5

CASH FLOW STATEMENT FY10 FY11 FY12E FY13E FY14EPre-tax profit 16,918 17,375 6,933 18,637 28,427 Depreciation 3,902 3,930 3,974 8,490 11,082 Total tax paid (4,511) (8,237) (2,427) (6,523) (9,949) Chg in w orking capital 12,479 7,233 8,944 998 (1,004) Other Adjustments (1,346) (882) (64) 1,736 2,448 Cash flow from oper. (a) 27,442 19,419 17,360 23,337 31,004 Capital ex penditure (10,820) (35,616) (72,800) (27,240) (8,882) Chg in inv estments (10,014) 15,069 - - - Other inv esting activ ities 1,795 2,624 1,800 1,900 2,000 Cash flow from inv. (b) (19,040) (17,923) (71,000) (25,340) (6,882) Free cash flow (a+b) 8,402 1,496 (53,640) (2,003) 24,122 Equity issued 0 - - - - Net debt raised (2,829) (1,394) 47,399 8,000 (11,600) Interest Paid (1,162) (1,043) (1,736) (3,636) (4,448) Div idend Paid (2,461) (2,452) (1,649) (2,680) (4,123) Cash flow from fin. (c) (6,452) (4,889) 44,014 1,684 (20,171) Net chg in cash (a+b+c) 1,950 (3,393) (9,626) (318) 3,951

BALANCE SHEET FY10 FY11 FY12E FY13E FY14EEquity capital 17,618 17,618 17,618 17,618 17,618 Reserv es & Surplus 38,347 47,671 50,771 60,671 75,736 Shareholders' funds 55,965 65,289 68,389 78,289 93,354 Total Debt 16,964 15,570 62,969 70,969 59,369 Deferred tax liabiity 6,602 3,472 3,229 2,763 2,052 Capital Employed 79,531 84,330 134,587 152,021 154,776 Net Block 32,924 30,896 30,362 145,907 162,065 CWIP 18,603 54,674 124,034 27,240 8,882 Cash & cash Eq. 23,440 24,151 14,525 14,207 18,158 Net other Current Assets (11,672) (26,340) (35,284) (36,282) (35,278) Inv estments 16,237 948 948 948 948 Total assets 79,531 84,330 134,587 152,021 154,776

KEY RATIOS FY10 FY11 FY12E FY13E FY14EEBITDA Margin (%) 6.0 5.3 1.7 5.0 7.0 Net margin (%) 3.5 3.0 0.9 2.2 3.3 Div idend Yield (%) 1.9 1.9 1.3 2.1 3.2 Net Debt/ Equity (x ) (0.1) (0.1) 0.7 0.7 0.4 Asset Turnov er Ratio (x ) 4.0 4.6 3.8 3.7 3.8 Working capital cy cle (day s) (31) (43) (30) (31) (31) ROCE (%) 23.7 22.5 7.9 15.5 21.4 RoE (%) 21.5 19.4 7.1 17.2 22.4 EV/Sales (x ) 0.3 0.3 0.3 0.3 0.3 EV/EBITDA (x ) 5.3 4.9 18.2 5.9 3.6 PER (x ) 9.8 9.3 23.0 8.7 5.7 Price/ Book (x ) 2.0 1.7 1.6 1.4 1.2

0

40

80

120

160

Apr-06 Sep-07 Jan-09 Jul-10 Dec-11-

75,000

150,000

225,000

300,000


CHENNAI PETROLEUM CORPORATION

RESEARCHRESEARCHRESEARCHRESEARCHRESEARCHIN

ITIA

TIN

G C

OVE

RAG

E

07 December 2011



AGGRESIVE PLANS, AWAITING APPROVALSCPCL has capacity of 11.5mmtpa and is one of the most complex refineriesin India with Fuel, Lube, Wax and Petrochemical feed stocks productionfacilities. The company is raising its capacity through revamp and lookingforward for residual up-gradation project to increase its distillate yield.Full impact of planned capex should materialise in FY16. We initiate ourcoverage on CPCL with an 'ACCUMULATE' rating.

Euro-IV upgradation: To meet the auto fuels Euro-IV specifications in metros(Chennai and Bangalore) and Euro-III specifications in other cities, CPCL is upgradingits Manali facility with a capex of Rs26bn. NHDT/ISOM units for MS (Jan'11) andthe DHDT unit for Diesel (May'11) has already got commissioned. Other utilitiesand offsite facilities should get commissioned by May'12.CDU/VDU-I Revamp: The company is enhancing its Manali capacity by 0.6mmtpato 4.3 MMTP by revamping the CDU/VDU. Project is expected to get commissionedin Q2FY13.Aggressive capex plans- awaiting approvals: CPCL is looking for Resid up-gradation project to increase the distillate yield of the Manali refinery from thepresent value of ~69 % to ~77%. Along with the distillate yield improvement, thisproject should also result in higher usage of low cost High Sulphur crude from thepresent level of 67% to 83%. This project should result in GRM expansion ofUSD2/bl. This project should be completed within 33 months from the zero date.Environmental clearance is yet awaited; however, management is confident of gettingit soon. Capex envisaged for the project is ~Rs32bn.Strong dividend history: CPCL has strong dividend payout ratio in the range of35-40% for the last six years (except FY09, when they had loss and dividend waszero). We expect similar strong trend to continue with some exception in FY12.Concerns: Delay in environmental approvals, volatility in crude oil price/ internationalGRM/ USD-INR exchange rate in the current weak global environment may impactthe earnings substantially.VALUATIONS AND RECOMMENDATIONWe expect EBITDA to clock a CAGR of 4.4% from FY11 to FY14 due to 70% de-growth in FY12 due to rupee depreciation. PAT is likely to remain flat for the sameperiod due to higher depreciation and interest cost. At the CMP of Rs185, thestock is trading at P/E of 5.7x & 5.4x and EV/EBITDA of 6.4x & 6.0x for FY13Eand FY14E respectively. We initiate coverage on CPCL with an 'ACCUMULATE'rating and a target price of Rs215 based on 6.7x FY13E EV/ EBITDA.

STOCK DATA


Market cap Rs28bnBook Value per share Rs253Shares O/S (F.V. Rs10) 149mnFree Float 33%Avg Trade Value (6 months) Rs14mn52 week High/Low 254/174Bloomberg Code MRL INReuters Code CHPC.BO

PERFORMANCE (%)

1M 3M 12MAbsolute (5.0) (7.4) (21.7)Relative (0.7) (7.9) (6.9)

45


TOP SHAREHOLDERSName % holdingLIC of India 5.9Bajaj Allianz Life Ins. Comp. 4.8New India Assurance Comp 2.6GIC of India 2.2United India Ins. Comp. 1.3

*As on Sept 30, 2011


KEY RATIOS

FY10 FY11 FY12E FY13E FY14ENet Sales 249,726 331,078 438,437 422,789 374,617 YoY Gr. (%) (21.9) 32.6 32.4 (3.6) (11.4) EBITDA 8,532 12,019 3,636 13,030 13,683 EBITDA Margin (%) 3.4 3.6 0.8 3.1 3.7 Net Profit 6,032 5,115 1,727 4,835 5,118 YoY Gr. (%) (251.8) (15.2) (66.2) 180.0 5.8

Dil. EPS (Rs) 40.5 34.3 11.6 32.4 34.3 ROCE (%) 12.5 12.2 0.8 9.8 10.1 RoE (%) 18.5 14.2 4.5 12.0 11.8 PER (x) 4.6 5.4 16.0 5.7 5.4 EV/Net sales (x) 0.3 0.2 0.2 0.2 0.2 EV/EBITDA (x) 8.0 5.8 23.2 6.4 6.0

ACCUMULATECMP Rs185TP Rs215

160

195

230

265

300

Dec-10 Mar-11 Jun-11 Sep-11 Nov -11

CPCL BSE (Rebased)

[email protected]

RESEARCHRESEARCHRESEARCHRESEARCHRESEARCH Chennai Petroleum Corporation

COMPANY BACKGROUNDChennai Petroleum Corporation Ltd (CPCL), erstwhile known as Madras Refineries Ltd (MRL)was incorporated in 1965 as a JV between Government of India (GOI), American Oil Company(AMOCO) and National Iranian Oil Company (NIOC) with a share holding of 74%, 13% and13% respectively. Currently, Indian Oil Corporation (IOC) and NIOC hold 51.89% and 15.4%respectively in CPCL.

In its long journey, CPCL increased its initial capacity of 2.5mmtpa to the present 11.5mmtpa.Currently it has two facilities, one at Manali, Chennai (10.5mmtpa) and another atNagapattinam at Cauvery basin (1.0mmtpa). Manali plant is among the complex refineriesin India with Nelson complexity of 7.3.

PRODUCT PORTFOLIO

CPCL produces a number of Petroleum and Specialty products like Lube oil, LPG, MS,HSD, SKO, ATF, Naphtha, FO and Bitumin. These find usage in sectors like transport,fertilisers, power, railways, petrochemicals and industries.

Crude Sourcing Portfolio: Crude sourcing is done at parent level i.e. through Indian OilCorporation (IOC). CPCL meets ~85% of its crude requirement through imports. The companybeing complex refinery uses ~70% of high sulphur crude.

Contribution (wt %) of different products


HSD36.9

ATF6.7

LABFS0.6

Naphtha6.6

MS9.0

LOBS1.9

FO14.5

ASPHALT5.0

Misc.1.5 F&L

9.2 LPG3.6

Propylene0.3

SK4.1

Journey so far….


1965 1969 1984 1985 1993 1994 20021994 2003 2004 2011

2.5mmtpacapacitycommissioned at Manali

AMOCO divestedits stake

Lube capacitydoubled to270tmpta

Cauvery refinerycapacity doubledto 1.0mmtpa

Manali capacityincreased to9.5mmtpa alongwith GRMimprovement

Company wasformed

Companyincreased to5.6mmtpa

Cauvery Refinery0.5mmtpa

Initial Public offer Oil jettycommissioned totransport oil fromPY-03

Capacityexpanded to 11.5mmtpa


(in %) Sep-11Promoter 67.3

FII 0.0

DII 18.8

Others 13.9

Product slate designed forhigher middle distillate ...

[email protected]


DETAILS OF ONGOING PROJECTSEuro-IV upgradation: To meet the auto fuels Euro-IV specifications in metros and Euro-IIIspecification in other cities, CPCL is incurring a capex of Rs26bn at its Manali facility. Thecompany commissioned Naphtha Hydro-treater / Isomerisation (NHDT/ISOM) units for MSproduction in Jan'11 and the Diesel Hydro-treater (DHDT) unit for Diesel quality Upgradationin May'11. Other utilities and offsite facilities along with a new Hydrogen generation unit isexpected to be completed by Dec'11 and will be commissioned in May'12 shutdown.CDU/VDU-I Revamp: CPCL is increasing its Manali facility capacity by 0.6mmtpa by revampingthe Crude Distillation Unit/ Vacuum Distillation Unit (CDU/VDU) in the refinery to raise thecapacity from 3.7 to 4.3 MMTP. Total capex planned for the project is Rs3.3bn and was earlierscheduled to be commissioned in May'12. However, as per EIL's latest project monitoringreport, the project is running behind schedule and there may be a delay of 3-4 months.DETAILS OF UPCOMING PROJECTSResidue upgradation: CPCL is looking to increase the distillate yield of the Manali refineryfrom the present value of ~69% to ~77%. Capex envisaged for the project is ~Rs32bn. Alongwith the distillate improvement, project should also result is higher usage of low cost HighSulphur crude from the 67% to 83%. As per the management, the project should result inGRM expansion of USD2/bbl. Project should get completed within 33 months from the zerodate. Environmental clearance is yet awaited; however, the management is confident ofgetting it soon.42" crude pipeline: CPCL is planning to implement a new 42" Crude oil pipeline project tomitigate the risk associated with transportation of Crude Oil through the existing 30" Crude OilPipeline from Chennai Port to Manali Refinery. Expected capex for the project is ~Rs1.3bn andshould be completed within 18 months from the zero date (Environment clearance is awaited).New Brown-field capacity: The company has further plans to put a brown-field expansionat Manali Refinery. Pre-Feasibility Report is under preperation. The configuration for thenew refinery will be chosen in such a manner that the new units along with the existingrefinery should yield best output.STABLE HISTORICAL PERFORMANCEConsistent higher capacity utilisation: CPCL has two facilities at Manali (10.5mmtpa) andCauvery (1.0mmtpa). Manali capacity was increased by 1mmtpa in FY10. Manali facility isoperating consistently above 100% capacity utilization and is one of the most complex andintegrated refineries with three crude distillation units, Diesel Hydro De-sulphurisation unit,Fluid Catalytic Cracking unit, Furfural Extraction unit, Lube Hydrofinishing unit, NMP Extractionunit, Hydro-Cracker unit, Propylene unit and Petrochemical Feedstock unit. Distillate yield forCPCL is around 69% and the company has consistently improved on energy parameter.

Capacity Utilisation and Crude Throughput


Distillate Yield and Operational Efficency


0.0

30.0

60.0

90.0

120.0

FY06 FY07 FY08 FY09 FY10 FY110.0

3.0

6.0

9.0

12.0

Cap utilsn-Manali (%) Cap utilsn-Cauv ery (%)Throughput (mn MT), RS

-

20.0

40.0

60.0

80.0

FY06 FY07 FY08 FY09 FY10 FY1164.0

68.0

72.0

76.0

80.0

Distillate Yield (%) Fuel & Loss (%)Energy Index , RS

INVESTMENT RATIONALE

Capacity to increase by0.6mmtpa and Euro IVupgradation in place...

Residue upgradation plannedto increase distillate yield to~77%, awaiting approvals...

[email protected]


Strong marketing network through parent company: IOC is the major shareholder ofCPCL with ~52% stake. MRPL exports around 40% (revenue wise 30-35%) of its productsmostly Naphtha, Mixed Xylene, ATF and FO. In domestic market, sales are mostly donethrough Oil Marketing Companies (OMCs). The company also does direct sales of smallquantity in Karnataka and its adjoining states.

NEAR TERM PRESSURE DUE TO PLANNED CAPEX

CPPL has a capex plan of ~Rs51bn in five years period from FY12 to FY16, which willincrease the gross block to 1.8x from ~Rs62bn (in FY11) to ~Rs115bn by FY16. As ofMar'11, the company has Net Debt/ equity at around 1.1. Poor performance in H1FY12 andwith problems lying ahead, cash flow from operations is likely to be disappointing in FY12and should result in net debt/ equity increasing to ~1.5. Planned capex should increasecapacity by 0.6mmtpa (Q2FY13) and GRM improvement due to residue up-gradation shouldbe visible only from FY15/FY16. Hence the net debt/ equity ratio should remain higher at~1.2 till FY15. We have not yet factored planned brown-field expansion.

Quantity wise marketing Breakup


Direct marketing is done throughpipeline to neighboring industries

Marketing through IOC is done atRTP prices in 200km radius

Coastal movement is to places likeMumbai, Bangalore in west cost andsome time even Haldia on east coast

Naphtha and Fuel oil form majorportion in exported products

Coastal movement10%

Export10%

Direct Marketing4%

Through IOC76%

Debt/Equity ratio at higher side


Muted CFO adding to problems


0

35,000

70,000

105,000

140,000

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

FY16E

-

0.40

0.80

1.20

1.60Gross Block (Rs mn) Net Debt/ Equity

(24,000)

(12,000)

0

12,000

24,000

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

FY16E

10,000

25,000

40,000

55,000

70,000Capex (Rs mn) CFO (Rs mn) Net Debt (Rs mn)

Proportion of domestic salesis 90%, of which ~76% isthrough IOC network...

Near term stress in cashflowdue to low profitability andongoing capex ...

[email protected]


PERFORMANCE TO IMPROVE POST ALL ONGOING CAPEX

CPCL is increasing its Manali refinery capacity by 0.6mmtpa resulting in total capacity of12.1mmtpa (11.1 mmtpa, Manali + 1.0 mmtpa, Cauvery). Incremental capacity should comeon-stream from Q2FY13. With strong domestic demand, we expect throughput to increasesteadily and GRM should also improve post FY15 due to residual up-gradation project.

After commissioning of all ongoing projects, Nelson index will increase from the currentlevels of ~7.3 to ~8.5. With increase in distillate and higher usage of sour crude, CPCLGRM should trade at a premium to Singapore GRM from FY15. However, GRM will alsodepend on prevailing international environment going ahead.

PRESSURE ON PROFITABILITY

We expect profitability to remain under pressure in FY12 due to increasing interest rate,sharp depreciation in rupee and ongoing constraints at Madras port. EBITDA is expected tode-grew by ~70% YoY in FY12, however, there should be a steady growth in EBITDA fromFY13. We expect situation to be slightly different for PAT. After de-growth of ~67% in FY12,there will be recovery in PAT, however, it will remain under pressure due to increasingdepreciation and interest burden.

Increasing throughput


Substantial jump in GRM


-

3.0

6.0

9.0

12.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

FY16E

0

30

60

90

120Throughput (mmtpa) Capacity Utilzn (%), RS

(6.0)

(2.0)

2.0

6.0

10.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

FY16E

(6.0)

(4.0)

(2.0)

-

2.0

GRM (USD/bl) Sing. GRM (USD/bl)Prem./ (Disc.) to Sing. GRM

EBITDA trend - jump after capex


PAT trend - jump after capex


(6,000)

1,000

8,000

15,000

22,000

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

FY16E

-700

-450

-200

50

300EBITDA (Rs mn) YoY (%), RS

(6,000)

1,000

8,000

15,000

22,000

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

FY16E

-400

-250

-100

50

200PAT (Rs mn) YoY (%), RS

Capacity to increase by0.6mmtpa to 12.1mmtpafrom May’12...

Planned capex to startcontribution from FY15...

[email protected]


MUTED RETURNS IN NEAR FUTURE

Major portion of Euro-IV project (capex Rs26bn) has been commissioned in CY12 andremaining will come on-stream in CY13. However, along with increasing depreciation andinterest cost there has not been significant improvement in margins due to upgraded autofuels. This should result in CPCL's bottom-line to be under pressure. We expect ROE toincrease to ~15% level only by FY15/FY16 post commissioning of residue up-gradationproject.

FAVOURABLE VALUATION PARAMETERS

CPCL has a strong dividend paying history with payout ratio in the range of 35-40% for thelast six years (except FY09, when they had loss and dividend was zero). We expect similarstrong trend to continue with some exception in FY12. Strong dividend yield makes CPCL asafe investment avenue.

With correction of ~10% in stock prices in last three months has resulted in CPCL tradingat a discount to its book value. Currently the stock is trading at ~0.8x its book value onFY12 and ~0.7x its book value on FY13 earnings.

Improvement in Margins going forward


Returns to increase in future


(5.0)

(1.0)

3.0

7.0

11.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

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FY16E

EBITDA Margin (%) PAT Margin (%)

(15.0)

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30.0

45.0

FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

FY16E

ROCE (%) ROE (%)

Strong Dividend Yield (%)


Attractive on Price/Book Ratio (1 yr forward)


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2.5

5.0

7.5

10.0FY06

FY07

FY08

FY09

FY10

FY11

FY12E

FY13E

FY14E

FY15E

FY16E

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12.0

24.0

36.0

48.0Div idend Yield (%) Pay out Ratio (incl tax ), RS

0.4x

0.7x

1.0x

1.6x

1.3x

Near term pressure onmargins and returns...

Cheaper valuation onP/B and strong dividendhistory ...

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6

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[email protected]


1 year forward EV/EBITDA


1 year forward P/E



Sharp weakening in INR against USD (~15% YTD) has resulted in heavy losses for refineryplayers in H1FY12. Oct/ Nov'11 development signals continuing problems. Adding to thewoes, none of the on-going or planned capex may add to profitability for CPCL in the nearfuture. Part implementation of Euro IV up-gradation has also not added to GRM. This maylead to problems in managing cash flows.

We expect EBITDA to clock a CAGR of mere 4.4% from FY11 to FY14 due to ~70% de-growth in FY12 (on account of rupee depreciation). PAT is likely to remain flat over the sameperiod due to higher depreciation and interest charges.

At the CMP of Rs185, the stock is trading at P/E of 5.7x & 5.4x, EV/EBITDA of 6.4x and6.0x and P/B of 0.7x and 0.6x respectively for FY13E and FY14E.

We initiate coverage on CPCL with 'ACCUMULATE' rating and a price target ofRs215 based on 6.7x FY13E EV/EBITDA (median 1-yr forward EV/EBITDA for last 5years is 7.4x). At our target price, EV/EBITDA for FY14 will be 6.3x and P/E will be6.6x and 6.3x respectively for FY13E and FY14E.

Even on DCF, with cost of equity of 12.5% and terminal growth rate of 0%, fair value for FY13stands at Rs214/ share.

4x6x8x

12x10x

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Assumptions


FY10 FY11 FY12E FY13E FY14E

Capacity (mmtpa) 10.50 11.50 11.50 12.10 12.10

Throughput (mmtpa) 10.06 10.75 10.81 11.62 11.62

Capacity Utilsn (%) 95.8 93.5 94.0 96.0 96.0

Singapore GRM (USD/bbl) 3.56 5.15 7.50 6.50 6.00

CPCL GRM (USD/bbl) 4.75 5.02 3.00 5.25 5.50

INR-USD 47.5 45.6 48.0 47.0 46.0

Brent (USD/bbl) 69.8 86.8 115.0 100.0 90.0

We initiate coverage with an‘ACCUMULATE’ rating withan upside of 16% in 1 year...

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RISK AND CONCERNS

Delay in Environmental clearances: Further delay in environmental clearances for Residualup-gradation and pipeline project may result in increase in Project costs.

Competition due to new refinery in Tamil Nadu: Nagarjuna Oil Corporation Ltd. with aninitial capacity of 6mmtpa is planned to get commissioned by Mar'12. This facility is locatedat Cuddalore, Tamil Nadu and is planned to expand to 15mmtpa in future. The competitionmay intensify for CPCL as ~80% of its products are sold in ~200km radius.

Macro parameters may falter the performance: Volatility in crude oil price, internationalGRM and sharp movement in USD-INR exchange rate may impact the earnings substantially.

Delay in project approvalswill be a major setback...

Global economic uncertaintymay impact earningssubstantially...

Chennai Petroleum Corporation



Chennai Petroleum CorporationRESEARCHRESEARCHRESEARCHRESEARCHRESEARCH


[email protected]

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12x

53

INCOME STATEMENT FY10 FY11 FY12E FY13E FY14ENet sales 249,726 331,078 438,437 422,789 374,617 Growth (%) (21.9) 32.6 32.4 (3.6) (11.4) Total Expenditure 241,195 319,059 434,801 409,759 360,934 Gross Profit 16,768 19,923 11,857 21,676 22,224 Growth (%) 79.1 18.8 (40.5) 82.8 2.5 EBITDA 8,532 12,019 3,636 13,030 13,683 Growth (%) (612.9) 40.9 (69.7) 258.3 5.0 Other income 2,351 1,306 813 976 1,171 Depreciation 2,671 3,145 3,680 3,952 4,322 EBIT 8,211 10,180 769 10,054 10,532 Interest paid 1,374 2,545 2,312 2,837 2,894 PBT 6,838 7,635 (1,542) 7,217 7,638 Total tax 805 2,520 (3,269) 2,381 2,521 Net Profit 6,032 5,115 1,727 4,835 5,118 Growth (%) (251.8) (15.2) (66.2) 180.0 5.8 Diluted EPS (Rs) 40.5 34.3 11.6 32.4 34.3 Growth (%) (251.8) (15.2) (66.2) 180.0 5.8

CASH FLOW STATEMENT FY10 FY11 FY12E FY13E FY14EPre-tax profit 6,838 7,635 (1,542) 7,217 7,638 Depreciation 2,671 3,145 3,680 3,952 4,322 Total tax paid (1,033) (1,307) 3,269 (2,381) (2,521) Chg in w orking capital (24,855) (2,349) (7,979) 4,983 4,044 Other Adjustments 1,405 2,527 2,312 2,837 2,894 Cash flow from oper. (a) (14,974) 9,651 (261) 16,608 16,377 Capital ex penditure (8,886) (7,173) (11,396) (10,656) (10,467) Chg in inv estments (6) 12 - - - Other inv esting activ ities 11 43 - - - Cash flow from inv. (b) (8,882) (7,119) (11,396) (10,656) (10,467) Free cash flow (a+b) (23,855) 2,532 (11,656) 5,952 5,910 Equity issued - - - - - Net debt raised 25,300 1,446 14,819 (1,281) (1,131) Interest Paid (1,395) (1,915) (2,312) (2,837) (2,894) Div idend Paid (2) (2,084) (697) (1,743) (1,743) Cash flow from fin. (c) 23,902 (2,552) 11,810 (5,862) (5,768) Net chg in cash (a+b+c) 47 (20) 153 90 142

BALANCE SHEET FY10 FY11 FY12E FY13E FY14EEquity capital 1,490 1,490 1,490 1,490 1,490 Reserv es & Surplus 33,131 36,169 37,198 40,290 43,665 Shareholders' funds 34,621 37,659 38,688 41,780 45,155 Total Debt 40,779 42,225 57,044 55,763 54,632 Deferred tax liabiity 5,760 6,045 6,045 6,045 6,045 Capital Employed 81,159 85,929 101,777 103,588 105,831 Net Block 29,291 34,358 42,737 45,822 49,257 CWIP 12,807 11,559 10,896 14,514 17,224 Cash & cash Eq. 143 124 277 367 509 Net other Current Assets 38,683 39,664 47,643 42,659 38,615 Inv estments 234 225 225 225 225 Total assets 81,159 85,929 101,777 103,588 105,831

KEY RATIOS FY10 FY11 FY12E FY13E FY14EEBITDA Margin (%) 3.4 3.6 0.8 3.1 3.7 Net margin (%) 2.4 1.5 0.4 1.1 1.4 Div idend Yield (%) 6.5 6.5 2.2 5.4 5.4 Net Debt/ Equity (x ) 1.2 1.1 1.5 1.3 1.2 Asset Turnov er Ratio (x ) 3.1 3.9 4.3 4.1 3.5 Working capital cy cle (day s) 52 38 36 32 32 ROCE (%) 12.5 12.2 0.8 9.8 10.1 RoE (%) 18.5 14.2 4.5 12.0 11.8 EV/Sales (x ) 0.3 0.2 0.2 0.2 0.2 EV/EBITDA (x ) 8.0 5.8 23.2 6.4 6.0 PER (x ) 4.6 5.4 16.0 5.7 5.4 Price/ Book (x ) 0.8 0.7 0.7 0.7 0.6

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ESSAR OIL

RESEARCHRESEARCHRESEARCHRESEARCHRESEARCHIN

ITIA

TIN

G C

OVE

RAG

E

07 December 2011



INCREASING SCALE AND COMPLEXITYEssar Oil (EOL), an integrated oil & gas company is undergoing an expansionto increase its refining capacity by 45% to 20mmtpa. Along with expansion,it is almost doubling its nelson complexity which would substantially improvemargins and hence profitability. Foray into niche business of Coal bedmethane (CBM) provides an upside potential.

Capacity expansion

EOL is expanding its throughput capacity from 14 to 20mmpta with CDU expansionin phase-I refinery (+4mmtpa) and optimisation through de-bottlenecking (+2mmtpa).

Enhancement in product and crude slate

Post optimisation, EOL's Nelson complexity index should increase from ~6.1currently to ~11.8 which would lead to delivery of better margin products. Also, thecrude slate for EOL is expected to improve from 72% of heavy/ ultra-heavy to 87%of ultra-heavy crude oil.

Foray into niche Coal Bed Methane business

EOL has exposure to upstream sector through 100% ownership in two CBM (CoalBed Methane) blocks - Raniganj and Rajmahal. Test production and supply to endcustomer has commenced in Raniganj East (0.22mmscmd) with a peak productionof 3.5mmscmd expected over the next few years.

Concerns

Volatility in crude oil price/ international GRM/ USD-INR exchange rate in thecurrent weak global environment may impact the earnings substantially. Any adverseregulatory change with respect to taxation may affect profitability. Delays incommissioning of the projects holds a downside risk.


Essar Oil is also set to benefit with increasing refining capacity and complexityimprovement, however, we are currently not rating the company.

STOCK DATA


Market cap Rs94bnBook Value per share Rs47Shares O/S (F.V. Rs10) 1365mnFree Float 13%Avg Trade Value (6 months) Rs175mn52 week High/Low 148/66Bloomberg Code ESOIL INReuters Code ESRO.BO

PERFORMANCE (%)

1M 3M 12MAbsolute (18.8) (24.8) (45.7)Relative (15.1) (25.2) (35.5)

54


NOT RATEDCMP Rs69


KEY RATIOS

FY07 FY08 FY09 FY10 FY11Net Sales 4,740 6,520 380,550 373,190 479,050 YoY Gr. (%) - 0.4 57.4 (0.0) 0.3 EBITDA (579) (440) 10,190 17,260 25,190 EBITDA Margin (%) (12.2) (6.6) 3.0 5.0 5.5 Net Profit (675) (410) (5,140) 290 6,540 YoY Gr. (%) - (0.4) 11.5 (1.1) 21.6

Dil. EPS (Rs) 6.3 6.7 2.7 7.1 11.1 ROCE (%) (0.4) (0.3) 3.8 7.8 10.8 RoE (%) (2.3) (1.2) (14.3) 0.7 11.7 PER (x) - - - - 14.6 EV/Net sales (x) - - 0.5 0.5 0.4 EV/EBITDA (x) - - 15.0 9.4 8.0

50

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140

170

Dec-10 Mar-11 Jun-11 Sep-11 Nov -11

EOL BSE (Rebased)

[email protected]

RESEARCHRESEARCHRESEARCHRESEARCHRESEARCH Essar Oil

COMPANY BACKGROUNDEssar Oil Limited (EOL) is an integrated oil company currently operating a 14mtpa Vadinarrefinery on West Coast of India. Although to a lesser extent, EOL captures the entire valuechain via backward integration (Oil & Gas exploration) and forward integration (network of1,376 retail outlets). The company has exposure to upstream sector through 100% ownershipin two CBM (Coal Bed Methane) blocks - Raniganj and Rajmahal. Test production hascommenced in Raniganj with a peak production of 3.5mmscmd expected over the next fewyears. It also has presence in other blocks (Mumbai high fields and Nigerian blocks) whichare still in exploratory phases and monetisation is not expected in near term.Essar Energy along with its subsidiary holds 87.09% of the total share capital of EOL. Themajority of the shareholding (~74%) is in the form of GDR (Global depository receipts) heldby Essar Energy's subsidiaries.

PRODUCT PORTFOLIOEOL had a capacity utilisation of ~105% (Crude throughput of 14.76mmt) and distillate yieldof 73% for FY11. Their main focus is sales in domestic market due to better price realisations,export products include fuel oil and gasoline. Keeping in mind the long term policy shifttowards de-regulation, they have a network of retail outlets across the country. However,they continue to have limited exposure to retail segment because of fuel subsidies involved.

CRUDE SOURCING PORTFOLIOIt can process more than 20 types of crudes including ultra heavy and tough crudesAvg. API (Density) -32.7, Avg. Sulphur -1.62% and Avg. TAN -0.27

Product Mix


Sales Mix


Crude Type


28% 28% 28% 27%

45% 46% 45% 44%

27% 26% 27% 29%

0%

25%

50%

75%

100%

H1 CY10 H2 CY10 CY 2010 H1 CY11

Heav y Middle Light

27%34% 31% 32%

58% 54% 56% 60%

5% 6%6%9%2%7%7%6%

0%

25%

50%

75%

100%

H1 CY10 H2 CY10 CY 2010 H1 CY11

Ex ports PSUs Bulk Retail

24% 22% 23% 16%

46% 43% 45%49%

30% 35% 33% 35%

0%

25%

50%

75%

100%

H1 2010 H2 2010 CY 2010 H1 CY11

Ultra Heav y Heav y Light


(in %) Sep-11Promoter 87.1

FII 3.0

DII 1.6

Others 8.3

[email protected]


Capacity expansion plans

EOL is currently undergoing an expansion plan to increase its refinery capacity by 6mmtpato 20mmtpa by 2HFY13 in two phases (Phase-I expansion to 18mmtpa and Optimisation to20mmtpa).

Post-expansion to 20mmtpa, NCI (Nelson complexity) is expected to increase to 11.8 fromcurrent 6.1.

As part of first phase of refinery expansion, EOL is planning to expand it's current crudedistillation (CDU) capacity from 14mmtpa to 18mmtpa and addition of addition of secondaryunits like Delayed coker (DCU), Isomerisation unit (ISOM), VGO Hydro-treater (VGOHT),Sulphur recovery (SRU) and Diesel Hydro-treater (DHDS). Most of Units & Facilities underExpansion Project achieved mechanical completion, except of DCU, VGOHT, SRU whichare expected to be complete Q3FY12. Finally, Ramp up of throughput expected duringQ4FY12.

As part of optimization process, CDU capacity is further expanded to 20mmtpa through de-bottlenecking (Conversion of VBU into CDU) and revamping of FCCU unit. OptimizationProject is on schedule (Progress - 63.7%) & expected to complete by Sept, 2012.

Capex Details


Today Phase 1 Optimisation Phase 11Commissioning Q4FY12 Q3FY13

Cumulative Capex (USD bn) 2.80 4.65 4.95 9.75

Incremental Capex (USD bn) 1.85 0.38 4.80

Complexity 6.1 11.8 11.8 12.8

API (density) 32.4 24.8 24.8 24

Avg Sulphur % 1.5% 3.0% 3.0% 3.0%

Product grade Euro III/IV Euro IV/V Euro IV/V Euro V/US

Change in Capacity of major equipments


UNIT / FACILITY CAPACITY CAPACITY(MMTPA) Post OPTI

CDU 10.5 18

VDU 7.2 10.9

VISBREAKER (VBU) 1.9 2.0 (CDU)

NAPHTHA HYDROTREATER (NHT) 1.6 1.8

CONTINUOUS CATALYTIC REFORMER UNIT (CCR) 0.9 1.1

FLUID CATALYTIC CRACKING UNIT (FCCU) 2.9 3.9

DIESEL HYDRODESULFURISATION UNIT (DHDS) 3.7 5.3

VGO HYDROTREATER (VGO HT) 6.5

DIESEL HYDROTREATER (DHDT) 4.0

DELAYED COKER UNIT (DCU) 7.5

ISOMERISATION (ISOM) 0.7

Essar Oil

Refining capacity toincrease from 14mmtpato 20mmtpa...

[email protected]


Improvement in crude slate and distillate yieldWith implementation of Phase-I refinery project the crude slate for EOL is expected toimprove from 72% of heavy/ ultra-heavy to 87% of ultra-heavy crude oil. Nelsen index willincrease from 6.1 currently to ~11.8 after these expansions which should result in delivery ofhigh margin products (Light/middle distillate)

Change in product mixProportion of fuel oil should decrease sharply post-optimisation with higher proportion ofvalue added products. It would also provide EOL flexibility to switch to light and middledistillates. As per management, Euro IV and Euro V grade will contribute 55% and 50%respectively in gasoline and diesel pool.

Improving yield


Expansion to provide crude as well as product flexibility


Prod

uct y

ield

Cru

de m

ix

Processing an increasingly high proportion of high sulphur and low API crudesFocus on delivery of higher margin products (middle/light distillates)

Ultra heavy20%

Heavy52%

Light28%

Light11%

Heavy25%

Ultra heavy64%

Ultra heavy87%

Light13%

Heavy end25%

Fuel Loss6%

Middle Distillates47%

LightDistillates

22%

Heavy end15% Fuel Loss

5%

LightDistillates

21%


VGO10%

LightDistillates

24%

Fuel Loss6%

Heavy end14%VGO

9%


14 MMTPA 18 MMTPA 20 MMTPA

0.81 0.97 1.280.53 0.76

2.153.06 0.60

1.84 1.75

5.34 7.72 9.13

0.70 1.17 0.282.47 2.49 2.63

1.09 1.41 2.29

0.211.83

0%

20%

40%

60%

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100%

14 MMTPA 18 MMTPA 20 MMTPA

Fuel & Loss/Residue Others Coke Fuel Oil VGO Diesel Jet/Kero Gasoline LPG/Naptha

Essar Oil

Higher proportion of dieselensures better margins intough environment...

[email protected]


Foray into upstream business holds upside potentialEOL has exposure to upstream sector through 100% ownership in two CBM (Coal BedMethane) blocks - Raniganj and Rajmahal. It also has presence in other blocks (Mumbaihigh fields and Nigerian blocks) which are still in exploratory phases and monetisation is notexpected in near term.

Details of Raniganj projectTest production and supply to end customer has commenced in Raniganj East (0.22mmscmd)with a peak production of 3.5mmscmd expected over the next few years. Gas Sales Priceof $ 5.25/mmbtu + $1.00/mmbtu for marketing & transportation charges has been approvedby MOP&G for test sales.CBM IN INDIACommercial CBM production has commenced only from 1 block i.e. GEECL's Raniganj(South) since 14th July 2007. The total CBM production figure is expected to be around 7.4mmscmd by the year 2014-15.

Tax benefits supporting EOL GRMTax benefit u/s 80-IB: If EOL commission the Phase-I refinery before Mar'12 they will get taxbenefit under section 80-IB of the income tax. As a result, there will be a tax holiday forseven years on the incremental earnings from the incurred capex. There will be a capacityaddition of 4mmtpa (+30%) and improvement in GRM for the complete facility.Sales Tax deferment benefit: EOL also benefits from a sales tax deferral scheme by theGujarat government, under which, any refinery constructed in the state during the period1995-2000 is eligible for sales tax deferment over a 12-year period from their commissioning,after which the tax collected becomes liable for payment in six equal tranches. EOL hadalready availed itself of Rs48bn of this benefit by FY11 as it adds USD2/bbl to it's GRM.However, due to delayed commissioning of the refinery in FY08-09, the State of Gujarat hascontested the validity of the sales tax benefit. The Gujarat High Court has, however, ruled infavor of Essar Oil, and the case is now pending a decision by the Supreme Court. Nevertheless,the company remains confident of its entitlement to the tax benefit.

2P/ 2C Best estimate Unrisked in- Details of CBM Block Place Ownership Acreage resources prospective resources place resource Total Remarks

Bcf Bcf Bcf Bcf

Raniganj (CBM) West Bengal 100% 500 Sq km 201 792 - 993 CPR by NSAI (2010) Rajmahal(CBM) Jharkhand 100% 1128 sq. km - 4,723 - 4,723 CPR by ARI (2010) Sohagpur-CBM-2008/IV M.P. &

Chhattisgarh 100% 339 sq. km 600 600 As per DGH Talcher-CBM-2008/IV Orissa 100% 557 sq. km 2,600 2,600 As per DGH IB Valley -CBM-2008/IV Orissa 100% 209 sq. km - - 1,200 1,200 As per DGH Total 2,733 sq km 201 5,515 4,400 10,116


EOL’s CBM Portfolio

Sources: Advance Resources International, PINC Research

Essar Oil

Coal Bed Methane

More than280 CBM Wells

dril led

ReserveEstablished

8.39tcf

DevelopmentActivity in3 Blocks

Commercialproduction

CommencedJuly, 2007

GasPrice 6.79 USD/

mmbtu

CBM gasProduction

@ 7.4 MMSCMDby 2015

One of the pioneer in CBM inIndia...



Essar OilRESEARCHRESEARCHRESEARCHRESEARCHRESEARCH


[email protected] 59

INCOME STATEMENT FY07 FY08 FY09 FY10 FY11Net sales 4,740 6,520 380,550 373,190 479,050 Growth (%) 0.4 57.4 (0.0) 0.3 Total Expenditure 5,319 6,960 370,360 355,930 453,860 EBITDA (579) (440) 10,190 17,260 25,190 Growth (%) (0.2) (24.2) 0.7 0.5 Other operating income - 10 1,350 1,280 1,320 EBITDA incl other op (475) (350) 12,020 19,370 27,790 Other income 104 80 480 830 1,280 Depreciation 45 30 6,550 7,280 7,310 EBIT (520) (380) 5,470 12,090 20,480 Interest paid 25 60 10,910 11,810 12,200 PBT (546) (440) (5,440) 280 8,280 Total tax 129 (30) (300) (10) 1,740 Net Profit (675) (410) (5,140) 290 6,540 Growth (%) (0.4) 11.5 (1.1) 21.6 Diluted EPS (Rs) 6.3 6.7 2.7 7.1 11.1 Growth (%) 4.7 5.8 (59.6) 164.9 55.7

CASH FLOW STATEMENT FY07 FY08 FY09 FY10 FY11Pre-tax profit (546) (441) (5,437) 286 8,284 Depreciation 45 25 6,549 7,283 7,309 Total tax paid (90) (214) 31 69 (1,606) Chg in w orking capital (350) (353) 10,223 (6,450) (9,257) Other Adjustments 3 (5) 7,840 6,503 7,457 Cash flow from oper. (a) (937) (987) 19,204 7,691 12,186 Capital ex penditure (24,652) (14,834) (16,770) (20,505) (43,741) Chg in inv estments (283) (1) - - - Other inv esting activ ities (26) (1,160) (3,252) (221) (13,819) Cash flow from inv. (b) (24,960) (15,994) (20,022) (20,726) (57,561) Free cash flow (a+b) (25,897) (16,981) (818) (13,035) (45,374) Equity issued 3,525 - - - - Net debt raised 24,279 12,290 (1,374) 6,652 42,398 Interest Paid (11) (39) (7,057) (10,133) (8,465) Div idend Paid (1,074) 6,188 8,431 16,788 10,909 Cash flow from fin. (c) 26,720 18,440 0 13,307 44,842 Net chg in cash (a+b+c) 823 1,458 (818) 272 (532)

BALANCE SHEET FY07 FY08 FY09 FY10 FY11Equity capital 13,455 13,420 13,092 23,713 13,823 Reserv es & Surplus 16,496 22,587 22,729 23,023 51,556 Shareholders' funds 29,951 36,007 35,820 46,737 65,379 Total Debt 85,714 98,153 100,317 103,537 145,469 Deferred tax liabiity 323 320 15,358 7,618 9,945 Capital Employed 115,988 134,480 151,496 157,891 220,793 Net Block 2,039 4,377 126,058 123,094 117,441 CWIP 106,260 132,827 19,139 43,188 84,230 Cash & cash Eq. 6,430 10,028 11,746 13,508 29,587 Net other Current Assets 166 (13,783) (6,479) (23,927) (11,495) Inv estments 1,094 1,031 1,031 2,030 1,030 Total assets 115,988 134,480 151,496 157,891 220,793

KEY RATIOS FY07 FY08 FY09 FY10 FY11EBITDA Margin (%) (12.2) (6.6) 3.0 5.0 5.5 Net margin (%) (14.2) (6.3) (1.4) 0.1 1.4 Div idend Yield (%) - - - - - Net Debt/ Equity (x ) 2.6 2.4 2.5 1.9 1.8 Asset Turnov er Ratio (x ) 0.0 0.0 2.5 2.4 2.2 Working capital cy cle (day s) - - 77 25 67 ROCE (%) (0.4) (0.3) 3.8 7.8 10.8 RoE (%) (2.3) (1.2) (14.3) 0.7 11.7 EV/Sales (x ) - - 0.5 0.5 0.4 EV/EBITDA (x ) - - 15.0 9.4 8.0 PER (x ) - - - - 14.6 Price/ Book (x ) 3.1 2.6 2.3 1.8 1.5

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T E A MEQUITY DESKSadanand Raje Head - Institutional Sales [email protected] 91-22-6618 6366

Technical Analyst

Rajeev Gupta Equities [email protected] 91-22-6618 6486Ankur Varman Equities [email protected] 91-22-6618 6380Himanshu Varia Equities [email protected] 91-22-6618 6342Shailesh Kadam Derivatives [email protected] 91-22-6618 6349Ganesh Gokhale Derivatives [email protected] 91-22-6618 6347

Mehul Desai Head - Sales Trading [email protected] 91-22-6618 6303Amar Margaje [email protected] 91-22-6618 6327Ashok Savla [email protected] 91-22-6618 6321Sajjid Lala [email protected] 91-22-6618 6337Raju Bhavsar [email protected] 91-22-6618 6322Hasmukh D. Prajapati [email protected] 91-22-6618 6325

SALES

DEALING

RESEARCHVineet Hetamasaria, CFA Head of Research, Auto, Cement [email protected] 91-22-6618 6388Nikhil Deshpande Auto, Auto Ancillary, Cement [email protected] 91-22-6618 6339Tasmai Merchant Auto, Auto Ancillary, Cement [email protected] 91-22-6618 6377Vinod Nair Construction, Power, Capital Goods [email protected] 91-22-6618 6379Ankit Babel Capital Goods, Engineering [email protected] 91-22-6618 6551Hitul Gutka Power [email protected] 91-22-6618 6410Subramaniam Yadav Construction [email protected] 91-22-6618 6371Madhura Joshi Power [email protected] 91-22-6618 6395Satish Mishra Fertiliser, Oil & Gas [email protected] 91-22-6618 6488Urvashi Biyani Fertiliser, Oil & Gas [email protected] 91-22-6618 6334Naveen Trivedi FMCG [email protected] 91-22-6618 6384Rohit Kumar Anand IT Services [email protected] 91-22-6618 6372Niraj Garhyan IT Services [email protected] 91-22-6618 6382Namrata Sharma Media [email protected] 91-22-6618 6412Sakshee Chhabra Media [email protected] 91-22-6618 6516Bikash Bhalotia Metals, Mining [email protected] 91-22-6618 6387Harleen Babber Metals, Mining [email protected] 91-22-6618 6389Dipti Vijaywargi Metals, Mining dipti.vijaywargi @pinc.co.in 91-22-6618 6393Sushant Dalmia, CFA Pharma [email protected] 91-22-6618 6462Poonam Sanghavi Pharma [email protected] 91-22-6618 6709Suman Memani Real Estate, Mid caps [email protected] 91-22-6618 6479Abhishek Kumar Real Estate, Mid caps [email protected] 91-22-6618 6398C Krishnamurthy Technical Analyst [email protected] 91-22-6618 6747

SINGAPORE DESKAmul Shah [email protected] 65-6327 0626

DIRECTORSGaurang Gandhi [email protected] 91-22-6618 6400Hemang Gandhi [email protected] 91-22-6618 6400Ketan Gandhi [email protected] 91-22-6618 6400

COMPLIANCERakesh Bhatia Head Compliance [email protected] 91-22-6618 6400

bright thinking

Member : Bombay Stock Exchange & National Stock Exchange of India Ltd. : Sebi Reg No: INB 010989331. Clearing No : 2111216, Maker Chambers V, Nariman Point, Mumbai - 400 021; Tel.: 91-22-66186633/6400 Fax : 91-22-22049195

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Disclaimer: This document has been prepared by the Research Desk of M/s Infinity.com Financial Securities Ltd. (PINC) and is meant for use of therecipient only and is not for public circulation. Each recipient of this document should make such investigations as it deems necessary to arrive atan independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), andshould consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not besuitable for all investorsThe information contained herein is obtained and collated from sources believed reliable and PINC has not independently verified all theinformation given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness orfairness of the information and opinions contained in this document.The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated asendorsement of the views expressed in the report. The opinion expressed or estimates made are as per the best judgement as applicable at thatpoint of time and PINC reserves the right to make modifications and alternations to this statement as may be required from time to time without anyprior approvalPINC, its affiliates, their directors, employees and their dependant family members may from time to time, effect or have effected an own accounttransaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investmentbanking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entitiesfunctions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the documentThis report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysisof PINC. The views expressed are those of analyst and the PINC may or may not subscribe to all the views expressed thereinThis document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, toany other person or published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted intothe United State (to U.S.Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributedin Japan or to any resident thereof. The distribution of this document in other jurisdictions may be restricted by law, and persons into whosepossession this document comes should inform themselves about, and observe, any such restrictionsNeither PINC, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, specialor consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.Copyright in this document vests exclusively with PINC and this document is not to be reported or circulated or copied or made available to others.

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Large Caps Mid Caps

M.Cap > USD1bn M.Cap <= USD1bn

Return %

Rating

BUY More than 15 More than 20Accumulate 5 to 15 10 to 20Reduce (-)5 to +5 0 to 10Sell Below (-)5 Less than 0

Rating Objective

pinc indian refinery scenario

Documents

net profit

pure refining

indian refining

strong domestic

refining capacity

middle distillate

indian players

essar oil