Thematic | June 2014
India PSUs
New reins, new reign!
Research Team
(Rajat@MotilalOswal.com)

Thematic | India PSUs
India PSUs: New reins, new reign!
Page No.
Summary
..............................................................................................................
3
PSUs: A force to reckon with
.............................................................................
6
Performance has deteriorated in last five years
..............................................
9
Change in guard a possible trigger for turnaround
.......................................
13
Restructure or retire? ................................................................................... 18
Profitability at bottom; valuations attractive ............................................. 25
Sector and key PSU stocks to watch out for ................................................ 28
Annexure I: Valuation snaphots ................................................................... 30
Companies (PSU top companies - A)
.........................................................
32-73
SBIN ............................................................................................... 33
ONGC ............................................................................................. 38
BHEL ............................................................................................... 43
NTPC .............................................................................................. 48
BPCL ............................................................................................... 53
COAL .............................................................................................. 58
SAIL ................................................................................................ 63
Companies (PSU top companies - B)
........................................................
68-112
CBK ................................................................................................. 68
GAIL ............................................................................................... 73
HPCL ............................................................................................... 78
IOCL ................................................................................................ 83
NMDC............................................................................................. 88
OINL ............................................................................................... 93
PNB ................................................................................................ 98
PWGR........................................................................................... 103
UNBK ........................................................................................... 108
Prices as on 16 June 2014
Investors are advised to refer through disclosures made at the end of the Research Report.
16 June 2014
2

Thematic | India PSUs
Thematic | June 2014
India PSUs
New reins, new reign!
Harnessing potential for a new harvest
The profitability of Indian PSUs, most of which were plagued with project delays,
policy paralysis and deteriorating balance sheet, is almost at half the FY04 levels.
However, we believe the worst is behind.
As Chief Minister of Gujarat, Mr Narendra Modi transformed a number of state PSUs.
As Prime Minister, we believe he could drive similar transformation in central PSUs.
We propose a ‘SECURE’ framework to turn around PSUs’ performance, but also
recognize that divestment too would be essential to further the nation’s development
agenda.
In this backdrop, we believe the likely winners among the listed PSUs would be SBI,
ONGC, BHEL, NTPC and BPCL.
PSU top companies - A
PSUs
Pg-33
Pg-38
Pg-43
Pg-48
Pg-53
Pg-58
Pg-63
A force to reckon with
SBIN
ONGC
BHEL
NTPC
BPCL
COAL
SAIL
Indian PSUs have developed a formidable franchise, with leadership positions in
sectors like Oil & Gas, Financials, Utilities, Mining and Heavy Engineering controlling
60%-90% market share. Over the years, they have played a significant role in the
growth of the Indian economy. Central and State PSUs contribute ~26% to the
national GDP. India ranks 7
th
in terms of share of PSUs (equally weighted share of
sales, assets and market value) in a country’s top 10 companies
Performance has deteriorated in last five years
But has bottomed out
PSU top companies - B
CBK
GAIL
HPCL
IOCL
NMDC
OINL
PNB
PWGR
UNBK
Pg-68
Pg-73
Pg-78
Pg-83
Pg-88
Pg-93
Pg-98
Pg-103
Pg-108
PSUs’ performance deteriorated in the second half of the last decade. Over FY09-14,
their aggregate sales and PAT grew at just a third of the growth rates achieved
during FY04-09. More than one-third (34%) of the CPSEs were loss-making in FY13
versus 27% in FY08. However, profitability and growth have bottomed-out. This is
getting reflected in both consensus and our estimates for the next couple of years.
(PAT growth estimates of 9% and 14% in FY15 and FY16, respectively, versus 5.7%
CAGR during FY09-14).
Change in guard
A possible trigger for turnaround
Corporate India is replete with examples of transformation in companies’ fortunes
following leadership changes. This should apply to politics as well, and hence, to
PSUs. As Chief Minister of Gujarat, Mr Narendra Modi transformed a number of
state PSUs by giving them more authority and autonomy in operations. With Mr
Modi as Prime Minister, the capital markets are now looking for similar
transformative measures for the CPSEs.
Restructure or retire?
A ‘SECURE’ framework can turnaround PSUs
Emphasis on restructuring of PSUs is clearly visible in some recent comments from
the new government. We propose a ‘SECURE’ framework to turn around PSUs’
performance. However, divestment would also be a necessity to further the
development agenda. We expect the government to keep the PSUs of strategic and
social importance but restructure them, and increase divestment in others (or even
privatize them). Several interesting suggestions focusing on ‘how to’ for divestment
have already started pouring in for the new government (refer page 24 for one such
suggestion).
Rajat Rajgarhia
(Rajat@MotilalOswal.com); +91 22 3982 5441
16 June 2014
Shubhashish Dubey
(Shubhashish.Dubey@MotilalOswal.com) /
Harshad Borawake
(HarshadBorwake@MotilalOswal.com)
3

Thematic | India PSUs
Profitability at bottom
Valuations attractive
The profitability of Indian PSUs, most of which were plagued with project delays,
policy paralysis and high debt, is almost at half the FY04 levels. However, we believe
the worst is behind and the new government’s policy actions could lead to a revival
in their fortunes. In this backdrop, we believe the likely winners among the listed
PSUs would be
SBI, ONGC, BHEL, NTPC and BPCL
.
Valuation table: Our top picks in PSU’s
Div.
Sales
PAT
PAT
P/E
P/B
RoE
Mkt Target Up- Sales
Yld
Gr. (%)
(INR b)
Gr. (%)
(x)
(x)
(%)
Company Cap Price side INR b
(%)
INRb (INR) (%)
FY14 FY15 FY16 FY17 CAGR FY14 FY15 FY16 FY17 CAGR FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 FY15
ONGC
SBI
NTPC
BHEL
BPCL
3,803
1,348
590
442
500
187
300
676
17 1,732 10.9
26
15
24
716
7.5
7.9
5.7
4.2
2.0
21.0
9.9
11.3
3.3
14.8
15.6
14.3
16.7
17.0
266 20.3 13.2 2.0 11.0 11.3 10.0
142 44.9 26.8 31.0
99 -6.9 15.3 16.0
39 -29.2 21.0 13.0
9.9 12.1
6.6 11.1
9.5
9.6
9.8
7.3
8.3
1.9
1.2
1.2
1.8
1.8
1.7
1.0
1.1
1.7
1.7
1.5 18.1 18.3 16.7
0.9 13.5 15.3 17.6
1.0 10.8 11.8 12.8
1.6
7.3 10.5 12.6
1.5 13.7 15.0 15.3
2,013 3,240
676 18.3 16.9
391 -15.7 10.2
Abs.
Perf.
(%)
3M 12M
2.8 37.9 42.3
1.7 60.4 28.4
3.6 32.3
3.8
1.2 31.8 35.8
1.8 37.2 66.3
36 -31.5 51.4 29.5 16.5 25.6 16.9 13.1
7.3 14.3 11.8 10.5
15 2,643 -3.0
CAGR:
FY04-14
Source: MOSL, Capitaline
Story in charts
PSUs’ PAT growth catching up with larger market
60
40
20
0
-20
PAT growth (listed PSUs)
BSE 200 Index PAT growth
RoEs have been comparable
25.0
20.0
15.0
10.0
5.0
0.0
Overall PSUs RoE (%)
BSE 200 Index RoE (%)
Source: MOSL, Capitaline
Source: MOSL, Capitaline
Listed PSUs’ performance deteriorated in last 5 years
FY04-09
Sales CAGR (%)
PAT CAGR (%)
PAT margin (%)
RoE (%)
RoCE (%)
Dividend yield (x)
PE (x)
PB (x)
Price performance rel to Sensex
21.4
19.4
15.5
20.5
19.1
2.8
11.6
2.4
7.9
FY09-14
8.6
5.7
12.3
15.6
13.3
2.8
14.7
2.3
(11.8)
FY04-14
14.8
12.4
13.9
18.1
16.3
2.8
13.1
2.3
(2.1)
Gap between PSUs and market P/E increased
Overall PSUs PE (x)
22
18
14
10
6
BSE 200 Index PE (x)
Source: MOSL, Capitaline
Source: MOSL, Capitaline
16 June 2014
4

Thematic | India PSUs
PSUs have dominated position within respective industries
40
QUESTION
MARKS
Infrastructure
Automobiles
Telecom
Metals
Capital Goods
Chemicals & Fertilizers
STARS
Utilities
Banks - PSU
30
20
Misc
10
NBFC
Oil & Gas
DOGS
CASH COWS
0
0.0
10.0
20.0
30.0
40.0
50.0
Share in sector sales (%)
60.0
70.0
80.0
90.0
Source: MOSL, Capitaline
SECURE framework that can be used to revive PSUs
Market reforms coupled with PSUs revival/divestment can
improve their profitability and drive re-rating
DIVEST /
PRIVATIZE
•
Concor
•
Balmer Lawrie
Investment
PSU Banks
ONGC
Coal India
GMDC
NTPC
Power Grid
DIVEST
Strong professional management
S
E
C
U
R
E
Focus on strategic leadership
Induct industry experts with proven track record
Induct technocrats both in management and board
PRIVATIZE
Scooters India
HMT
Bharat
Immunology
ITDC
Balmer Lawrie
Mysore Lamps
•
Mysore Paper
•
Dredging Corp
•
HFL
•
Hind Photofilms
•
SCI
•
STC
•
MMTC
REVIVE
SAIL
Petronet
CPCL
OMCs (BPCL, HPCL, IOCL)
Empowerment
Reduce political interference beyond policy issues
Full autonomy to management and board for day-to-
day operations of all PSUs
Consolidate and control through SLAs
Consolidate under one PSU watchdog; sever ties with
ministries. Set vision and overall goals.
Monitor performance through pre-defined SLAs
Low (non-core)
Strategic importance
High (core)
Source: MOSL
Upgrade technology and skills
Continuous upgrade in technology to remain competitive
and generate efficiencies
Upgrade talent and technical know-how
Restructuring
Align businesses, supply chain, products and operations
Improve fiscal prudence
Optimize usage of resources
Expand
Expand globally
Expand product portfolio
Source: MOSL
16 June 2014
5

Thematic | India PSUs
PSUs: A force to reckon with
Central PSUs contribute ~20% to national GDP
Indian PSUs have developed a formidable franchise, with leadership positions in
sectors like Oil & Gas, Financials, Utilities, Mining and Heavy Engineering.
Over the years, they have played a significant role in the growth of the Indian
economy. Central PSUs contribute ~20% to the national GDP.
India ranks 7 in terms of share of PSUs (equally weighted share of sales, assets and
market value) in a country’s top 10 companies
th
Number of PSUs in India
863
In India, PSUs have grown considerably in number and size
An Independent India set up public sector undertakings (PSUs) in the first five-year
plan, primarily with the objective to achieve self-sufficiency and sustainable
economic growth. Since then, both state and central PSUs have grown in number
and size. Central public sector enterprises (CPSEs) have grown from just five, with a
total investment of INR0.3b in 1951, to 277, with a total investment of INR8,506b in
FY13. Additionally, there are several hundred state public sector enterprises and
departmental undertakings.
Growth in central PSUs in India*
10,000
8,000
6,000
220
4,000
2,000
0
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
210
200
Investment (INR b)
No. of operating enterprises
240
230
277
Central
State
Source: Department of Public Enterprise
Source: MOSL, Department of Public Enterprises
*Data for central public sector enterprises. Includes government companies wherein the central government holds
>51% equity. Does not include departmental undertakings (e.g., railways, postal services, broadcasting, etc), public
sector banks, insurance companies and state level public enterprises.
Have built a formidable franchise, with leadership in multiple sectors
Indian PSUs have developed a formidable franchise and sizable business across
sectors. PSUs are leaders, with sizable market share in sectors such as Oil & Gas
(ONGC, GAIL, IOCL), Financials (SBIN), Utilities (NTPC, NHPC, PWGR), Mining (COAL,
NMDC), Heavy Engineering (BHEL), Logistics & Transportation (Indian Railways, SCI,
FCI, CWC, STCI), Aviation (Air India, HNAL) and Telecom (BSNL, MTNL). India’s
country state-owned-enterprise share* (CSS) is 58.9, the 7th highest in the world.
16 June 2014
6

Thematic | India PSUs
PSUs have significant market share across sectors (%)
Public sector
33
43
32
Private sector
23
22
9
67
57
68
77
78
91
Crude oil & gas Refinery crude
production
throughput
Power
generation -
installed
capacity
Banking - total Telecom - fixed Coal production
o/s loans
lines
Source: MOSL
Country state-owned-enterprise share*
China
United Arab Emirates
Russia
Indonesia
Malaysia
Saudi Arabia
India
Brazil
Norway
Thailand
Singapore
France
Ireland
Greece
Finland
Korea
Belgium
sweden
Austria
Turkey
96
88
81
69
68
67
59
50
48
37
22
17
16
15
13
10
8
8
7
3
India ranks 7 in terms of
share of PSUs in a country’s
top 10 companies
th
* CSS is an equally weighted average of state-
owned-enterprises shares of sales, assets and
market values among country‘s top ten
companies.
Source: Kowalski, P. et al. (2013), OECD publishing
Number of PSUs in Forbes 2000, by
country
70
Increasing importance of PSUs in line with trend in emerging countries
The increasing importance of PSUs in India is contrary to the wide-scale privatization
in the developed world, but in line with the trend in emerging countries. Of the 204
state-owned companies on the Forbes Global 2000 companies list (year 2011), 30
were Indian. India had the second highest number of state-owned companies on the
list after China, which had 70.
30
9
9
8
China India Russia UAE Malaysia
Source: Kowalski, P. et al. (2013), OECD
publishing
Flag bearers of economic growth; CPSEs contributing ~20% to India’s GDP
PSUs have played a significant role in India’s economic growth. CPSEs’ total gross
turnover as a percentage of India’s GDP has ranged between 18% and 23% during
FY92-13. Additionally, state-level PSUs contributed around 6% to India’s GDP (FY10).
Even relative to other developing and developed countries, the contribution of
state-owned companies to the Indian economy is significant.
7
16 June 2014

Thematic | India PSUs
Contribution of CPSEs to India’s GDP
Turnover (INR b)
24,000
18,000
12,000
6,000
0
Turnover as percent of GDP (%)
26%
20%
13%
7%
0%
State-owned enterprises’ share as percentage of GNI* (%)
Country
Brazil
China
India
Indonesia
Russia
South Africa
BRIICS average
OECD countries avg.
Sales
12.0
26.0
16.0
3.0
16.0
2.0
12.5
5.0
Profit
1.7
2.9
4.3
0.3
3.0
1.7
2.3
0.4
Assets
51.0
145.0
75.0
19.0
64.0
3.0
59.5
29.1
Market
Value
18.0
44.0
22.0
12.0
28.0
1.0
20.8
5.9
Source: Department of Public Enterprises, MOSL
*Financial data for 2011 and GNI for 2010 (covers PSUs that are part of Forbes 2000 list).
Source: Kowalski, P. et al. (2013), OECD publishing
16 June 2014
8

Thematic | India PSUs
Performance has deteriorated in last five years
However, profitability and growth have bottomed-out
PSUs’ performance deteriorated in the second half of the last decade. Over FY09-14,
their aggregate sales and PAT grew at just a third of the growth rates achieved during
FY04-09.
More than one-third (34%) of the CPSEs were loss-making in 2013 versus 27% in 2008.
However, profitability and growth have bottomed-out. This is getting reflected in both
consensus and our estimates for the next couple of years.
Several PSUs have underperformed
There were 79 loss-making
central PSUs (FY13); and
215 loss-making state PSUs
(FY10)
Whil
e some PSUs have performed well, several have underperformed in terms of
growth, profitability and meeting social objectives. The underperformance was
largely driven by (i) economic slowdown, (ii) inflexible structure, (iii) excessive
government control and intervention, (iv) misuse of PSUs’ finances to meet the
government’s fiscal objectives, (iv) lack of preparedness post the financial crisis of
2008-09, and (v) uncompetitive operations
.
Number of loss-making CPSEs has continuously increased during the last decade
Profit making CPSEs
CPSEs making no profit/loss
230
2
89
216
-
73
226
1
63
217
1
61
214
-
54
213
-
55
Loss incurring CPSEs
Total CPSEs
217
-
60
220
-
62
225
-
64
229
1
79
139
143
160
154
160
158
157
158
161
149
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Source: MOSL, Department of Public Enterprises
The average contribution of
all CPSEs (both listed and
unlisted) to GDP during
FY04-09 was ~22% versus
~19% during FY10-13.
Significant deterioration in performance in last five years
Listed PSUs’ performance was markedly different in the two halves of the last
decade. Over FY09-14, their aggregate sales and PAT grew at just a third of the
CAGR clocked during the previous 5-year period, FY04-09.
Listed PSUs’ performance during two phases of last decade
Sales CAGR (%)
PAT CAGR (%)
PAT margin (%)
RoE (%)
RoCE (%)
Dividend yield (x)
PE (x)
PB (x)
Price performance rel to Sensex
FY04-09
21.4
19.4
15.5
20.5
19.1
2.8
11.6
2.4
7.9
FY09-14
8.6
5.7
12.3
15.6
13.3
FY04-14
14.8
12.4
13.9
18.1
16.3
2.8
2.8
14.7
13.1
2.3
2.3
(11.8)
(2.1)
Source: MOSL, Capitaline
16 June 2014
9

Thematic | India PSUs
Profitability and growth have bottomed-out
The new government at the center and its resolve to (1) turn around PSUs’
performance, and/or (2) pursue divestment/retirement policy with renewed vigor
augur well for the PSUs at large.
The aggregate PAT of listed PSUs (excluding banks and the three oil marketing
companies (OMCs)) is expected to register 4% growth compared with a 4% decline
in FY13. PSUs’ PAT growth is catching up with the rest of the market. MOSL
estimates indicate double-digit growth in PSUs’ aggregate PAT during FY15 (11%)
and FY16 (13%).
Against a decline in PSUs’ aggregate sales in FY14, MOSL estimates indicate 4%
growth in FY15 and 7% growth in FY1
6.
PSUs’ PAT growth catching up with larger market
60
40
20
0
-20
PAT growth (listed PSUs)
BSE 200 Index PAT growth
30.0
20.0
10.0
0.0
Sales growth likely to turn positive from FY15
40.0
Sales growth (listed PSUs)
BSE 200 Index Sales growth
Source: MOSL, Capitaline
Source: MOSL, Capitaline
PSUs continued to outperform the market in terms of profit margins, with long-term
PAT margin of 14.1% against 12.3% for BSE 200. RoEs of listed PSUs and BSE 200
stocks are largely comparable (14.5% for PSUs v/s 14.6% for BSE 200 in FY14).
PSUs continued to outperform the market on PAT margins
20.0
15.0
10.0
5.0
0.0
PAT margin (listed PSUs)
BSE 200 Index PAT margin
RoEs have been comparable
25.0
20.0
15.0
10.0
5.0
0.0
Overall PSUs RoE (%)
BSE 200 Index RoE (%)
Source: MOSL, Capitaline
Source: MOSL, Capitaline
16 June 2014
10

Thematic | India PSUs
Stark contrast in performance within PSUs
However, there is a stark contrast in performance within the PSUs. While PSUs
operating in the Resource and Utilities spaces have been competitive, Consumer-
oriented and Manufacturing PSUs have continuously underperformed.
Consumer-centric and Manufacturing PSUs have consistently underperformed.
This is manifested in lower sales growth and profitability of PSUs in Telecom and
Airlines as compared to other PSUs and their respective sector peers. Telecom PSUs
witnessed sales de-growth of 6% during FY04-14. PSUs in these sectors are loss
making, with significant negative average PAT margins during FY04-14 (Telecom: -
34%, Autos: -51%).
Resource and Utilities PSUs are more competitive
primarily due to their
monopolistic situation and high entry barriers (capital cost, regulations), resulting in
better financial performance.
PSUs’ performance by sector (FY04-14)
PSUs sales CAGR, by sector (%)
PSUs PAT CAGR, by sector (%)
PSUs average PAT margin, by sector (%)
Utilities
Infrastructure
Oil & Gas
Capital Goods
Metals
Chemicals & Fertilizers
Misc
Telecom
Automobiles
-6.0
-10.4
21.1
20.5
17.2
13.5
9.9
9.7
7.0
-4.0
NA
NA
9.5
10.1
10.6
17.8
28.4
7.7
20.9
14.9
13.1
13.3
4.5
3.7
-39.6
-51.3
15.3
Source: MOSL, Capitaline
Profit concentration is significant among PSUs.
The top-10 profit-making PSUs
contribute nearly two-third of the total profits of profit-making central PSUs. The
top-10 loss-making PSUs contribute a whopping 87% to the total loss of loss-making
central PSUs. The contrast in performance across sectors is clearly visible, with most
of the top profit-making PSUs belonging to the Resources and Utilities space, and
most loss-making PSUs being from Services and Manufacturing.
16 June 2014
11

Thematic | India PSUs
Most profit-making PSUs are in Resources and Utilities
100%=INR1,350 b (net profit of profit-making central PSUs)
Most loss-making PSUs are in Services and Manufacturing
100%=(INR283 b) (net loss of loss- making central PSUs)
ONGC
16%
NTPC
FCI
9%
8%
Air India
19%
MTNL
19%
CPRL
6%
Others
37%
GAIL
3%
Coal India
7%
BHEL
5%
NMDC
5%
IOCL
4%
PFC
Power Grid 3%
3%
Hindustan
Photo Films
6% Hindustan
BSNL
28%
Cables
MRPL
3%
3% Bharat
Petro
1%
Hindustan
Fertilizer
Fertilizers &1%
Others Chemicals
13%
1%
Source: MOSL, Department of Public Enterprises
Source: MOSL, Department of Public Enterprises
On BCG matrix, all resources, banks and capital goods PSUs figures as “stars” (high
market share in high growth sectors) indicating that they are doing well and offer
great opportunities. However, services-centric and light manufacturing related PSUs
figures as “question marks” (low market share in high growth sectors) signifying a
need to either revive or privatize/disinvest in such PSUs. Heavy manufacturing,
which includes railway components, defense, ship building, etc, is an exception.
These account for a large chunk of the current non-oil imports in India. Thus,
supporting this segment through opening up of the FDI in key areas (like defense,
railways, etc) is critical. We believe that PSUs stand to benefit given the already
established infrastructure in several cases, which can be scaled up / modernized
quickly.
Listed PSUs performance vis-à-vis market
40
QUESTION
MARKS
Infrastructure
Automobiles
Telecom
Metals
Capital Goods
Chemicals & Fertilizers
STARS
Utilities
Banks - PSU
30
20
Misc
10
NBFC
Oil & Gas
DOGS
CASH COWS
0
0.0
10.0
20.0
30.0
40.0
50.0
Share in sector sales (%)
60.0
70.0
80.0
90.0
Source: MOSL, Capitaline
16 June 2014
12

Thematic | India PSUs
Change in guard a possible trigger for turnaround
Will Mr Modi transform CPSEs as he did the Gujarat PSUs?
Corporate India is replete with examples of transformation in companies’ fortunes
following leadership changes. This should apply to politics as well, and hence, to PSUs.
As Chief Minister of Gujarat, Mr Narendra Modi transformed a number of state PSUs
by giving them more authority and autonomy in operations.
With Mr Modi as Prime Minister, the capital markets are now looking for similar
transformative measures for the CPSEs.
Leadership changes often transform companies’ performance
We had argued in our earlier India Strategy note that change in management and its
impact on underlying performance is as relevant to politics (and hence, PSUs, as
they are controlled by the government) as it is to corporate India. Changes in senior
leadership of a company bring about changes in its goals and direction. Recent
history suggests that changes in senior leadership of underperforming companies
have given a renewed thrust to their operations, and hence, stock performance. A
few examples:
Mr P J Nayak
took over as MD of Axis Bank in January 2000. Since then, the
stock has delivered annualized returns of ~48%.
Mr Romesh Sobti
took over as CEO of IndusInd Bank in February 2008. Since
then, the stock has provided annualized returns of ~32%.
Mr N Chandresekaran
took over the reins of TCS in October 2009. Since then,
the stock has provided annualized returns of ~31%.
Mr Bhaskar Bhat
took over as MD of Titan in April 2002. Since then, the stock
has delivered annualized returns of ~45%.
Mr Punit Goenka
took over as MD of Zee in October 2009. Since then, the stock
has provided annualized returns of ~21%.
Change in management #2: IndusInd Bank
600
450
CAGR: 32%
Price (INR)
Sensex Index Rebased
562
Change in management #1: Axis Bank
Price (INR)
1,400
1,050
700
350
0
P J Nayak
took over as MD in Jan 2000
CAGR: 48%
781
89
Sensex Index Rebased
Romesh Sobti
took over as CEO in Feb 2008
300
150
0
148
Source: Bloomberg, Company, MOSL
Source: Bloomberg, Company, MOSL
16 June 2014
13

Thematic | India PSUs
Change in management #3: TCS
Price (INR)
2,600
2,000
1,400
800
200
N Chandrasekaran
took over as CEO in Oct -09
CAGR: 31%
1,044
2158
Sector Index Rebased
Source: Bloomberg, Company, MOSL
Change in management #4: Titan
Price (INR)
340
255
170
85
0
19
CAGR: 45%
Sensex Index Rebased
307
Change in management #5: Zee
Price (INR)
300
225
150
75
0
CAGR: 21%
Sensex Index Rebased
273
198
Bhaskar Bhat
took over as MD in Apr-02
Punit Goenka
took over as MD
in Oct-09
Source: Bloomberg, Company, MOSL
Source: Bloomberg, Company, MOSL
This should apply to politics as well, and hence, to PSUs
Similarly, we believe a change in the Indian government, which was marked by poor
governance, widespread corruption and policy paralysis under the UPA regime,
bodes well for the market. As Chief Minister of Gujarat, Mr Narendra Modi
transformed a number of state PSUs. The capital markets are now looking for similar
transformative measures for the central PSUs.
16 June 2014
14

Thematic | India PSUs
Taking inspiration from Gujarat
As Chief Minister of Gujarat,
Mr Narendra Modi
transformed a number of
state PSUs by giving them
more authority and
autonomy in operations
Gujarat is the only state with profit-making state PSUs among the top 10 states in
terms of capital employed. Gujarat PSUs are also among the most productive,
ranking 4th in terms of turnover per employee and 5th in terms of PAT per
employee. Greater autonomy and an enabling environment have led to turnaround
and outperformance by Gujarat-based PSUs. Gujarat State Fertilizers and Chemicals
(GSFC), which posted a loss of ~INR4b in FY03, reported a PAT of ~INR5b in FY13.
During the same period, Gujarat State Petronet (GSPL) registered a PAT CAGR of
42%, followed by Gujarat Industries Power (GIPC; 25%), Gujarat Alkalies (24%) and
Gujarat Mineral Development Corporation (GMDC; 22%)
.
Gujarat tops the ten states with profit making PSUs
Net profit/loss, FY10, INR b
Maharashtra
Rajasthan
Karnataka
Punjab
Uttar Pradesh
Andhra Pradesh
Gujarat
Haryana
West Bengal
Odisha
Kerala
Tamilnadu
Chhattisgarh
Jammu & Kashmir
Madhya Pradesh
Delhi
Assam
Tripura
Bihar
Goa
Himachal Pradesh
Puducherry
Meghalaya
Andaman
Dadra Nagarhaveli
Arunachal Pradesh
Nagaland
6
4
1
0
0
0
0
0
0
0
(0)
(0)
(0)
(0)
(1)
(2)
(2)
(2)
(3)
(4)
(4)
(5)
(7)
(11)
(15)
(37)
(52)
Total capital employed, FY10, INR b
Maharashtra
Rajasthan
Karnataka
Punjab
Uttar Pradesh
Andhra Pradesh
Gujarat
Haryana
West Bengal
Odisha
Kerala
Tamilnadu
Chhattisgarh
Jammu & Kashmir
Madhya Pradesh
Delhi
Assam
Tripura
Bihar
Goa
Himachal Pradesh
Puducherry
Meghalaya
Andaman
Dadra Nagarhaveli
Arunachal Pradesh
Nagaland
705
501
453
436
376
358
333
238
238
155
142
136
85
74
29
19
15
11
6
3
3
2
1
1
0
0
0
Source: National survey on state level public enterprises, 2009-10; MOSL
16 June 2014
15

Thematic | India PSUs
Gujarat is among the top five states with most productive state PSUs
PAT per employee, FY10, INR '000
Andaman
Puducherry
Madhya Pradesh
Goa
Gujarat
Kerala
Tripura
Himachal Pradesh
Assam
Karnataka
(4.5)
Maharashtra
(9.0)
Andhra Pradesh
(12.8)
Odisha
(13.0)
Tamilnadu
(23.5)
Nagaland
(33.3)
West Bengal
(54.7)
Meghalaya
(62.3)
Chhattisgarh
(72.8)
Rajasthan
(78.7)
Haryana
(263.6)
Bihar
(387.7)
Uttar Pradesh
(433.0)
Delhi
(582.5)
Jammu & Kashmir (605.2)
Punjab (700.0)
235.8
97.2
90.3
54.7
49.5
46.9
31.2
30.4
2.9
Sales per employee, FY10, INR '000
Punjab
Bihar
Andaman
Gujarat
Madhya Pradesh
Haryana
Uttar Pradesh
Chhattisgarh
Himachal Pradesh
Odisha
Jammu & Kashmir
Rajasthan
West Bengal
Karnataka
Maharashtra
Tamilnadu
Andhra Pradesh
Puducherry
Goa
Kerala
Delhi
Tripura
Assam
Meghalaya
Nagaland
15,060
6,061
5,834
4,051
4,033
3,780
3,667
3,061
3,050
2,505
2,459
2,406
2,287
2,189
2,006
1,784
1,671
1,637
1,060
1,037
774
616
398
353
8
Source: National survey on state level public enterprises, 2009-10; MOSL
Gujarat PSUs have outperformed other listed PSUs in terms of sales and PAT growth
Sales CAGR 2004-14 (%)
Gujarat
Avg PAT margin 2004-14 (%)
Gujarat
PSU sector (listed)
32.8
14.9
25.5
13.3
9.3
4.5
9.0
4.5
14.2
4.5
Gujarat provides several
case studies of revival in
PSUs performance through
governance reforms
Gujarat State Petronet
Limited
Gujarat Mineral
Development
Corporation
Gujarat State Fertilizers
and Chemicals
Gujarat Narmada Valley
Fertilisers
Gujarat Alkalies and
Chemicals Limited
22.3
17.2
16.8
9.9
9.9
9.7
11.3
9.7
9.5
9.7
Source: MOSL, Capitaline
16 June 2014
16

Thematic | India PSUs
Case studies of turnaround of few Gujarat PSUs
GSFC (PAT, INR b)
5.0
2.5
7.5 7.6
5.2
1.8 1.5
3.3 3.2 2.4
-3.8
Source: Company, MOSL
Gujarat State Fertilizers & Chemicals (GSFC)
GSFC is a clear example of PSU turnaround through bold policy decisions,
productivity enhancement, cost reduction through technology upgrade,
improvement in governance and reduction in political interference. GSFC, which was
loss-making in FY02 and FY03, generated profits in all subsequent years. It
registered an average PAT margin of ~10.6% during FY08-13.
The revival was supported by the government of Gujarat, which had earlier set up a
PSU restructuring committee. On the advice of the committee, the government
professionalized the Board and gave complete autonomy to the management team
for day-to-day operations. A strong team monitored the progress being made. Other
major factors that turned the company profitable include:
Efficient operations
Reduction in cost of sales by substituting naptha and LSHS with natural gas
Backward integration and competitive contracting with private players (JV with
Tunisian Indian Fertilizers; strategic stake in Karnalyte Resources Inc, Canada)
Foray into the global market
Technology upgrade (alternative energy generation facilities; formed 100%
subsidiary, GSFC Agrotech Limited for research and production of liquid
biofertilizers, plant growth promoters, etc)
Focus on ideal product mix (diversified into MEK-oxime, biofertilizers and
biotechnology products, and advanced tissue culture facilities to support
horticulture and other crops)
GSPC (PAT, INR b)
8.5
6.1
2.8 2.8 2.3
4.1 3.7
3.2 3.2
Gujarat State Petroleum Corporation (GSPC)
GSPC is another turnaround story. It has grown from a company operating small gas
fields in Gujarat to an expansive Oil & Gas exploration, development, production,
and trading company, with global operations. The government of Gujarat gave it a
free hand and allowed to it expand globally. Currently, it holds working interest in
64 onshore and offshore exploration and production blocks, including 11 located in
Australia, Egypt, Indonesia and Yemen.
Gujarat Electricity Board (GEB)
GEB, ea
rlier a loss-making state monopoly, was turned around through a series of
organizational restructuring and reform measures. First, GEB was restructured in
2005 into seven corporate entities: six functional entities (one each for generation
and transmission, and four distribution companies for four regions of the state) and
one holding company also handling bulk purchase and sale of power. Consumer-
centric services and improvement in key metrics (higher PLF, lower T&D losses,
optimum use of resources and manpower) also helped the
tu
rnaround. Most
notably, the turnaround came despite no hike in power tariffs for the last six years
(barring the 63p/unit pass-through of higher fuel surcharge).
Source: Company, MOSL
GEB (PAT, INR b)
2
2
1
1
4
(9)
(19)
Source: Company, MOSL
16 June 2014
17

Thematic | India PSUs
Restructure or retire?
Expect a mix of both; proposing a ‘SECURE’ framework for revival
Emphasis on professional restructuring of PSUs is clearly visible in some recent
comments from the new government.
We propose a ‘SECURE’ framework to turn around PSUs’ performance. However,
divestment would also be a necessity to further the development agenda.
We expect the government to keep the PSUs of strategic and social importance but
restructure them, and increase divestment in others (or even privatize them).
With the revival of Gujarat PSUs and the man behind it, Mr Narendra Modi now at
the center, the debate has opened on whether the government’s stake in Indian
PSUs would be divested or would the government try to revive and restructure PSUs
to make them viable business entities. We expect the government to follow a dual
policy – keep the PSUs of strategic and social importance but restructure them, and
increase divestment in others (or even privatize th
em).
Key challenges faced by PSUs
Indian PSUs face unprecedented political interference. The government looks at
PSUs not as for-profit businesses, but merely as organizations with a socio-political
agenda, thus hurting the interests of minority shareholders. This manifests itself
through (i) high subsidy burden (in case of OMCs), (ii) payment of jumbo dividends
(most PSUs) instead of investing excess cash in value enhancing opportunities, (iii)
conduct of operations (awarding contracts to private sector, etc), (iv) talent and
compensation policies, and (v) continued underachievement of disinvestment
targets
.
Challenges faced by PSUs
Union-
ization
Excessive
bureaucratic
government
control and
intervention
Multiple
principles and
multiple goals
Talent
issues
Inflexible
structure
Miss-use of PSUs
financials to control
government’s fiscal
situation
Lack of
clarity in
vision
Uncompetitive
operations
Source: MOSL
16 June 2014
18

Thematic | India PSUs
PSUs face unprecedented
challenges compared with
their private counterparts
due to excessive political
interference
PSUs have been bereft of proper autonomy and authority to make investments and
acquisitions both in India and overseas. They are required to follow convoluted
procedures and face protracted delays, which limits their operational and strategic
decision-making. While Maharatna and Navratna PSUs have been given some
autonomy to make investment decisions, they face substantial interference in
operations, including recruitment, board and key management appointments, etc.
PSUs lag their private sector peers in talent management, including (i) attracting and
retaining right talent, (ii) providing adequate compensation based on meritocracy,
and (iii) equipping employees with right skills and technology.
Restructuring of PSUs to make them viable: A possibility
The new NDA government’s pro-privatization stance, and more importantly, Prime
Minister Narendra Modi’s focus on reviving PSUs through professional makeover
and greater autonomy should drive improvement in PSUs’ performance. The
management teams of the PSUs too are optimistic and are waiting in anticipation.
Emphasis on professional restructuring of PSUs is clearly visible in some recent
comments from the new government.
Recent comments in favor of PSU revival
“These decisions should be professional and not
political. Even today if you take the employees of
these PSUs into confidence and empower them
they can deliver a better performance than a lot of
private firms. We should not doubt the capability
of the employees of PSUs but instead have faith in
them”
Narendra Modi on PSUs privatisation
(then PM designate)
"His [Modi's] views [on disinvestment] are not the
same as mine … There will be constraint of
resources. Other means will be required for
revenue generation…He [Modi] has managed to
turn around industries like GSFC and the electricity
boards”
Arun Shourie, Former minister,
Disinvestment, in previous NDA
“Gujarat has shown the way that even loss
incurring public sector companies could be made
profitable with correct planning. We are hoping for
same kind of financial restructuring without
burdening the consumers.”
Pyush Goyal, Union Minister of State for Power
“We are hoping that a lot will change around PSUs.
And I hope they [the new government] do it within
the first month of taking charge else it will be
difficult to do”
Arup Roy Choudhury, Chairman and MD, NTPC
Source: Industry news
Is it really hard to bring in change and revive PSUs?
Is it really hard
to revive PSUs?
Gujarat PSUs
revival suggest
otherwise.
Source: Industry news
16 June 2014
19

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

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

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

Thematic | India PSUs
To address India’s fiscal deficit and improve economic efficiencies, we believe it is
imperative for the government to urgently divest more. Focusing on restructuring
and revival of PSUs may not be enough, as the government would need funds to
push economic growth. We expect the government to continue divesting in
profitable and core PSUs while retaining its majority holding (e.g., in PSU banks,
ONGC, Coal India, GMDC, NTPC, PowerGrid, etc). It could sell significant stake in (or
even privatize) PSUs engaged in non-core areas such as Autos and Healthcare, and
where government holding is low and revival is difficult.
‘Restructure or retire’ guideline framework
DIVEST /
PRIVATIZE
•
Concor
•
Balmer Lawrie
Investment
PSU Banks
ONGC
Coal India
GMDC
NTPC
Power Grid
DIVEST
PRIVATIZE
Scooters India
HMT
ITDC
Balmer Lawrie
Mysore Lamps
•
Mysore Paper
•
Dredging Corp
•
HFL
•
Hind Photofilms
•
STC
•
MMTC
REVIVE
SAIL
Petronet
CPCL
OMCs (BPCL, HPCL, IOCL)
Low (non-core)
Strategic importance
High (core)
Source: MOSL, Department of Disinvestment
Disinvestment timeline
Sale to CPSEs: KRL, CPCL and BRPL
Strategic sale: BALCO, LJMC, CMC,
HTL, VSNL, IBP, PPL, HZL, IPCL, hotel
properties of ITDC and HCI,
Slump sale of Hotel Centaur,
Mumbai and leasing of Ashok
Bangalore
Special dividend: VSNL, STC, MMTC
Sale to employees: VSNL, HZL, CMC
Premium for renunciation of rights
issue in favour of SMC
Put Option of MFIL
Minority shares sold by
auction method in
bundles of "very good",
"good" and "average"
companies
1991-96
2000-03
Strategic sales in
NHPC, OIL, NMDC,
SJVN, EIL, COAL
INDIA, PGCIL,
MOIL, SCI, PFC,
NBCC, HCL, PFC
Further dilution in
NTPC, REC, ONFC,
NMDC
2008-12
Planned sale of
Tyre Corporation
of India, Hindustan
Copper and
Rashtriya Ispat
Nigam
2014
1996-00
GDR of VSNL, MTNL, GAIL
Domestic offering of VSNL,
Concor, GAIL
Cross purchase by GAIL, ONGC
and IOC
Strategic sale of MFIL
Capital reduction and dividend
from BALCO
2003-08
Strategic sale of JCL; Call
Option of HZL
Offer for Sale of MUL, IBP,
IPCL, CMC, DCI, GAIL, NTPC,
PGCIL, REC and ONGC
Sale of shares of ICI Ltd
Sale of shares to IPCL
employees
Sale of MUL shares to DIIs,
banks and employees
2012-14
Strategic sale of NBCC,
RCF, NALCO, NFL, NLC,
BHEL
Further dilution in HCL,
NMDC, OIL, NTPC, SAIL,
MMTC, ITDC, STC,
NHPC, PGCIL, EIL, IOCL
CPSE-ETF
Source: MOSL, Department of Disinvestment
16 June 2014
23

Thematic | India PSUs
Right to disinvest: Masterstroke suggestion
Swaminathan Aiyar in an open letter to Finance Minister, Arun Jaitley, has made a
masterstroke suggestion to the legislative bottleneck plaguing multiple sectors.
Consider the following:
Problem #1 – Oil Companies:
Vajpayee government sought to privatize
government-owned oil companies (HPCL, BPCL). But these had been
nationalized through legislation, and the courts said the government couldn’t
sell a majority stake without fresh legislation. The Vajpayee government lacked
a majority in the Rajya Sabha, and so dropped the whole idea.
Problem #2 – Coal Sector:
Coal was nationalized by law in the 1970s. Courts
held that new legislation was required to divest more than half the government
stake in Coal India, or allow any private mines save for captive consumption. For
want a majority in both houses, neither the NDA nor UPA governments could
push forward on this.
Problem #3 – PSU Banks:
Without fresh legislation, the government cannot
drop its stake in nationalized banks (which account for 70% of the banking
system) below 50%. Indian banks must raise massive equity to keep lending in
coming years. Can the government find lakhs of crores from its budget to
recapitalize public sector banks?
Problem #4 – Education System:
Court decisions mandate that no state
government can approve a private university by executive decree: this needs
fresh legislation, with all the red tape, politics and corruption involved. Private
universities are a badly needed form of education reform, but the legislative
requirement means they are hamstrung.
What is the solution? – A new omnibus law giving government right to
disinvest, including right to privatize
The government should not see these as separate issues. Tackle them all in one go
by enacting a new omnibus law giving the government the right to disinvest by
executive action, overriding existing laws. In one sweep, it will allow government to
sell majority stakes in any government companies, raising resources for the budget
and infrastructure. It will let government denationalize coal and rapidly kick-start
new private universities. It will let public sector banks raise fresh capital on the
markets, reducing the government’s stake below 50%. Time is of the essence. The
government lacks a majority in the Rajya Sabha. If a Bill passes the Lok Sabha but
fails in the Rajya Sabha, the government can convene a joint session to pass it, and
the government now has an overall majority. But this is a politically painful and
time-consuming process, which government cannot wish to go through for every
economic reform. It’s surely preferable to have one omnibus Bill giving the
government the right to lower its shareholding in any government companies to any
level it pleases. This will facilitate rapid reforms in many areas, including coal.
Link to full letter:
http://blogs.timesofindia.indiatimes.com/Swaminomics/jaitley-
should-enact-a-right-to-disinvest/
16 June 2014
24

Thematic | India PSUs
Profitability at bottom; valuations attractive
Identifying likely winners in the PSU space
The profitability of Indian PSUs, most of which were plagued with project delays,
policy paralysis and high debt, is almost at half the FY04 levels.
However, we believe the worst is behind and the new government’s policy actions
could lead to a revival in their fortunes.
In this backdrop, we identify likely winners among the listed PSUs.
The worst is behind, in our view
The profitability of Indian PSUs is almost at half the FY04 levels, with PAT margin at
6% (against 9.5% in FY04) and RoE at ~10% (against a healthy 18-20% in FY04).
However, we believe that the worst case scenario has played out for PSUs, which
were plagued with various issues including project delays, policy paralysis and high
debt.
Profitability of PSUs impacted much more than private peers in last five years
15
18
12
16
13
15
9
12
PSUs
BSE200
PSUs
BSE200
PSUs
BSE200
PSUs
BSE200
FY04-08
FY09-14
FY04-08
FY09-14
Avg. EBITDA margin (%)
Avg. EBIT margin (%)
Source: MOSL, Capitaline
PSUs’ profitability declined rapidly in the last five years…
PSU EBITDA Margin (%)
17.0
BSE 200 EBITDA Margin (%)
…with EBIT margin in FY14 almost half the FY04 level
PSU EBIT Margin (%)
15.1
BSE 200 EBIT Margin (%)
14.8
15.0
13.6
11.9
14.5
11.2
10.5
11.6
9.1
7.8
Source: MOSL, Capitaline
Source: MOSL, Capitaline
16 June 2014
25

Thematic | India PSUs
Return ratios of PSUs have declined; RoCE declining more
than RoE
RoE (%)
19.3
18.4
16.1
15.0
RoCE (%)
PSUs couldn’t catch up with the private sector despite their
dominant position in the early 2000s
57%
40%
PSU PAT as a % of BSE 200 sales
PSU Mcap as a % of BSE 200 MCap
35%
13.4
10.8
21%
Source: MOSL, Capitaline
Source: MOSL, Capitaline
Lower valuations led by lack of Board control, lower profitability
PSU valuations have been at a discount to the broader markets, primarily due to (1)
greater operational and strategic control by the government, (2) lower profitability
in the recent years, and (3) higher dividend payout to meet the government’s fiscal
requirements, irrespective of the PSUs’ reinvestment needs.
Even in sectors like Mining and Utilities, where PSUs are market leaders, valuations
are lower than private peers, as reported profitability is not a reflection of true
business profitability, in our view. We expect the new government to focus on
improvement in PSUs’ operations and grant greater autonomy to their Boards of
Management. This could help revive their return ratios and lead to re-rating.
Is prevailing market price a reflection of true intrinsic value?
PSU valuation has always been a challenging task for the government during the
divestment process. Often, the prevailing profitability of a PSU does not reflect the
true profitability of its underlying business. This is because, unlike a private business
entity, the PSU’s primary focus is not on profit. PSUs serve a larger social goal.
We believe that investors should not use the prevailing market valuation of a PSU as
a benchmark. Instead, the focus should be on discovery of the true value of the
underlying business, which will be achieved with reduction in government control.
Increasing gap between PSUs and market P/E …
Overall PSUs PE (x)
22
18
14
10
6
2
1
BSE 200 Index PE (x)
4
3
… so is the case with P/B
Overall PSUs PB (x)
BSE 200 Index PB (x)
Source: MOSL, Capitaline
Source: MOSL, Capitaline
16 June 2014
26

Thematic | India PSUs
PSUs’ payout higher than non-PSUs; special dividends by However, lower profitability keeps valuations subdued,
OINL and COAL boosted recent year payouts
resulting in higher dividend yield
BSE 200 Payout (%)
50
40
30
20
10
PSU Payout (%)
5
4
3
2
1
PSU dividend yield (%)
BSE 200 dividend yield (%)
Source: MOSL, Capitaline
Source: MOSL, Capitaline
Profitability to improve with right policy decisions; will drive re-rating
A BJP-led government had presided over the early divestment and privatization
drive in 1998-2004. With the BJP-led NDA once again in power,
privatization/divestment could gather steam. However, given the turnaround of the
Gujarat PSUs, we believe the government could first resurrect the profitability of the
PSUs before opting for divestment.
If the right policy decisions are taken, PSUs’ profitability should improve, making a
strong case for a re-rating. Prominent PSUs that we believe will see a sharp upturn
in profitability, and consequently, a significant re-rating include
BHEL, BPCL, SBI,
NTPC
and
ONGC.
Our top PSU picks include
BHEL, BPCL, SBI, NTPC and
ONGC
Valuation table: Our top picks in PSU’s
Sales
PAT
Mkt Target Up- Sales
Gr. (%)
(INR b)
Company Cap Price side INR b
INRb (INR) (%)
FY14 FY15 FY16 FY17 CAGR FY14
3,803 500 17 1,732 10.9 7.9
ONGC
2.0 14.8
266
2,013 3,240 26 676 18.3 16.9 21.0 15.6
SBI
142
1,348 187 15 716 7.5 5.7
NTPC
9.9 14.3
99
590 300 24 391 -15.7 10.2 11.3 16.7
BHEL
36
BPCL
442
676
15 2,643 -3.0
4.2
3.3
17.0
Div.
Yld
(%)
FY15 FY16 FY17 CAGR FY15 FY16 FY17 FY15 FY16 FY17 FY15 FY16 FY17 FY15
PAT
Gr. (%)
P/E
(x)
P/B
(x)
RoE
(%)
20.3 13.2 2.0 11.0 11.3 10.0
44.9 26.8 31.0
-6.9 15.3 16.0
9.9 12.1
6.6 11.1
9.5
9.6
9.8
7.3
8.3
1.9
1.2
1.2
1.8
1.8
1.7
1.0
1.1
1.7
1.7
1.5 18.1 18.3 16.7
0.9 13.5 15.3 17.6
1.0 10.8 11.8 12.8
1.6
7.3 10.5 12.6
1.5 13.7 15.0 15.3
Abs.
Perf.
(%)
3M 12M
2.8 37.9 42.3
1.7 60.4 28.4
3.6 32.3
3.8
1.2 31.8 35.8
1.8 37.2 66.3
-31.5 51.4 29.5 16.5 25.6 16.9 13.1
7.3 14.3 11.8 10.5
39 -29.2 21.0 13.0
CAGR:
FY04-14
Source: MOSL, Capitaline
16 June 2014
27

Strategy | PSU
Sector and key PSU stocks to watch out for
Sectors
Financials
What went wrong?
Key reforms/ changes expected from new government
Key stocks to watch out for
Stubborn inflation and volatility in INR resulted into tight liquidity
conditions and high interest rate.
Moderating economic growth and fall in new investment demand has led
to significant slowdown of loan growth and increase in stress levels in the
system.
Stress loans percentage for PSU Banks increased by 3x+ in last five years.
AS-15 related provisions led to significant hit on the BV and profitability.
Unable to raise capital and thus led to serious growth concerns and
eroding valuations
NBFCs
Infrastructure Finance Companies
Fuel shortage impacting the PLF; which is limiting the ability to service
debt.
Stressed financial health of SEBs and mounting debt burden
Asset Finance Companies
Sharp decline in manufacturing, infrastructure, & investment activities,
impacted CV sales
Moreover, freight rates have been on a decline and diesel prices went up,
exerting pressure on profitability of CV financiers.
Projects completed (as a % of projects under implementation) have
touched abysmally low (3.4%), thus impacting the virtuous cycle of cash
flow generation in the system.
Public Private Partnership models in various sectors like roads, railways,
ports, airports, etc. got impacted given weak regulatory and
implementation structures.
Resolution of bottle-necks created in infrastructure space and revival of
growth would led to better loan growth and ROA (led by fall in credit
cost).
Improvement in State DISCOMs financial health.
Shareholding of GoI in state-owned banks to be brought below/at least
51%.
Access to foreign capital for state-owned banks is capped at 20% as
compared to 74% for private banks. Voting rights capped could be
increased.
Design a new governance structure/HR reforms for PSU banks viz. i) pay
structure of the employees to be in sync with market, variable structure
to be introduced and ii) top management of the banks tenures should be
elongated as short tenures act as an impediment in laying out a well
defined strategy and implementation of the same.
Consolidation among state-owned banks.
Improvement in financial health of SEBs.
Resolution of fuel supply issues.
State Bank of India
Canara Bank
Punjab National Bank
Union Bank of India
Power Finance
Corporation
Reducing the excise rates on commercial vehicles to revive demand.
Improvement in road infrastructure would increase the efficiency of
vehicle and reduce turnaround time.
Massive pick-up in government capex and spend in sectors like roads,
railways, urban infrastructure, oil & gas, and power.
Addressing the last-mile issues in terms of fast -tracking stuck projects.
Cabinet Committee on Investments has already cleared projects worth
~INR20t (equivalent to ~25% of the projects under implementation).
Simplify contentious issues like land acquisition and forest clearances.
Capital
Goods
BHEL
16 June 2014
28

Strategy | PSU
Sectors
Power
What went wrong?
Key reforms/ changes expected from new government
Key stocks to watch out for
Power sector is reeling under pressure of poor demand.
State owned power distribution companies faced mounting losses and
unserviceable debt components.
Two decade low reported deficit.
Excessive fuel shortage impacting plant load factors (PLF) of Coal and Gas
projects
Steel demand slowed down from double digit annual growth during FY05-
FY11 to grinding halt in FY14.
Project execution became tardy due to both external and internal factors
for PSUs.
Shortage of domestic coal and higher prices at E-auction drove up costs
and affected viability of new power intensive investments. This led to
idling of new capacities.
Production of iron ore declined due to crack down on illegal mining and
virtual stop to granting of new mining leases for iron ore, bauxite & coal.
Naxal activities affected supply chain and new investments.
Improvement in State DISCOMs financial health.
Augmenting/enabling fuel supply to projects.
Cohesive regulatory framework.
Reliable and wide grid connectivity.
NTPC
Coal India
PowerGrid Corporation
Metals
We expect revival in infrastructure and capex cycle to boost the demand
for Metals.
The working of govt. and PSU is likely to get more efficient as new
ministers encourage performance rather than sycophancy.
Remove the impediments so as to increase coal and mineral output.
SAIL
NMDC
Source: Company, MOSL
16 June 2014
29

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

Thematic | India PSUs
Company
Orissa Minerals
United Bank (I)
FACT
Natl.Fertilizer
Pun. & Sind Bank
MTNL
Balmer Lawrie &
GNFC
Guj Alkalies
Guj Inds. Power
STC
CPCL
ITDC
Dredging Corporation of
Tamil Nadu Newsprint
Tide Water Oil
Andrew Yule &
ITI
Balmer Lawrie
Orissa Sponge Iron
PNB Gilts
Madras Fertilizers
Scooters India
Punjab Communications
Hind.Organ.Chem.
Nitta Gelatin India
Bharat Immunolog
Andhra Petrochem
Guj. State Fin. Corp
Mysore Paper Mills
Punjab Alkalies
Elnet Technologies
Tamil Nadu Telecom
Hind.Fluoro Carb
Swadeshi Polytex
Sales
Sales
PAT
Mkt Cap INR b
Gr. (%)
(INR b)
(INR b)
FY14 FY15 FY16 CAGR FY14
26
0
NA
NA -41.7
0
25
22
21
19
19
15
15
15
13
13
13
13
13
11
9
8
7
5
5
4
4
3
1
1
1
1
1
1
1
0
0
0
0
0
40
22
80
NA
34
31
48
19
14
154
4
8
25
10
4
7
NA
NA
NA
26
2
0
2
3
2
3
NA
4
3
0
0
0
0
12.9 -100.0 17.7
NA
NA
NA
NA
-1.6
-15.4
NA
-4.6
NA
NA
NA
-5.3
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
5.0
5.0
NA
1.6
NA
NA
NA
15.9
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
8.5
9.0
NA
-6.1
11.0
11.3
9.5
6.3
5.9
19.2
4.7
4.0
15.5
18.3
10.5
-5.1
NA
-44.8
NA
8.6
2.6
-6.4
-6.5
12.6
25.1
5.5
NA
4.8
8.4
10.4
-6.7
2.8
NA
2
-3
-1
NA
-33
2
3
2
2
-5
-3
0
0
2
1
0
-3
NA
0
NA
1
0
0
-2
0
0
0
NA
-1
0
0
0
0
0
PAT
Gr. (%)
FY15
FY16
NA
NA
40.3
NA
NA
NA
NA
20.8
-7.1
NA
2.0
NA
-223.4
NA
NA
22.5
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
-100.0
NA
NA
NA
NA
5.0
11.0
NA
1.0
NA
20.6
NA
NA
20.6
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
P/E
P/B
RoE
Div.
Abs.
(x)
(x)
(%)
Yld (%) Perf. (%)
CAGR FY15E FY16E FY15E FY16E FY15E FY16E FY14 3M 12M
-24.5 NA
NA
NA
NA
NA
NA
0.1 101.3 106.4
-3.6
4.7
NA
NA
NA
17.6
8.8
11.3
10.7
NA
NA
22.3
-14.0
11.8
24.4
NA
-6.9
NA
NA
NA
NA
15.0
NA
1.8
-0.4
-18.3
NA
-100.0
21.2
NA
8.5
-3.5
9.4
NA
8.2
NA
NA
NA
NA
8.2
5.6
NA
7.1
NA
3.6
NA
NA
5.6
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
7.8
5.1
NA
7.0
NA
3.0
NA
NA
4.6
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
0.5
NA
NA
NA
NA
1.4
0.5
NA
0.8
NA
0.7
NA
NA
0.9
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
1.2
0.5
NA
0.7
NA
0.6
NA
NA
0.8
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
5.8
NA
NA
NA
NA
8.9
NA
10.6
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
9.2
NA
9.8
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
4.8
4.5
1.6
3.9
NA
NA
NA
NA
4.3
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
3.9
NA
NA
NA
70.4 -13.5
87.3 74.4
95.5 17.4
79.2 30.8
123.5 76.5
84.3 48.6
44.1 34.8
23.8 13.4
64.8 34.1
36.1 132.5
41.5 11.8
63.5 -89.1
109.7 139.9
35.1 61.9
34.5 40.3
102.6 145.1
67.1 70.2
30.4 13.5
146.7 42.4
36.3 16.0
57.2 125.7
94.3 55.3
47.7 175.9
68.0 99.0
42.3 -23.2
161.1 97.7
18.1
-3.9
365.2 452.0
46.7 69.2
31.8 31.1
44.0 68.9
35.9 40.0
100.3 28.6
-41.8 -48.1
16.6 15.3
505 13.5 -16.1
18.5 19.5
16.0 17.0
CAGR: FY04-14
Source: MOSL, Capitaline
16 June 2014
31

Thematic | India PSUs
Companies
BSE Sensex: 25,190
S&P CNX: 7,534
June 2014
PSU top companies - A
SBIN
ONGC
BHEL
NTPC
BPCL
COAL
SAIL
Pg-33
Pg-38
Pg-43
Pg-48
Pg-53
Pg-58
Pg-63
PSU top companies - B
CBK
GAIL
HPCL
IOCL
NMDC
OINL
PNB
PWGR
UNBK
Pg-68
Pg-73
Pg-78
Pg-83
Pg-88
Pg-93
Pg-98
Pg-103
Pg-108
16 June 2014
32

16 June 2014
Thematic | India PSUs | Sector: Financials
State Bank of India
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR2,580
TP: INR3,240
Buy
Best placed for economic recovery
Strong liability franchise |Healthy capitalization
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
SBIN IN
746.6
2,834/1,453
18/26/3
2,013.3
33.9
In FY09-14, State Bank of India’s (SBIN) EPS CAGR was flat due to a) rising stress
levels, b) continued high one-off employee provisions and c) moderate balance
sheet growth and fees. Despite the 45%+ increase in balance sheet size, market
capitalization is still 10% below the peak levels of November 2010.
Improvement in economic growth augurs well from growth and asset quality
perspective. With a 10bp decline in credit cost and 10bp improvement in NIM,
RoA/RoE will improve by 11bp/180bp+ and earnings will see an upgrade of 13%.
RoE is expected to improve from 11% to 15%+ in FY16E. Better-than-expected
growth can provide significant upside.
Financial Snapshot (INR b)
Y/E March
2015E 2016E 2017E
NII (INR b)
577.1 674.2 814.9
OP (INR b)
NP (INR b)
EPS (INR) *
EPS Gr. (%)
BV/Sh.(INR)*
P/E (x)
P/BV (x)*
RoE (%)
RoA (%)
*consolidated
392.0 469.9 599.3
159.6 201.8 264.1
275.1 348.8 459.3
44.9
9.0
1.2
13.5
0.8
26.8
7.1
1.0
15.3
0.9
31.7
5.4
0.9
17.6
1.0
2,110 2,394 2,770
What went wrong in five years
Moderating economic growth and fall in new investment demand led to
slowdown of loan growth and significant rise in stress levels in the system.
Elevated inflation level and volatility in INR resulted in tight liquidity
conditions and high interest rate, further accentuating stress in the system.
AS-15 related employee provisions led to significant hit on net worth
(~INR80b) and profitability.
Resolution of bottlenecks created in infrastructure space and revival of
growth would not only provide opportunity for loan growth but also reduce
stress assets and credit cost.
Focus on plucking the low hanging fruits like operating leverage, fees
improvement and improvement in CA balances.
Shareholding of GoI in PSU banks to be brought below 51%. Access to
foreign capital for PSU banks could be raised from the current cap of 20%.
SBIN’s earnings CAGR over the last five years has been at ~4%, led by rising
stress levels (GNPAs at 5% v/s 2.9% in FY09), which not only led to high
credit cost (1.2% v/s average of 0.4% in FY05-08) but also impacted NIM.
Liability franchise continues to be enviable with SBIN’s SA market share
(24% standalone) and CASA ratio being the best in the industry at 43%.
SBIN being the market leader reflects the state of Indian economy. Revival
in economic growth is expected to translate into better loan growth
opportunities and improvement in asset quality.
One-off employee related provisions are behind and new management’s
focus to reduce overheads will drive strong operating leverage in the next
growth cycle.
SBIN trades at 1.2x P/BV (LPA) and with the economy bottoming out and
reform-oriented actions, we expect a re-rating in the stock.
Core operating profitability and earnings are likely to have bottomed out in
FY14. We expect earnings CAGR of 30%+ over FY15-16E. Maintain
Buy.
What needs to be done
Shareholding pattern (% )
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
58.6
20.8
12.0
8.5
62.3
17.9
11.5
8.2
62.3
16.0
13.3
8.4
What the bank did in last five years
Stock Performance (1-year)
What is the underlying potential
Valuation and view with sensitivity on target price
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Sohail Halai
(Sohail.Halai@MotilalOswal.com); +91 22 39825430

State Bank of India
Story in charts
Return ratios have bottomed out, expect to rebound (%)
RoE
0.9 1.0 0.9
1.0 1.1
0.9
0.9
0.7
RoA
0.9 1.0
0.6
0.9
Trading at LPA, significant upside potential
2.7
PB (x)
Peak(x)
2.3
1.2
1.1
0.3
0.6
1.2
At 25%+ LPA: TP
INR3,710
Avg(x)
Min(x)
At peak Valuation:
TP INR5,630
0.8
1.9
Source: Company, MOSL
Source: Company, MOSL
NIM to be stable, NII growth to rebound (%)
NIM
NII growth
37.4
24.7
12.1
12.1
3.0
-3.7
3.0 3.4 3.5
2.8 2.7 2.6 3.2 3.8
13.0
22.6
13.4
2.4
3.3
3.2 3.2 3.2
11.2
33.1
17.1 16.8
Earnings growth to rebound led by core operations (%)
80
50
20
-10
-40
Core PPP growth
PAT growth
Source: Company, MOSL
Source: Company, MOSL
Factored moderation in credit cost, can surprise positively
2.5
PCR (%)
Credit Cost (%)
Net stress loans lowest in the system (% of loans)
SEB, 0.3
AI, 0.1
NNPA, 2.6
0.7
0.1
0.5 0.5
0.5
1.2
0.8
1.4
1.1
1.3
1.1
1.0
OSRL, 3.1
Source: Company, MOSL
Source: Company, MOSL
16 June 2014
34

State Bank of India
Company description
State Bank of India (SBIN) is India's largest commercial bank, with a balance sheet
size of over ~INR24t (consolidated) and Government ownership of 58%. The bank,
along with its associate banks, has a network of over 22,000 branches across India
and controls over 20%+ of the banking business. The Bank also has the following
Non-Banking Subsidiaries in India: (1) SBI Capital Markets Ltd, (2) SBI Funds
Management Pvt Ltd, (3) SBI Factors & Commercial Services Pvt Ltd, (4) SBI Cards &
Payments Services Pvt. Ltd. (SBICPSL), (5) SBI DFHI Ltd, (6) SBI General Insurance
Company Limited and (7) SBI Pension Funds Pvt Ltd (SBIPFPL). Bank also has a joint
venture in Life Insurance with BNP Paribas Cardif, in which it owns 74% stake.
Market leader in terms of business (Market share, %)
21.0
19.5
18.0
16.5
15.0
Loans
Deposits
Significant gains in SA MS despite rising competition (%)
30.0
25.0
20.0
15.0
10.0
CA
SA
Source: Company, MOSL
Source: Company, MOSL
Rapid branch expansion post FY07
Earnings impacted because of weak macros – expect rebound
EPS (INR)
31.7
21.6
15.1 17.3
-1.2
1.2
7.1
-9.0
-27.5
105
104
105
121
142
173
185
168
229
262
190
EPS growth, %
35.9
14.6
Source: Company, MOSL
Source: Company, MOSL
16 June 2014
35

State Bank of India
Financials and Valuations
Income Statement
Y/E March
Interest Income
Interest Expense
Net Interest Income
Change (%)
Non Interest Income
Net Income
Change (%)
Operating Expenses
Pre Provision Profits
Change (%)
Provisions (excl tax)
PBT
Tax
Tax Rate (%)
Profits for Equity SH
Change (%)
2012
1,065.2
632.3
432.9
33.1
143.5
576.4
19.2
260.7
315.7
24.6
130.9
184.8
67.8
36.7
117.1
41.7
2013
1,196.6
753.3
443.3
2.4
160.4
603.7
4.7
292.8
310.8
-1.6
111.3
199.5
58.5
29.3
141.1
20.5
2014
1,363.5
870.7
492.8
11.2
185.5
678.4
12.4
357.3
321.1
3.3
159.4
161.7
52.8
32.7
108.9
-22.8
2015E
1,572.6
995.5
577.1
17.1
202.3
779.5
14.9
387.5
392.0
22.1
157.3
234.7
75.1
32.0
159.6
46.5
(INR Billion)
2016E
1,795.2
1,121.0
674.2
16.8
233.3
907.5
16.4
437.6
469.9
19.9
173.2
296.7
94.9
32.0
201.8
26.4
2017E
2,169.7
1,354.8
814.9
20.9
276.2
1,091.1
20.2
491.8
599.3
27.5
210.8
388.5
124.3
32.0
264.1
30.9
Balance Sheet
Y/E March
Equity Share Capital
Reserves & Surplus
Net Worth
Deposits
Change (%)
of which CASA Dep
Change (%)
Borrowings
Other Liabilities & Prov.
Total Liabilities
Current Assets
Investments
Change (%)
Loans
Change (%)
Fixed Assets
Other Assets
Total Assets
2012
6.7
832.8
839.5
10,436.5
11.7
4,676.1
1.3
1,270.1
809.2
13,355.2
971.6
3,122.0
5.6
8,675.8
14.7
54.7
531.1
13,355.2
2013
6.8
982.0
988.8
12,027.4
15.2
5,390.6
15.3
1,691.8
954.1
15,662.1
1,148.2
3,508.8
12.4
10,456.2
20.5
70.1
478.9
15,662.1
2014
7.5
1,175.4
1,182.8
13,944.1
15.9
5,923.6
9.9
1,831.3
964.1
17,922.3
1,325.5
3,983.1
13.5
12,098.3
15.7
80.0
435.5
17,922.3
2015E
7.5
1,297.2
1,304.7
16,035.7
15.0
6,812.2
15.0
2,116.1
1,099.6
20,556.1
1,364.2
4,580.5
15.0
14,034.0
16.0
76.5
500.8
20,556.1
(INR Billion)
2016E
7.5
1,451.2
1,458.7
19,162.7
19.5
7,834.0
15.0
2,457.4
1,255.4
24,334.2
1,567.5
5,267.6
15.0
16,840.8
20.0
82.3
575.9
24,334.2
2017E
7.5
1,652.7
1,660.2
24,145.0
26.0
9,273.9
18.4
2,866.4
1,434.6
30,106.2
2,258.3
6,215.8
18.0
20,882.6
24.0
87.2
662.3
30,106.2
Asset Quality
Y/E March
GNPA
NNPA
GNPA Ratio
NNPA Ratio
PCR (Excl Tech. write off)
PCR (Incl Tech. Write off)
2012
396.8
158.2
4.5
1.8
60.1
68.1
2013
511.9
219.6
4.8
2.1
57.1
66.6
2014
616.1
311.0
5.0
2.6
49.5
62.9
2015E
548.5
299.7
3.8
2.1
45.4
66.3
(INR Billion)
2016E
486.0
282.8
2.9
1.7
41.8
70.1
2017E
419.1
227.2
2.0
1.1
45.8
77.3
16 June 2014
36

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

16 June 2014
Thematic | India PSUs | Sector: Oil & Gas
ONGC
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR427
TP: INR500
Buy
High ad-hoc subsidy led non-remunerative profitability
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Adequate profitability would revive ONGC’s prospects aided by
exploration focus and aggressive overseas acquisitions
ONGC IN
8,555.5
472/234
7/33/6
3,803.3
63.3
Last 5 year subsidy payout of USD41b is more than the capex of USD37b
impacting investment and acquisitions leading to production decline.
Mere profit normalization through new gas price and elimination of subsidy
through pricing reforms leading to higher net oil realization could more than
double ONGC’s earnings
In a free pricing scenario, we expect reversal of RoE’s which have dipped from
~30% to <17% now and expect likely doubling of fair value.
What went wrong in the five years?
Financial Snapshot (INR b)
Y/E March
2015E 2016E 2017E
Net Sales
1,921 2,072 2,113
EBITDA
Adj PAT
EPS (INR)
Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
667.5 784.6 796.5
322.9 365.6 372.8
37.7
20.3
18.1
16.5
11.3
1.9
42.7
13.2
18.3
18.5
10.0
1.7
43.6
2.0
16.7
16.8
9.8
1.5
During the last five years, ONGC’s net oil realization is down by ~USD5/bbl
led by ad-hoc subsidy policy v/s USD20/bbl increase in international prices.
Since FY05, its cumulative capex of USD37b, is less than subsidy at USD41b.
ONGC’s Operational performance is marred by (a) non-remunerative and
uncertain cashflows impacting long-term investments, (b) suboptimal
performance in overseas acquisitions and (c) dismal NELP performance.
Give (a) remunerative oil and gas price realization, (b) free hand to
management with control on operating cashflows, (c) expedite decision
making on new domestic & overseas investments, and (d) actively monitor
and take timely corrective actions for any delay in the large projects.
Sub-par ad-hoc earnings led to focus change from high value exploration to
low return IOR/EOR (~20% of current production) to maintain production.
While, the ONGC efforts are commendable in maintaining production in
aging fields, aggressive exploration and overseas acquisition would have
ensured more secure long term growth prospects
Last decade subsidy payout of USD55b, if reinvested, could have resulted in
additional production of 100mmt (4.5x of the current annual production).
Mere profitability normalization through market determined oil and gas
realization will add USD6.5b to ONGC’s PAT, implying MCap addition of
USD65b (@P/E of ~10x) v/s current MCap of USD57b.
Every USD1/bbl increase in oil net realization increases ONGC’s EPS by
~INR0.8/sh implying INR8/sh increase in fair value @P/E of 10x.
Every USD1/mmbtu increase in gas price increases ONGC’s EPS by
~INR2.7/sh implying INR27/sh @P/E of 10x.
Likely doubling of gas price, lowering of subsidy to give remunerative oil
realization will help drive earnings growth of ONGC.
The stock trades at 10x FY16E EPS of INR42.7.
Buy.
222.3 249.8 278.2
What needs to be done?
What has company done in last five years?
Shareholding pattern (%)
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
68.9
10.9
6.7
13.5
69.2
10.5
6.8
13.5
69.2
10.8
6.3
13.6
What is the underlying potential?
Stock Performance (1-year)
Valuation and views with sensitivity on TP
Financials and valuations
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Nitish Rathi
(Nitish.Rathi@MotilalOswal.com); +91 22 3982 5558

ONGC
Story in charts
Non-commensurate retail price increases led to India’s under Subsidy burden on ONGC resulted in de-linking its realization
recovery bill rising to INR1.6t in FY13 (INR b)
from international oil prices, with discount rising to ~60%
Petrol
LPG
Total
Diesel
INR b
Kerosene
Crude (USD/bbl) - RHS
120
1,610
1,399
1,385
90
400
494
773 1,033
461
780
60
30
0
Brent (USD/bbl)
120
90
60
30
0
ONGC net realization (USD/bbl)
93
201
Source: PPAC, MoPNG, MOSL
Source: ONGC< MOSL
Since FY05, ONGC has paid cumulative subsidy of INR2.7t v/s Non-remunerative pricing and subdued capex has taken a toll
its own capex of INR2.3t
on ONGC’s operations with stagnating oil and gas production
Subsidy (INRb)
Capex (INRb)
28
26
24
22
20
Standalone Oil Production (mmt)
Domestic Gas Production (bcm)
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: ONGC, PPAC, MOSL
Source: ONGC, MOSL
ONGC’s consolidated EPS could increase 64% at rational
subsidy and gas ~USD8.4/mmbtu
Base
Subsidy @46%
realization (USD/bbl)
47.8
28.3
28.3
FY13
41.5
31.0
31.0
Gas @USD8.4/mmbtu
Total
68.0
53.4
4.6
5.8
42.7
Even at long term P/E of 9.7x, ONGC could see 34% upside
on the likely new EPS
ONGC stock price
ONGC Price (@ 5Yr avg P/E of 10.2x new EPS)
P/E (x)
600
400
200
516
15
10
5
0
47.1
37.7
37.7
0
FY14
FY15
FY16
16 June 2014
39

ONGC
Company description
ONGC, a Fortune 500 company, is an eminent exploration and production (E&P)
company in India. With over 300 discoveries, it has established in-place reserves of
6.9b ton of oil equivalent (btoe), with ultimate reserves of 2.4btoe. It currently
accounts for ~68% of India's domestic oil and gas production. Through its 100%
subsidiary ONGC Videsh Limited (OVL), it has equity investments in E&P blocks in 16
countries. Downstream presence is marked through its subsidiary (71.6% stake),
MRPL.
Disinvestment timeline
With government stake at 63%, we believe the medium term focus of the
government with respect to ONGC will be towards improving the profitability.
Further divestment, in our view would be after 2-3 years, when the expected
profitability increase is achieved.
ONGC: Key Assumptions
Year End: March 31 (INRm)
Exchange Rate (INR/USD)
APM Gas Price (USD/mmbtu)
Brent crude price (USD/bbl)
Production Details (mmtoe)
Domestic Oil Production (mmt)
Domestic Gas Production (bcm)
Domestic Production (mmtoe)
OVL Production (mmtoe)
Group Production (mmtoe)
Subsidy Sharing (INRb)
Oil Price Realization (USD/bbl)
Gross
Upstream Discount
Net
Cons EPS Break-up (INR/sh)
EPS (Standalone)
EPS (OVL)
EPS (MRPL & Others)
EPS (Consolidated)
FY11
45.7
3.9
86.5
27.3
25.3
52.6
9.4
62.1
249
89.4
35.6
53.8
20.4
3.0
1.1
24.5
FY12
47.9
4.2
114.5
26.9
25.5
52.4
8.8
61.2
445
117.4
61.8
55.6
26.8
3.2
0.4
30.4
FY13
54.5
4.2
110.6
26.1
25.3
51.5
7.3
58.7
494
110.7
62.9
47.8
24.5
4.6
-0.8
28.3
FY14
60.6
4.2
107.8
26.1
24.9
51.0
8.3
59.4
564
107.8
66.3
41.5
25.8
5.2
0.0
31.0
FY15E
58.0
6.3
105.0
0.9
27.2
26.4
53.6
8.9
62.5
491
105.0
57.9
47.1
FY16E
57.0
6.3
105.0
28.4
27.0
55.4
10.0
65.4
369
105.0
42.2
62.8
FY17E
57.0
6.3
100.0
29.2
27.6
56.8
10.0
66.8
311
100.0
34.3
65.7
31.3
35.3
36.6
5.3
6.0
5.5
1.1
1.4
1.4
37.7
42.7
43.6
Source: Company, MOSL
16 June 2014
40

ONGC
Financials and valuations
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
2012
1,463.7
24.4
577.7
39.5
234.3
343.4
4.3
57.6
0.0
428.0
143.7
33.6
284.3
263.1
23.3
-2.9
281.4
2013
1,624.0
11.0
548.8
33.8
231.4
317.4
4.8
54.9
0.0
367.4
127.5
34.7
239.9
239.9
-8.8
2.3
242.2
2014
1,732.3
6.7
569.8
32.9
250.8
319.0
6.6
81.7
0.0
394.1
127.6
32.4
266.5
263.6
9.9
1.9
268.4
2015E
1,921.3
10.9
667.5
34.7
243.8
423.7
7.8
60.7
0.0
476.6
150.8
31.6
325.8
325.8
23.6
-2.9
322.9
(INR Billion)
2016E
2,071.9
7.8
784.6
37.9
268.2
516.4
5.2
48.5
0.0
559.6
190.3
34.0
369.4
369.4
13.4
-3.8
365.6
2017E
2,113.0
2.0
796.5
37.7
285.5
511.0
5.3
56.7
0.0
562.4
185.7
33.0
376.7
376.7
2.0
-3.9
372.8
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
42.8
1,321.6
1,364.4
152.2
122.0
1,864.7
1,113.7
806.3
687.9
380.4
29.2
796.9
131.7
117.1
373.6
174.4
451.8
390.3
61.5
345.1
1,864.7
2013
42.8
1,482.5
1,525.3
204.5
142.3
2,098.8
1,235.0
827.2
805.2
397.4
21.3
776.7
127.8
154.0
302.5
192.4
429.6
373.4
56.2
347.2
2,098.8
2014
42.8
1,655.9
1,698.7
348.4
179.8
2,455.0
1,399.2
932.1
801.9
334.8
289.9
642.7
107.1
149.5
209.8
176.4
351.2
296.6
54.6
291.5
2,455.0
2015E
42.8
1,858.7
1,901.5
348.8
182.4
2,667.0
1,482.5
1,033.6
867.3
418.3
300.3
631.4
109.4
146.2
197.9
178.0
360.6
304.6
55.9
270.9
2,667.0
(INR Billion)
2016E
2017E
42.8
42.8
2,094.2
2,337.0
2,137.0
2,379.8
349.2
349.2
194.4
201.9
2,922.0
3,179.4
1,570.7
1,659.7
1,133.7
1,221.5
943.2
1,032.1
506.1
593.8
310.6
321.0
652.7
650.4
113.1
115.7
165.8
166.0
194.2
187.4
179.6
181.3
374.7
378.9
318.2
322.4
56.5
56.5
278.0
271.5
2,922.0
3,179.4
E: MOSL Estimates
16 June 2014
41

ONGC
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
32.9
60.3
159.5
9.8
30.3
13.0
7.1
2.7
2.3
5.9
2.3
22.7
20.2
0.9
29.2
32.8
0.0
0.1
2013
28.3
55.4
178.3
9.5
45.4
15.1
7.7
2.4
2.2
6.5
2.2
16.6
16.0
0.8
34.6
28.7
0.0
0.1
2014
31.4
60.7
198.5
9.5
35.4
13.6
7.0
2.2
2.2
6.7
2.2
16.5
14.0
0.8
31.5
22.6
0.0
0.2
2015E
37.7
66.2
222.3
12.0
37.1
11.3
6.4
1.9
2.0
5.7
2.8
18.1
16.5
0.8
27.8
20.8
0.0
0.2
2016E
42.7
74.1
249.8
13.0
35.5
10.0
5.8
1.7
1.8
4.9
3.0
18.3
18.5
0.7
29.2
19.9
0.0
0.2
2017E
43.6
76.9
278.2
13.0
34.9
9.8
5.5
1.5
1.8
4.8
3.0
16.7
16.8
0.7
28.7
20.0
0.0
0.1
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
428.0
129.2
0.0
0.0
-118.8
-70.5
474.5
-393.0
2.9
0.0
-390.0
0.1
91.5
-4.3
-85.4
1.9
86.4
287.0
373.4
2013
367.4
120.9
0.0
0.0
-124.3
-11.7
447.0
-422.8
10.7
0.0
-412.1
2.0
-2.7
-6.9
-110.0
-117.5
-82.6
373.4
290.8
2014
394.3
199.8
0.0
0.0
-90.0
-37.1
466.9
-339.1
-268.6
0.0
-607.8
0.0
143.9
0.0
-95.0
48.9
-91.9
302.4
210.4
2015E
476.7
199.9
0.0
0.0
-148.2
8.7
537.2
-419.2
-10.3
0.0
-429.5
0.0
0.4
0.0
-119.9
-119.5
-11.9
209.6
197.7
(INR Billion)
2016E
2017E
559.8
562.5
212.1
210.0
0.0
0.0
0.0
0.0
-178.3
-178.3
-10.8
-0.3
582.8
593.9
-446.6
-460.4
-10.3
-10.3
0.0
0.0
-457.0
-470.7
0.0
0.0
0.4
0.0
0.0
0.0
-129.9
-129.9
-129.5
-129.9
-3.7
-6.7
197.7
194.0
194.0
187.3
E: MOSL Estimates
16 June 2014
42

16 June 2014
Thematic | India PSUs | Sector: Capital Goods
BHEL
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR241
TP: INR300
Buy
Cyclical factors support recovery
Strong operating leverage and FCF improvement to drive re-rating
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
BHEL IN
2,447.6
292/100
1/34/5
590.1
9.8
During FY14, BHEL’s BTB inched up to 2.5x (from lows of 2.2x in September 2013).
Also, Power segment BTB had improved to 2.5x in FY14 (from lows of 2.3x in
September 2013); we expect a bounce-back to 3x in FY15.
Focus on cash realization led to a cash surplus situation after a gap of four years
in FY14; also the rising trend in debtors had been arrested. We expect operating
cash flows to improve from an average of ~INR20b in FY10 to ~INR75b in FY14-
17E. Net cash is expected to increase to INR256b in FY17E (41% of market
capitalization).
BHEL has strong operating leverage, expect earnings CAGR of 40% in FY15E-17E.
Key variable to monitor will be the impact of VII Pay Commission.
Financial Snapshot (INR b)
Y/E March 2015E 2016E 2017E
Net Sales
323.7 356.8 397.1
EBITDA
Adj PAT
EPS (INR)
Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
36.2
24.9
10.2
-32
142
7.3
7.4
25.6
1.8
49.6
37.6
15.4
51
152
10.5
10.3
16.9
1.7
62.8
48.7
19.9
29
165
12.6
12.6
13.1
1.6
What went wrong in five years
Industry ordering declined from peak levels of ~30-35gw p.a. during FY07-
10 to ~10gw p.a. levels during FY12-14.
Post NTPC’s bulk tender, BTG prices declined by ~20-25% over the last four
years, despite increased commodity prices.
Industry business failed to provide support in a constrained environment as
~60% of the revenue was largely from captive power plants.
Address contentious issues in the power segment, including fuel availability,
SEB finances, distribution reforms etc.
Increased spend in railways and demand pick-up in cement/metals is vital
to drive the industrial business.
BHEL has expanded capacity from 7gw to ~20gw. It has also built
capabilities for EPC execution, expanded manufacturing offerings (in terms
of Auxillaries/Balance of Plant to capture an increasing part of the value
addition), outsourced Erection Testing Commissioning/rationalized vendor
base (leading to lower costs/higher operational efficiencies) etc.
Attempts are being made to broad-base revenue in segments like
Transportation (Greenfield unit for Mainline Electric Multiple Units,
expanding locos capacity), renewable (solar manufacturing), Power T&D
(HVDC, STATCON, 765kva transformers, GIS etc).
BHEL has meaningful operating leverage both at P&L (staff costs at 18.2% of
revenue in FY15E v/s 11.4% in FY12) and B/S (core NWC stable at ~200-210
days, while reported NWC at 154 days in FY14 v/s negative 24 days in FY09).
Maintain Buy with a target price of INR310/sh (20x FY16E). BHEL is strongly
exposed to any cyclical uptick and we estimate that 1gw incremental
revenue v/s estimates can translate into a potential earnings upgrade of
24% in FY16E.
Earnings CAGR of 40% over FY15E-17E.
What needs to be done
What company did in last five years
Shareholding pattern (%)
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
63.1
16.5
16.4
4.1
67.7
12.0
15.9
4.5
67.7
12.4
15.0
4.9
Stock Performance (1-year)
What is the underlying potential
Valuation and views with sensitivity on target price
Financials and valuations
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 3982 5410
Nirav Vasa
(Nirav.Vasa@MotilalOswal.com); +91 22 3982 5422

BHEL
Story in charts
Power segment BTB has improved from lows in FY14
Power Orderbook (INR B)
BTB (x)
Expect power segment revenue to improve in FY16E
Power Rev (INR B, ttm)
% YoY
Staff cost is largely fixed, provides operating leverage
Staff cost
Staff cost, % of revenues
Provisions (incl. LDs) at high levels, expect to decline
Net Provisions + LDs (%)
y
NWC also driven by cyclical factors
NWC (excluding cash), % sales
Client advances, % sales
Retention money has bloated given tight liquidity (INR b)
Retention Money
No of days (x)
129
75
89
104
172 184
116
42%33%
18% 18%
14% 5%
-3% -7% 2%
7%
24%
35%
42%
38%
21%
25 25 25 18 32
57 54 58
Expect FCF to improve meaningfully (INR b)…
FCF
…leading to strong increase in net cash position (INR b)
Net Cash / (Debt)
Source: MOSL, Company
16 June 2014
44

BHEL
Company description
BHEL is India’s dominant producer of power and industrial machinery and a leading
EPC company, established in the late 1950s as the Government’s wholly-owned
subsidiary. The company has 14 manufacturing divisions, 8 service centers, 4 power
sector regional centers besides project sites spread across all over India and abroad.
It has a manufacturing capacity of 20gw spread across multiple factories in India,
including thermal, hydro and gas projects.
Disinvestment timeline
With Government’s stake at 63.1%, we believe that there exists scope for lowering
the same through an IPO.
Operating Matrix
FY06
Order Intake (INR B)
Power
R&M
Industry
International Business
Cancellations
Total Order Intake
Order backlog (INR B)
Power
Industry
International Business
Total Order backlog
Growth (%)
Segmental Revenues
Power
Industry
International Business
Total Revenues
EBITDA Margins (%)
Contribution Margins (%)
Staff Costs (%)
Other Expenses (%)
Cash / (Debt), INR B
Cash
Retention Money
Debt
Net Cash / (Debt)
INR/sh
90
19
47
33
-
189
280
60
35
375
3.9
98
37
10
145
18.9
43.3
13.7
10.7
41.3
11.7
-5.6
47.4
19.4
FY07
245
32
60
19
-
356
376
70
43
550
88.2
127
50
11
187
20.4
43.3
13.9
9.0
58.1
27.1
-0.9
84.3
34.4
FY08
387
24
69
23
-
503
710
88
57
852
41.1
159
44
11
214
18.9
44.4
15.8
9.7
83.9
28.3
-1.0
111.2
45.4
FY09
FY10
FY11
443
21
114
37
-
605
1,258
232
117
1,641
2.5
348
90
12
450
19.9
40.3
13.5
9.5
96.3
96.9
-1.0
192.2
78.5
FY12
176
23
79
2
58
221
1,077
175
94
1,347
(63.5)
379
102
15
495
20.3
41.5
11.4
9.4
66.7
134.7
-1.2
200.2
81.8
FY13
227
29
41
20
-
317
FY14
170
34
50
26
-
280
FY15E
204
40
60
25
-
329
810
91
99
999
17.5
269
73
6
403
12.0
42.1
14.8
15.3
118.7
181.0
-26.5
273.2
111.6
6
337
10.9
42.6
18.2
13.5
62
8
372
13.6
42.2
16.4
12.2
FY16E
232
46
75
25
-
378
795
95
116
1,006
14.9
293
71
11
414
15.4
42.2
14.3
12.5
FY17E
256
53
105
25
-
439
793
108
130
1,031
16.2
310
92
444 401
28
19
92
135
33
36
-
-
597
590
974
130
71
1,170
18.7
213
56
12
280
15.7
38.5
15.4
7.4
103.1
41.9
-1.5
143.5
58.6
1,125
208
91
1,424
(1.1)
269
57
16
342
17.7
40.4
15.7
6.9
97.9
67.7
-1.3
164.3
67.1
933
835
115
93
104
80
1,152
1,008
43.2
(11.5)
396
100
6
502
19.4
42.1
11.9
10.9
77.3
168.5
-14.2
231.6
94.6
325
173.4
244.4
283.6
162.9
113.4
98.2
-26.7
-26.7
-26.7
309.6
331.1
355.1
126.5
135.3
145.1
Source: Company, MOSL
16 June 2014
45

BHEL
Financials and valuation
Income statement
Y/E March
Revenues
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
2012
472,278
19
99,076
20.6
8,000
91,076
513
12,656
-193
103,026
32,623
31.7
70,403
68,922
22
2013
476,177
1
93,898
19.4
9,534
84,364
1,253
11,217
-4
94,324
28,177
29.9
66,148
65,540
-5
2014
383,888
-19
45,198
11.6
9,829
35,369
1,326
16,160
253
50,456
15,849
31.4
34,608
36,303
-45
2015E
323,738
-16
36,228
10.9
10,664
25,564
1,782
12,254
0
36,035
11,171
31.0
24,864
24,864
-32
(INR Million)
2016E
356,813
10
49,603
13.6
11,908
37,696
1,877
17,953
0
53,772
16,131
30.0
37,640
37,640
51
2017E
397,098
11
62,823
15.4
13,388
49,434
1,985
22,163
0
69,612
20,884
30.0
48,729
48,729
29
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
4,895
248,837
253,732
1,234
-15,462
239,504
97,066
54,098
42,968
13,476
4,617
591,237
135,487
357,405
66,720
31,624
412,794
336,380
76,414
178,443
239,504
2013
4,895
299,546
304,441
14,152
-15,507
303,086
107,832
63,248
44,585
11,716
4,292
625,185
117,638
398,882
77,321
31,344
382,692
293,270
89,421
242,493
303,086
2014
4,895
325,575
330,471
26,548
-19,690
337,329
119,135
72,005
47,131
6,220
4,202
650,670
97,976
399,530
118,729
34,435
370,894
267,633
103,260
279,776
337,329
2015E
4,895
341,712
346,608
26,734
-19,690
353,652
129,424
82,669
46,755
5,000
4,202
601,716
85,791
315,379
173,401
27,146
304,021
202,146
101,875
297,695
353,652
(INR Million)
2016E
2017E
4,895
4,895
366,141 397,766
371,036 402,661
26,734
26,734
-19,690
-19,690
378,081 409,706
143,214 160,004
94,577 107,965
48,638
52,039
5,000
5,000
4,202
4,202
642,039 689,950
92,771
99,274
276,353 279,489
244,445 283,632
28,469
27,555
321,798 198,182
214,336
84,550
107,462 113,632
320,241 491,768
378,081 553,009
E: MOSL Estimates
16 June 2014
46

BHEL
Financials and valuation
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
28.2
31.4
103.7
6.4
22.3
2013
26.8
30.7
124.4
5.4
20.0
2014
14.8
18.8
135.0
2.8
19.1
2015E
10.2
14.5
141.6
3.0
30.0
2016E
15.4
20.2
151.6
4.6
35.1
2017E
19.9
25.4
164.5
6.0
35.1
9.2
8.3
2.5
5.8
2.5
30.9
43.3
2.3
271.9
103.1
104.2
-0.3
9.7
8.5
2.1
6.1
2.1
23.7
31.1
1.8
300.7
88.7
97.5
-0.2
17.6
13.8
1.9
12.1
1.1
10.9
11.0
1.2
372.9
91.4
100.8
-0.3
25.6
17.9
1.8
13.5
1.2
7.3
7.4
1.0
347.0
94.4
84.7
-0.4
16.9
12.9
1.7
8.5
1.8
10.5
10.3
1.0
275.8
92.6
87.8
0.1
13.1
10.3
1.6
6.1
2.3
12.6
12.6
0.9
250.7
89.0
89.7
0.1
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
103,218
8,000
0
513
32,623
-85,648
-11,438
-13,097
-225
0
-13,322
6,169
213
513
11,302
-5,434
-30,194
96,302
66,108
2013
94,329
9,534
0
1,253
28,177
-8,217
31,108
-9,390
325
0
-9,065
-43
12,918
1,253
23,064
-11,442
10,601
66,720
77,321
2014
50,203
9,829
0
1,326
15,849
40,073
54,628
-6,879
90
0
-6,789
-5,035
12,396
1,326
12,465
-6,431
41,408
77,321
118,729
2015E
36,035
10,664
0
1,782
11,171
47,384
73,635
-9,069
0
0
-9,069
0
187
1,782
8,299
-9,895
54,671
118,729
173,401
(INR Million)
2016E
2017E
53,772
69,612
11,908
13,388
0
0
1,877
1,985
16,131
20,884
40,807
969
98,007
73,401
-13,790
-16,790
0
0
0
0
-13,790
-16,790
0
0
0
0
1,877
1,985
11,295
15,440
-13,172
-17,425
71,045
39,186
173,401 244,445
244,445 283,632
E: MOSL Estimates
16 June 2014
47

16 June 2014
Thematic | India PSUs| Sector: Utilities
NTPC
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR164
TP: INR187
Buy
Poor demand, Stiff regulations impact performance
Higher PLF, possible inorganic growth key trigger to watch out for
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
NTPC IN
8,245.5
169/111
11/-9/-31
1,347.7
22.7
NTPC is formidable player in Power sector in India and accounts for ~18% of
India’s installed capacity (as at March 2014) but ~24% of total generation.
Poor demand from DISCOMs led coal plant PLF to come down by 10ppt over
FY09-14. Improving demand scenario to bode well. Capacity under construction
represents ~50% growth on installed base.
Valuations are trough. Reversal to mean could lead to TP of INR203/sh, upside of
24%. 5% higher PLF above 85% to drive 5% EPS upgrade, upside thus exists.
Financial Snapshot (INR b)
Y/E March
2015E 2016E 2017E
Net Sales
715.7 756.2 831.1
EBITDA
Adj PAT
EPS (INR)
Growth (%)
BV/Share
( )
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
168.8 194.5 234.2
95.8 110.5 128.1
11.6
-5
110
10.8
7.8
11.1
1.2
13.4
15
118
11.8
8.5
9.6
1.1
15.5
16
126
12.8
9.6
8.3
1.0
What went wrong in the five years?
NTPC missed 11
th
plan capacity addition target by ~12GW vs original plan.
Reported RoE declined from peak of 15% in FY2008 to 12% in FY14.
Generation grew moderate at mere 2% CAGR over FY09-14, coal generation
grew marginally higher at 3% CAGR. Coal supply woes along with slackening
demand led to lower coal project PLF from 92% in FY08 to 81% in FY14.
Need to (a) lower execution time, speedier project implantation, (b)
Conducive demand environment for higher PLF, (c) effective utilization of
cash, free cash flow to core assets, pursue inorganic growth, vs treasury and
(d) Remove regulatory uncertainty, difficulties.
Award of projects on bulk tendering basis of ~16GW, capacity under
construction now stands at ~20GW.
Capacity addition target in 12
th
plan of 14GW on track, as FY13-14 capacity
addition already at 6.6GW (47% of target achieved).
Efforts on coal mines development, 3 MDOs appointed. First captive
production likely in FY15E.
Projects under construction offers ~50% growth on current installed base.
Long term plan to reach 128GW by 2032 with projects already identified.
Near term potential is to achieve higher PLFs. We model coal project PLF at
86% by FY17E. Access to 5b tons of coal reserve.
NTPC trades at PER of 12x on FY16E basis, vs LT peak PER of 26x and 10-year
average of 16x. 15x PER on current FY16E EPS would mean TP of INR203/sh
Rise in PLF would be a key upside trigger. 5% PLF leads to increase in EPS by
INR0.7/sh increase or INR10/sh increase in TP (@15x PER).
Earnings CAGR of 15% over FY15-17E,
Buy
with TP of INR187/sh.
What needs to be done?
What has company done in last five years?
Shareholding pattern (%)
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
75.0
12.9
9.4
2.7
75.0
12.1
10.4
2.5
75.0
10.5
9.4
5.1
What is the underlying potential?
Stock Performance (1-year)
Valuation and views with sensitivity on TP
Financials and valuations
Nalin Bhatt
(NalinBhatt@MotilalOswal.com); +91 22 3982 5429

NTPC
Story in charts
Capacity addition momentum to continue (GW)
Availability remains robust in FY14 (%)
Coal (PAF(%)
93 92
90 90
Gas PAF(%)
93
90
91
89 89 89 89
92 92
88 88 88 88 89
91
82 84
89 88 88
93 93 94 93
90 90 90 90
88
87 87
87
Source: Company, MOSL
PLFs however continue to remain muted (%)
Coal PLF(%)
Gas PLF (%)
Generation growth thus remain muted
Gen. Gr (YoY, %)
Cap Addn. Gr (YoY, %)
88 88 90 92 91 91 88 85
81 81 85 85 86
80 82 81 84 84
71 72 71 70 68 70 66 78 68 67 78 78 65 57 36 45 60 75
Source: MOSL, Company
Core RAB growth in-line with capacity addition growth
RAB (INR b)
Capacity (GW)
39.2
43.8
48.9 49.9
55.9
64.7
Reported earnings growth robust over FY15-17E
FY15-17E:
16%
22.5 24.5
29.1
25.0 27.4
30.1 31.7
34.2
FY02-04:
2.9%
FY05-08:
17.4%
FY09-12:
0%
155 164 167 205 215 227 237 262 301 315 345 414 465 488
Source: MOSL, Company
Expect capacity addition momentum to continue (GW)
Source: MOSL, Company
16 June 2014
49

NTPC
Company description
NTPC is the largest power generator in India with Installed capacity stands at
43.1GW and contribute ~30% of generation of the electricity in India. This includes
17 coal based and 7 gas based stations, located across the country. In addition under
JVs, 7 stations are coal based & another station uses naptha/LNG as fuel and 7
renewable energy projects.
NTPC ranked 384th in the ‘2013, Forbes Global 2000’ ranking of the World’s biggest
companies. NTPC became a “Maharatna” company in May, 2010, one of the only
four companies to be awarded this status. The company has set a target to have an
installed power generating capacity of 128GW by the year 2032. It aims to add
14GW in 12th plan v/s ~9GW addition in 11th plan period. It has also ventured into
related areas like coal mining, distribution, transmission, and gas exploration.
Disinvestment timeline
With government stake at 75%, we believe the medium term focus of the
government with respect to NTPC will be towards improving the profitability.
Further divestment, in our view would be after 2-3 years, when the expected
profitability increase is achieved.
Trend in core and reported profitability of NTPC
Year
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Gen. Profit
(INR b)
38.0
38.9
43.2
48.3
55.3
57.3
60.9
69.7
68.3
70.9
80.7
76.7
89.6
101.1
Growth
(%)
0.0
2.4
10.9
12.0
14.4
3.6
6.3
14.4
-2.0
3.8
13.8
-4.9
16.9
12.7
PAT
(INR b)
52.6
58.1
63.3
72.3
75.7
81.3
84.5
79.6
79.7
89.9
109.7
97.0
111.8
129.5
Growth
(%)
0.0
10.4
9.0
14.2
4.7
7.5
3.9
-5.9
0.2
12.8
22.0
-11.6
15.2
15.8
EPS
Growth
(INR/sh)
(%)
6.4
0.0
7.0
10.4
7.7
9.0
8.8
14.2
9.2
4.7
9.9
7.5
10.3
3.9
9.7
-5.9
9.7
0.2
10.9
12.8
13.3
22.0
11.8
-11.6
13.6
15.2
15.7
15.8
Source: MOSL
16 June 2014
50

NTPC
Financials and valuations
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Consolidated PAT
2012
615,937
12
140,399
22.6
27,917
112,482
17,116
27,897
0
123,262
31,024
25.2
92,237
79,720
0
92,237
2013
647,024
5
171,141
26.1
33,968
137,173
19,244
31,016
-16,841
165,787
39,592
23.9
126,194
89,924
13
126,194
2014
666,027
3
174,253
26.1
39,724
134,529
25,938
28,457
0
137,048
34,169
24.9
102,878
101,322
13
102,878
2015E
715,685
7
168,849
23.5
46,063
122,786
30,773
29,868
0
121,881
26,080
21.4
95,801
95,801
-5
95,801
(INR Million)
2016E
756,194
6
194,480
25.6
52,635
141,846
32,623
32,450
0
141,673
31,192
22.0
110,481
110,481
15
110,481
2017E
831,079
10
234,214
28.1
60,123
174,091
43,187
35,877
0
166,781
38,657
23.2
128,124
128,124
16
128,124
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
(INR Million)
2012
2013
2014
2015E
2016E
2017E
82,455
82,455
82,455
82,455
82,455
82,455
650,457 721,421 775,699 827,369 886,958 956,062
732,912 803,875 858,153 909,824 969,412 1,038,516
476,955 553,309 665,281 681,944 758,090 821,888
6,369
9,153
10,516
10,516
10,516
10,516
1,216,236 1,366,337 1,533,950 1,602,284 1,738,018 1,870,920
818,283 1,032,457 1,269,644 1,302,428 1,487,604 1,687,189
365,719 403,096 442,820 488,883 541,517 601,640
452,564 629,361 826,824 813,545 946,086 1,085,549
418,278 371,094 343,171 376,689 367,846 334,472
95,839
91,376
97,579
67,784
70,008
72,608
427,908 508,005 527,968 558,034 603,884 627,486
37,029
40,572
53,734
59,103
61,866
64,755
58,325
53,655
52,201
61,075
63,931
66,916
177,643 184,902 153,114 219,656 251,582 253,891
154,911 228,877 268,920 218,200 226,505 241,924
178,353 233,500 261,591 213,768 249,807 249,195
139,979 156,055 179,771 155,609 193,994 194,611
38,374
77,445
81,820
58,159
55,812
54,584
249,555 274,506 266,378 344,266 354,077 378,291
1,216,236 1,366,337 1,533,951 1,602,284 1,738,018 1,870,920
E: MOSL Estimates
16 June 2014
51

NTPC
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
9.7
14.6
88.9
4.0
5.2
13.4
8.9
1.5
2.2
9.7
3.1
13.1
9.6
0.5
34.3
21.8
106.4
0.7
2013
10.9
19.4
97.5
5.8
15.3
11.9
6.7
1.3
2.2
8.4
4.4
16.4
10.6
0.5
29.8
22.5
117.3
0.7
2014
12.3
17.3
104.1
5.1
11.7
10.5
7.5
1.2
2.4
9.1
3.9
12.4
9.3
0.5
28.5
29.3
132.7
0.8
2015E
11.6
17.2
110.3
4.6
11.5
11.1
7.5
1.2
2.1
9.0
3.6
10.8
7.8
0.5
31.0
30.0
103.3
0.7
2016E
13.4
19.8
117.6
5.3
11.5
9.6
6.5
1.1
2.1
8.1
4.1
11.8
8.5
0.5
30.7
29.7
125.4
0.8
2017E
15.5
22.8
126.0
6.2
11.5
8.3
5.7
1.0
2.0
7.0
4.8
12.8
9.6
0.5
29.3
28.3
118.4
0.8
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
123,262
27,917
0
17,116
-31,024
-10,525
126,745
-126,303
-27,609
0
-153,912
0
44,491
-17,116
-27,703
42,957
15,791
161,853
177,643
2013
165,787
33,968
0
19,244
-39,592
-17,693
161,713
-166,990
-4,463
0
-171,453
0
75,823
-19,244
-40,086
16,999
7,258
177,643
184,902
2014
137,048
39,724
0
25,938
-34,169
-23,660
144,881
-209,264
6,202
0
-203,061
0
71,861
-25,938
-35,533
15,819
-42,361
184,902
142,540
2015E
121,881
46,063
0
30,773
-26,080
-11,346
161,291
-66,302
-29,795
0
-96,097
0
19,175
-30,773
-32,319
-30,989
34,205
153,114
187,319
(INR Million)
2016E
2017E
141,673 166,781
52,635
60,123
0
0
32,623
43,187
-31,192
-38,657
22,115
-21,904
217,853 209,530
-176,333 -166,211
2,225
2,600
0
0
-174,108 -163,611
0
0
78,407
65,833
-32,623
-43,187
-37,271
-43,223
-11,941
-43,768
31,804
2,150
219,656 251,582
251,460 253,732
E: MOSL Estimates
16 June 2014
52

16 June 2014
Thematic | India PSUs | Sector: Oil & Gas
BPCL
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR590
TP: INR676
Buy
Ad-hoc/delayed subsidy impacts profitability
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Diesel deregulation, marketing margin increase to drive earnings; E&P
to give further upside
BPCL IN
723.1
650/256
3/50/29
442.4
7.4
BPCL’s interest cost increased >6x in the last eight years. This increase was led by
ad-hoc subsidy sharing policy and delayed compensation by the government.
Diesel deregulation and likely marketing margin can boost earnings for BPCL,
which if reinvested in improving GRMs can increase its bottom-line for long term.
What went wrong in the five years?
Financial Snapshot (INR Billion)
Y/E March 2015E 2016E 2017E
Net Sales
2,564 2,670 2,757
EBITDA
Adj PAT
EPS (INR)
Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
73.9
27.2
37.6
-30.5
13.7
8.5
14.3
1.8
76.2
32.7
45.3
20.6
15.0
8.9
11.8
1.7
85.0
37.0
51.2
13.0
15.3
10.5
10.5
1.5
Gross under-recoveries increased from INR88b in FY06 to INR345b in FY14.
This coupled with delayed compensation increased debt and interest costs
impacting BPCL’s profitability.
BPCL’s debt touched its peak in FY13 at INR238b, 185% higher than INR84b
in FY06. Interest costs in FY14 at INR20b are >6x than INR3b in FY06.
BPCL’s returns are marred by (a) lower realizations led by ad-hoc subsidy
sharing, (b) Lower GRMs.
Give (a) De-regulation of diesel, (b) lowering of subsidy, (c) ambitious
investments in improving the refinery complexity to increase GRMs (as
being done by MRPL) and (d) actively monitor and take timely corrective
actions for any delay in the large projects.
BPCL has managed its treasury and inventory well, and along with its
increased focus on marketing and branding, its cost-efficiency has led to a
better performance than other MNCs.
While, BPCL along with Oman Oil Company successfully commissioned Bina
refinery, the refinery didn’t profits till FY13.
Post FY06, subsidy payout of INR107b, could have been invested for
refinery up-gradation to improve its GRMs.
Mere subsidy/interest cost reduction, could’ve increased EPS by INR4/sh.
Every INR0.5/ltr increase in diesel marketing margin increases EPS by INR7.
Refining contributes 26% in overall EBITDA. Every USD1/bbl increase in
BPCL’s GRM increases its SA EBITDA by 18% and EPS by INR3.5/sh.
Lowering of subsidy to give timely realization, along with some marketing
margins in diesel will give boost to the earnings of BPCL.
The stock trades at 11.8x FY16E EPS of INR45.3.
Buy.
What needs to be done?
290.9 321.0 354.6
What has company done in last five years?
Shareholding pattern (%)
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst.
Foreign
Others
55.8
15.9
11.5
16.9
55.8
16.8
10.2
17.2
55.8
16.6
10.4
17.2
What is the underlying potential?
Stock Performance (1-year)
Valuation and views with sensitivity on TP
Financials and valuations
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Nitish Rathi
(Nitish.Rathi@MotilalOswal.com); +91 22 3982 5558

BPCL
Story in charts
Non-commensurate retail price increases led to India’s under BPCL has managed to keep its RoE high led by its cost
recovery bill rising to INR1.6t in FY13 (INR b)
efficient business performance
Diesel
INR b
Kerosene
Crude (USD/bbl) - RHS
114 111 108 120
1,610
82 85
87 1,385
1,399 90
70
58 64
1,033
780
60
42
773
461
29
400 494
30
201
93
0
Petrol
LPG
Total
RoE (%)
19.8
12.5
6.1
4.8
11.9
21.7
11.1
5.0
11.5
FY06
Source: PPAC, MoPNG, MOSL
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, MOSL
Interest cost has increased 6 times to its FY06 level led by BPCL’s debt peaked in FY13 to INR238b, 185% higher than
higher debt due to delayed compensation for subsides
INR84b in FY06
Interest Cost (INRb)
23
14
3
6
7
14
84
26
22
20
150
108
212
Total Debt (INRb)
222
236
190
238
175
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: Company, MOSL
Source: Company, MOSL
BPCL’s PAT could increase by 32% (~INR11.8/sh increase in
EPS) by Int. cost reduction and INR0.5/lt marketing margin
BPCL PAT (INR b)
2.8
26.3
6.7
34.8
-1.0
Expect BPCL’s E&P valuation to increase led by SEAL basin in
Brazil and Mozambique
Block
Brazil (Wahoo)
Brazil (SEAL)
Mozambique
Total
185
197
INR/sh
12
Remarks
150-200mmbbl reserves
Yet to announce, expected
to be meaningful
50-70tcf gas reserves
Source: Company, MOSL
FY14 Base Benefit from Benefit from Impact of
New likely
Case PAT
lower
higher MM 15% market PAT / EPS
interest
share loss
Source: MOSL
16 June 2014
54

BPCL
Company description
A Fortune 500 company, BPCL has interests in oil refining and marketing of
petroleum products. It is the third largest refining company in India with a capacity
of 12mmtpa at its Mumbai facility and 9.5mmtpa at Kochi. BPCL has majority stake
(63%) in Numaligarh Refineries, a 3mmtpa refinery in the north-east. BPCL has
investments in IGL (22.5%) and Petronet LNG (12.5%). BPCL is a public sector firm in
which the government of India holds 54.93%.
Disinvestment timeline
With government stake at 54.9%, we believe the medium term focus of the
government with respect to BPCL will be towards improving the profitability.
Further divestment, in our view would be after 2-3 years, when the expected
profitability increase is achieved.
BPCL: Key Assumptions
Exchange Rate (INR/USD)
Brent Crude (USD/bbl)
Market Sales (MMT)
YoY (%)
GRM (USD/bbl)
Singapore GRM (USD/bbl)
Prem/(disc) (USD/bbl)
Refinery Throughput (mmt)
YoY (%)
Under recoveries Sharing (INR b)
Gross under recoveries
Upstream sharing
Govt. sharing
Net sharing
Net sharing (%)
FY11
45.7
86.5
29.1
4.9
4.5
5.2
(0.7)
21.8
6.6
180
70
65
45
25
FY12
47.9
114.5
31.1
7.0
3.2
8.2
(5.1)
22.9
5.2
326
130
197
0
0
FY13
54.5
110.0
33.3
6.9
5.0
7.7
(2.7)
23.2
1.2
390
168
219
2
1
FY14
60.6
107.8
34.0
2.1
4.3
5.6
(1.3)
23.4
0.6
345
156
184
5
1
FY15E
58.0
105.0
35.0
3.0
5.0
6.5
(1.5)
24.0
2.8
FY16E
57.0
105.0
35.9
2.5
5.0
6.5
(1.5)
24.0
0.0
FY17E
57.0
100.0
37.3
4.0
5.1
6.5
(1.4)
24.2
1.0
205
165
139
130
99
83
72
63
53
4
3
2
2
2
2
Source: Company, MOSL
16 June 2014
55

BPCL
Financials and valuations
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
2012
2,121.4
38.1
48.1
2.3
24.1
24.0
22.6
14.6
0.0
16.0
7.5
46.8
8.5
7.8
-52.2
-0.7
7.1
2013
2,421.8
14.2
66.7
2.8
24.6
42.1
25.2
15.3
0.0
32.2
12.8
39.9
19.4
18.8
140.9
-0.6
18.3
2014
2,642.6
9.1
92.1
3.5
26.1
66.0
19.8
15.5
0.0
61.7
21.1
34.3
40.5
39.1
107.9
-1.4
37.7
2015E
2,563.9
-3.0
73.9
2.9
30.0
43.9
15.6
13.8
0.0
42.1
14.5
34.4
27.6
27.2
-30.5
-0.4
26.7
(INR Billion)
2016E
2,670.4
4.2
76.2
2.9
31.1
45.2
13.7
17.8
0.0
49.3
16.1
32.7
33.2
32.7
20.6
-0.4
32.3
2017E
2,757.2
3.3
85.0
3.1
32.0
53.0
12.0
14.7
0.0
55.7
18.3
32.8
37.4
37.0
13.0
-0.4
36.5
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
7.2
151.6
158.8
301.5
16.8
487.5
416.7
174.4
242.3
45.3
78.9
404.0
211.0
52.0
13.3
127.8
290.7
271.4
19.2
113.3
487.5
2013
7.2
160.5
167.8
328.6
16.1
523.2
437.8
198.2
239.6
74.6
74.7
399.1
199.6
43.6
28.5
127.5
272.5
240.8
31.7
126.6
523.2
2014
7.2
185.2
192.5
305.2
16.1
525.9
483.1
224.3
258.8
74.6
113.0
402.9
192.1
59.5
50.4
100.8
331.0
298.4
32.7
71.9
525.9
2015E
7.2
203.1
210.3
271.6
16.7
511.2
499.8
254.3
245.6
74.6
128.0
391.6
181.4
55.9
93.5
60.8
336.1
303.2
32.9
55.5
511.2
(INR Billion)
2016E
2017E
7.2
7.2
224.8
249.1
232.1
256.4
245.5
217.6
17.4
18.7
508.1
506.2
514.8
526.0
285.3
317.3
229.4
208.7
74.6
74.6
143.0
163.0
399.2
414.8
183.9
189.6
57.2
59.0
117.4
125.4
40.8
40.8
345.8
362.5
312.7
329.2
33.1
33.3
53.4
52.3
508.1
506.2
E: MOSL Estimates
16 June 2014
56

BPCL
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
10.8
43.2
219.6
5.5
35.5
2013
26.0
59.3
232.0
11.0
35.2
2014
54.1
88.2
266.2
17.0
35.4
9.9
6.1
2.0
0.1
2.8
3.2
5.5
5.2
4.6
8.9
36.3
0.0
1.9
11.9
8.3
4.8
6.6
30.1
0.0
2.0
22.5
12.6
5.0
8.2
26.5
0.0
1.6
2015E
37.6
78.4
290.9
11.0
35.1
14.3
6.8
1.8
0.1
2.4
2.1
13.7
8.5
4.9
8.0
25.8
0.0
1.3
2016E
45.3
87.6
321.0
13.0
33.6
11.8
6.1
1.7
0.0
1.7
2.4
15.0
8.9
5.2
7.8
25.1
0.0
1.1
2017E
51.2
94.8
354.6
15.0
34.3
10.5
5.7
1.5
0.0
1.1
2.8
15.3
10.5
5.4
7.8
25.1
0.0
0.8
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
16.0
24.1
0.0
22.3
-6.9
-40.4
19.1
-42.2
19.4
0.0
-22.8
0.0
-14.9
-21.9
-6.5
-43.8
-47.5
60.7
13.3
2013
32.2
24.6
0.0
24.7
-9.2
-11.3
59.2
-73.8
37.8
0.0
-36.0
0.0
42.0
-25.5
-5.0
2.3
25.5
-3.2
22.3
2014
61.7
26.1
0.0
19.8
-21.1
76.7
163.2
-45.3
-38.3
0.0
-83.6
0.0
-23.4
-19.8
-14.4
-57.6
21.9
28.5
50.4
2015E
42.1
30.0
0.0
15.6
-13.8
59.4
133.3
-16.7
-15.0
0.0
-31.7
0.0
-33.6
-15.6
-9.3
-58.6
43.0
50.4
93.5
(INR Billion)
2016E
2017E
49.3
55.7
31.1
32.0
0.0
0.0
13.7
12.0
-15.5
-17.0
25.9
9.1
104.6
91.8
-14.9
-11.2
-15.0
-20.0
0.0
0.0
-29.9
-31.2
0.0
0.0
-26.1
-27.9
-13.7
-12.0
-11.0
-12.7
-50.8
-52.6
23.9
8.0
93.5
117.4
117.4
125.4
E: MOSL Estimates
16 June 2014
57

16 June 2014
Thematic | India PSUs | Sector: Utilities
Coal India
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR389
TP: INR421
Neutral
Volume, operational efficiency next growth driver
Enabling environment key to volume growth, initial steps encouraging
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
COAL IN
6,316.4
424/238
22/24/-3
2,459.6
40.9
Constraints on clearances, land and evacuation front led to poor volume
growth in the past. Corrective actions taken are encouraging.
Revamping clearances structure and establishing evacuation
infrastructure would be a key to volume growth.
10% volume growth and operational efficiency can lead to ~13% upgrade
in FY16E earnings. Valuations near term LT average, but could improve as
earnings are driven by volume, cost efficiency.
Production growth over FY10-14 stood at 2% CAGR (FY11-12 growth of 1%
YoY) due to environment/forest clearances and evacuation issues.
Employee cost is up 1.7x from FY10 levels of INR167b to INR278b in FY14
led by wage revision, conducted once in 5 years.
Other key issues were 1) Mandate from PMO to sign FSA for all capacity till
FY15, 2) Talks of coal regulator, lower E-auction volumes, 3) Delays in
setting up washeries, 4) regulatory uncertainty, 5) OFS, and union issues.
Conducive operating environment is must as timely clearances and land is
critical to volume growth. Removal of CEPI, 25% increases in Brownfield
mines, etc are key initial steps, which are encouraging.
Similar emphasis needs to be placed on railway evacuation infrastructure,
as mere production growth is of no consequence.
Achieving volume growth through fire fighting measures, but outcome has
been muted. FY13/14 still witnessed 3%+ growth in production.
Price re-alignment to weather rising cost and lower volumes.
Volume growth could be ramped-up to 8-10% with co-ordination of State
and Centre. Clearance, land and evacuation are subject matter that needs
highest attention.
Drive to improve efficiency 1) rationalization of UG mines/legacy labor, 2)
theft of coal, 3) high scale modernization/private sector in mining.
At LT average PER 16x on FY16E EPS, TP would stands at INR492/sh. 10%
volume growth, operational efficiency could lead upgrade of 13% in FY16E.
Expect earnings CAGR of 10% over FY14-16E. COAL trades at PER of 12.7x
and P/B of 4.3x on FY16E basis.
Financial Snapshot (INR b)
Y/E March 2015E 2016E 2017E
Sales
729
779
837
EBITDA
198
216
242
NP*
181
194
213
EPS (INR)*
28.7
30.8
33.7
EPS Gr. (%) 13.2
7.4
9.7
BV/Sh. (INR) 78.6
90.9 104.4
RoE (%)**
25.9
24.5
23.6
RoCE (%)
60.1
54.8
52.1
Payout (%)
55.9
60.0
60.0
Valuations
P/E (x)
13.6
12.7
11.5
P/BV (x)
5.0
4.3
3.7
EV/EBITDA
9.9
8.8
7.5
Div. Yld (%)
3.7
4.7
5.2
EV/ Sales (x) 2.7
2.4
2.2
Shareholding pattern (%)
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
89.7
2.9
5.4
2.1
90.0
2.4
5.5
2.1
90.0
2.0
5.5
2.5
What went wrong in the five years?
What needs to be done?
What has company done in last five years?
What is the underlying potential?
Stock Performance (1-year)
Coal India
Sensex - Rebased
430
380
330
280
230
Valuation and views with sensitivity on TP
Financials and valuations
Nalin Bhatt
(NalinBhatt@MotilalOswal.com); +91 22 3982 5429
Satyam Agarwal
(AgarwalS@MotilalOswal.com); +91 22 3982 5410

Coal India
Story in charts
Production growth to accelerate going forward…
Production (m ton)
Growth (% YoY)
Flat growth
from FY10-12
CAGR of ~6%
10
10.2
…as also dispatch growth, railway infrastructure is key
Dispatches
7.2 7.1
3.9
2.5 2.3
% YoY
7.9
5.9
1.7
6.1
5.7
7
4
1
-2
312 343 368 394 410 420 430 464 472 500 530 561
Source: Company, MOSL
Muted realization growth vs steady price revision in past
Cost efficiency of 500bps over FY1-17E (INR/ton)
Stores & Spares
Contractual Expenses
% of revenues
93.5
81.9
75.7 78.0
77.6
Staff cost
Others
100
90
72.8 74.9 73.5
76.8
72.9 72.3
80
71.1
70
60
800
600
400
200
0
Source: MOSL, Company
PAT growth largely in-line with volume growth (INR b)
76.7
29.8
1.9
(31.2)
61
42
43
56
98
109 162 177 160 181 194 213
11.2
47.8
9.3
(9.5)
13.2 7.4
9.7
PAT
Growth (% YoY)
Payout strong and yield provides downside comfort
160
120
80
40
0
Dividend Payout (%)
Special dividend
Dividend Yield (%)
in FY14
10
8
5
3
0
Source: MOSL, Company
16 June 2014
59

Coal India
Company description
Coal India Limited (CIL) is a leading public sector undertaking engaged into coal
mining in India and is working on establishing its footprint globally through
MoUs/acquisition route. CIL operates through its 9 wholly owned subsidiaries, of
which 1 subsidiary is engaged in exploration and feasibility study analysis. CIL has
total resources of 64.3b tonnes and proved reserves of 52.4b tonnes, of which
extractable reserves stand at 21.7b tonnes.
Disinvestment timeline
With government stake at 90%, there is a fair possibility of offer for sale. However,
given contentious issues of lower volume growth and cost push, we believe the near
term focus would be to first put COAL on growth path. This will also lead to
improved sentiments and valuation to conduct OFS.
Coal India: Operational matrix
Production
% YoY
Coal Sales (m tons)
Linkages
Proportion (%)
E-Auction
Proportion (%)
Beneficiated coal
Proportion (%)
Grade A / B
Proportion (%)
Total
% YoY
Realization (INR/t)
Raw Coal (FSA)
E-auction coal
Beneficiated Coal
Grade A / B
Blended
% YoY
Cost Composition (% of Revenue)
Stores & Spares
Staff cost
Contractual Exp
Overburden Removal Adj
Others
Total Costs
EBIDTA Margins
Financials (INR/ton)
Revenues
EBIDTA
PBT
PAT
FY10
430
6.8
321
78.4
46
11.2
15
3.6
28.4
3.2
410
3.9
884
1,583
2,134
2,000
1,089
10.7
11.0
37.3
8.4
6.8
12.9
76.5
23.5
1,089
256
348
240
FY11
431
0.3
328
78.1
48
11.4
15
3.7
28.8
3.0
420
2.5
958
1,846
2,118
2,100
1,195
9.8
10.5
37.7
9.2
5.2
10.2
72.8
27.2
1,195
325
397
260
FY12
436
1.0
362
84.2
51
11.8
17
3.9
-
-
430
2.3
1,235
2,599
2,228
-
1,452
21.5
8.8
42.3
7.9
5.9
10.0
74.9
25.1
1,452
364
493
376
FY13
452
3.8
397
85.6
49
10.6
14
3.0
-
-
464
7.9
1,298
2,544
2,300
-
1,472
1.4
8.9
40.0
8.5
4.7
11.5
73.5
26.5
FY14 FY15E
465
495
2.8
6.5
400
84.7
55
11.6
13
2.9
-
-
472
1.7
1,323
2,205
2,282
-
1,463
(0.6)
10.2
40.4
9.9
4.8
11.5
76.8
23.2
428
85.6
52
10.4
16
3.1
-
-
500
5.9
1,326
2,212
2,289
-
1,458
(0.3)
9.3
40.4
9.3
4.0
10.0
72.9
27.1
1,458
396
536
362
FY16E
525
6.1
450
84.9
53
9.9
22
4.2
-
-
530
6.1
1,326
2,255
2,334
-
1,469
0.7
9.2
40.0
9.2
4.3
9.7
72.3
27.7
FY17E
556
5.8
465
82.9
53
9.4
36
6.5
-
-
561
5.7
1,326
2,300
2,381
-
1,493
1.7
9.0
39.3
9.0
4.3
9.5
71.1
28.9
1,472 1,463
390
338
538
485
381
339
1,469
1,493
408
432
542
562
366
380
Source: MOSL
16 June 2014
60

Coal India
Financials and valuations
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Consolidated PAT
2012
624,154
24
156,679
25.1
19,692
136,986
540
75,369
-911
212,727
64,845
30.5
147,883
161,582
48
161,582
2013
683,027
9
180,836
26.5
18,130
162,707
452
87,467
-69
249,790
76,227
30.5
173,564
176,624
9
176,624
2014
688,100
1
159,632
23.2
19,964
139,668
580
89,694
-14
228,795
77,679
34.0
151,116
159,881
-9
159,881
2015E
729,191
6
197,778
27.1
20,169
177,609
375
90,738
0
267,972
86,943
32.4
181,028
181,028
13
181,028
(INR Million)
2016E
778,952
7
216,146
27.7
21,429
194,716
353
93,308
0
287,671
93,335
32.4
194,336
194,336
7
194,336
2017E
837,544
8
242,462
28.9
22,791
219,671
332
96,134
0
315,473
102,355
32.4
213,118
213,118
10
213,118
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
63,164
341,366
404,530
13,054
-11,941
406,179
380,964
246,561
134,403
29,034
19,814
874,673
60,713
56,630
582,028
175,302
647,160
437,266
209,894
227,512
410,761
2013
63,164
421,556
484,720
10,778
-22,550
473,584
390,107
255,449
134,658
34,960
23,950
999,531
56,178
104,802
622,360
216,190
696,455
571,852
124,603
303,076
496,646
2014
63,164
360,881
424,045
1,715
-19,717
406,678
439,893
263,804
176,089
14,913
37,749
793,955
55,681
82,410
523,895
131,969
616,028
499,790
116,238
177,927
406,678
2015E
63,164
433,292
496,456
9,523
-19,717
486,898
494,749
272,898
221,851
40,343
16,183
905,105
59,006
87,332
515,990
242,778
696,584
561,323
135,261
208,521
486,898
(INR Million)
2016E
2017E
63,164
63,164
511,027 596,274
574,190 659,438
8,952
8,415
-19,717
-19,717
564,061 648,771
555,091 621,467
282,807 293,610
272,285 327,857
46,127
51,340
16,992
17,842
990,365 1,087,691
63,032
67,774
93,291 100,308
574,386 637,566
259,655 282,043
761,708 835,958
616,140 676,272
145,568 159,687
228,657 251,733
564,061 648,771
E: MOSL Estimates
16 June 2014
61

Coal India
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
EV/EBITDA
EV/Sales
EV /m ton of Reserves
Price/Book Value
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
25.6
28.7
64.0
10.0
53.7
15.2
13.6
12.1
3.0
86.9
6.1
2.6
40.1
37.0
1.7
33.1
35.5
0.0
0.0
2013
28.0
30.8
76.7
14.0
70.1
13.9
12.6
10.2
2.7
85.0
5.1
3.6
39.0
37.0
1.5
56.0
30.0
0.0
0.0
2014
25.3
28.5
67.1
30.0
165.9
15.4
13.7
12.1
2.8
89.1
5.8
7.7
33.3
31.7
1.5
43.7
29.5
0.0
0.0
2015E
28.7
31.9
78.6
14.3
70.0
13.6
12.2
9.9
2.7
89.8
5.0
3.7
2016E
30.8
34.2
90.9
18.5
70.0
12.7
11.4
8.8
2.4
-25.9
4.3
4.7
2017E
33.7
37.3
104.4
20.2
70.0
11.5
10.4
7.5
2.2
-28.8
3.7
5.2
39.3
39.8
1.6
43.7
29.5
0.0
0.0
36.3
37.1
1.5
43.7
29.5
0.0
0.0
34.6
36.2
1.4
43.7
29.5
0.0
0.0
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
213,638
19,692
0
540
-64,845
76,585
245,611
-22,286
-9,177
0
-31,463
-1,496
-610
-540
-74,999
-90,185
123,963
458,064
582,028
2013
249,859
18,130
0
452
-76,227
-16,757
175,457
-15,068
-4,136
0
-19,204
12,741
-2,276
-452
-106,115
-115,921
40,332
582,028
622,360
2014
228,809
19,964
0
580
-77,679
3,625
175,300
-29,739
-13,799
0
-43,539
15,598
-9,063
-580
-227,389
-229,200
-97,439
622,360
524,921
2015E
267,972
20,169
0
375
-86,943
-38,499
163,074
-80,287
21,566
0
-58,721
0
7,809
-375
-108,617
-112,259
-7,905
523,895
515,990
(INR Million)
2016E
2017E
287,671 315,473
21,429
22,791
0
0
353
332
-93,335 -102,355
38,260
40,105
254,378 276,346
-66,126
-71,589
-809
-850
0
0
-66,935
-72,438
0
0
-571
-537
-353
-332
-116,602 -127,871
-129,047 -118,882
58,396
85,026
515,990 574,386
574,386 659,412
E: MOSL Estimates
16 June 2014
62

16 June 2014
Thematic | India PSUs | Sector: Metals
SAIL
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR98
TP: INR116
Neutral
Project execution mismanaged, wage hike hit margins
Need to focus on projects completion and asset sweating
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
SAIL IN
4,130.1
113/38
21/20/50
403.1
6.7
Volume growth at inflection point, operating leverage will aid margins.
Underlying growth potentials are huge due to large mining assets and land
.
What went wrong in five years
Financial Snapshot (INR Billion)
Y/E March
2015E 2016E 2017E
Net Sales
499.1 562.2 636.5
EBITDA
Adj PAT
EPS (INR)
Growth (%)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
EV/EBITDA (x)
78.2
31.9
7.7
66.7
7.2
7.2
12.8
0.9
8.7
90.8
31.5
7.6
-1.0
6.8
7.1
12.9
0.9
8.1
99.7
29.9
7.2
-5.4
6.1
6.7
13.6
0.8
7.6
During FY10-14, Steel Authority of India Ltd’s (SAIL) EBITDA per ton declined
from USD176/t to USD57/t due to a fall in steel realization from USD718/t
to USD640/t and increase in specific labor cost from USD71/t to USD101/t.
This affected operating cash flows significantly.
Since FY09, its cumulative capex is ~INR532b (USD9b) on expansion
programs, but sales volumes remained unchanged at 12.1mt. Projects are
running behind schedule due to mismanagement and typical public sector
procedural bottlenecks. Net debt has increased by INR324b to INR226b.
Instead of breaking down the whole project into smaller packages, the PSU
would be better off giving turnkey order for full project. Although this may
be slightly expensive initially, the overall project cost will be lower due to
savings of time, interest and opportunity.
Focus should shift to completion of projects and asset sweating.
There is a need to benchmark its cost structure with peers in the industry.
SAIL is executing INR720b capex to increase saleable steel capacity from
12.4mtpa to 20.2mtpa. INR532b is already spent.
Salem steel plant is completely revamped. Many old blast furnaces and
coke oven batteries have been revamped. New CRM is added at Bokaro,
While a new 2.4mtpa blast furnace is commissioned at Roorkela. The
2.4mtpa new capacity in ISP, Burnpur is near complete.
Company has access to large captive iron ore mines with huge reserves of 2-
3bt. Current iron ore production is only a fraction of its true potential.
SAIL has five integrated steel plants in different locations in east and central
parts of India. Each site has sufficient land for future expansions.
These advantages can be capitalized to increase capacity 2-3x through
Brownfield expansion of steel plant and iron ore mines.
Saleable steel volumes are expected to post a CAGR of 12% over FY14-17E.
EBITDA per ton is expected to clock a CAGR of 19% to USD96/t due to the
benefit of operating leverage. Thus, EBITDA will post a CAGR of 33% to
INR98.4b during the same period.
Every 1 USD/t change in steel revenue realization translates into EPS
upgrade of 2-2.5%.
The stock is valued based on FY16E EV/EBITDA of 6.5x and book value of
capital work in progress (CWIP).
What needs to be done
What company did in last five years
Shareholding pattern (% )
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
80.0
10.9
6.0
3.1
80.0
10.6
6.4
3.0
80.0
11.9
4.9
3.2
What is the underlying potential
Stock Performance (1-year)
Valuation and views with sensitivity on target price
Financials and valuations
Sanjay Jain
(SanjayJain@MotilalOswal.com); +91 22 3982 5412

SAIL
Story in charts
Volume growth at inflection point, margins to improve
EBITDA per ton (USD)
300
250
Earnings growth dragged by rising interest, depreciation
17
Depreciation (U$/t)
19
Sales (m tons)
15
Net interest (U$/t)
45
25
5
-15
-35
200
13
12
11 12
11 12 12 11 11 12
10 10 11
9 10
16
14
11
150
9
100
6
50
4
0
1
Source: SAIL, MOSL
Source: SAIL, MOSL
Conversion cost (USD/t) has peaked
Labor
P&F
Others
Capex (INR b) cycle has peaked
114
101 95
62
27
89
105
90 85
60
1
2
3
17 14
Source: SAIL, MOSL
Source: SAIL, MOSL
Net debt to equity is still less than 1x (INR b)
500
375
250
125
0
Debt
Cash
Net Worth
RoIC (%) is unlikely to improve
98.5
71.9
47.9
63.6 60.5
37.2
21.6
14.4 9.3 12.1 11.3
9.1
Source: MOSL, SAIL
Source: SAIL, MOSL
16 June 2014
64

SAIL
Company description
Steel Authority of India Ltd (SAIL), a public sector undertaking (PSU), is the largest
steel producer in India, with ~20% market share. Its current capacity of 13mtpa is
vertically integrated from mines to finished steel and is spread across four plants in
the mineral-rich belt of Chhattisgarh, Orissa and Jharkhand. SAIL is totally self-
sufficient in iron ore (captive mines). However, it has to depend on purchase of
coking coal and a large share is imported. It has a wide range of products and is a
large producer of special steel.
Disinvestment timeline
With the Government’s stake at 80%, we believe its near term focus with respect to
SAIL will be to improve profitability. Further divestment will depend on market
conditions.
Key assumptions
Y/E March
Production (m tons)
Sales (m tons)
Realization (USD/ton)
Coking coal - benchmark fob
Raw material cost (USD/tss)
Iron ore cost (USD/ton)
Coking coal (USD/tss)
Others (USD/tss)
EBITDA per ton (US$)
FY14
12.9
12.1
640
151
264
18
177
68
57
FY15E
13.9
13.1
630
114
236
19
146
70
87
FY16E
15.9
15.1
630
110
229
20
140
69
99
FY17E
17.9
17.1
630
110
232
20
135
77
96
Target price calculation (INR m)
Year
Volumes (m tons)
EBITDA (INR per ton)
EBITDA
Target EV/EBITDA(x)
Target EV
less: Net Debt (INR m)
add: CWIP
Equity value
Target price (INR/sh.)
2011
11.7
6,768
79,427
2012
11.4
5,618
64,041
2013
11.1
4,628
51,212
2014
12.1
3,806
45,943
2015E
13.1
5,981
78,170
6.5
508,108
277,337
290,289
521,060
126
2016E
15.1
6,022
90,753
6.5
589,895
327,045
215,289
478,140
116
27,261
224,220
106,983
283,157
183,642
361,549
225,771
350,289
16 June 2014
65

SAIL
Financials and valuation
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
2012
466.6
7.5
64.0
13.7
16.9
47.2
7.8
16.0
-2.6
52.8
16.9
32.0
35.9
37.7
-23.5
0.0
37.7
2013
450.9
-3.4
51.2
11.4
15.3
35.9
8.5
9.5
-2.3
34.6
11.3
32.7
23.3
24.8
-34.1
0.0
24.8
2014
471.2
4.5
45.9
9.8
18.5
27.5
10.8
7.4
9.6
33.7
7.0
20.7
26.7
19.1
-23.0
0.0
19.1
2015E
499.1
5.9
78.2
15.7
24.4
53.8
15.2
3.1
0.0
41.6
9.8
23.5
31.9
31.9
66.7
0.0
31.9
(INR Billion)
2016E
562.2
12.7
90.8
16.1
32.6
58.1
19.5
2.7
0.0
41.3
9.7
23.5
31.5
31.5
-1.0
0.0
31.5
2017E
636.5
13.2
99.7
15.7
40.1
59.6
22.8
2.3
0.0
39.1
9.3
23.7
29.9
29.8
-5.4
0.0
29.9
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
41.3
361.4
402.7
173.6
17.8
594.2
440.7
253.0
187.6
283.2
0.7
313.5
139.0
48.5
66.6
59.4
190.8
33.2
157.6
122.7
594.2
2013
41.3
375.2
416.5
225.4
19.0
660.9
451.4
267.5
183.9
361.5
0.7
319.0
161.7
45.6
41.8
70.0
204.3
34.4
169.9
114.7
660.9
2014
41.3
392.2
433.5
295.4
23.0
751.9
567.7
286.0
281.7
350.3
0.7
334.3
148.5
45.2
69.6
71.0
215.0
45.2
169.9
119.2
751.9
2015E
41.3
414.4
455.7
345.4
24.9
826.0
717.7
310.4
407.3
290.3
0.7
345.4
157.2
47.9
68.1
72.2
217.7
47.9
169.9
127.7
826.0
(INR Billion)
2016E
2017E
41.3
41.3
436.3
456.5
477.6
497.8
385.4
425.4
26.8
28.6
889.8
951.8
877.7
1,037.7
343.0
383.1
534.7
654.6
215.3
115.3
0.7
0.7
362.9
412.1
177.1
200.5
53.9
61.0
58.4
75.9
73.5
74.7
223.8
230.9
53.9
61.0
169.9
169.9
139.1
181.2
889.8
951.8
E: MOSL Estimates
16 June 2014
66

SAIL
Financials and valuation
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
9.1
13.2
97.5
2.0
25.7
10.8
7.4
1.0
1.1
8.0
2.0
9.7
10.6
0.8
37.9
108.7
30.1
0.3
2013
6.0
9.7
100.8
2.0
39.0
16.4
10.1
1.0
1.3
11.5
2.0
6.1
7.2
0.7
36.9
130.9
31.5
0.4
2014
4.6
9.1
105.0
2.0
50.6
21.3
10.8
0.9
1.3
13.8
2.0
4.5
4.9
0.6
35.0
115.0
38.8
0.5
2015E
7.7
13.6
110.3
2.0
30.3
12.8
7.2
0.9
1.4
8.7
2.0
7.2
7.2
0.6
35.0
115.0
41.5
0.6
2016E
7.6
15.5
115.6
2.0
30.6
12.9
6.3
0.9
1.3
8.1
2.0
6.8
7.1
0.6
35.0
115.0
41.7
0.7
2017E
7.2
16.9
120.5
2.0
32.4
13.6
5.8
0.8
1.2
7.6
2.0
6.1
6.7
0.7
35.0
115.0
41.5
0.7
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
52.8
16.9
-16.0
7.8
-15.2
-28.0
17.0
-95.2
-0.1
0.0
-95.3
0.0
-31.1
-7.8
-9.7
-32.6
-110.9
177.5
66.6
2013
34.6
15.3
-9.5
8.5
-11.2
-16.9
21.2
-89.1
0.0
0.0
-89.2
0.0
51.8
-8.5
-9.7
43.1
-24.9
66.6
41.8
2014
33.7
18.5
-7.4
10.8
-4.0
24.4
75.9
-105.0
0.0
0.0
-105.0
0.0
70.0
-10.8
-9.7
57.0
27.9
41.8
69.6
2015E
41.6
24.4
-3.1
15.2
-9.1
-8.8
60.3
-90.0
0.0
0.0
-90.0
0.0
50.0
-15.2
-9.7
28.2
-1.6
69.6
68.1
(INR Billion)
2016E
2017E
41.3
39.1
32.6
40.1
-2.7
-2.3
19.5
22.8
-9.0
-8.6
-19.9
-23.4
61.8
67.7
-85.0
-60.0
0.0
0.0
0.0
0.0
-85.0
-60.0
0.0
0.0
40.0
40.0
-19.5
-22.8
-9.7
-9.7
13.5
9.9
-9.7
17.6
68.1
58.4
58.4
75.9
E: MOSL Estimates
16 June 2014
67

16 June 2014
Thematic | India PSUs | Sector: Financials
Canara Bank
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR439
TP: INR560
Buy
Levered to infrastructure reforms
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
CBK IN
461.3
498/190
17/56/-19
202.4
3.4
RAM at cyclical low | Earnings sensitivity highest
Financial Snapshot (INR b)
Y/E March
2015E 2016E 2017E
NII
105.1 123.5 151.7
OP
NP )
EPS (INR)
EPS Gr. (%)
BV/Sh (INR)
P/E (x)
P/BV (x)
RoE (%)
RoA (%)
74.6
27.0
58.5
10.8
7.5
0.8
10.8
0.5
90.5
35.3
76.5
30.7
5.7
0.7
12.9
0.6
114.8
46.6
100.9
31.9
4.3
0.6
15.3
0.6
Canara bank’s (CBK) focus on growth (~24%+ in FY14) without
improvement in core profitability led to faster capital consumption.
Over FY11-14, CBK’s profitability declined (RoA of 0.5% in FY14 v/s 1.3% in
FY11), led by 100bp+ compression in Risk-Adjusted Margins (RAM).
While stress increased over FY09/13, in FY14 net stress loan remained flat
at 8.7% of loans –signs of stress loans peaking out.
Improvement in the economic growth and reforms (CBK’s, infra exposure
is at 19%) would lead to better profitability, lower stress addition and
ease BV dilutive capital infusion.
564.0 622.7 700.1
What went wrong in five years
Moderating economic growth and fall in new investment demand led to
slowdown of loan growth and significant rise in stress levels in the system.
Stubborn inflation and volatility in INR resulted in tight liquidity conditions
and high interest rate, further accentuating the stress in the system.
What needs to be done
Resolution of bottle-necks in infrastructure space and revival of growth
would lead to better loan growth and ROA (led by fall in credit cost).
Shareholding of GoI in PSU banks to be brought below/at-least 51%. Access
to foreign capital for PSU banks could be raised from current cap of 20%.
Steps to improve governance standards based on Nayak committee
recommendations
Shareholding pattern (% )
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
69.0
13.1
9.1
8.8
69.0
12.9
10.5
7.6
67.7
13.4
12.3
6.7
What the bank did in last five years
Stock Performance (1-year)
Continuous change in strategy with the change at the helm of affairs
leading to weak profitability and faster consumption of capital
Strong growth in infra sector led to higher pressure on asset quality.
Further, low cost deposits growth could not keep pace with the overall
deposits leading to decline in CASA ratio (down 550bp+ over FY09-14)
CBK is highly levered towards infrastructure space (19% of loans) and
reforms in this space will be a significant positive for the company.
Easing G-sec yields will aid earnings as of the overall investments AFS
portfolio is 32% and has duration of 3years+.
Canara Bank
Sensex - Rebased
525
425
325
225
125
What is the underlying potential
Valuation and view with sensitivity on target price
CBK trades at 0.7x P/BV (below its LPA) and with the economy bottoming
out and reform-oriented actions, we expect a re-rating in the stock. Expect
30%+ PAT CAGR. Maintain
Buy.
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Sohail Halai
(Sohail.Halai@MotilalOswal.com); +91 22 39825430

Canara Bank
Story in charts
Trades at 30% discount to LPA
Return ratios expected to have bottomed out (%)
29.2
20.020.7
18.8 19.1
RoA
22.7
RoE
26.8 26.4
17.1
13.3
10.4 10.8
12.9
Expect gradual improvement in NIM (%)
NIM
33.4
18.3 17.5
13.7
20.4
12.4
-0.1 2.5
-12.1
NII growth
35.5
17.5 17.5
13.5
Earnings highly sensitive to reforms in Infra segment (%)
60
40
20
0
-20
Core PPP growth
PAT growth
Credit cost estimates conservative
55.9 52.5
Credit Cost (%)
51.0
37.9
29.4 30.5 30.5
25.7
16.0 15.7 21.2
24.4
28.5
PCR (%)
Net stress loans at INR262b (8.7% of loans)
Iron and
Steel, 0.3
SEB, 2.2
Aviation, 0.
3
NNPA, 2.0
OSRL, 3.9
Source: MOSL, Company
Source: MOSL, Company
16 June 2014
69

Canara Bank
Company description
Canara Bank (among the top 6 banks with a market share of ~5% in deposits and
loans) was incorporated in 1906 at Mangalore and subsequently nationalized, in
1969. The bank is headquartered in Bangalore, Karnataka. The government holds
69% of the equity. As on Mar-14 the bank has a large network of 4700+ branches
and 6300+ ATMs which is geographically well diversified. Its subsidiaries include
Canbank Mutual Fund & Canfin Homes, Canbank Venture Capital Fund and Canbank
Factors.
Pick up in loans and deposits MS in FY14
6.0
5.3
4.5
3.8
3.0
Loans
Deposits
CASA MS improved marginally in FY14 – decline arrested (%)
6.5
5.3
4.0
2.8
1.5
CA
SA
Source: MOSL, Company
Source: MOSL, Company
Strong branch expansion in FY14
Higher opex and provisions led to decline in earnings
EPS (INR)
32.4
45.8
23.3
-18.5
51
74
91
74
-12.5
65
-18.5
53
EPS growth (%)
Source: MOSL, Company
Source: MOSL, Company
16 June 2014
70

Canara Bank
Financials and Valuations
Income Statement
Y/E March
Interest Income
Interest Expense
Net Interest Income
Change (%)
Non Interest Income
Net Income
Change (%)
Operating Expenses
Pre Provision Profits
Change (%)
Provisions (excl tax)
PBT
Tax
Tax Rate (%)
Profits for Equity SH
Change (%)
Equity Dividend (Incl tax)
Core PPP*
Change (%)
2012
308.5
231.6
76.9
-0.1
29.3
106.2
1.0
46.7
59.4
-2.4
18.6
40.8
8.0
19.6
32.8
-18.5
5.7
48.2
-2.1
2013
340.8
262.0
78.8
2.5
31.5
110.3
3.9
51.4
58.9
-0.9
22.2
36.7
8.0
21.8
28.7
-12.5
6.7
44.5
-7.6
2014
395.5
306.0
89.4
13.5
39.3
128.8
16.7
60.8
68.0
15.4
37.3
30.6
6.3
20.4
24.4
-15.1
5.9
50.4
13.2
2015E
443.6
338.5
105.1
17.5
39.4
144.4
12.1
69.8
74.6
9.7
40.0
34.6
7.6
22.0
27.0
10.8
6.3
59.4
17.9
(INR Billion)
2016E
515.3
391.9
123.5
17.5
45.9
169.3
17.3
78.9
90.5
21.3
45.2
45.2
10.0
22.0
35.3
30.7
8.2
72.1
21.4
2017E
616.0
464.4
151.7
22.9
51.8
203.5
20.2
88.7
114.8
26.9
52.8
62.1
15.5
25.0
46.6
31.9
10.8
95.1
32.0
Balance Sheet
Y/E March
Equity Share Capital
Reserves & Surplus
Net Worth
Deposits
Change (%)
of which CASA Dep
Change (%)
Borrowings
Other Liabilities & Prov.
Total Liabilities
Current Assets
Investments
Change (%)
Loans
Change (%)
Fixed Assets
Other Assets
Total Assets
2012
4.4
222.5
226.9
3,270.5
11.5
796.1
-4.2
155.3
88.9
3,741.6
281.8
1,020.6
22.0
2,324.9
10.0
28.6
85.8
3,741.6
2013
4.4
244.3
248.8
3,558.6
8.8
860.6
8.1
202.8
113.3
4,123.4
347.1
1,211.3
18.7
2,421.8
4.2
28.6
114.6
4,123.4
2014
4.6
291.6
296.2
4,207.2
18.2
1,032.8
20.0
272.3
143.5
4,919.2
448.3
1,268.3
4.7
3,010.7
24.3
66.4
125.6
4,919.2
2015E
4.6
309.5
314.1
4,838.3
15.0
1,157.5
12.1
304.4
173.6
5,630.4
469.6
1,458.5
15.0
3,492.4
16.0
65.6
144.4
5,630.4
(INR Billion)
2016E
4.6
333.8
338.4
5,806.0
20.0
1,297.3
12.1
309.4
211.0
6,664.7
566.4
1,677.3
15.0
4,190.9
20.0
64.2
166.1
6,664.7
2017E
4.6
366.7
371.3
7,199.4
24.0
1,502.6
15.8
314.4
257.5
8,142.6
713.5
1,979.2
18.0
5,196.7
24.0
62.2
191.0
8,142.6
Asset Quality
Y/E March
GNPA
NNPA
GNPA Ratio
NNPA Ratio
PCR (Excl Tech. write off)
PCR (Incl Tech. Write off)
2012
40.3
33.9
1.7
1.5
16.0
67.6
2013
62.6
52.8
2.6
2.2
15.7
61.4
2014
75.7
59.7
2.5
2.0
21.2
60.1
2015E
86.7
65.6
2.5
1.9
24.4
61.8
(INR Billion)
2016E
85.8
61.4
2.0
1.5
28.5
66.8
2017E
80.1
48.0
1.5
0.9
40.1
75.1
16 June 2014
71

Canara Bank
Financials and Valuations
Ratios
Y/E March
Spreads Analysis (%)
Avg. Yield-Earning Assets
Avg. Yield on loans
Avg. Yield on Investments
Avg. Cost-Int. Bear. Liab.
Avg. Cost of Deposits
Interest Spread
Net Interest Margin
Profitability Ratios (%)
RoE
RoA
Int. Expense/Int.Income
Fee Income/Net Income
Non Int. Inc./Net Income
Efficiency Ratios (%)
Cost/Income*
Empl. Cost/Op. Exps.
Busi. per Empl. (Rs m)
NP per Empl. (Rs lac)
Asset-Liabilty Profile (%)
Loans/Deposit Ratio
CASA Ratio
Investment/Deposit Ratio
G-Sec/Investment Ratio
CAR
Tier 1
2012
9.5
10.6
7.6
7.1
7.1
2.4
2.4
17.1
0.9
75.1
15.4
27.6
45.4
63.6
125.9
7.8
71.1
24.3
31.2
87.0
13.8
10.4
2013
9.4
10.3
8.2
7.3
7.4
2.1
2.2
13.3
0.7
76.9
16.3
28.6
49.7
63.3
135.6
6.7
68.1
24.2
34.0
84.2
12.4
9.8
2014
9.5
10.5
8.3
7.4
7.4
2.1
2.1
10.4
0.5
77.4
13.3
30.5
49.8
60.4
136.1
5.0
71.6
24.5
30.1
85.2
10.6
7.7
2015E
9.1
10.1
7.8
7.0
7.0
2.1
2.2
10.8
0.5
76.3
15.1
27.2
49.7
59.8
157.1
5.5
72.2
23.9
30.1
99.5
9.8
7.2
2016E
9.1
10.0
7.8
7.0
6.8
2.1
2.2
12.9
0.6
76.0
14.3
27.1
48.3
58.4
181.5
7.0
72.2
22.3
28.9
103.8
9.0
6.6
(%)
2017E
9.0
9.9
7.8
6.8
6.6
2.2
2.2
15.3
0.6
75.4
13.5
25.5
44.9
57.4
217.4
9.0
72.2
20.9
27.5
109.1
8.1
6.0
Valuations
Y/E March
Book Value (INR)
Change (%)
Price-BV (x)
Adjusted BV (INR)
Price-ABV (x)
EPS (INR)
Change (%)
Price-Earnings (x)
Dividend Per Share (INR)
Dividend Yield (%)
2012
463.8
14.6
0.9
414.1
1.1
74.1
-18.5
5.9
11.0
2.5
2013
513.4
10.7
0.9
436.0
1.0
64.8
-12.5
6.8
13.0
3.0
2014
519.1
1.1
0.8
435.1
1.0
52.9
-18.5
8.3
11.0
2.5
2015E
564.0
8.6
0.8
471.7
0.9
58.5
10.8
7.5
11.7
2.7
2016E
622.7
10.4
0.7
536.3
0.8
76.5
30.7
5.7
15.3
3.5
2017E
700.1
12.4
0.6
632.5
0.7
100.9
31.9
4.3
20.2
4.6
16 June 2014
72

16 June 2014
Thematic | India PSUs | Sector: Oil & Gas
GAIL
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR433
TP: INR399
Neutral
Subsidy; gas pipeline underutilization impact returns
Higher gas availability and low/nil subsidy to improve utilization and
profitability
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
GAIL IN
1,268.5
446/273
1/7/12
563.6
9.4
Financial Snapshot (INR b)
Y/E March
2015E 2016E 2017E
Net Sales
604.8 675.9 759.0
EBITDA
Adj PAT
EPS (INR)
Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
75.9
40.5
32.0
10.0
14.2
14.4
13.5
1.8
81.5
42.3
33.4
4.4
13.6
14.8
13.0
1.7
81.6
43.2
34.1
2.1
12.7
14.2
12.7
1.6
Shareholding pattern (%)
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
63.4
15.5
18.8
2.3
64.6
14.4
18.5
2.5
64.6
15.7
16.9
2.8
GAIL’s last 5 year subsidy payout of INR112b (46% of 5-year capex) and
underutilization of new pipelines has impacted reinvestment and return ratios.
Higher gas availability from domestic/imported source would revive transmission
business. But high feedstock cost a concern in petchem and LPG businesses.
What went wrong in the five years?
GAIL’s average subsidy payout in the last 5 years stood at ~INR22b v/s
average PAT of ~INR37b, thereby significantly impacting the bottom-line.
New pipelines are underutilized due to non-availability of incremental gas.
On the other hand where LNG volumes could have flown in the pipeline
projects did not complete due to land acquisition issues (Kochi-Bangalore).
Give (a) Lower / eliminate subsidy; (b) Fast track the delayed southern India
pipeline project; (c) Boost domestic gas production through remunerative
gas pricing and timely E&P approvals and (d) rollout more CGD networks.
Signed gas purchase agreement with Sabine Pass, USA (3.5mmt, 2018 start)
and booked 50% capacity in Dominion Cove LNG terminal. Also, revived
5mmt Dabhol LNG terminal and imports LNG from PLNG’s Dahej terminal.
GAIL is doubling its petchem capacity at Pata to 900KTA.
Increasing CGD network in India through GAIL Gas (100% subsidiary) and
JV’s
Subsidy reduction will directly increase the retained earnings which if
reinvested in setting up strategic pipeline/CGD network shall boost its
profitability for the longer term.
Efficient E&P policies, along with favorable gas prices shall increase pipeline
utilizations and in turn profitability.
If FY15 subsidy is nil (v/s current estimation of INR14b) then GAIL EPS will
increase by INR7 (18% upside). However this could be negated by lowering
domestic gas allocation for petchem and LPG production leading to higher
feedstock prices as it will have to be replaced by high cost LNG.
Medium term gas headwinds impacting profitability is a concern and low/nil
subsidy will be a respite. Higher LPG and Petchem prices necessary to
neutralize likely increase in the feedstock prices.
The stock trades at 13x FY16E EPS of INR33.4. Neutral.
What needs to be done?
235.1 256.8 278.9
What has company done in last five years?
What is the underlying potential?
Stock Performance (1-year)
Valuation and views with sensitivity on TP
Financials and valuations
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Nitish Rathi
(Nitish.Rathi@MotilalOswal.com); +91 22 3982 5558

GAIL
Story in charts
Since FY08, GAIL’s Gross block increased 136% whereas PAT Subsidy sharing has remained significant as compared to the
increased 53% as gas pipelines have been underutilized
Capex
Gross block (INRb)
36
PAT (INRb)
37
40
311
40
363
33
13
18
9
23
13
21
47
32
27
19
Subsidy (INRb)
Capex (INRb)
62
59
43
26
170
28
176
31
210
221
263
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: PPAC, MoPNG, MOSL
Source: OINL, MOSL
Return ratios of GAIL were marred by inefficient subsidy Recent increase in EBIT is contributed by Gas trading (CAGR
regime and higher depreciation (underutilized pipelines)
of 33% since FY08), and now accounts for 18% of overall EBIT
RoE (%)
27
26
25
25
RoCE (%)
Gas trans EBIT
Petchem EBIT
19
17
22
21
20
20
20
18
FY12
18
FY13
17
FY14
11
2
2
13
FY08
26
10
3
2
12
FY09
19
12
3
3
20
FY10
LPG trans EBIT
LPG & Liq. HC EBIT
38
13
10
3
19
FY12
Gas trading EBIT
INR b
41
13
12
1
16
FY13
21
26
11
7
3
23
FY11
29
12
13
2
16
FY14
FY08
FY09
FY10
FY11
Source: OINL, PPAC, MOSL
Source: Company, MOSL
Non-commensurate retail price increases led to India’s
under recovery bill rising to INR1.6t in FY13 (INR b)
Diesel
INR b
Kerosene
Crude (USD/bbl) - RHS
114 111 108 120
1,610
82 85
87 1,385
1,399 90
70
58 64
1,033
780
60
42
773
461
29
400 494
30
201
93
0
Petrol
LPG
Total
GAIL’s 1 year forward P/E stands at 13.4
20
15
10
5
0
11.5
P/E (x)
5 Yrs Avg(x)
12.9
15 Yrs Avg(x)
10 Yrs Avg(x)
13.3
9.3
Source: Company, MOSL
Source: Company, MOSL
16 June 2014
74

GAIL
Company description
GAIL is a major gas transmission, processing, distribution and marketing company in
India, with interests in gas distribution, petrochemicals, LPG, and telecom. It owns
~8,500km of natural gas pipelines, two LPG transmission pipelines of 1,900km,
500KTA petchem capacity, ~1.4mt LPG/other hydrocarbons capacity and over
13,000km of optical fiber cable network. GAIL is also involved in city gas distribution,
E&P and power businesses through its joint ventures.
Disinvestment timeline
With government stake at 56.1%, we believe the medium term focus of the
government with respect to GAIL will be towards improving the profitability.
Further divestment, in our view would be after 2-3 years, when the expected
profitability increase is achieved.
GAIL India: Key Assumptions
FY09
Brent crude (USD/bbl)
85
FY10
70
FY11
87
FY12
114
FY13
110
FY14 FY15E FY16E FY17E
108
107
105
100
Exchange Rate (INR/USD)
Subsidy (INRb)
Avg. Gas Price (USD/mmbtu)
Natural Gas Transmission
Volumes (mmscmd)
Average Tariff (INR/mscm)
LPG Transmission
Volume ('000 MT)
Average Tariff (INR/MT)
Petrochemicals
Capacity ('000MT)
Utilization (%)
Sales ('000 MT)
Realization (USD/MT)
LPG & liq. HC
Sales ('000MT)
LPG realization (USD/MT)
EPS (INR/sh)
46.1
17.8
3.7
84
840
47.5
13.3
3.6
107
829
46.0
21.1
5.0
119
888
47.9
31.8
6.1
119
895
54.5
26.9
6.7
60.6
19.0
7.7
58.0
14.0
8.7
98
1,100
3,300
1,329
900
80%
720
1,653
57.0
10.5
8.8
106
1,125
3,300
1,329
900
85%
765
1,671
57.0
8.9
8.8
125
1,200
3,300
1,329
900
90%
810
1,639
105
97
983 1,169
2,744 3,160 3,337 3,362 3,200 3,030
1,392 1,415 1,422 1,351
937 1,329
410
410
420
450
450
450
103% 100% 100% 100% 95% 100%
423
409
420
448
427
445
1,488 1,472 1,546 1,589 1,614 1,616
1,401 1,442 1,368 1,439 1,371 1,308
739
607
778
910
957
936
22.1 24.8 28.7 28.8 31.7 31.8
1,410 1,410 1,410
920
923
899
32.0
33.4
34.1
Source: MOSL
16 June 2014
75

GAIL
Financials and valuations
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
2012
402.8
24.1
57.0
14.1
7.9
49.1
1.2
5.5
0.0
53.4
16.9
31.6
36.5
36.5
2.6
0.0
0.0
2013
473.3
17.5
62.8
13.3
9.8
53.0
2.0
9.5
0.0
60.6
20.4
33.6
40.2
40.2
10.1
0.0
0.0
2014
572.5
20.9
64.4
11.2
11.8
52.6
3.7
11.6
3.4
57.1
20.3
35.5
36.9
36.9
-8.4
0.0
0.0
2015E
604.8
5.6
75.9
12.6
16.2
59.7
5.0
6.1
0.0
60.8
20.3
33.3
40.5
40.5
10.0
0.0
0.0
(INR Billion)
2016E
675.9
11.8
81.5
12.1
16.8
64.7
6.7
5.4
0.0
63.5
21.2
33.3
42.3
42.3
4.4
0.0
0.0
2017E
759.0
12.3
81.6
10.8
16.9
64.8
5.9
6.0
0.0
64.8
21.6
33.3
43.2
43.2
2.1
0.0
0.0
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
12.7
203.6
216.2
53.5
17.7
287.4
263.1
104.5
158.6
79.4
35.5
117.4
14.2
21.8
9.3
72.1
103.4
59.9
43.6
13.9
287.4
2013
12.7
229.6
242.3
90.6
23.0
355.9
311.5
114.4
197.1
89.8
37.2
122.8
15.4
25.5
23.6
58.4
90.9
73.0
17.9
31.9
355.9
2014
12.7
259.2
271.9
103.0
25.7
400.5
362.6
126.2
236.4
81.2
41.0
139.7
21.8
28.6
21.8
67.5
97.8
78.4
19.4
41.9
400.5
2015E
12.7
285.6
298.2
100.0
30.7
428.9
442.6
142.4
300.2
59.0
41.0
129.1
14.1
30.2
16.1
68.8
100.3
81.0
19.4
28.8
428.9
(INR Billion)
2016E
2017E
12.7
12.7
313.0
341.1
325.7
353.8
85.0
70.0
36.0
41.4
446.7
465.2
475.9
493.4
159.2
176.1
316.7
317.4
68.1
68.1
41.0
41.0
127.3
152.8
15.3
16.8
33.8
37.9
8.2
26.5
70.1
71.5
106.4
114.1
87.0
94.2
19.4
19.8
20.9
38.7
446.7
465.2
E: MOSL Estimates
16 June 2014
76

GAIL
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
28.8
0.0
170.5
8.7
0.0
15.0
0.0
2.5
0.1
0.0
2.0
17.9
18.9
1.6
19.7
12.9
0.0
0.2
2013
31.7
0.0
191.0
0.0
0.0
13.7
0.0
2.3
0.1
0.0
0.0
17.5
16.5
1.5
19.7
11.8
0.0
0.4
2014
29.1
0.0
214.4
0.0
0.0
14.9
0.0
2.0
0.1
0.0
0.0
14.3
13.9
1.5
18.2
13.9
0.0
0.4
2015E
32.0
0.0
235.1
0.0
0.0
13.5
0.0
1.8
0.1
0.0
0.0
14.2
14.4
1.5
18.2
8.5
0.0
0.3
2016E
33.4
0.0
256.8
0.0
0.0
13.0
0.0
1.7
0.1
0.0
0.0
13.6
14.8
1.5
18.2
8.3
0.0
0.3
2017E
34.1
0.0
278.9
0.0
0.0
12.7
0.0
1.6
0.1
0.0
0.0
12.7
14.2
1.7
18.2
8.1
0.0
0.2
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
53.4
7.9
0.0
0.0
-14.3
-5.1
44.9
-66.2
-9.7
4.4
-71.4
0.0
27.1
0.0
-12.5
14.5
-12.0
21.3
9.3
2013
60.6
10.2
0.0
0.0
-15.1
-6.4
50.3
-55.0
-4.1
4.3
-54.7
0.0
33.0
0.0
-14.3
18.7
14.3
9.3
23.6
2014
64.0
11.8
0.0
0.0
-17.6
-11.8
46.3
-42.5
-3.8
0.0
-46.4
0.0
12.3
0.0
-14.1
-1.8
-1.8
23.6
21.8
2015E
60.8
16.2
0.0
0.0
-15.2
7.4
69.3
-57.8
0.0
0.0
-57.8
0.0
-3.0
0.0
-14.2
-17.2
-5.7
21.8
16.1
(INR Billion)
2016E
2017E
63.5
64.8
16.8
16.9
0.0
0.0
0.0
0.0
-15.9
-16.2
-0.1
0.6
64.3
66.0
-42.4
-17.5
0.0
0.0
0.0
0.0
-42.4
-17.5
0.0
0.0
-15.0
-15.0
0.0
0.0
-14.8
-15.1
-29.8
-30.1
-7.9
18.4
16.1
8.2
8.2
26.5
E: MOSL Estimates
16 June 2014
77

16 June 2014
Thematic | India PSUs | Sector: Oil & Gas
HPCL
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR406
TP: INR477
Buy
Ad-hoc /delayed subsidy impacted profitability
Balance sheet vulnerability likely to reduce with higher profitability
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
HPCL IN
338.6
463/158
-4/69/24
137.5
2.3
HPCL’s profitability likely to improve led by lower interest cost and likely higher
diesel marketing margins
Higher cashflow to help reinvestment to improve efficiency and complexity of
marketing and refining businesses respectively
What went wrong in the five years?
Financial Snapshot (INR b)
Y/E Mar 2015E 2016E
Net Sales 2,159 2,278
EBITDA
Adj PAT
EPS INR
Gr. (%)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
43.1
27.4
-46.3
6.1
3.9
14.9
0.9
45.6
35.1
27.7
478.5
7.5
4.6
11.7
0.9
2017E
2,123
51.8
47.1
34.4
509.2
9.5
6.0
8.7
0.8
9,305 11,883 15,976
HPCL’s gross under-recoveries increased from INR83b in FY06 to INR362b in
FY14 leading to higher debt and interest due to delayed compensation.
HPCL’s interest costs increased >7x in the last eight years. This increase was
led by ad-hoc subsidy sharing policy and delayed compensation by the
government.
Lower than required reinvestment in refining business led to subpar GRM
performance in recent years.
Give (a) petroleum pricing freedom, (b) de-regulate LPG and kerosene and
(c) invest in improving refinery complexity.
Invest in the allied downstream petchem to capture the entire value chain
gains.
Despite weak balance sheet HPCL has been able to expand its retail network
at an adequate pace.
In JV with Mittal Energy it has commissioned 9mmt grassroots refinery in
Bhatinda to capture North Indian petroleum demand growth.
Refining margins could improve meaningfully if complexity of the current
refineries is increased.
Marketing freedom the diesel marketing could improve marketing business
profitability and take overall return ratios from current single digit to
healthy double digit levels.
Every increase of INR0.5/ltr in diesel marketing margins increases EPS by
INR15.5/sh.
Refining business contributes ~40% of the gross margins and every
USD1/bbl increase in HPCL’s GRM increases its EPS by ~INR10/sh.
Lowering of subsidy, along with some marketing margin increase in diesel
will boost HPCL’s earnings.
The stock trades at 11.7x FY16E EPS of INR35.1.
Buy.
What needs to be done?
BV/Sh INR 455.8
What has company done in last five years?
Shareholding pattern (%)
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
51.1
22.1
10.9
15.9
51.1
22.6
10.5
15.7
51.1
24.1
10.1
14.8
What is the underlying potential?
Stock Performance (1-year)
Valuation and views with sensitivity on TP
Financials and valuations
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Nitish Rathi
(Nitish.Rathi@MotilalOswal.com); +91 22 3982 5558

HPCL
Story in charts
Non-commensurate retail price increases led to India’s under Ad-hoc subsidy sharing and delays in compensation by the
recovery bill rising to INR1.6t in FY13 (INRb)
govt. has impacted RoE (%)
Diesel
INR b
Kerosene
Crude (USD/bbl) - RHS
114 111 108 120
1,610
82 85
87 1,385
1,399 90
70
58 64
1,033
780
60
42
773
461
29
400 494
30
201
93
0
Petrol
LPG
Total
20.0
16.0
12.0
8.0
4.0
0.0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14E
Source: PPAC, MoPNG, MOSL
Source: Company, MOSL
Although interest cost has declined from its peak in FY09, it is HPCL’s debt has peaked FY13/14 to INR325b, ~400% higher
still >7 times high from its FY06 levels.
than INR67b in FY06
Interest cost (INRb)
21
17
9
9
67
18
15
168
105
228
213
Gross Debt (INRb)
298
250
325
325
8
2
4
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: Company, MOSL
Source: Company, MOSL
HPCL’s PAT could increase by 74% (~INR21.3/sh increase in
EPS) by Int. cost reduction and INR0.5/lt marketing margin
HPCL PAT (INR b)
15.5
6.6
26.8
48.1
-0.8
Even at long term P/E of 9.4x, HPCL could see 37% upside on
the likely new FY16 EPS (allowing INR0.5/lt MM)
HPCL stock price
HPCL Price (@ 15Yr avg P/E of 9.4x new EPS)
P/E (x) - RHS
584
750
600
450
300
150
0
20
15
10
5
0
FY14 Base
Case EPS
Interest cost
reduction
Marketing Market share New likely
margin
loss (@15%)
EPS
(@INR0.5/ltr)
Source: MOSL
Source: Company, MOSL
16 June 2014
79

HPCL
Company description
Fortune-500 company, HPCL is a refining and marketing company in India and also
has interests in upstream. It owns 14.8mmt of refining capacity, split across Mumbai
(6.5mmt) and Vishakapatnam (8.3mmt). It has a crude and product pipeline network
of ~2,400km and sells ~30mmt of petroleum products. HPCL also holds a 16.9%
stake in MRPL and 49% stake in 9mmt Bhatinda refinery. HPCL is a state-owned
company, with 51.1% Government of India (GoI) stake.
Disinvestment timeline
With government stake at 51.1%, we believe the medium term focus of the
government with respect to HPCL will be towards improving the profitability.
Further divestment, in our view would be after 2-3 years, when the expected
profitability increase is achieved.
HPCL: Key Assumptions
Exchange Rate (INR/USD)
Brent Crude (USD/bbl)
Market Sales (MMT)
YoY (%)
GRM (USD/bbl)
HPCL Blended GRM
Singapore GRM (USD/bbl)
Prem/(disc) (USD/bbl)
Refinery throughput (mmt)
Total Refinery throughput (MMT)
YoY (%)
Under recoveries Sharing (INRb)
Gross under recoveries
Upstream sharing
Govt. sharing
Net sharing
Net sharing (%)
FY11
45.7
86.5
27.0
2.9%
4.5
5.2
(0.7)
15.8
-3.1%
171
66
61
43.4
25%
FY12
47.9
114.5
29.5
9.1%
5.2
8.2
(3.0)
16.1
1.9%
304
121
183
0.1
0%
FY13
54.5
110.6
30.3
2.8%
2.1
7.7
(5.6)
15.8
-1.4%
362
112
248
2.3
1%
FY14
60.6
107.8
31.0
2.1%
3.4
5.6
(2.2)
15.4
-2.6%
325
168
152
4.8
1%
FY15E
58.0
105.0
31.9
3.0%
4.0
6.5
(2.5)
15.9
2.7%
212
134
74
3.7
2%
FY16E
57.0
105.0
32.8
3.0%
4.0
6.5
(2.5)
16.0
0.9%
FY17E
57.0
100.0
33.7
2.5%
4.5
6.5
(2.0)
16.0
0.0%
176
148
106
89
67
56
3.3
2.7
2%
2%
Source: MOSL
16 June 2014
80

HPCL
Financials and valuations
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
(INR Million)
2012
2013
2014
2015E
2016E
2017E
1,781,392 2,065,293 2,231,454 2,158,657 2,278,163 2,123,441
36.1
15.9
8.0
-3.3
5.5
-6.8
34,082
39,424
52,081
43,131
45,646
51,757
1.9
1.9
2.3
2.0
2.0
2.4
17,129
19,315
21,884
24,478
26,368
28,096
16,953
20,109
30,197
18,653
19,278
23,661
16,977
18,377
15,046
14,939
11,356
9,620
12,222
12,300
11,004
10,220
9,872
9,881
-5
714
0
0
0
0
12,202
13,318
26,155
13,933
17,794
23,922
3,077
5,699
8,817
4,628
5,911
7,946
25.2
42.8
33.7
33.2
33.2
33.2
9,125
7,620
17,338
9,305
11,883
15,976
9,115
9,047
17,338
9,305
11,883
15,976
-40.8
-0.7
91.6
-46.3
27.7
34.4
0
0
0
0
0
0
9,125
7,620
17,338
9,305
11,883
15,976
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
3,390
127,835
131,225
298,312
30,853
460,390
334,590
126,094
208,496
44,445
103,705
354,427
194,545
35,652
2,264
121,967
250,683
230,847
19,836
103,744
460,390
2013
3,390
133,874
137,264
324,583
35,984
497,830
370,062
144,575
225,487
51,729
106,269
378,962
164,387
49,350
1,471
163,754
264,617
241,622
22,995
114,345
497,830
2014
3,390
145,064
148,454
325,000
39,085
512,538
435,291
166,460
268,831
18,000
106,269
391,062
189,876
56,642
18,783
125,762
271,625
249,779
21,845
119,438
512,538
2015E
3,390
151,117
154,507
250,000
40,478
444,985
471,291
190,937
280,354
12,000
106,269
348,182
182,973
54,794
11,247
99,168
301,821
278,883
22,938
46,362
444,984
(INR Million)
2016E
2017E
3,390
3,390
158,835 169,218
162,225 172,609
190,000 180,000
42,257
44,649
394,482 397,258
505,291 535,291
217,305 245,401
287,986 289,890
8,000
8,000
106,269 106,269
303,373 294,109
193,213 180,768
57,828
53,900
15,148
22,256
37,184
37,184
311,145 301,011
287,061 275,722
24,084
25,290
-7,773
-6,903
394,482 397,257
E: MOSL Estimates
16 June 2014
81

HPCL
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
26.9
77.4
387.1
8.5
36.9
15.2
5.3
1.1
0.2
8.7
2.1
7.1
3.9
4.1
7.3
39.9
0.0
2.3
2013
26.7
79.5
404.9
8.5
44.2
15.3
5.1
1.0
0.2
8.2
2.1
5.7
4.2
4.3
8.7
29.1
0.0
2.4
2014
51.1
115.7
437.9
15.5
35.5
8.0
3.5
0.9
0.1
5.9
3.8
12.1
6.0
4.4
9.3
31.1
0.0
2.2
2015E
27.4
99.7
455.8
8.2
35.0
14.9
4.1
0.9
0.1
5.5
2.0
6.1
3.9
4.5
9.3
30.9
0.0
1.6
2016E
35.1
112.8
478.5
10.5
35.0
11.7
3.6
0.9
0.1
3.8
2.6
7.5
4.6
5.4
9.3
31.0
0.0
1.2
2017E
47.1
130.0
509.2
14.1
35.0
8.7
3.1
0.8
0.1
3.0
3.5
9.5
6.0
5.4
9.3
31.1
0.0
1.0
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
12,192
17,129
0
21,392
-2,715
-27,301
15,291
-41,359
6,378
6,345
-28,636
0
37,919
-14,836
-5,509
17,574
4,230
-1,966
2,264
2013
14,746
19,344
0
20,193
-1,072
-30,945
11,496
-36,807
-2,404
5,505
-33,706
0
37,072
-22,187
-3,344
11,540
-10,670
12,141
1,471
2014
26,155
21,884
0
15,046
-5,716
12,219
69,588
-31,500
0
0
-31,500
0
417
-15,046
-6,148
-20,776
17,311
1,471
18,783
2015E
13,933
24,478
0
14,939
-3,235
65,541
115,656
-30,000
0
0
-30,000
0
-75,000
-14,939
-3,252
-93,192
-7,536
18,783
11,247
(INR Million)
2016E
2017E
17,794
23,922
26,368
28,096
0
0
11,356
9,620
-4,131
-5,554
58,035
6,237
109,421
62,321
-30,000
-30,000
0
0
0
0
-30,000
-30,000
0
0
-60,000
-10,000
-11,356
-9,620
-4,165
-5,592
-75,521
-25,212
3,900
7,108
11,247
15,148
15,148
22,256
E: MOSL Estimates
16 June 2014
82

16 June 2014
Thematic | India PSUs Update | Sector: Oil & Gas
IOC
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR336
TP: INR418
Buy
Ad-hoc /delayed subsidy impacted profitability
Profitability to improve led by diesel deregulation, increase in
marketing margin
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
IOCL IN
2,428.0
385/186
-2/49/2
815.7
13.6
Financial Snapshot (INR b)
Y/E March
2015E 2016E 2017E
Net Sales
4,296 4,264 4,149
EBITDA
Adj PAT
EPS (INR)
Gr. (%)
BV/Sh. (INR)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
189.1 210.9 240.5
71.9
29.6
1.4
10.5
7.6
12.0
1.2
86.4
35.6
20.2
11.7
8.9
10.0
1.1
96.0
39.5
11.1
12.1
10.1
9.0
1.0
Shareholding pattern (%)
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
68.6
4.8
2.2
24.4
78.9
4.4
2.2
14.5
79.0
4.5
2.0
14.5
On-going subsidy reforms to boost IOCL’s profitability led by lower interest cost
and likely higher diesel marketing margins.
Higher cashflow to help reinvestment to improve efficiency and complexity of
marketing and refining businesses respectively.
What went wrong in the five years?
IOCL’s gross under-recoveries increased from INR431b in FY06 to INR729b
in FY14 leading to higher debt and interest due to delayed compensation.
IOCL’s interest costs peaked in FY13 at INR64b, 4x of the FY08 levels.
IOCL’s profitability was marred by (a) inefficiencies of the subsidy regime,
(b) lower GRMs due to lower complexity (the commissioning of Paradip
refinery capable of processing heavier crude has been delayed).
Give (a) petroleum pricing freedom, (b) de-regulate LPG and kerosene and
(c) expedite and take timely corrective actions for any delay in the mega
projects (d) reinvest the earnings in improving refinery complexity.
IOCL is commissioning its 11
th
refinery at Paradip, Odisha with nameplate
capacity of 15mmtpa at ~INR300b.
Consistently registering refinery capacity utilization of >100%.
IOCL has been able to expand its retail network at a pace higher than
before.
Refining margins could improve meaningfully if complexity of the current
refineries is increased.
Marketing freedom the diesel marketing could improve marketing business
profitability and improve overall return ratios.
Every increase of INR0.5/ltr in diesel marketing margins increases EPS by
INR2.7/sh.
Mere interest cost reduction, led by lower subsidy could’ve increased EPS
by INR2.3/sh.
Lowering of subsidy, along with some marketing margin increase in diesel
will give boost IOCL’s earnings.
The stock trades at 10x FY16E EPS of INR35.6.
Buy.
What needs to be done?
299.3 322.0 361.5
What has company done in last five years?
What is the underlying potential?
Valuation and views with sensitivity on TP
Stock Performance (1-year)
Financials and valuations
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Nitish Rathi
(Nitish.Rathi@MotilalOswal.com); +91 22 3982 5558

IOC
Story in charts
Non-commensurate retail price increases led to India’s under Interest cost has remained a key driver of RoE, due to
recovery bill rising to INR1.6t in FY13 (INRb)
inefficiencies in current subsidy regime
Petrol
LPG
Total
Diesel
INR b
Kerosene
Crude (USD/bbl) - RHS
1,385
773
400
93
494
201
1,033
461
780
1,610 1,399 120
90
60
30
0
FY08
6
FY09
FY10
FY11
FY12
FY13
FY14
14
7
20
RoE (%)
22
20
11
Source: PPAC, MoPNG, MOSL
Source: Company, MOSL
Interest cost peaked in FY13 at INR64b 4x FY08 level led by IOCL’s debt has peaked in FY14 to INR832b, ~120% higher
higher debt due to delayed compensation for subsidies
than INR355b in FY08
Interest Cost (INRb)
56
40
27
16
15
355
450
446
64
51
527
Total Debt (INRb)
754
783
832
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company, MOSL
Source: Company, MOSL
IOCL’s PAT could increase by 17% (~INR3.1/sh increase in
EPS) by Int. cost reduction and INR0.5/lt marketing margin
IOCL PAT (INRb)
2.7
2.3
30.9
FY14 Base Interest cost Marketing Market share New likely
Case EPS
reduction
margin
loss (@15%)
EPS
(@INR0.5/ltr)
35.1
-1.9
Even at long term P/E of 9.6x, IOCL could see 35% upside on
the likely new FY16 EPS (allowing INR0.5/lt MM)
IOCL stock price
IOCL Price (@ 15Yr avg P/E of 9.6x new EPS)
P/E (x) - RHS
475
600
450
300
150
0
May-08
17
12
7
2
-3
May-10
May-12
May-14
Source: MOSL
Source: Company, MOSL
16 June 2014
84

IOC
Company description
Fortune-500 company, IOC is the largest refining and marketing company in India. It
operates 8 refineries (incl BRPL) with a capacity of 54.2mmtpa and has a 52% stake
in CPCL (11.5mmt refining capacity). The company controls a refining capacity of
65.7 mmtpa. It has a pipeline network of >10,300km (62mmtpa capacity), has
22,372 petrol/diesel outlets and has interests in petrochemicals and upstream oil
and gas. IOC is a Public Sector Company with 78.9% Government stake.
Disinvestment timeline
With government stake at 68.6%, we believe the medium term focus of the
government with respect to IOCL will be towards improving the profitability.
Further divestment, in our view would be after 2-3 years, when the expected
profitability increase is achieved.
IOCL: Key Assumptions
Exchange Rate (INR/USD)
Conversion (MT to bbl)
Brent Crude (USD/bbl)
Market Sales Volume (MMT)
YoY (%)
GRM (USD/bbl)
Singapore GRM (USD/bbl)
Prem/(disc) (USD/bbl)
Refinery throughput (mmt)
YoY (%)
Pipeline throughput (mmt)
YoY (%)
Under recoveries Sharing (INR b)
Gross under recoveries
Upstream sharing
Govt. sharing
Net sharing
Net sharing (%)
FY11
45.7
7.37
86.5
72.9
4%
5.9
5.2
0.8
53.0
4%
67.8
5%
431
167
226
38
9%
FY12
47.9
7.37
114.5
75.7
4%
3.6
8.2
(4.5)
55.6
5%
70.3
4%
755
300
455
0
0%
FY13
54.5
7.37
110.0
76.2
1%
2.2
7.6
(5.4)
54.7
-2%
70.9
1%
858
320
533
5
1%
FY14
60.6
7.37
107.8
75.5
-1%
4.2
5.6
(1.4)
53.1
-3%
70.2
-1%
729
347
372
11
1%
FY15E
58.0
7.37
105.0
78.0
3%
4.5
6.5
(2.0)
55.4
4%
72.5
3%
472
297
165
9
2%
FY16E
57.0
7.37
105.0
80.4
3%
5.0
6.5
(1.5)
62.3
13%
74.7
3%
FY17E
57.0
7.37
100.0
82.2
2%
5.0
6.5
(1.5)
69.2
11%
76.4
2%
387
327
232
196
147
124
8
7
2%
2%
Source: MOSL
16 June 2014
85

IOC
Financials and valuations
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Min. Int. & Assoc. Share
Adj Cons PAT
2012
4,072.3
32.2
180.3
4.4
53.1
127.2
58.9
48.8
77.1
40.0
-2.7
-6.8
42.7
119.3
52.4
-0.4
41.9
2013
4,607.5
13.1
127.4
2.8
56.9
70.5
70.8
45.4
0.0
45.0
8.8
19.5
36.3
44.5
-62.7
8.2
52.7
2014
4,872.6
5.8
159.7
3.3
63.6
96.1
59.1
45.3
17.5
64.8
30.1
46.4
34.7
70.9
59.3
1.2
37.1
2015E
4,296.2
-11.8
189.1
4.4
69.9
119.2
55.6
43.7
0.0
107.4
33.4
31.1
74.0
71.9
1.4
-2.1
69.8
(INR Billion)
2016E
4,264.5
-0.7
210.9
4.9
77.1
133.8
47.8
41.9
0.0
127.9
39.7
31.0
88.2
86.4
20.2
-1.8
84.6
2017E
4,149.8
-2.7
240.5
5.8
88.7
151.8
44.2
42.3
0.0
149.9
49.8
33.2
100.1
96.0
11.1
-4.1
91.9
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
24.3
579.5
603.7
800.2
59.7
1,483.0
1,076.3
430.4
645.8
154.5
175.9
1,221.8
638.5
115.5
8.2
459.6
715.2
561.2
154.0
506.6
1,483.0
2013
24.3
609.9
634.1
840.3
63.3
1,549.0
1,105.3
487.4
618.0
193.4
178.4
1,406.1
656.6
137.8
98.9
512.9
847.0
665.2
181.8
559.0
1,549.0
2014
24.3
656.0
680.3
885.4
64.2
1,639.9
1,226.6
551.0
675.7
268.8
187.0
1,448.9
730.8
130.0
98.6
489.6
940.7
750.7
190.0
508.2
1,639.9
2015E
24.3
702.3
726.6
705.3
70.1
1,514.1
1,354.3
620.8
733.5
243.8
187.0
1,235.6
637.8
147.6
120.3
329.9
886.1
693.6
192.5
349.6
1,514.1
(INR Billion)
2016E
2017E
24.3
24.3
757.5
853.5
781.8
877.8
608.3
561.3
77.3
78.6
1,481.3
1,535.7
1,492.2
1,782.1
698.0
786.7
794.3
995.4
218.8
43.8
187.0
187.0
1,158.9
1,165.2
629.7
609.1
142.7
140.0
76.2
105.6
310.2
310.5
877.9
856.0
685.7
662.0
192.2
194.0
280.9
309.2
1,481.3
1,535.7
E: MOSL Estimates
16 June 2014
86

IOC
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Creditors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
49.2
39.1
248.7
5.0
33.9
2013
18.3
45.2
261.2
6.2
33.4
2014
29.2
41.5
280.2
8.7
66.6
12.1
8.5
1.3
0.3
10.3
2.5
7.2
9.3
3.0
10.4
57.2
0.0
1.3
5.9
4.6
3.0
10.9
52.0
0.0
1.3
5.3
6.0
3.1
9.7
54.7
0.0
1.3
2015E
29.6
57.5
299.3
9.0
36.7
12.0
6.2
1.2
0.3
7.6
2.5
10.5
7.6
2.7
12.5
54.2
0.0
1.0
2016E
35.6
66.6
322.0
11.0
36.9
10.0
5.3
1.1
0.3
6.6
3.1
11.7
8.9
2.8
12.2
53.9
0.0
0.8
2017E
39.5
74.4
361.5
12.0
37.1
9.0
4.8
1.0
0.3
5.5
3.4
12.1
10.1
2.8
12.3
53.6
0.0
0.6
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
40.0
49.8
0.0
59.0
-4.1
-132.2
-7.7
-170.2
39.7
0.0
-130.5
0.0
222.7
-63.6
-28.1
131.0
-7.2
15.4
8.2
2013
45.0
56.9
0.0
70.8
-5.1
38.2
205.9
-67.9
-2.6
0.0
-70.5
0.0
40.2
-70.8
-14.1
-44.7
90.6
8.2
98.9
2014
99.8
63.6
0.0
59.1
-29.3
50.6
243.8
-196.8
-8.5
0.0
-205.3
0.0
45.1
-59.1
-24.7
-38.7
-0.3
98.9
98.6
2015E
107.4
69.9
0.0
55.6
-27.5
180.4
385.7
-102.7
0.0
0.0
-102.7
0.0
-180.1
-55.6
-25.6
-261.3
21.7
98.6
120.3
(INR Billion)
2016E
2017E
127.9
149.9
77.1
88.7
0.0
0.0
47.8
44.2
-32.5
-48.5
24.5
1.2
244.8
235.5
-112.9
-114.9
0.0
0.0
0.0
0.0
-112.9
-114.9
0.0
0.0
-97.0
-47.0
-47.8
-44.2
-31.2
0.0
-176.0
-91.2
-44.1
29.4
120.3
76.2
76.2
105.6
E: MOSL Estimates
16 June 2014
87

16 June 2014
Thematic | India PSUs | Sector: Metals
NMDC
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR179
TP: INR220
Buy
Domestic tail winds stronger than global headwinds
Strong margins; 7% volume growth; attractive 5% dividend yield
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
NMDC IN
3,964.7
196/93
6/7/32
710.5
11.8
Financial Snapshot (INR Billion)
2015E 2016E 2017E
Y/E March
Net Sales
132.2 137.1 149.4
EBITDA
Adj PAT
EPS (INR)
Gr. (%)
RoE (%)
RoCE (%)
P/E (x)
P/BV (x)
EV/EBITDA (x)
85.5
71.1
17.9
11.2
22.7
33.2
9.8
2.1
5.8
88.3
72.5
18.3
2.0
21.4
31.4
9.6
2.0
5.7
97.5
77.9
19.6
7.4
21.4
31.4
9.0
1.9
5.2
NMDC is a key beneficiary of domestic demand-supply gap.
True potential of underlying asset is yet to be tapped.
Slurry pipeline of Essar (customer) was damaged by naxals in Chhattisgarh.
This led to bottlenecks in logistics and affected deliveries of Bailadila
complex.
Higher royalties and new forest development tax raised costs.
Production declined at Kumarswamy mines due to a delay in permits.
Capital allocation was suboptimal. Large retained profits in fixed deposits
dragged down RoE.
Financials and valuations
Although dividend payout has been raised to address investors’ grievances,
yet NMDC has large cash piles on its balance sheet. Company should raise
the dividend payout further to enhance RoE and shareholders’ total return.
Expedite debottlenecking of logistics.
Ensure that mining permits are renewed well in advance.
Reserves at Donimalai mines replenished through further exploration.
Mechanization of Kumarswamy mines is underway in advanced stages.
1.2mtpa pellet plant set up at Donimalai complex.
Bailadila 11B - additional 7mtpa capacity added at Chhattisgarh complex.
NMDC has access to high quality iron ore reserves of 1.4bt. These assets are
highly underexplored. True reserves are likely to be manifold.
If logistics bottlenecks are addressed, iron ore production can increase
exponentially.
Although global seaborne iron ore prices are under pressure due to
oversupply, NMDC could raise prices in the domestic market as supply is
getting tighter due to closure of mines. Company’s ore is still cheaper for
Indian steel mills. NMDC’s realization is still lower than global peers, while
its grade and product mix is superior.
Every INR100/t change in iron ore realization leads to EPS upgrade of 3%.
NMDC is valued based on FY16E EV/EBITDA of 6.5x and book value of
capital work in progress. Dividend yield is attractive at ~5%.
What went wrong in five years
What needs to be done
What company did in last five years
Shareholding pattern (% )
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
80.0
10.6
6.2
3.1
80.0
10.5
6.1
3.4
80.0
11.5
4.8
3.7
What is the underlying potential
Stock Performance (1-year)
NMDC
Sensex - Rebased
200
Valuation and views with sensitivity on target price
170
140
110
80
Financials and valuations
Sanjay Jain
(SanjayJain@MotilalOswal.com); +91 22 3982 5412

NMDC
Story in charts
Realization resilient, margins trended down in 4 years…
…costs increased due to royalty, CSR
Source: NMDC, MOSL
Source: NMDC, MOSL
RoIC (%) has peaked, yet exceptional
RoE (%) declined due to increase in cash reserves
Source: NMDC, MOSL
Source: NMDC, MOSL
Payout ratio is hiked to enhance RoE
NMDC is selling largely in domestic market
Source: NMDC, MOSL
Source: NMDC, MOSL
16 June 2014
89

NMDC
Company description
NMDC is India's largest iron ore producer, with a capacity of 36mtpa. It produces
~30-32mtpa of iron ore from four mining complexes in Chhattisgarh and Karnataka.
In addition to its iron ore operations, NMDC has a diamond mine at Panna (Madhya
Pradesh) and owns a 10.5mw wind power plant in Karnataka. In July 2010, Sponge
Iron India, which has a small sponge iron capacity of 60ktpa, was merged with
NMDC. It is investing INR155b over the next five years to expand the iron ore
production to 50mtpa and forward integrate by setting up a 3mpta steel plant in
Chhattisgarh and 1.2mtpa pellet plant in Karnataka.
Disinvestment timeline
With Government’s stake at 80%, we believe its near term focus with respect to
NMDC will be to increase production and address logistic bottlenecks. Further
divestment will depend on market condition.
Key assumption: Sales (mt)
Kirandul, Chhattisagrh
Bacheli, Chhattisagrh
Donimalai, Karnataka
36.5
10.0
13.5
13.0
FY16
37.5
10.5
13.5
13.5
FY17
26.3
5.7
10.4
10.2
FY07
30.0
6.9
11.7
11.4
FY08
28.6
6.4
10.8
11.4
FY09
23.8
5.7
10.7
7.4
FY10
25.2
4.2
12.1
8.8
FY11
27.3
5.6
12.6
9.0
FY12
26.4
5.3
11.7
9.4
FY13
30.6
9.4
11.4
9.7
FY14
33.0
9.5
12.5
11.0
FY15
Source: Company, MOSL
Target price calculations (INR m)
Y/E March
2011
EBITDA per ton
3,284
Volumes (m tons)
26.3
EBITDA
86,430
Target EBITDA multiple
Target EV
Less: Net Debt (Rs m)
-172,281
Add: CWIP
6,772
Equity Value
Target price
2012
3,270
27.3
89,281
2013
2,963
26.3
77,838
-202,646
19,147
-210,258
32,808
2015E
2016E
2,513
2,419
34.0
36.5
85,452
88,296
6.5
6.5
555,438
573,924
-186,572 -201,025 -199,812
53,989
75,841
98,570
832,303
872,306
210
220
Source: Company, MOSL
2014
2,548
30.5
77,713
16 June 2014
90

NMDC
Financials and valuations
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
2012
112.6
-0.9
89.3
79.3
1.3
88.0
0.0
20.2
-0.5
107.6
34.9
32.5
72.7
73.0
12.3
2013
107.0
-4.9
77.8
72.7
1.4
76.5
0.0
22.4
-4.1
94.8
31.2
32.9
63.6
66.3
-9.2
2014
120.6
12.6
77.7
64.4
1.5
76.2
0.0
20.9
0.5
97.6
33.4
34.2
64.2
63.9
-3.6
2015E
132.2
9.7
85.5
64.6
1.8
83.6
0.0
20.9
0.0
104.5
33.4
32.0
71.1
71.1
11.2
(INR Billion)
2016E
137.1
3.6
88.3
64.4
2.0
86.3
0.0
20.3
0.0
106.6
34.1
32.0
72.5
72.5
2.0
2017E
149.4
9.0
97.5
65.2
2.2
95.2
0.0
19.3
0.0
114.5
36.6
32.0
77.9
77.9
7.4
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
4.0
240.1
244.1
0.0
1.0
245.1
23.9
12.0
11.9
19.1
2.5
233.0
4.6
7.4
202.6
18.4
21.4
6.4
15.0
211.6
245.1
2013
4.0
271.1
275.1
0.0
1.0
276.2
26.0
13.4
12.6
32.8
2.5
261.0
6.4
10.8
210.3
33.5
32.8
11.1
21.7
228.2
276.2
2014
4.0
295.9
299.9
0.0
1.1
301.0
27.3
14.9
12.4
54.0
2.5
245.9
6.8
14.5
186.6
38.0
13.8
1.9
12.0
232.1
301.0
2015E
4.0
322.9
326.9
0.0
1.1
328.0
31.3
16.7
14.6
75.8
2.5
256.1
4.3
12.7
201.0
38.0
21.0
9.1
12.0
235.0
328.0
(INR Billion)
2016E
2017E
4.0
4.0
346.7
373.6
350.7
377.5
0.0
0.0
1.1
1.1
351.7
378.6
35.3
39.3
18.7
21.0
16.5
18.3
98.6
128.5
2.5
2.5
255.5
251.5
4.5
4.9
13.1
14.3
199.8
194.3
38.0
38.0
21.3
22.2
9.4
10.2
12.0
12.0
234.1
229.3
351.7
378.6
E: MOSL Estimates
16 June 2014
91

NMDC
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Asset Turnover (x)
Debtors (No. of Days)
Inventory (No. of Days)
Debtors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
18.4
18.7
61.6
4.5
26.3
9.6
9.4
2.9
4.4
5.6
2.6
33.5
49.3
0.5
23.9
14.9
23.9
-0.8
2013
16.7
16.4
69.4
7.0
51.1
10.5
10.8
2.5
4.6
6.3
4.0
25.5
37.9
0.4
36.9
21.7
36.9
-0.8
2014
16.1
16.6
75.6
8.5
61.4
10.9
10.6
2.3
4.3
6.6
4.8
22.2
33.7
0.4
43.8
20.6
43.8
-0.6
2015E
17.9
18.4
82.4
9.5
62.0
9.8
9.6
2.1
3.8
5.8
5.4
22.7
33.2
0.4
35.0
12.0
35.0
-0.6
2016E
18.3
18.8
88.4
10.5
67.2
9.6
9.4
2.0
3.6
5.7
6.0
21.4
31.4
0.4
35.0
12.0
35.0
-0.6
2017E
19.6
20.2
95.2
11.0
65.5
9.0
8.7
1.9
3.4
5.2
6.2
21.4
31.4
0.4
35.0
12.0
35.0
-0.5
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
Other Income
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
107.6
1.3
-20.2
0.0
-34.9
-7.1
44.0
-13.5
-1.1
0.0
-14.6
0.0
0.0
-19.1
20.2
1.1
30.4
172.3
202.6
2013
94.8
1.4
-22.4
0.0
-31.2
-9.0
33.5
-15.8
0.0
0.0
-15.8
0.0
0.0
-32.5
22.4
-10.1
7.6
202.6
210.3
2014
97.6
1.5
-20.9
0.0
-33.4
-27.5
17.2
-22.4
0.0
0.0
-22.4
0.0
0.0
-39.4
20.9
-18.5
-23.7
210.3
186.6
2015E
104.5
1.8
-20.9
0.0
-33.4
11.5
63.5
-25.9
0.0
0.0
-25.9
0.0
0.0
-44.1
20.9
-23.2
14.5
186.6
201.0
(INR Billion)
2016E
2017E
106.6
114.5
2.0
2.2
-20.3
-19.3
0.0
0.0
-34.1
-36.6
-0.3
-0.7
53.9
60.1
-26.7
-33.9
0.0
0.0
0.0
0.0
-26.7
-33.9
0.0
0.0
0.0
0.0
-48.7
-51.0
20.3
19.3
-28.4
-31.7
-1.2
-5.6
201.0
199.8
199.8
194.3
E: MOSL Estimates
16 June 2014
92

16 June 2014
Thematic | India PSUs | Sector: Oil & Gas
Oil India
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR597
TP: INR734
Buy
High ad-hoc subsidy led non-remunerative profitability
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
OINL IN
601.1
633/415
2/8/-27
364.0
6.1
Favorable pricing, coupled with exploration focus and aggressive
overseas acquisitions shall revive OINL’s returns
Last 5 year subsidy payout of USD5.5b was 5x capex of USD1.1b impacting
investment in exploration and acquisition leading to stagnant production.
Mere profit normalization through new gas price and elimination of
subsidy through pricing reforms could increase OINL’s earnings by 35%.
In a free pricing scenario, we expect reversal of RoE which have dipped
from ~32% in FY06 to <15% in FY14 and expect RoE to increase to ~24%.
During the last five years, OINL’s net oil realization is down by ~USD7/bbl
led by ad-hoc subsidy policy v/s USD40/bbl increase in international prices.
Direct and indirect consequences of blockades, bandhs across the
operational areas (primarily North-East India) led to oil production decline.
OINL’s returns are marred by (a) lower realizations led by ad-hoc subsidy
sharing, (b) lower capex leading to stagnant production.
Financial Snapshot (INR b)
Y/E MAR
2015E 2016E 2017E
Net Sales
109.3 125.1 129.4
EBITDA
Net Profit
EPS (INR)
EPS Gr. (%)
BV/Sh. (INR)
P/E (x)
P/BV (x)
EV/EBITDA (x)
EV/Sales (x)
RoE (%)
52.2
37.1
61.8
24.6
9.7
1.6
6.3
3.0
17.1
62.9
43.6
72.6
17.5
8.2
1.4
5.2
2.6
18.3
65.0
46.2
76.9
6.0
7.8
1.3
4.8
2.4
17.5
What went wrong in the five years?
377.9 417.5 459.5
What needs to be done?
Give (a) remunerative oil and gas price realization, (b) free hand to
management with control on operating cashflows, (c) expedite decision
making on domestic and overseas investments in and (d) actively monitor
and take timely corrective actions for any delay in the large projects.
While, the OINL’s was able to get hold of 4% stake in Rovuma1 offshore
(Mozambique acquisition) with a bridge loan of USD1.1b, its cumulative
subsidy sharing since FY05 at USD5.7b was 3x cumulative capex of USD1.8b.
Last decade subsidy payout of USD5.5b, if reinvested, could have resulted in
additional production of 10mmt (3x of the current annual production).
Market determined oil and gas realization will add USD1.5b to OINL’s PAT,
i.e. USD13.5b (@P/E of 9x) increase in MCap v/s current MCap of USD6.2b.
Shareholding pattern (%)
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
67.6
8.1
9.3
14.9
68.4
6.9
9.7
15.0
68.4
7.9
7.7
15.9
What has company done in last five years?
What is the underlying potential?
Stock Performance (1-year)
Oil India
Sensex - Rebased
700
640
580
520
460
400
Valuation and views with sensitivity on TP
Every USD1/bbl increase in oil net realization increases OINL’s EPS by
~INR1.4/sh implying INR12.6/sh increase in fair value @P/E of 9x.
Every USD1/mmbtu increase in gas price increases ONGC’s EPS by
~INR2.7/sh implying INR24.3/sh @P/E of 9x.
Financials and valuations
Likely arms-length gas price, lower subsidy will boost the earnings of OINL.
The stock trades at 8.2x FY16E EPS of INR72.6.
Buy.
Harshad Borawake
(HarshadBorawake@MotilalOswal.com); +91 22 3982 5432
Nitish Rathi
(Nitish.Rathi@MotilalOswal.com); +91 22 3982 5558

Oil India
Story in charts
Non-commensurate retail price increases led to India’s under Subsidy burden on OINL resulted in de-linking its realization
recovery bill rising to INR1.6t in FY13 (INR b)
from international oil prices, with discount rising to ~54%
Petrol
LPG
Total
Diesel
INR b
Kerosene
Crude (USD/bbl) - RHS
1,610 1,399 120
1,385
90
461
780
60
30
0
Brent Crude Price (USD/bbl)
160
120
80
40
0
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Net Realization (USD/bbl)
93
201 400
494
773 1,033
Source: PPAC, MoPNG, MOSL
Source: OINL, MOSL
Since FY06, OINL has paid cumulative subsidy of INR283b v/s Non-remunerative pricing and subdued capex has taken a toll
its own capex of INR87b
on OINL’s operations with stagnating oil and gas production
Subsidy (INRb)
Capex (INRb)
74
79
87
Oil Production (mmt)
4.0
3.5
33
1
6
FY06
2
7
FY08
3
12
10
9
15
6
16
Gas Production (bcm)
3.0
2.5
2.0
2
5
FY07
2
FY09
FY10
FY11
FY12
FY13
FY14
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: OINL, PPAC, MOSL
Source: Company, MOSL
Oil India consolidated EPS could increase 29% at rational
subsidy and gas ~USD8.4/mmbtu
Base
Subsidy @48%
Realization (USD/bbl)
47.8
59.7
59.7
44.0
61.8
49.6
49.6
FY14
61.8
72.6
Gas @USD8.4/mmbtu
Total
70.0
61.8
93.3
14.9
5.8
At long term P/E of 9.4x, OINL could see xx% upside on the
likely new EPS
OINL Stock Price (INR)
Stock Price (5 Yr. avg. P/E of 9.5x new EPS)
P/E (x)
1000
750
500
250
0
870
12
9
6
3
0
FY13
FY15
FY16
Source: Company, MOSL
Source: Company, MOSL
16 June 2014
94

Oil India
Company description
Oil India (OIL), established in 1959, is a 'Navratna' stateowned company, engaged in
exploration, development, production and transportation of crude oil and natural
gas in India. OIL has 2P reserves of 944mmboe, ~94% of these located in the north-
east. It owns 1,157km of common carrier cross-country crude oil pipeline, and the
660km product pipeline and the 192km pipeline to Numaligarh refinery.
Disinvestment timeline
With government stake at 67.6%, we believe the medium term focus of the
government with respect to OINL will be towards improving the profitability.
Further divestment, in our view would be after 2-3 years, when the expected
profitability increase is achieved.
Oil India: Key Assumptions
Year End: March 31 (INR m)
Exchange Rate (USD/bbl)
APM Gas Price (USD/mmbtu)
Brent Crude Price (USD/bbl)
Taxes & Duties
Royalty rate - Oil (%)
Royalty rate - Gas (%)
Cess (INR/MT)
Production Details
Oil (mmt)
Gas (bcm)
Total (mmtoe)
Subsidy Sharing (INRb)
Oil Price Realization (USD/bbl)
Gross
Upstream Discount
Net
EPS (INR/sh.)
FY11
45.6
3.9
86.7
20%
10%
2,500
3.59
2.35
5.94
32.9
86.1
27.6
58.5
48.0
FY12
47.9
4.2
114.5
20%
10%
2,500
3.85
2.63
6.48
73.5
114.7
54.8
59.8
57.3
FY13
54.5
4.2
110.6
20%
10%
4,500
3.70
2.64
6.34
78.9
109.6
56.0
53.6
59.7
FY14
60.6
4.2
107.8
20%
10%
4,500
3.48
2.64
6.12
87.4
106.4
59.3
47.1
49.6
FY15E
58.0
6.3
107.0
20%
10%
4,500
3.60
2.77
6.37
76.8
106.0
50.4
55.6
61.8
FY16E
57.0
6.3
105.0
20%
10%
4,500
3.63
2.91
6.55
57.7
FY17E
57.00
6.3
100.0
20%
10%
4,500
3.67
3.06
6.73
48.6
104.0
99.0
38.2
31.8
65.8
67.2
72.6
76.9
Source: MOSL
16 June 2014
95

Oil India
Financials and valuations
Income statement
Y/E March
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
2012
97,741
17.7
23,776
24.3
15,263
8,513
105
19,536
0
27,944
16,550
59.2
11,395
34,469
19.4
2013
95,252
-2.5
19,891
20.9
9,201
10,690
26
19,570
0
30,234
16,939
56.0
13,295
35,893
4.1
2014
91,267
-4.2
8,556
9.4
11,770
-3,214
688
21,084
0
17,183
14,291
83.2
2,891
29,813
-16.9
2015E
109,304
19.8
26,916
24.6
14,544
12,372
1,098
18,933
0
30,207
18,298
60.6
11,909
37,150
24.6
(INR Million)
2016E
125,054
14.4
35,260
28.2
15,428
19,832
925
18,623
0
37,530
21,494
57.3
16,036
43,640
17.5
2017E
129,418
3.5
35,923
27.8
14,871
21,053
925
19,812
0
39,940
22,778
57.0
17,163
46,245
6.0
Balance sheet
Y/E March
Share Capital
Reserves
Net Worth
Debt
Deferred Tax
Total Capital Employed
Gross Fixed Assets
Less: Acc Depreciation
Net Fixed Assets
Capital WIP
Investments
Current Assets
Inventory
Debtors
Cash & Bank
Loans & Adv, Others
Curr Liabs & Provns
Curr. Liabilities
Provisions
Net Current Assets
Total Assets
2012
6,011
171,202
177,213
101
12,799
190,113
35,340
24,757
10,584
45,667
26,142
144,421
5,333
10,518
109,355
19,214
36,699
23,188
13,511
107,721
190,113
2013
6,011
186,103
192,115
10,578
14,314
217,006
40,437
26,331
14,105
53,534
18,571
165,599
6,443
9,027
121,329
28,800
34,802
17,096
17,706
130,797
217,006
2014
6,011
200,872
206,883
97,827
15,269
319,979
45,533
28,940
16,592
58,966
114,567
160,635
9,563
4,673
117,560
28,839
30,781
15,315
15,466
129,854
319,979
2015E
6,011
221,156
227,167
71,127
16,933
315,226
50,629
31,528
19,101
76,314
115,676
148,094
6,263
11,380
101,613
28,839
43,958
28,182
15,776
104,136
315,226
(INR Million)
2016E
2017E
6,011
6,011
244,983 270,234
250,995 276,245
71,127
71,127
18,887
20,957
341,008 368,329
55,725
60,821
34,455
37,675
21,270
23,146
95,159 104,898
118,211 120,746
153,129 167,718
6,815
7,059
13,019
13,474
104,455 118,346
28,839
28,839
46,761
48,178
30,669
31,765
16,091
16,413
106,369 119,540
341,008 368,329
E: MOSL Estimates
16 June 2014
96

Oil India
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
EV/Sales
EV/EBITDA
Dividend Yield (%)
Profitability Ratios (%)
RoE
RoCE
Turnover Ratios (%)
Fixed Asset Turnover (x)
Debtors (No. of Days)
Leverage Ratios (%)
Net Debt/Equity (x)
2012
57.3
65.9
294.8
19.0
38.5
2013
59.7
69.1
319.6
30.0
58.2
2014
49.6
60.6
344.2
21.5
50.5
2015E
61.8
72.7
377.9
24.0
45.4
2016E
72.6
84.2
417.5
28.0
45.4
2017E
76.9
89.2
459.5
30.0
45.4
12.0
9.8
1.7
3.6
9.6
3.6
9.7
8.2
1.6
3.0
6.3
4.0
8.2
7.1
1.4
2.6
5.2
4.7
7.8
6.7
1.3
2.4
4.8
5.0
20.7
27.7
2.8
38.2
-0.6
19.4
26.0
2.5
37.9
-0.6
14.9
16.7
2.2
18.0
-0.1
17.1
17.8
2.3
38.0
-0.1
18.3
20.1
2.4
38.0
-0.1
17.5
19.7
2.2
38.0
-0.2
Cash flow statement
Y/E March
OP/(Loss) before Tax
Depreciation
Others
Interest
Direct Taxes Paid
(Inc)/Dec in Wkg Cap
CF from Op. Activity
(Inc)/Dec in FA & CWIP
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax)
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
2012
51,019
5,142
0
-13,509
-18,968
3,125
30,972
-8,599
-16,688
11,335
-13,951
0
-10,042
-68
-15,231
-25,340
-8,320
117,675
109,355
2013
52,832
5,671
0
-14,678
-24,588
-8,808
11,045
-12,515
7,571
14,768
9,824
0
10,694
-26
-19,562
-8,895
11,975
109,355
121,329
2014
44,105
6,621
0
-10,540
-13,336
-2,826
25,923
-79,814
-32,622
11,228
-101,208
0
87,249
-688
-15,045
71,516
-3,769
121,329
117,560
2015E
55,447
6,544
0
-8,765
-16,634
9,770
52,963
-33,000
-1,109
9,863
-24,246
0
-26,700
-1,098
-16,866
-44,664
-15,947
117,560
101,613
(INR Million)
2016E
2017E
65,134
69,023
6,986
7,385
0
0
-8,348
-9,101
-19,540
-20,707
610
719
51,841
53,319
-35,000
-25,000
-2,535
-2,535
9,273
10,026
-28,262
-17,509
0
0
0
0
-925
-925
-19,812
-20,995
-20,737
-21,920
2,843
13,891
101,613 104,455
104,455 118,346
E: MOSL Estimates
16 June 2014
97

16 June 2014
Thematic | India PSUs | Sector: Financials
Punjab National Bank
BSE Sensex
25,190
S&P CNX
7,534
CMP: INR947
TP: INR1,320
Buy
Significantly levered to up-cycle
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Superior return ratios | Better capitalization
PNB IN
362.1
1,068/402
-1/45/-4
342.7
5.7
Financial Snapshot (INR b)
Y/E March
2015E 2016E 2017E
NII
176.8 209.4 245.1
OP
NP
EPS (Rs)
EPS Gr. (%)
BV/Share
P/E (x)
P/BV (x)
RoE (%)
RoA (%)
123.6 149.2 176.8
44.0
31.6
7.9
0.9
12.1
0.7
57.3
30.4
6.0
0.8
14.0
0.8
67.4
17.5
5.1
0.7
14.5
0.8
121.5 158.4 186.1
1,060 1,200 1,364
PNB’s earnings CAGR of over last five years has been just 2%, led by rising
stress levels (net stress loans of 13% highest among comparable banks).
PNB is highly levered to economic growth and continuous improvement in
the same can provide significant upside in earnings (led by asset quality).
Even post factoring elevated credit cost of 1.25% and 1.05% (average of
0.5% over FY05/10) earnings CAGR is expected to be at 30%+.
Healthy capitalization (Tier I of 8.9%) and RoA’s of 0.7%/0.8% (despite
factoring higher credit cost) is a key positive, turn in asset quality could
drive return ratios higher.
What went wrong in five years
Moderating economic growth and fall in new investment demand led to
slowdown of loan growth and significant rise in stress levels in the system.
Stubborn inflation and volatility in INR resulted in tight liquidity conditions
and high interest rate, further accentuating the stress in the system.
AS-15 related provisions led to significant hit on the BV and profitability.
What needs to be done
Resolution of bottle-necks in infrastructure space and revival of growth
would lead to better loan growth and ROA (led by fall in credit cost).
Shareholding of GoI in PSU banks to be brought below/atleast 51%. Access
to foreign capital for PSU banks could be raised from current cap of 20%.
Shareholding pattern (% )
As on
Mar-14 Dec-13 Mar-13
Promoter
Dom. Inst
Foreign
Others
58.9
18.6
17.2
5.2
58.9
18.5
17.5
5.1
57.9
18.9
18.0
5.2
What has company done in last five years?
Stock Performance (1-year)
Earnings CAGR over last five years has been just 2%, led by rising stress
levels (GNPA rose to 5.3% v/s 1.8% in FY09; OSRL stood at 10.2%). This led
to rise in credit cost to 1.4% in FY14 (35bp in FY08) and impacted PAT.
Bank has done a commendable work of sustaining margins at 3.5%+ levels
despite higher slippages and volatility in interest rates, driven by benefit of
better liability profile (on back of consolidation in balance sheet growth).
Strong presence in rich northern region helps PNB to maintain CASA growth
and NIMs. PNB also has one of the most conservative assumption on
employee expenses and chances of negative surprise is limited
Tier I is healthy at 8.9% can be utilized to leverage on economic growth.
With a 10bp decline in credit cost and 10bp improvement in NIM, RoA/RoE
will improve by 12bp/175bp+ and earnings will see an upgrade of 13%.
Return ratios to remain healthy at ~0.8% and ROE to be ~14%.
Improvement in growth and in-turn asset quality could significantly drive up
return ratios and re-rating.
Buy.
Punjab National Bank
Sensex - Rebased
1,080
900
720
540
360
What is the underlying potential?
Valuation and views with sensitivity on TP
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 3982 5415
Sohail Halai
(Sohail.Halai@MotilalOswal.com); +91 22 39825430

Punjab National Bank
Story in charts
Return ratios have bottomed out, expect to rebound (%)
RoE
1.2 1.2
1.1 1.0 1.1
RoA
1.2
1.4 1.4 1.3
Trading at LPA significant upside potential
2.0
PB (x)
Peak(x)
Avg(x)
1.8
Min(x)
At 25%+ LPA
TP INR1,786
At LPA TP
INR1,440
1.0
0.6
0.7
1.5
0.8
1.0
0.5
0.0
1.2
0.4
0.9
Source: Company, MOSL
Source: Company, MOSL
NIMs to be stable; NII growth to rebound (%)
NIM
NII growth
39.3
23.4 24.1
13.6
6.2
10.7 8.7 9.5
Earnings to rebound by asset quality then core PPP (%)
60
30
Core PPP growth
PAT growth
16.0
10.5 10.3
18.0
18.4
0
-30
-60
Source: Company, MOSL
Source: Company, MOSL
Conservatively factored higher credit cost
2.7
PCR (%)
Credit Cost (%)
A large part of the stress came from infra and iron and steel
segment (% of loans)
Iron &
Steel, 1.7
SEB, 1.4
1.1
Power -
Pvt, 1.8
NNPA, 2.8
0.7
0.3
0.1
0.3
0.6 0.6
1.1
0.9 0.9
1.4 1.3
Aviation, 0.
5
OSRL, 4.7
Source: Company, MOSL
Source: Company, MOSL
16 June 2014
99

Punjab National Bank
Company description
Punjab National Bank (PNB) has a strong presence in northern and central India and
a network of over ~6200 domestic branches. Of the overall braches 62% is located in
semi-urban and rural areas. PNB was the second largest state-owned bank in FY12,
however with rise in stress levels bank consolidated its loan book which led to fall in
market share and is now fourth largest state-owned bank in terms of balance-sheet
and third largest in terms of profitability. Strength of PNB is in its strong liability
franchise (CASA ratio of 38%+) and strong NIMs – best among peers.
Over last two years PNB consolidated its loan book and
reduce bulk deposits which led to fall in market share (%)
Loans (LHS)
6.0
5.5
5.0
4.5
4.0
Deposits (RHS)
SA market share holding up well (%)
8.5
7.0
5.5
4.0
2.5
CA
SA
Source: MOSL, Company
Source: MOSL, Company
Branch expansion gained pace post FY09
Earnings has declined over last two years led by increasing
stress levels in the balance-sheet
EPS (INR)
50.9
31.6
7.0
2.1
7.0
33.0
26.4
13.0
EPS growth (%)
2.9
-6.7
-31.3
42
45
46
49
65
98
124 140 144 134
92
Source: Company, MOSL
Source: Company, MOSL
16 June 2014
100

Punjab National Bank
Financials and Valuations
Income Statement
Y/E March
Interest Income
Interest Expense
Net Interest Income
Change (%)
Non Interest Income
Net Income
Change (%)
Operating Expenses
Pre Provision Profits
Change (%)
Provisions (excl tax)
PBT
Tax
Tax Rate (%)
Profits for Equity SH
Change (%)
Equity Dividend (Incl tax)
Core PPP*
Change (%)
2012
364.8
230.6
134.1
13.6
42.0
176.2
14.2
70.0
106.1
17.2
35.8
70.4
21.5
30.6
48.8
10.2
8.7
97.6
18.4
2013
418.9
270.4
148.5
10.7
42.2
190.7
8.3
81.7
109.1
2.8
43.9
65.2
17.7
27.2
47.5
-2.8
11.2
100.0
2.5
2014
432.2
270.8
161.5
8.7
45.8
207.2
8.7
93.4
113.8
4.4
66.9
46.9
13.5
28.7
33.4
-29.6
4.2
103.2
3.2
2015E
480.9
304.1
176.8
9.5
50.7
227.6
9.8
103.9
123.6
8.6
60.8
62.8
18.9
30.0
44.0
31.6
5.1
112.2
8.7
(INR Billion)
2016E
558.5
349.0
209.4
18.4
55.7
265.1
16.5
115.9
149.2
20.7
67.2
81.9
24.6
30.0
57.3
30.4
6.7
137.5
22.5
2017E
663.0
417.9
245.1
17.1
61.1
306.3
15.5
129.5
176.8
18.5
80.5
96.3
28.9
30.0
67.4
17.5
7.9
164.9
19.9
Balance Sheet
Y/E March
Equity Share Capital
Reserves & Surplus
Net Worth
Deposits
Change (%)
of which CASA Dep
Change (%)
Borrowings
Other Liabilities & Prov.
Total Liabilities
Current Assets
Investments
Change (%)
Loans
Change (%)
Fixed Assets
Other Assets
Total Assets
2012
3.4
274.8
278.2
3,795.9
21.3
1,341.3
11.5
372.6
135.2
4,581.9
288.3
1,227.0
28.9
2,937.7
21.3
31.7
97.2
4,581.9
2013
3.5
323.2
326.8
3,915.6
3.2
1,533.4
14.3
396.2
150.9
4,789.5
271.3
1,299.0
5.9
3,088.0
5.1
33.6
97.6
4,789.5
2014
3.6
355.3
359.0
4,514.0
15.3
1,728.7
12.7
480.3
150.9
5,504.2
452.2
1,437.9
10.7
3,492.7
13.1
34.2
87.3
5,504.2
2015E
3.6
394.4
398.0
5,191.1
15.0
1,972.3
14.1
481.3
176.2
6,246.7
445.6
1,653.5
15.0
4,016.6
15.0
35.0
96.0
6,246.7
(INR Billion)
2016E
3.6
444.9
448.5
6,177.4
19.0
2,250.8
14.1
504.7
209.8
7,340.3
478.1
1,901.6
15.0
4,819.9
20.0
35.1
105.6
7,340.3
2017E
3.6
504.6
508.2
7,351.1
19.0
2,569.4
14.2
532.6
248.6
8,640.5
519.1
2,186.8
15.0
5,783.9
20.0
34.6
116.2
8,640.5
Asset Quality
Y/E March
GNPA
NNPA
GNPA Ratio
NNPA Ratio
PCR (Excl Tech. write off)
PCR (Incl Tech. Write off)
2012
87.2
44.5
1.4
1.5
48.9
62.7
2013
134.7
72.4
4.3
2.3
46.3
58.8
2014
188.8
99.2
5.3
2.8
47.5
59.1
2015E
214.9
96.4
5.2
2.4
55.2
65.5
(INR Billion)
2016E
221.2
81.2
4.5
1.7
63.3
73.0
2017E
243.8
73.2
4.1
1.3
70.0
78.4
16 June 2014
101

Punjab National Bank
Financials and Valuations
Ratios
Y/E March
Spreads Analysis (%)
Avg. Yield-Earning Assets
Avg. Yield on loans
Avg. Yield on Investments
Avg. Cost-Int. Bear. Liab.
Avg. Cost of Deposits
Interest Spread
Net Interest Margin
Profitability Ratios (%)
RoE
RoA
Int. Expense/Int.Income
Non Int. Inc./Net Income
Efficiency Ratios (%)
Cost/Income*
Empl. Cost/Op. Exps.
Busi. per Empl. (Rs m)
NP per Empl. (Rs lac)
Asset-Liabilty Profile (%)
Loans/Deposit Ratio
CASA Ratio
Investment/Deposit Ratio
G-Sec/Investment Ratio
CAR
Tier 1
2012
9.5
10.6
7.1
6.1
6.2
3.4
3.5
21.1
1.2
63.2
23.9
39.7
67.5
98.9
7.9
77.4
35.3
32.3
81.5
12.6
9.3
2013
9.6
10.6
7.5
6.4
6.6
3.2
3.4
16.5
1.0
64.5
22.1
42.8
69.5
108.5
7.5
78.9
39.2
33.2
83.0
12.7
9.8
2014
9.0
9.8
7.5
5.8
6.0
3.1
3.3
10.2
0.6
62.6
22.1
45.1
69.7
114.1
5.1
77.4
38.3
31.9
78.3
11.5
8.9
2015E
8.7
9.6
7.3
5.7
5.8
3.0
3.2
12.1
0.7
63.2
22.3
45.7
68.7
126.0
6.4
77.4
38.0
31.9
78.5
10.9
8.6
2016E
8.7
9.6
7.3
5.7
5.7
3.1
3.3
14.0
0.8
62.5
21.0
43.7
67.7
142.7
8.1
78.0
36.4
30.8
81.2
10.2
8.2
(%)
2017E
8.8
9.6
7.3
5.7
5.8
3.0
3.2
14.5
0.8
63.0
20.0
42.3
66.8
164.6
9.2
78.7
35.0
29.7
84.0
9.5
7.9
Valuations
Y/E March
Book Value (INR)
Change (%)
Price-BV (x)
Adjusted BV (INR)
Price-ABV (x)
EPS (Rs)
Change (%)
Price-Earnings (x)
Dividend Per Share (INR)
Dividend Yield (%)
2012
777.4
22.9
1.2
692.0
1.4
144.0
2.9
6.6
22.0
2.3
2013
884.1
13.7
1.1
751.0
1.3
134.3
-6.7
7.1
27.0
2.8
2014
952.6
7.7
1.0
774.5
1.2
92.3
-31.3
10.3
10.0
1.0
2015E
1,059.9
11.3
0.9
886.9
1.1
121.5
31.6
7.9
12.1
1.3
2016E
1,199.8
13.2
0.8
1,054.0
0.9
158.4
30.4
6.0
15.8
1.7
2017E
1,364.3
13.7
0.7
1,232.9
0.8
186.1
17.5
5.1
18.6
1.9
16 June 2014
102