4 Upstream Report

India upstream PSUs
EQUITY: OIL & GAS/CHEMICALS
Declines in oil prices weaken outlook
Global Markets Research
Risk-reward still favourable for ONGC/OIL at new oil

assumptions; low oil for long a negative
15 January 2015
Earnings/TPs down on lower oil price assumptions; new subsidy formula

remains the key, but we think risk-reward still favourable for ONGC/OIL
Our oil & gas team has lowered its base case oil price assumptions to
USD60/bbl Brent for 2015, rising to USD80/bbl in the medium term (earlier:
USD85 for 2015, and USD90 thereafter). Lower oil assumptions are certainly
negative for upstream producers ONGC/OIL. But, as we highlighted in our
report last month, the weak oil price may be a blessing in disguise for
upstream operators. With oil now below USD50/bbl, the current USD56/bbl
formula simply cannot work. An early decision on subsidies is key for the
revival of investor interest ahead of ONGCs planned follow-on offer.
At fixed INR300bn GoI support, expect 12-13% EPS CAGR for ONGC/OIL
The government is well aware of the issues, and appears to be working on an
early decision on subsidies. But high volatility of oil/INR makes the decision
difficult. We think the formula will have to be such that ONGC/OILs earnings
are not impacted much at the current very low oil prices. As oil recovers, we
think upside will accrue. We assume fixed govt compensation of INR300bn for
FY15-17F, and expect three-year earnings CAGRs of 12-13% for ONGC/OIL.
We highlight that a fixed outgo of INR300bn should not be difficult (the outgo
was much higher in FY13/14, at INR1000/708bn). Also, annual gains from the
recent three excise duty hikes alone are above INR500bn.
Anchor themes
While further declines in oil
prices have weakened the
outlook, the risk-reward still
looks favourable for ONGC /
OINL. In our base case, we
continue to prefer upstream
over downstream PSUs.
Nomura vs consensus
We are more positive on
upstream PSUs than
consensus.
Research analysts
India Oil & Gas/Chemicals
Anil Sharma - NFASL
anil.sharma.1@nomura.com
+91 22 4037 4338
Ravi Adukia, CFA - NFASL
ravikumar.adukia@nomura.com
+91 22 4037 4232
We continue to prefer upstream over OMCs in base case

In our base case, we assume oil prices of USD60/70/80/bbl for FY16/17/18F.
We also mark to market forex and assume reduced capex and costs to reflect
a weaker macro environment. Our earnings for ONGC/OIL fall by 8-12%, and
we cut TPs by 8% for Oil India and 13% for ONGC. In our base case of oil
price recovery, we continue to prefer upstream over downstream PSUs.
Among upstream, our preference remains for ONGC over Oil India.
In bear case LT USD60/bbl, we would prefer downstream over upstream
In a bear case of USD50/bbl in FY16 and flat at USD60/bbl thereafter, we
would expect further 14-16% cuts in FY16 earnings and 1-6% cuts in FY17
earnings. While subsidy support would likely ensure not much of a decline in
domestic oil realisations, earnings would be impacted due to lower realisation
in condensates and the overseas business. Also, in a low price environment,
our expectations of growth would reduce. In a low oil price scenario, our
preference would be for downstream oil marketers, as concerns on fuel underrecoveries would further reduce. While the earnings impact would not be much
for OMCs, we think the sentiment in a low-price environment would get better.
Fig. 1: Stocks for action
Com pany
Code
Rating
ONGC
ONGC IN Buy
Oil India
OINL IN
Buy
M. Cap
Avg. TO
Target
Price
(USDm n)
47,923
(USDm n)
Price
12-Jan
30.6
410
348
18%
3.7
650
551
18%
5,335
Upsides
Source: Nomura research. Note: Share prices are as of 12 January 2015 close.
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | India upstream PSUs
15 January 2015
Contents
Summary ................................................................................................3
Lower oil price weakens outlook .............................................................4
Lower oil price assumptions ......................................................................... 4
Under-recovery estimates decline further ..................................................... 4
High sensitivity of under-recoveries to oil price ............................................. 5
Subsidy clarity key; we are optimistic......................................................6

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

paying off..............................................................................................10
Oil and Natural Gas ..............................................................................11
Oil India ................................................................................................15
Appendix A-1 ........................................................................................19
15 January 2015
Summary
Fig. 2: Upstream oil PSUs summary of our rating and target price revisions
Company
ONGC
Oil India
Rating
TP (INR/sh)
Price
(INR/sh)
Market Cap
(USDbn)
New
Old
New
Old
ONGC IN
348
47.9
Buy
Buy
410
OINL IN
551
5.3
Buy
Buy
650
Ticker
Upsides
Valuation
Method
470
18%
P/B
710
18%
P/B
Pricing as of 12 January 2015. Source: Bloomberg, Nomura estimates
Fig. 3: Upstream oil PSUs key market information

Name
Ticker
ONGC
Oil India
Market price
No. of o/s shares

(mn)
M Cap
(USDbn)
Free Float
FII holdings
3M TO
(USDmn)
52W H/L
ONGC IN
348
8555
47.9
13.3
7.2
30.6
472-264
OINL IN
551
601
5.3
23.5
9.7
3.7
668-439
Fig. 4: Upstream oil PSUs summary valuations

P/E(x)
EV/EBITDA(x)
Price/Book(x)
FY14 FY15F FY16F FY17F
Dividend Yield
ONGC
11.2
11.4
9.0
8.0
5.6
5.5
4.7
4.1
1.7
1.6
1.4
1.3
2.7
2.9
3.5
3.5
Oil India
11.3
11.8
8.2
7.8
8.7
8.5
5.7
5.4
1.6
1.5
1.4
1.2
3.9
3.4
4.3
4.5
Fig. 5: Upstream oil PSUs summary financials

INRbn
ONGC
Oil India
Revenue (INRbn)
EBITDA (INRbn)
PAT (INRbn)
EPS (INR/sh)
1,732
1,668
1,726
1,863
578
592
691
756
265
262
331
372
31
31
39
43
92
95
117
120
36
37
54
56
29
28
40
42
49
47
67
70
Source: Company data, Nomura estimates
Fig. 6: Upstream oil PSUs absolute and relative stock performance

Absolute local (%)
Com pany
ONGC
1m
0.9
3m
6m
(16.4) (14.1)
ytd
16.1
(0.4)
1m
0.0
3m
6m
12m
(20.0) (22.1) (11.1)
Rel. MSCI Oil & Gas (%)

ytd
1m
3m
(0.7)
(1.5)
(7.5)
6m
8.5
12m
ytd
34.2
5.5
Oil India
(1.6)
(5.9)
11.6
(6.6)
(2.5) (13.5) (14.6) (14.5)
(7.0)
(3.9)
0.0
18.9
29.0
(1.1)
Average
(0.4) (12.9) (10.0)
13.9
(3.5)
(1.2) (16.8) (18.4) (12.8)
(3.8)
(2.7)
(3.8)
13.7
31.6
2.2
30.6
0.4
BSE Sensex
0.9
(9.5)
Rel. local m arket (%)
12m
4.6
10.3
Fig. 7: Nomura vs. consensus

Consensus
INR
ONGC
Oil India
Nomura
TP
FY16F EPS
Rating
TP
FY16F EPS
ONGC IN
444
40
Buy
410
39
OINL IN
681
71
Buy
650
67
Source: Bloomberg, Nomura estimates
15 January 2015
Lower oil price weakens outlook

Lower oil price assumptions
Our oil & gas team has lowered its base case oil price assumption to USD60/bbl Brent
for 2015, rising to USD80/bbl in the medium term (earlier USD85 for 2015, and USD90
thereafter).
Our team believes that the market continues to under-appreciate Saudi Arabias
determination to protect its market share on a more medium-term basis. An effective do
nothing statement at Novembers OPEC meeting was a clear signal but there could be a
tail event risk that the Kingdom chooses to increase production in the long run to
maintain OPEC leadership against rising volumes particularly from Iraq or Iran, while
ensuring there is no quick rebound in volumes from unconventional plays. In the nonOPEC world, deflation trends in contractor costs, raw material and labour costs,
alongside weaker currencies also place meaningful downward pressure on perceptions
of the back-end of the curve.
Fig. 8: Our new oil price assumptions
FY15F
Brent oil (USD/bbl)
FY16F
FY17F
FY18F
New
Old
New
Old
New
Old
New
Old
85.8
93.5
60
85
70
90
80
90
Source: Nomura estimates
Where could we be wrong?

We point to a number of upward risks. These include: 1) a change in Saudi policy on
market share; 2) better-than-expected economic data points translating into improved oil
demand (underlying rather than seasonal); 3) an unprecedented level of co-ordination
between OPEC and key non-OPEC members including Russia and Mexico; and 4) a
marked slowdown in growth and/or acceleration in decline rates from the key
unconventional tight oil basins in North America.
(For more details on our latest oil price view, please see our European oil teams note:
EU Big Oil - Not cheap enough; discounting USD 75-80/bbl, 14 Jan 2015)
Under-recovery estimates decline further

With our lower oil price assumptions partly offset by a weaker currency, our underrecoveries estimate declines to INR744bn in FY15F (47% y-y decline) and INR345bn in
FY16F (54% y-y decline). We now estimate a sharp 75% y-y decline in FY16F underrecoveries, from INR1.4trillion in the last fiscal year (FY14).
Fig. 9: Our fuel under-recoveries estimates
FY11
Brent price (USD/bbl)
86.7
Exchange rate (INR/USD)
45.6
Gross under-recoveries (INRbn)
Diesel
344
PDS Kerosene
196
Domestic LPG
220
Total - INRbn
782
Total - USDbn
17
FY12
114.5
47.9
FY13
110.6
54.4
FY14 FY15F FY16F FY17F FY18F

107.7
85.8
60.0
70.0
80.0
60.4
61.3
63.0
63.0
63.0
812
274
300
1,385
29
921
294
396
1,610
30
628
306
465
1,399
23
100
241
402
744
12
145
201
345
5
168
298
466
7
190
408
598
9
Source: PPAC, Nomura estimates
15 January 2015
High sensitivity of under-recoveries to oil price

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

Early subsidy decision key for revival of investor interest
The mechanism of under-recovery sharing has largely been very ad-hoc and nontransparent in recent years. There have always been concerns on relative sharing
among the government, upstream companies and the downstream marketers. The
delayed decisions and further delayed payments exacerbated the subsidy sharing
problem.
Over the past three years, the upstream share has been decided on the basis of
USD56/bbl. Volatile oil prices, and the largely declining trend in oil prices has meant that
upstreams net realisations have been falling. The decline was higher in FY14F, and as
at the end-of year the government further increased the upstream subsidy burden, and
subsidy share was increased to USD59/bbl in FY14.
With the recent sharp decline in oil prices, we believe there is a pressing need to re-visit
the USD56/bbl upstream subsidy formula. With oil now below USD50/bbl, the current
USD56/bbl subsidy formula cannot work.
New subsidy formula will have to be remunerative at current

oil price; upsides will be higher when oil recovers
As we noted in our report India oil PSUs - Now prefer upstream over downstream last
month, the government is working on several options to determine subsidy sharing.
Among the proposals that were under consideration:
fixed government LPG subsidy of 20/kg; and
50:50 sharing among govt and upstream;
50:50 sharing with cess payout part of upstreams 50% share
But working out a subsidy sharing formula that is not very burdensome for upstream, and
at the same time ensures limited fiscal impact is a difficult task. This is made more
difficult by the continued decline in oil prices, and high volatility of exchange rates.
But, as we note above, the current mechanism of USD56/bbl cannot sustain for long,
and the government will have to decide fast. We expect a decision ahead of the 3QFY15
results, which companies are likely to report in February.
Also, as the government is considering a follow-on offer for ONGC soon, it will have to
ensure that the subsidy formula is not burdensome, and is remunerative at current low oil
prices of USD50-60/bbl. In our view, if the formula is remunerative at current prices, it will
likely result in upside when oil prices gradually recover. We forecast oil prices will rise
from USD60/bbl in 2015 to USD70/bbl in 2016 and USD80/bbl in 2017, and thereafter.
We assume government subsidy of INR300bn; balanced by

upstream
While a formal announcement on subsidy sharing is imminent, we assume fixed
government support of INR300bn. This implies effective government under-recovery
sharing of 40-87% in FY15-17F, vs. an actual share of 51-62% over the past four years.
On an absolute basis, our numbers assume a sharp 58% decline in the government
share in FY15F to INR300bn (from INR708bn in FY14) and staying constant at
INR300bn over FY16-17F.
We think our assumption of INR300bn is conservative, and the government can easily
absorb this much. The annual subsidy of INR300bn is 70% less than the peak payout of
INR1000bn in FY13, and 58% lower than the payout of INR708bn in FY14.
Also, we highlight that from recent increases in the excise duties on diesel and petrol the
government will collect annually over INR500bn, and thus the payout of INR300bn for
under-recoveries should not be difficult.
15 January 2015
Fig. 11: Our subsidy sharing assumptions
Gross under-recoveries (INRbn)

Sharing (INRbn)
GoI
Upstream
Net to OMCs
Sharing %
GoI
Upstream
Net to OMCs
Upstream sharing (INRbn)
ONGC
OIL
GAIL
Upstream sharing %
ONGC
OIL
GAIL
FY12
1,385
FY13
1,610
FY14
1,399
FY15F
744
FY16F
345
FY17F
466
FY18F
598
835
550
0
1,000
600
10
708
670
21
300
444
-
300
45
-
300
166
-
300
298
-
60%
40%
0%
62%
37%
1%
51%
48%
1%
40%
60%
0%
87%
13%
0%
64%
36%
0%
50%
50%
0%
445
74
32
494
79
27
564
87
19
375
58
10
39
6
-
144
22
-
259
39
-
80.8%
13%
5.8%
82.4%
13%
4.5%
84.1%
13.0%
2.8%
84.6%
13.2%
2.3%
86.5%
13.5%
0.0%
86.7%
13.3%
0.0%
86.9%
13.1%
0.0%
We assume fixed govt u/r

compensation of INR300bn for
FY15-17F, which is the likely
amount if the govt provides a
fixed subsidy of INR20/kg on
LPG
Source: PPAC, Nomura estimates
Upstream net realisations to increase sharply at our subsidy share assumptions

Fig. 12: At fixed govt support of INR300bn, upstream net oil realisation will likely be
resilient USD56-57/bbl in FY16-18F
FY12
FY13
FY14
FY15F
FY16F
FY17F
FY18F
114.5
110.6
107.7
85.8
60.0
70.0
80.0
Exchange rate
47.9
54.4
60.4
61.3
63.0
63.0
63.0
Upstream subsidy
56.0
56.0
59.3
38.7
3.8
13.5
23.5
Net realisation
58.5
54.6
48.4
47.1
56.2
56.5
56.5
Brent
At our government support

assumption of INR300bn,
ONGC/OILs net oil realisation
will likely be resilient at USD5657/bbl in FY16-18F
Note: Net realisation in above chart means Brent less upstream subsidy
15 January 2015
Risk-reward remains favourable at new oil assumptions

At our assumption of a fixed compensation of INR300bn for fuel under-recoveries, we
note that net oil realisation will be resilient at 56-57/bbl from FY16-18F.
For ONGC, we expect earnings to grow from INR31/share in FY14 to INR43.5/share in
FY17, implying a 12% CAGR over three years.
Similarly, for Oil India, we expect earnings to grow from INR49/share in FY14F to
INR70/share in FY17F, implying a 13% CAGR over the next three years.
Compared with the 12-13% earnings CAGR that we expect over the next three years, we
highlight that owing to high subsidies, earnings growth has been muted for both ONGC
and OIL India. For the three years to FY14, ONGCs earnings recorded a 5.8% CAGR,
while OILs CAGR was lower at 0.6%.
Fig. 13: Our key assumptions and EPS estimates for ONGC / OIL
FY13
FY14
FY15F
FY16F
Brent (USD/bbl)
FY11
86.7 114.5 110.6
107.7
85.8
60.0
70.0
80.0
45.6
47.9
54.4
60.4
61.3
63.0
63.0
63.0
Upstream subsidy (USD / bbl)
34.6
56.0
56.0
59.3
38.7
3.8
13.5
23.5
Brent - Subsidy (USD/bbl)
52.1
58.5
54.6
48.4
47.1
56.2
56.5
56.5
Upstream subsidy (INRbn)
303
550
600
670
444
45
166
298
4.2
4.2
4.2
4.2
4.8
5.6
5.6
5.6
- ONGC
26.2
29.2
28.3
31.0
30.6
38.7
43.5
46.0
- Oil India
48.0
57.7
59.8
48.9
46.7
67.0
70.3
71.9
16%
11%
-3%
9%
-1%
26%
12%
6%
6%
20%
4%
-18%
-5%
44%
5%
2%
Gas price (USD/mmbtu)
FY12
FY17F FY18F
EPS (INR/sh)
EPS Growth %
- ONGC
- Oil India
Fig. 14: Our P/B-based target price derivation for ONGC and Oil India
P/B valuations
ONGC
Oil India
Avg. ROE (FY16-17F)
16.7%
16.9%
3.5%
2.5%
LT growth
Cost of equity (Ke)
12.5%
12.5%
Target P/B multiple
1.50
1.45
FY17F book value per share
274
447
Implied Equity value per share
411
648
Price Target
410
650
Current market price
348
551
18%
18%
up/down side
15 January 2015
Bear case: What if oil remains low for longer

In a bear case, we assume low oil prices of USD50/bbl in FY16F and USD60/bbl for
FY17 and beyond.
Earnings decline may be sharp at USD50/bbl; not much at 60/bbl
At our assumption of a fixed government subsidy of INR300bn, the net oil realisation for
ONGC/OIL is largely resilient to oil price changes and will remain around USD56/bbl, if
oil is USD60/bbl or above. Hence, earnings from own domestic oil and gas production
will be largely resilient for both ONGC and OIL.
However, if oil prices remain low at USD50/bbl, net realisation would decline further to
USD50/bbl, and lead to an earnings decline of 14-16% in FY16F.
Also, we note that earnings sensitivity would be higher for ONGC due to the higher
sensitivity of earnings from businesses where there are no subsidies. These include
condensates and value added products (in ONGC operated blocks), oil production in
Joint Venture blocks (Cairn-operated Rajasthan block and Panna-Mukta-Tapti block),
and also in the overseas business of ONGC Videsh Limited (OVL, 100% unlisted
subsidiary).
Also, investment and long-term growth may likely slow down
In our view, if oil prices remain low for longer, investments in exploration and
development may considerably slow down for both ONGC and OIL. This would likely
slow down expectations of long-term growth rates. Compared with our growth
expectation of 3.5% for ONGC and 2.5% for OIL India built in our P/B valuations, we
would assume no growth in a bear case scenario. This would reduce our NAV by 21%
for ONGC and 14% for Oil India.
In a scenario of low oil prices for a long term, our preference would be for downstream oil
marketing companies (OMCs) over upstream. While the earnings impact for OMCs
would not increase due to lower oil prices (as all under-recoveries are compensated), but
with a lower oil price, the concerns on subsides sharply reduce. Also, at sustained low oil
prices, we think demand for oil products would grow, raising both marketing volumes and
margins.
Fig. 15: Base and bear case scenarios earnings and NAVs
ONGC
Base
Oil India
Bear Change
Base
Bear
Change
-16%
67.0
57.6
-14%
EPS
- FY16F
38.7
32.6
- FY17F
43.5
41.0
-6%
70.3
69.8
-1%
NAV
411
324
-21%
648
558
-14%
15 January 2015
New governments focus on delivery

and efficiency seems to be paying off
We also note that the new NDA government has been particularly focused on efficiency
and delivery. Our interaction with companies and industry participants suggests that the
government is relatively more demanding in terms of targets and questions companies if
there are misses. While these are still early days, there are early signs that these efforts
are paying off. And production of oil for ONGC, and of both oil and gas for Oil India, has
moved up in recent months, as shown in the figures below.
Fig. 16: ONGC: Mumbai High oil (& condensate) production
380
(kbpd)
Fig. 17: ONGC: Oil production trend

(kbpd)
540
520
360
500
340
480
320
460
Fig. 19: Oil India: Gas production trend
80
(kbpd)
8.0
75
Oct-14
Apr-14
Oct-13
Fig. 18: Oil India: Oil production trend
Apr-13
Source: PPAC, Nomura research
Apr-13
Oct-12
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
440
Apr-09
300
(mmscmd)
7.4
70
6.8
65
6.2
60
Oct-14
Apr-14
Oct-13
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
5.0
Oct-08
Oct-14
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
50
Apr-08
5.6
55
10
Oil and Natural Gas ONGC.NS
ONGC IN
Risk reward remains favourable
Realisation to be resilient at fixed govt subsidy; low

oil prices for long term a negative
15 January 2015
Rating
Remains
Action: Reduce earnings/TP to INR410 on lower oil price assumption;

early subsidy clarity key for reviving investor interest
Our oil & gas team has lowered its base case oil price assumption to
USD60/bbl Brent for 2015F, rising to USD80/bbl for the medium term (earlier
USD85 for 2015F, USD90 thereafter). The lower oil assumption is certainly
negative for upstream producers ONGC and OIL. But, as we mentioned in our
oil PSU report last month (link), the weak oil price may be a blessing in
disguise for upstream operators. With oil now below USD50/bbl, the current
USD56/bbl formula simply cannot work. An early decision on subsidy is key for
the revival of investor interest ahead of the planned follow on offer soon.
FY14
FY15F
FY16F
FY17F
New
Old
New
Revenue (bn)
1,732
1,730
1,668
1,878
1,726
2,004
1,863
265
283
262
375
331
408
372
265
283
262
375
331
408
372
30.98
33.09
30.60
43.81
38.69
47.64
43.50
9.4
6.8
-1.2
32.4
26.5
8.7
12.4
11.2
N/A
11.4
N/A
9.0
N/A
8.0
EV/EBITDA (x)
5.6
N/A
5.5
N/A
4.7
N/A
4.1
Price/book (x)
1.7
N/A
1.6
N/A
1.4
N/A
1.3
Dividend yield (%)
+17.9%

+91 22 4037 4232
Old
FD normalised P/E (x)
Potential upside
Anil Sharma - NFASL

+91 22 4037 4338
New
FD norm. EPS growth (%)
INR 348
Old
FD normalised EPS
Closing price
12 January 2015
Research analysts
Actual
Normalised net profit (bn)
INR 410
Nomura vs consensus
Our FY16F EPS is 3% below
consensus. Our TP is 8% below
consensus.
Currency (INR)
Reported net profit (bn)
Target price
Reduced from 470
Anchor themes
While counter-intuitive, we think
that the current oil price
weakness is likely a blessing in
disguise for upstream PSUs, as
the government will be forced to
decide on subsidies.
We expect a 12% EPS CAGR over FY14-17F, at fixed govt subsidy

In our numbers, we assume fixed government compensation of INR300bn for
FY15-17F, and estimate an FY14-17F earnings CAGR of 12% for ONGC. We
highlight that the fixed outgo of INR300bn should not be difficult to achieve
(the government outgo was much higher at INR1000/708bn in FY13/14). Also,
the gains from the recent three excise duty hikes themselves will be over
INR500bn annually, on our estimates.
Government focus on delivery yielding early results
For a long-term re-rating, ONGC should deliver production growth. The new
governments focus is on efficiency/delivery. While it is still early days, we note
that ONGCs production growth of 1.9% in Oct-14 and 3% in Nov-14 was the
highest in five years. We expect domestic production trends to reverse and
estimate growth of 3-4% in oil and 4-5% in gas over FY15-17F.
Catalysts: Subsidy-sharing clarity; court ruling on royalties
Valuation: We cut earnings and TP; maintain Buy
With our lower oil price and net realisation estimates, we cut our FY15-17F
EPS by 8-12%. Our new P/B-based TP is INR410 (vs. INR470 earlier).
Year-end 31 Mar
Buy
2.7
N/A
2.9
N/A
3.5
N/A
3.5
ROE (%)
16.3
15.6
14.5
18.4
16.6
17.7
16.8
Net debt/equity (%)
12.3
12.3
12.3
10.4
10.2
7.2
5.4

Key company data: See page 2 for company data and detailed price/index chart
Nomura | Oil and Natural Gas
15 January 2015
Key data on Oil and Natural Gas

Relative performance chart
Cashflow statement (INRbn)
Source: Thomson Reuters, Nomura research
Notes:
Performance
(%)
Absolute (INR)
Absolute (USD)
Rel to MSCI India
1M 3M 12M
3.1 -14.0 22.4
3.4 -15.3 21.8
3.1 -21.7 -9.3
M cap (USDmn)
47,817.8
Free float (%)
20.7
3-mth ADT (USDmn)
30.5
FY13
1,614
-871
743
-442
0
301
530
-215
-14
301
-5
0
72
367
-128
240
2
0
0
242
0
242
-94
148
FY14
1,732
-944
789
-461
0
327
578
-246
-5
327
-6
0
71
392
-128
264
-2
2
0
265
0
265
-95
170
FY15F
1,668
-878
790
-459
0
331
592
-257
-5
331
-7
0
76
401
-138
263
-1
0
0
262
0
262
-100
162
FY16F
1,726
-829
897
-462
0
435
691
-251
-5
435
-8
0
80
507
-174
333
-2
0
0
331
0
331
-120
211
FY17F
1,863
-887
976
-482
0
493
756
-258
-5
493
-8
0
86
571
-196
376
-4
0
0
372
0
372
-120
252
12.3
12.3
12.3
2.7
6.7
2.0
5.7
10.0
46.0
32.8
18.6
15.0
34.7
38.9
16.8
13.8
11.2
11.2
11.2
2.7
5.6
1.7
5.6
9.8
45.5
33.4
18.9
15.3
32.6
35.9
16.3
12.3
11.4
11.4
11.4
2.9
6.3
1.6
5.5
9.8
47.4
35.5
19.9
15.7
34.4
38.2
14.5
10.7
9.0
9.0
9.0
3.5
5.5
1.4
4.7
7.4
52.0
40.0
25.2
19.2
34.3
36.3
16.6
13.2
8.0
8.0
8.0
3.5
4.9
1.3
4.1
6.4
52.4
40.6
26.5
20.0
34.2
32.3
16.8
14.0
10.3
-8.3
-3.1
-3.1
7.3
9.1
9.4
9.4
-3.7
2.5
-1.2
-1.2
3.5
16.6
26.5
26.5
7.9
9.4
12.4
12.4
Valuations and ratios

Reported P/E (x)
Normalised P/E (x)
Dividend yield (%)
Price/cashflow (x)
Price/book (x)
EV/EBITDA (x)
EV/EBIT (x)
Gross margin (%)
EBITDA margin (%)
EBIT margin (%)
Net margin (%)
Effective tax rate (%)
Dividend payout (%)
ROE (%)
ROA (pretax %)
Growth (%)
Revenue
EBITDA
Normalised EPS
Normalised FDEPS
FY13
530
-103
20
447
-423
24
8
0
5
37
-39
35
-110
2
-3
0
-7
-118
-83
279
196
8
FY14
578
113
-158
533
-616
-83
-26
FY15F
592
-12
-110
471
-416
54
0
FY16F
691
-7
-141
543
-426
117
0
FY17F
756
9
-160
604
-421
184
0
-36
90
-48
-104
-98
2
247
0
1
152
49
196
245
211
0
16
13
83
-98
0
0
0
-7
-104
-21
245
224
232
0
16
13
146
-120
0
0
0
-8
-128
18
224
242
214
0
16
16
216
-120
0
0
0
-8
-128
88
242
330
126
FY13
196
0
154
128
274
752
21
1,647
83
0
25
2,528
116
186
181
484
88
FY14
245
0
160
148
301
854
47
2,096
184
0
61
3,242
139
307
228
674
317
FY15F
224
0
155
142
316
836
48
2,289
179
0
61
3,412
139
269
256
664
317
FY16F
242
0
160
147
331
879
48
2,497
174
0
61
3,659
139
259
284
682
317
FY17F
330
0
173
158
345
1,006
48
2,695
170
0
61
3,979
139
277
314
730
317
411
984
19
0
43
1,430
0
53
1,525
2,528
501
1,492
29
0
43
1,586
0
93
1,722
3,242
518
1,499
30
0
43
1,737
0
103
1,883
3,412
534
1,533
32
0
43
1,938
0
114
2,094
3,659
550
1,597
36
0
43
2,179
0
124
2,346
3,979
1.55
62.0
1.27
52.4
1.26
49.2
1.29
55.9
1.38
63.2
0.02
0.5
0.37
12.3
0.39
12.3
0.31
10.2
0.17
5.4
28.31
28.31
28.31
178.28
9.50
30.98
30.98
30.98
201.22
9.50
30.60
30.60
30.60
220.11
10.00
38.69
38.69
38.69
244.77
12.00
43.50
43.50
43.50
274.23
12.00
30.6
54.3
77.0
8.0
33.1
53.3
95.3
-8.9
34.5
60.3
119.7
-24.9
33.4
63.7
116.5
-19.4
32.6
62.7
110.2
-14.9
Balance sheet (INRbn)
Income statement (INRbn)

Year-end 31 Mar
Revenue
Cost of goods sold
Gross profit
SG&A
Employee share expense
Operating profit
EBITDA
Depreciation
Amortisation
EBIT
Net interest expense
Associates & JCEs
Other income
Earnings before tax
Income tax
Net profit after tax
Minority interests
Other items
Preferred dividends
Normalised NPAT
Extraordinary items
Reported NPAT
Dividends
Transfer to reserves
Year-end 31 Mar
EBITDA
Change in working capital
Other operating cashflow
Cashflow from operations
Capital expenditure
Free cashflow
Reduction in investments
Net acquisitions
Dec in other LT assets
Inc in other LT liabilities
Adjustments
CF after investing acts
Cash dividends
Equity issue
Debt issue
Convertible debt issue
Others
CF from financial acts
Net cashflow
Beginning cash
Ending cash
Ending net debt
As at 31 Mar
Cash & equivalents
Marketable securities
Accounts receivable
Inventories
Other current assets
Total current assets
LT investments
Fixed assets
Goodwill
Other intangible assets
Other LT assets
Total assets
Short-term debt
Accounts payable
Other current liabilities
Total current liabilities
Long-term debt
Convertible debt
Other LT liabilities
Total liabilities
Minority interest
Preferred stock
Common stock
Retained earnings
Proposed dividends
Other equity and reserves
Total shareholders' equity
Total equity & liabilities
Liquidity (x)
Current ratio
Interest cover
Leverage
Net debt/EBITDA (x)
Net debt/equity (%)
Per share
Reported EPS (INR)
Norm EPS (INR)
FD norm EPS (INR)
BVPS (INR)
DPS (INR)
Activity (days)
Days receivable
Days inventory
Days payable
Cash cycle
12
15 January 2015
Fig. 20: Key assumptions and EPS estimates for ONGC

USD/bbl
FY12
FY13
FY14
FY15F
FY16F
FY17F
FY18F
Brent
114.5
110.6
107.7
85.8
60.0
70.0
80.0
Subsidy
56.0
56.0
59.3
38.7
3.8
13.5
23.5
Net realisation
58.5
54.6
48.4
47.1
56.2
56.5
56.5
Reported realisation (USD/bbl)

Gross
117.4
110.7
106.7
85.7
59.9
69.9
79.9
Reported subsidy **
62.7
62.9
65.8
42.5
4.2
14.8
25.8
Net reported realisation **
54.7
47.9
41.0
43.2
55.7
55.1
54.1
4.2
4.2
4.2
4.8
5.6
5.6
5.6
EPS (INR.sh)
29.2
28.3
31.0
30.6
38.7
43.5
46.0
EPS Growth %
11%
-3%
9%
-1%
26%
12%
6%
Note: ** ONGCs subsidy is calculated on its production volume of both oil & condensates based on government intimated
subsidy number. However, it reports per bbl burden only on actual sales volume of oil (excludes condensates).
Fig. 21: ONGC production estimates

FY10
FY11
FY12
FY13
FY14
FY15F
FY16F
FY17F
24.7
24.4
23.7
22.6
22.2
22.4
23.0
23.8
Oil production (MMT)

- Nomination blocks
- Share of JVs
1.8
2.9
3.2
3.6
3.7
3.6
3.9
4.2
- Total
26.5
27.3
26.9
26.1
26.0
26.0
27.0
28.0
Y-Y%
-2%
3%
-1%
-3%
-1%
0%
4%
4%
23.1
23.1
23.3
23.6
23.3
22.7
23.9
25.2
2.5
2.2
2.2
1.8
1.6
1.5
1.4
1.3
25.6
25.3
25.5
25.3
24.8
24.2
25.3
26.5
1%
-1%
1%
-1%
-2%
-3%
4%
5%
Gas production (BCM)

- Nomination blocks
- Share of JVs
- Total
Y-Y%
Fig. 22: OVL production estimates

FY10
FY11
FY12
FY13
FY14
FY15F
FY16F
FY17F
Oil (MMT)
6.5
6.8
6.2
4.3
5.5
5.6
5.9
5.8
Gas (BCM)
2.4
2.7
2.5
2.9
2.9
3.3
3.4
3.4
Total
8.9
y-y %
9.5
8.8
7.3
8.4
8.8
9.4
9.2
7%
-8%
-17%
15%
6%
6%
-2%
Fig. 23: Sensitivity of key variables to ONGCs EPS

FY16F
Base EPS
INR/share
Net reported oil realisation (USD/bbl)
0.6
5.6
- Increase by USD1/mmbtu
2.8
- INR1/USD depreciation
55.7
- Increase by USD1/bbl
FY17F
38.7
55.1
1.5%
0.6
1.4%
5.6
7.3%
63.0
0.9
43.5
INR/share
2.9
6.7%
63.0
2.3%
1.0
2.4%
13
15 January 2015
Revise TP to INR410; reiterate Buy

We continue to use a one-year forward P/B multiple to value ONGC. Based on our
revised average ROE estimate for FY16-17F (unchanged) at 16.7% (18.1% earlier), cost
of equity of 12.5% (unchanged) and growth rate of 3.5% (unchanged), we revise our
one-year forward P/B multiple target to 1.50x (earlier 1.65x). Our revised TP is INR410
(INR470 earlier).
Fig. 24: We value ONGC at 1.50x FY17F P/B multiple
We use an average ROE (FY16-17F) of 16.7% and cost of equity of 12.5% to derive our target P/B
multiple
new
old
Avg. ROE (FY16-17F)
16.7%
18.1%
Cost of equity
12.5%
12.5%
Growth rate %
3.5%
3.5%
Target P/B multiple
1.50
1.65
274
286
411
472
Price Target
410
470
Fig. 25: 1-year forward P/E band
Fig. 26: 1-year forward P/B band
(INR/share)
500
(INR/share)
450
2.0x
450
350
8.0x
300
Dec-14
Apr-14
Aug-14
Dec-13
Apr-13
Aug-13
Dec-12
Apr-12
Aug-12
Dec-11
Dec-14
Apr-14
Aug-14
Dec-13
Aug-13
Apr-13
Dec-12
Aug-12
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Apr-10
Aug-10
Aug-11
250
200
Source: Datastream, Nomura estimates
1.25x
Apr-11
7.0x
250
1.50x
Dec-10
300
9.0x
Apr-10
10.0x
350
1.75x
400
Aug-10
11.0x
400
200
2.25x
500
Risks
A higher-than-expected upstream subsidy burden could hurt ONGCs financials. A
negative Supreme Court decision on the royalty issue may result in a sharp earnings
impact. Possible delays in key projects and lower-than-expected production pose
downside risks to our estimates.
14
Oil India OILI.NS
OINL IN
Early clarity on subsidy sharing key
Sharp oil price decline to force early subsidy clarity;

but low oil for long to weaken outlook
15 January 2015
Rating
Remains
Action: Reduce earnings/TP on lower oil price assumption; counter

intuitively lower oil blessing in disguise, but early subsidy clarity key
Our oil & gas team has lowered its base case oil price assumption to
USD60/bbl Brent for 2015F, rising to USD80/bbl for the medium term (earlier
USD85 for 2015F, USD90 thereafter). The lower oil assumption is certainly
negative for upstream producers ONGC and OIL. But, as we mentioned in our
oil PSU report last month (link), the weak oil price may be a blessing in
disguise for upstream operators. With oil now below USD50/bbl, the current
USD56/bbl formula simply cannot work. An early decision on subsidy is key for
the revival of investor interest. We assume a fixed govt compensation of
INR300bn for FY15-17F, and expect an FY14-17F earnings CAGR of 13% for
Oil India. We highlight that the fixed outgo of INR300bn should not be difficult
to achieve (the government outgo was much higher at INR1,000bn/708bn for
FY13/14).
Oil production recovering and rise in gas production likely soon
After declining for two years (down 4%/6% in FY13/14) due to the law-andorder situation in the north-east, oil production has been recovering. Gas
production should rise as GAILs Brahmaputra cracker starts next year. We
also believe the governments focus on faster decisions, efficiency, delivery
and close monitoring of targets will yield results, and production will improve.
Concerns: Court decision on royalty issue
Following the Gujarat governments decision to challenge post-discount
royalty payouts by ONGC (Gujarat won in the High Court and the matter is
now before the Supreme Court), the Assam government has also raised a
similar demand. OINLs entire oil production is from on-land blocks, and its
payout may sharply rise. This issue could be a near-term overhang.
We cut earnings and TP; maintain Buy with a revised TP of INR650
With our lower oil price and net realisation estimates, we reduce our FY15-17F
EPS estimates by 9-11% and cut P/B-based TP to INR650 (from INR710).
Year-end 31 Mar
FY14
FY15F
FY16F

Anil Sharma - NFASL
+91 22 4037 4338
+91 22 4037 4232
FY17F
New
Old
New
Revenue (bn)
92
100
95
126
117
130
120
Reported net profit (bn)
29
32
28
44
40
47
42
29
32
28
44
40
47
42
FD normalised EPS
48.94
52.61
46.67
73.43
67.02
77.71
70.29
FD norm. EPS growth (%)
-18.1
7.5
-4.6
39.6
43.6
5.8
4.9
11.3
N/A
11.8
N/A
8.2
N/A
7.8
EV/EBITDA (x)
8.7
N/A
8.5
N/A
5.7
N/A
5.4
Price/book (x)
1.6
N/A
1.5
N/A
1.4
N/A
1.2
ROE (%)
Net debt/equity (%)
INR 551
Research analysts
Old
Dividend yield (%)
Closing price
12 January 2015
+18%
Nomura vs consensus
Our FY16F EPS/TP are 5%/6%
below consensus.
New
INR 650
Anchor themes
While counter-intuitive, we think
that the current oil price
weakness is likely a blessing in
disguise for upstream PSUs, as
the government will be forced to
decide on subsidies.
Old
Normalised net profit (bn)
Target price
Reduced from 710
Potential upside
Actual
Currency (INR)
Buy
3.9
N/A
3.4
N/A
4.3
N/A
4.5
14.8
14.8
13.2
18.8
17.4
17.9
16.5
net cash net cash net cash net cash net cash net cash net cash

Key company data: See page 2 for company data and detailed price/index chart
Nomura | Oil India
15 January 2015
Key data on Oil India

Relative performance chart
Cashflow statement (INRbn)
Source: Thomson Reuters, Nomura research
Notes:
Performance
(%)
Absolute (INR)
Absolute (USD)
Rel to MSCI India
1M 3M
0.7 -8.2
0.9 -9.6
0.7 -15.9
12M
18.4
17.8
-13.4
M cap (USDmn)
Free float (%)
3-mth ADT (USDmn)
5,322.9
12.7
3.7
FY13
95
-53
42
-8
0
34
42
-8
FY14
92
-56
36
-13
0
23
36
-13
FY15F
95
-58
37
-11
0
26
37
-11
FY16F
117
-63
54
-12
0
42
54
-12
FY17F
120
-64
56
-12
0
44
56
-12
34
0
23
-1
26
-4
42
-4
44
-4
19
53
-17
36
21
44
-14
29
20
42
-14
28
22
61
-21
40
24
64
-22
42
36
29
28
40
42
36
-21
15
29
-15
14
28
-13
15
40
-16
24
42
-17
25
9.2
9.2
9.2
5.4
28.4
1.7
5.3
6.6
44.1
44.1
35.2
37.6
32.1
58.4
19.4
26.8
11.3
11.3
11.3
3.9
12.6
1.6
8.7
13.5
39.2
39.2
25.3
31.9
32.6
51.4
14.8
12.7
11.8
11.8
11.8
3.4
10.8
1.5
8.5
12.3
39.3
39.3
27.3
29.6
33.0
46.8
13.2
10.7
8.2
8.2
8.2
4.3
7.6
1.4
5.7
7.3
46.3
46.3
36.0
34.5
34.0
40.9
17.4
16.2
7.8
7.8
7.8
4.5
7.3
1.2
5.4
6.9
46.7
46.7
36.4
35.1
34.0
40.9
16.5
15.6
0.3
-3.3
3.5
3.5
-3.3
-13.9
-18.1
-18.1
2.6
2.7
-4.6
-4.6
23.5
45.5
43.6
43.6
3.0
4.0
4.9
4.9
Valuations and ratios

Reported P/E (x)
Normalised P/E (x)
Dividend yield (%)
Price/cashflow (x)
Price/book (x)
EV/EBITDA (x)
EV/EBIT (x)
Gross margin (%)
EBITDA margin (%)
EBIT margin (%)
Net margin (%)
Effective tax rate (%)
Dividend payout (%)
ROE (%)
ROA (pretax %)
Growth (%)
Revenue
EBITDA
Normalised EPS
Normalised FDEPS
FY13
42
-10
-20
12
-15
-4
7
FY14
36
-6
-3
26
-29
-2
-31
FY15F
37
-2
-5
31
-21
9
-4
FY16F
54
4
-14
44
-26
17
-4
FY17F
56
1
-12
45
-27
18
-5
-9
2
22
19
-20
0
13
0
0
-7
12
109
121
-109
-22
4
-21
-72
-21
0
89
0
-1
67
-5
121
117
-15
-9
0
21
18
-15
0
0
0
-4
-19
-1
117
116
-15
-13
0
26
25
-13
0
0
0
-4
-17
9
116
125
-23
-13
0
26
26
-16
0
0
0
-4
-20
6
125
130
-29
FY13
121
10
9
6
27
174
9
21
0
0
50
254
13
17
15
45
FY14
117
14
5
10
27
172
36
19
53
0
71
351
101
17
8
126
FY15F
116
18
5
10
27
175
36
20
53
0
81
365
101
17
6
124
FY16F
125
22
6
13
27
192
36
21
53
0
93
396
101
21
9
132
FY17F
130
27
6
13
27
204
36
23
53
0
106
422
101
22
10
133
0
17
62
0
21
147
0
21
145
0
21
153
0
21
154
6
163
6
175
6
190
6
214
6
239
24
192
254
24
205
351
24
220
365
24
244
396
24
268
422
3.86
1,105.4
1.36
33.0
1.41
7.4
1.46
12.0
1.53
12.5
Balance sheet (INRbn)
Income statement (INRbn)

Year-end 31 Mar
Revenue
Cost of goods sold
Gross profit
SG&A
Employee share expense
Operating profit
EBITDA
Depreciation
Amortisation
EBIT
Net interest expense
Associates & JCEs
Other income
Earnings before tax
Income tax
Net profit after tax
Minority interests
Other items
Preferred dividends
Normalised NPAT
Extraordinary items
Reported NPAT
Dividends
Transfer to reserves
Year-end 31 Mar
EBITDA
Change in working capital
Other operating cashflow
Cashflow from operations
Capital expenditure
Free cashflow
Reduction in investments
Net acquisitions
Dec in other LT assets
Inc in other LT liabilities
Adjustments
CF after investing acts
Cash dividends
Equity issue
Debt issue
Convertible debt issue
Others
CF from financial acts
Net cashflow
Beginning cash
Ending cash
Ending net debt
As at 31 Mar
Cash & equivalents
Marketable securities
Accounts receivable
Inventories
Other current assets
Total current assets
LT investments
Fixed assets
Goodwill
Other intangible assets
Other LT assets
Total assets
Short-term debt
Accounts payable
Other current liabilities
Total current liabilities
Long-term debt
Convertible debt
Other LT liabilities
Total liabilities
Minority interest
Preferred stock
Common stock
Retained earnings
Proposed dividends
Other equity and reserves
Total shareholders' equity
Total equity & liabilities
Liquidity (x)
Current ratio
Interest cover
Leverage
Net debt/EBITDA (x)
Net debt/equity (%)
net cash net cash net cash net cash net cash
net cash net cash net cash net cash net cash
Per share
Reported EPS (INR)
Norm EPS (INR)
FD norm EPS (INR)
BVPS (INR)
DPS (INR)
59.75
59.75
59.75
320.21
30.00
48.94
48.94
48.94
340.72
21.50
46.67
46.67
46.67
365.55
18.67
67.02
67.02
67.02
405.12
23.46
70.29
70.29
70.29
446.63
24.60
37.5
40.3
137.7
-60.0
27.5
53.0
109.7
-29.2
18.8
63.3
106.6
-24.5
17.3
65.9
111.0
-27.8
18.8
72.4
122.0
-30.7
Activity (days)
Days receivable
Days inventory
Days payable
Cash cycle
16
Nomura | Oil India
15 January 2015
Fig. 27: Key assumptions and EPS estimates for OIL India
(USD/bbl)
FY12
FY13
FY14F
FY15F
FY16F
FY17F
FY18F
Brent
114.5
110.6
107.7
85.8
60.0
70.0
80.0
Subsidy
56.0
56.0
59.3
38.7
3.8
13.5
23.5
Net realisation
58.5
54.6
48.4
47.1
56.2
56.5
56.5
Reported realisation
Gross
114.7
109.6
106.4
84.9
59.4
69.3
79.2
Subsidy
54.8
56.0
59.3
38.7
3.8
13.5
23.5
Net
59.8
53.6
47.1
46.2
55.5
55.7
55.7
4.2
4.2
4.2
4.8
5.6
5.6
5.6
EPS (INR.sh)
57.7
59.8
48.9
46.7
67.0
70.3
71.9
EPS growth %
20%
4%
-18%
-5%
44%
5%
2%
Fig. 28: Production volume assumptions

FY10
FY11
FY12
FY13
FY14
FY15F
FY16F
FY17F
- MMT
3.63
3.62
3.87
3.70
3.50
3.54
3.64
3.71
- kbpd
70.8
70.6
75.4
72.2
68.3
68.9
71.0
72.4
3.9%
-0.2%
6.7%
-4%
-5%
1%
3%
2%
- BCM
2.4
2.4
2.6
2.6
2.6
2.8
2.9
3.0
- mmscmd
6.6
6.4
7.2
7.2
7.2
7.6
8.1
8.3
Y-Y%
6%
-3%
12%
0%
0%
6%
5%
3%
Oil production
Y-Y%
Gas production
Fig. 29: Sensitivity of key variable to Oil Indias EPS
Base EPS(INR/share)
FY16F
FY17F
67.0
70.3
INR/share
Net reported oil realisation (USD/bbl)
- Increase by USD1/bbl
1.4
5.6
- Increase by USD1/mmbtu
55.5
4.8
63.0
- INR1/USD appreciation
1.5
INR/share
55.7
2%
1.4
2%
5.6
7%
4.9
7%
63.0
3%
1.7
3%
17
Nomura | Oil India
15 January 2015
Reiterate Buy with a new TP of INR650

We continue to use one-year forward P/B multiple to value Oil India. Based on our
revised average ROE estimates for FY16-17F (unchanged) at 16.9% (earlier 18.3%),
cost of equity of 12.5% (unchanged), and growth rate of 2.5% (unchanged), we arrive at
our target one-year forward P/B multiple of 1.45x (1.55x previously).
Our revised TP is INR650/share (down from INR710 earlier).
Risks
Higher-than-expected upstream subsidy burden could negatively impact OINLs
financials.
Lower-than-expected production growth also poses downside risks to our estimates.
An adverse Supreme Court decision on royalty issues could significantly impact OINL's
earnings.
Fig. 30: We value Oil India at 1.45x FY17F P/BF multiple
Avg. ROE (FY16-17F)
New
16.9%
Old
18.3%
Cost of equity
12.5%
12.5%
2.5%
2.5%
Target P/B multiple
1.45
1.55
447
458
648
710
Price Target
650
710
Growth rate
Fig. 31: Oil India 1-year forward P/E band
Fig. 32: Oil India 1-year forward P/B band
(INR/share)
700
(INR/share)
650
650
10x
600
1.9x
1.7x
1.5x
600
9x
550
500
8x
450
7x
400
550
1.3x
500
Dec-14
Aug-14
Apr-14
Dec-13
Apr-13
Aug-13
Dec-12
Apr-12
Aug-12
Dec-11
Apr-11
Aug-11
Dec-10
Apr-10
Dec-14
Aug-14
Apr-14
Dec-13
Apr-13
Aug-13
Dec-12
Aug-12
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Apr-10
Aug-10
400
Aug-10
450
350
300
2.1x
18
15 January 2015
Appendix A-1
Analyst Certification
We, Anil Sharma and Ravikumar Adukia, hereby certify (1) that the views expressed in this Research report accurately reflect
our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this
Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by
Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures

The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more
Nomura Group companies.
Materially mentioned issuers

Issuer
Oil India
Oil and Natural Gas
Ticker
OINL IN
ONGC IN
Price
INR 535
INR 339
Price date
Stock rating Sector rating Disclosures
13-Jan-2015 Buy
N/A
A4,A6
13-Jan-2015 Buy
N/A
A4
The Nomura Group had an investment banking services client relationship with the issuer during the past 12 months.
A6
The Nomura Group expects to receive or intends to seek compensation for investment banking services from the issuer in the next three
months.
Oil India (OINL IN)
INR 535 (13-Jan-2015) Buy (Sector rating: N/A)
Rating and target price chart (three year history)

Date
18-Dec-14
22-May-14
22-May-14
23-Jul-13
23-Jul-13
14-Dec-12
18-Sep-12
18-Sep-12
Rating
Target price
710.00
Buy
690.00
Neutral
590.00
400.00
Reduce
405.00
Closing price
561.80
618.90
618.90
532.05
532.05
449.30
476.30
476.30
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We value Oil India based on P/B methodology. Based on average ROE (FY16-17F) of 16.9%, cost of
equity of 12.5%,and growth rate of 2.5%, we arrive at a target FY17F P/B of 1.45x. Applied to our FY17F book value per share
forecast, we set our target price at INR650.The benchmark index for this stock is MSCI India.
Risks that may impede the achievement of the target price Higher-than-expected upstream subsidy burden could have a
negative impact on OILs financials. Lower-than-expected production growth also poses downside risks to our estimates. An
adverse Supreme Court decision on royalty issue could significantly affect OINL's earnings.
19
15 January 2015
Oil and Natural Gas (ONGC IN)
INR 339 (13-Jan-2015) Buy (Sector rating: N/A)
Rating and target price chart (three year history)

Date
18-Dec-14
22-May-14
22-May-14
23-Jul-13
23-Jul-13
14-Dec-12
18-Sep-12
18-Sep-12
Rating
Target price
470.00
Buy
475.00
Neutral
330.00
225.00
Reduce
250.00
Closing price
344.95
392.80
392.80
312.15
312.15
259.50
280.75
280.75
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We use P/B methodology to value ONGC. Based on average ROE (FY16-17F) of 16.7%, cost of
equity of 12.5%,and growth rate of 3.5%, we arrive at target P/B of 1.50x FY17F for ONGC. At our target multiple of 1.50x
FY17F P/B, we set our TP at INR410.The benchmark index for this stock is MSCI India.
Risks that may impede the achievement of the target price Downside risks: Higher-than-expected upstream subsidy burden
could negatively impact ONGCs financials. Negative Supreme Court decision on royalty issue may result in sharp earnings
impact. Delays in key projects and lower-than-expected production pose downside risks to our estimates.
Rating and target price changes
Issuer
Ticker
Old stock rating
New stock rating
Old target price
New target price
Oil India
Oil and Natural Gas
OINL IN
ONGC IN
Buy
Buy
Buy
Buy
INR 710
INR 470
INR 650
INR 410
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15 January 2015
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The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock,
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Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013
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India upstream PSUs

EQUITY: OIL & GAS/CHEMICALS

Declines in oil prices weaken outlook

Global Markets Research

Risk-reward still favourable for ONGC/OIL at new oil

Earnings/TPs down on lower oil price assumptions; new subsidy formula

We continue to prefer upstream over OMCs in base case

Nomura | India upstream PSUs

Subsidy clarity key; we are optimistic......................................................6

New governments focus on delivery and efficiency seems to be

Nomura | India upstream PSUs

Pricing as of 12 January 2015. Source: Bloomberg, Nomura estimates

Fig. 3: Upstream oil PSUs key market information

No. of o/s shares

Pricing as of 12 January 2015. Source: Bloomberg, Nomura estimates

Fig. 4: Upstream oil PSUs summary valuations

FY14 FY15F FY16F FY17F

FY14 FY15F FY16F FY17F

FY14 FY15F FY16F FY17F

Pricing as of 12 January 2015. Source: Bloomberg, Nomura estimates

Fig. 5: Upstream oil PSUs summary financials

FY14 FY15F FY16F FY17F

FY14 FY15F FY16F FY17F

FY14 FY15F FY16F FY17F

FY14 FY15F FY16F FY17F

Source: Company data, Nomura estimates

Fig. 6: Upstream oil PSUs absolute and relative stock performance

(20.0) (22.1) (11.1)

Rel. MSCI Oil & Gas (%)

(2.5) (13.5) (14.6) (14.5)

(0.4) (12.9) (10.0)

(1.2) (16.8) (18.4) (12.8)

Rel. local m arket (%)

Pricing as of 12 January 2015. Source: Bloomberg, Nomura estimates

Fig. 7: Nomura vs. consensus

Source: Bloomberg, Nomura estimates

Nomura | India upstream PSUs

Lower oil price weakens outlook

Brent oil (USD/bbl)

Source: Nomura estimates

Where could we be wrong?

Under-recovery estimates decline further

FY14 FY15F FY16F FY17F FY18F

Source: PPAC, Nomura estimates

Nomura | India upstream PSUs

High sensitivity of under-recoveries to oil price

Source: Nomura estimates

Nomura | India upstream PSUs

Subsidy clarity key; we are optimistic

New subsidy formula will have to be remunerative at current

We assume government subsidy of INR300bn; balanced by

Nomura | India upstream PSUs

Fig. 11: Our subsidy sharing assumptions

Gross under-recoveries (INRbn)

We assume fixed govt u/r

Source: PPAC, Nomura estimates

Upstream net realisations to increase sharply at our subsidy share assumptions

At our government support

Nomura | India upstream PSUs

Risk-reward remains favourable at new oil assumptions

86.7 114.5 110.6

Exchange rate (INR/USD)

Upstream subsidy (USD / bbl)

Brent - Subsidy (USD/bbl)