06 june 2011 india daily

8/6/2019 06 June 2011 India Daily

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For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES.REFER TO THE END OF THIS MATERIAL.

INDIA DAILYJune 6, 2011 India 3-Jun 1-day1-mo 3-mo

Sensex 18,376 (0.6) (0.8) (0.6)

Nifty 5,517 (0.6) (0.6) (0.4)

Global/Regional indices

Dow Jones 12,151 (0.8) (3.9) (0.2)

Nasdaq Composite 2,733 (1.5) (3.4) (1.9)

FTSE 5,855 0.1 (2.0) (2.3)

Nikkie 9,415 (0.8) (4.5) (12.0)

HangSeng 22,950 (1.3) (0.9) (2.0)

KOSPI 2,113 (0.0) (1.6) 5.4

Value traded India

Cash(NSE+BSE) 124 131 146

Derivatives (NSE) 947 1,558 1,506

Deri. open interest 1,203 1,257 1,231

Forex/money market

Change, basis points

3-Jun 1-day 1-mo 3-mo

Rs/US$ 44.8 (2) 29 (23)

10yr govt bond, % 8.3 (3) - 34

Net investment (US$mn)

2-Jun MTD CYTD

FIIs 34 154 (86)

MFs (32) 6 (282)

Top movers -3mo basis

Change, %

Best performers 3-Jun 1-day 1-mo 3-mo

APNT IN Equity 3167.8 2.0 17.3 26.3

DIVI IN Equity 772.8 (1.4) 12.4 25.5

MSEZ IN Equity 161.1 (0.1) 22.1 21.3

HH IN Equity 1861.1 (0.5) 5.4 21.1

RBXY IN Equity 534.3 (1.3) 24.2 18.1

Worst performers

POWF IN Equity 204.0 (0.6) (4.9) (23.8)

NACL IN Equity 90.3 (1.0) 1.3 (18.4)

GMRI IN Equity 32.7 (1.5) (11.9) (17.4)

SBIN IN Equity 2312.5 (0.9) (12.7) (14.5)

TTMT IN Equity 1023.8 (2.3) (14.7) (12.9)

Contents

Updates

Reliance Industries: Cash may not be king in this case

GSPL: All transmission companies seem to be bullish on the Indian gas story

News Round-up

Banks, MFIs reach debt recast deal. MFI promoters agree to pledge 100%shareholding; banks refuse to give fresh loans to the sector. About USD 1.42 bn

loans have been prevented from becoming non-performing assets. (BSTD-Sat)

In a major haul of the FDI norms in the content distribution space, the governmenthas put 49% of the foreign investments in the direct-to-home (DTH) sector on theautomatic route while increasing the overall cap to 74%. (FNLE)

To meet the additional credit requirements in a market plagued by high interest ratesand lowersales, Tata Motors (TTMT IN) has infused an additional USD 167 mn into its

wholly-owned Tata Motors Finance by expanding the equity base from USD 444 mn

to USD 611 mn. (FNLE)

RIL (RIL IN) to be free of debt this year. (BSTD-Sat) HDIL (HDIL IN) has indicated it would clock 0.7-1 million sq ft if transfer of

development right (TDR) sales for 2011-12, a drop of 20% compared to last year.

(BSTD-Sat)

IDFC (IDFC IN) and Khazanah will form a joint venture company to develop roadprojects in India. Khazanah will hold 80.1% stake in the proposed JV and IDFC the

balance. Both would also invest in convertible instruments issued by the JV. (BSTD-

Sat)

The Steel Authority of India Ltd (SAIL IN) will set up four pellet plants over the nexttwo-to -three years to utilise fines generated by its mines. (THBL SAT)

REC (RECL IN) to raise $1.75 bn Via Foreign Currency Bonds. (ECNT) M&M (MM IN) asks suppliers to Focus on cost cuts, On-time Delivery. (ECNT) Ashok Leyland (AL IN) sales drop 12% in May. (BSTD-Sat) Raheja group may exit Crossword. Big retailers Tata, Reliance, Birla seen as potential

suitors. (BSTD)

GMDC (GMDC IN) is looking to add value to its mineral products with privatepartnerships. It sells raw bauxite and plans to set up a project for value addition in

bauxite products at Kutch. (BSTD)

Hindustan Sanitaryware takes 60% in Garden Polymers. Deal worth USD 20 mn, tobuy rest of stake, too; aims at growing subsidiary 40% yearly for next 5 years. (BSTD)

Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line.


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For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

Nothing material in new announcement at recent annual general meeting (AGM)

RIL did not announce any major expansion plans or identify new growth areas in its 37th

annual

general meeting of shareholders held on June 3, 2011. The company seems to have dropped

power as a growth area but stressed on a new wave of growth in consumer and digital areas. It

did not provide much clarity on production issues in the KG D-6 block but acknowledged technical

issues in the block.

Use of cash critical for next leg of growth; stock de-rating may continue otherwise

In our view, RILs ability to use likely large gross cash flow generation fruitfully over the next few

years (US$20 bn in FY2012-14E) would determine RILs stock price in the medium term. RIL stock

has historically enjoyed a large growth premium associated with RILs ability to use cash flows and

capital markets aggressively to grow at scorching rates. However, RIL runs the risk of being valued

like a normal company on earnings and cash flows unless it can demonstrate the ability to create

value beyond cycles in extant areas and in new consumer-centric and knowledge-based areas.

The stock has already seen some de-rating of late.

Cash is just that, cash; several options to use it though

RILs free cash flow generation (US$5.5 bn per annum in FY2012-14E) may not be sufficient to

prevent a de-rating unless it can use the same to create additional value. RILs large size (US$62 bn

market capitalization) means that it will have to create US$9 bn of value every year to simply grow

at say, 14% CAGR (in line with Indias nominal GDP growth). RIL has several options to use the

large cash flow though(1) invest in extant businesses, (2) invest in new businesses, (3) acquire

assets and (4) return the cash to shareholders.

Reduced target price to factor in continued delay in E&P activity, fine-tuned estimates

We have reduced our 12-month SOTP-based target price to `1,020 from `1,100 to factor in

(1) lower gas production at KG D-6 block for the next three years, (2) likely delay in gas production

from NEC-25, KG D-3, KG D-9 and MN D-4 blocks; we have pushed back production by 1-3 yearsand (3) higher cost of capital to factor in enhanced risk. We have fine-tuned estimates.

.dot

Reliance Industries (RIL)Energy

Cash may not be king in this case. RILs recent AGM did not address the key issuesfacing RIL and RIL stock(1) use of cash, (2) future growth areas than can create

meaningful value and (3) conservative approach towards extant and new growth areas.We have reduced our 12-month SOTP-based TP to `1,020 from `1,100 previously. In

our view, RIL stock may continue to get de-rated unless it can demonstrate ability to

successfully invest cash generated over the next few years to create meaningful value.

Reliance Industries

Stock data Forecasts/Valuations 2011 2012E 2013E

52-week range (Rs) (high,low) EPS (Rs) 62.0 68.0 70.9

Market Cap. (Rs bn) 2,783.2 EPS growth (%) 24.8 9.8 4.2

Shareholding pattern (%) P/E (X) 15.1 13.7 13.2

Promoters 41.0 Sales (Rs bn) 2,481.7 3,341.4 2,995.6

FIIs 21.4 Net profits (Rs bn) 202.9 222.7 232.1MFs 2.6 EBITDA (Rs bn) 384.8 371.2 374.3

Price performance (%) 1M 3M 12M EV/EBITDA (X) 8.0 7.2 6.5

Absolute (1.0) (4.4) (9.3) ROE (%) 13.0 12.9 12.0

Rel. to BSE-30 (0.1) (3.8) (16.0) Div. Yield (%) 0.8 0.9 1.0

Company data and valuation summary

1,187-885

REDUCE

JUNE 06, 2011

UPDATE

Coverage view: Cautious

Price (Rs): 935

Target price (Rs): 1,020

BSE-30: 18,376

QUICK NUMBERS

US$20 bn of grosscash generationover FY2012-14E

Needs to createUS$9 bn of value

every year to simply

grow at 14% CAGR

Target price revisedto `1,020 from

`1,100 previously


3/22

Reliance Industries Energy

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Nothing material in AGM, most of the announcements are already known

We will not focus on the announcements of the AGM since almost of these have been

discussed by the management in recent analyst meetings, investor presentations and the

FY2011 annual report. In fact, the most significant announcement (if it can be called so)

was a lack of any mention of the power sector in the chairmans speech. In the previousAGM, the management had announced transformational initiatives power with its

intention to participate in the whole value chain of the power business, spanning

generation, transmission and distribution. It seems the power sector is no longer a

growth area for RIL.

The management also did not provide further clarity on the production issues in KG D-6

block but acknowledged certain issues in the block. We reproduce the statement from

the chairmans speech. Significant efforts are underway to comprehend the character

and the behavior of these complex reservoirs, first of its kind developed in Indian deep

waters. These include extensive geoscientific and engineering work to be undertaken

with our partners to sustain and augment the production. After the government

approvals for the BP-Reliance partnership, the KG D6 reservoirs will be jointly assessed toaddress the technical issues in ramping up production.

We instead discuss the key challenges facing RIL stock at the current juncture.

Multiple de-rating may continue

We see a continued risk of de-rating of RIL stock without clear signals from the

management on its strategy to grow the company beyond the current businesses. The

market has historically accorded a growth premium to RILs valuation (through high value

of emerging businesses) with the expectation that RIL will use its cash flows to enter new

businesses, build leadership positions in those businesses and create value. Given the

continued delay in monetizing E&P assets and question marks on its most recent

businesses, we believe RIL runs the risk of being valued like any normal company.

We note that RIL stock has traded at premium multiples compared to the cyclical

commodity nature of its earnings (see Exhibit 1 that compares RILs 12-month rolling

forward P/E multiple with the markets since April 1999). The market has historically

accorded a growth premium to RIL given that it has (1) grown earnings rapidly by

aggressively creating capacities to participate in the growing markets of petrochemicals

and refining in India and (2) identified growth opportunities, which the market has given

disproportionate value to in the initial years of those new businesses.


4/22

Energy Reliance Industries

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Market has accorded high multiple to RIL for its growth prospects12-month forward P/E for Reliance Industries versus Sensex (X)

-

5

10

15

20

25

30

35

Apr-99

Oct-99

Apr-00

Oct-00

Apr-01

Oct-01

Apr-02

Oct-02

Apr-03

Oct-03

Apr-04

Oct-04

Apr-05

Oct-05

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Reliance Industries Sensex

(X)

Source: Company, Bloomberg, Kotak Institutional Equities estimates

In our view, the recent de-rating of the stock reflects the markets growing concerns

about the two aforementioned growth drivers of RIL.

Earnings growth. We model RILs EPS to grow at 8.7% CAGR between FY2011 andFY2014E in contrast to very rapid growth in its earnings over the past two decades.

RILs EPS has grown at 15% CAGR between FY1993 and FY2011 and at 24% CAGR

between FY2001 and FY2011 (see Exhibit 2 that charts RILs yearly EPS and growth

rate between various periods). We choose these periods since 1993 marked thebeginning of RILs rapid push into petrochemicals and FY2001 marked its entry into

refining with the first full year of operation of its first Jamnagar refinery. RILs EPS has

grown a more sedate 14.4% CAGR between FY2006 and FY2011 despite start of its

second Jamnagar refinery and a much more significant foray into the E&P segment

with the start of gas production from its KG D-6 block.

RIL's EPS to grow at CAGR of 9% over FY2011-14E versus CAGR of 24% over the past decadeReliance Industries' EPS, March fiscal year-ends, 1993-2014E (Rs)

5 6 6 6 68 8 10 7 8

1216

26

32

40

52 51 50

62

68 71

80

-

10

20

30

40

50

60

70

80

90

100

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012E

2013E

2014E

RIL's EPS

(Rs)

15% CAGR in FY1993-2011

24% CAGR in FY2001-11

9% CAGR in FY2011-14E

Source: Company, Kotak Institutional Equities estimates


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RIL has historically used cash flows of extant businesses to expand aggressively into the

same business through vertical integration or has invested in growth areas that have

further contributed to earnings growth. However, RILs current expansion plans are

quite small in the context of its extant operations.

Value of new businesses. We see low value in RILs future initiatives given limitedprogress in organized retailing, retreat from SEZs and lack of other initiatives. We treat

E&P as a traditional business even though we ascribe some value to several of RILs oil

and gas blocks where it has made discoveries. RILs recent production problems at its

KG D-6 block and continued delay in E&P activity in other blocks may lead to the

market questioning the streets valuations of the E&P segment, notwithstanding the

US$24 bn valuation implied for RILs 23 oil and gas blocks in India (other than PMT

fields) by the recent RIL-BP deal.

RILs stock price has typically reflectedvalue for new initiatives, be it telecom in

CY2001-05, E&P in CY2004-08 (and even now) and retailing and SEZ in CY2007-08.

The market has accorded massive value to RILs new initiatives at very early stages of

those initiatives.Reduced SOTP-based target price to `1,020, fine-tuned estimates

Exhibit 3 is our SOTP valuation of RIL based on FY2013E estimates. We have made a few

changes to our SOTP and earnings models.

SOTP valuation of Reliance is Rs1,020 per share on FY2013E estimatesSum-of-the-parts valuation of Reliance Industries, FY2013E basis (Rs)

Valuation base (Rs bn) Multiple (X) EV Valuation

Other EBITDA Multiple EV/EBITDA (Rs bn) (Rs/share)

Chemicals 120 6.5 781 262

Refining & Marketing 151 6.5 983 330

Oil and gasproducing (PMT and Yemen) 24 4.0 97 33

Gasproducing and developing (DCF-based) (a) 403 403 135

KG D-6 287 287 96NEC-25 31 31 10

KG D-3 44 44 15

KG D-9 34 34 11

MN D-4 7 7 2

OilKG-DWN-98/3 (b) 37 37 12

Investments other than valued separately 289 289 97

Loans & advances to affiliates 71 71 24

Retailing 52 80% 42 14

SEZ development 35 80% 28 9

Capital WIP (book value) 65 100% 65 22

Total enterprise value 2,797 938

Net debt (244) (82)

Implied equity value 3,040 1,020

Notes:

(a) We value KG D-6, NEC-25, CBM, KG D-3, KG D-9 and MN D-4 blocks on DCF.

(b) 140 mn bbls of re coverable reserve s based on gross OOIP of 0.35 bn bbls.

(c) Capital WIP includes capex on new petrochemical units.

(d) We use 2.981 bn shares (excluding trea sury shares) for per share computations.

Source: Kotak Institutional Equities estimates

Reduced KG D-6 gas production. We have cut FY2012E, FY2013E, FY2014E gasproduction to 50 mcm/d, 55 mcm/d and 70 mcm/d against 52 mcm/d, 65 mcm/d and

80 mcm/d previously. Our revised FY2012E, FY2013E and FY2014E EPS are `68, `70.9

and `79.6 versus `68.5, `73.1 and `81.5 previously.

Pushed back production from other blocks by 1-3 years. We now model gasproduction from NEC-25 block in FY2017E and from KG D-3 and KG D-9 blocks in

FY2018E. We model eventual gas production of 1.9 tcf, 9.3 tcf and 5.3 tcf from NEC-25, KG D-3 and KG D-9 blocks. We have pushed back gas production in MN D-4

block to FY2021E versus FY2018E earlier noting that RIL is yet to commence

exploration drilling in the block. RIL took about 6.5 years to produce gas from the KG

D-6 block after discovery of first gas in the block.


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Finally, we have removed the valuation of the CBM blocks (Sohagpur East and

Sohagpur West) from our SOTP model since RIL is yet to make any significant progress

in exploiting the blocks and it will be some time before RIL is able to develop the

blocks and pipeline infrastructure to evacuate the gas to consumption centers. The

blocks are far from consumption centers and in the coal-rich eastern part of the

country. We were overly optimistic about the prospects of the CBM blocks and hadaccorded `107 bn value (`36/share) to them previously. We will value them on

earnings basis as and when they commence production; initial production would be

too small to make any material difference, in our view.

No change to refining and chemical margin assumptions. We model FY2012E,FY2013E and FY2014E refining margins at US$9.5/bbl, US$10.1/bbl and US$10.5/bbl.

Exhibit 4 gives our key assumptions for the refining segment. Exhibit 5 gives the major

price and margin assumptions for the chemical segment. As can be seen, we expect

EBITDA of both the chemical and refining segments to grow moderately over the next

three years.

Major assumptions of refinery division, March fiscal year-ends, 2006-2014E (US$/bbl)

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

RIL refinery

Rupee-dollar exchange rate 44.3 45.3 40.3 45.8 47.4 45.6 45.5 44.0 44.0

Import tariff on crude (%) 5.1 5.1 2.4 1.3 1.1 5.4 5.7 5.7 5.7

Re fine ry yie ld (pe r bbl of crude throughput) 61.9 75.3 97.4 104.6 83.2 96.5 126.7 115.8 110.5

Cost of inputs (pe r bbl of crude throughput) 49.5 63.5 83.1 92.6 76.3 88.6 118.2 106.6 100.5

Net refining margin 12.4 11.8 14.3 12.0 6.9 7.8 8.5 9.2 10.0

Crude throughput (mn tons) 30.5 31.8 31.8 32.0 32.0 33.3 33.8 33.8 33.8

Fuel and loss-own fuel used (%) 7.6 8.0 8.0 8.0 6.0 6.0 6.0 6.0 6.0

Fuel & loss equivalent-gas used (%) 2.0 2.0 2.0 2.0 2.0

SEZ refinery

Import tariff on crude (%) 0.6 1.1 1.1 1.1

Refinery yield (per bbl of crude throughput) 70.6 91.5 121.6 111.0 105.7

Cost of inputs (per bbl of crude throughput) 64.2 82.6 111.1 99.9 94.0

Net refining margin 6.4 9.0 10.5 11.1 11.7

Crude throughput (mn tons) 28.9 33.3 33.8 33.8 33.8

Fuel and loss-own fuel used (%) 6.5 6.5 6.5 6.5 6.5

Fuel & loss equivalent-gas used (%) 2.0 2.0 2.0 2.0 2.0

Blended refining margin (US$/bbl) 6.7 8.4 9.5 10.1 10.9

Total crude throughput (mn tons) 60.9 66.6 67.6 67.6 67.6



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Key chemical prices and margins assumptions, March fiscal year-ends, 2006-14E

2006 2007 2008 2009 2010 2011E 2012E 2013E 2014E

Chemical prices

LDPE 1,130 1,360 1,600 1,400 1,500 1,555 1,675 1,650 1,625

LLDPE 1,125 1,350 1,575 1,330 1,400 1,455 1,475 1,450 1,425

HDPE 1,100 1,340 1,500 1,275 1,375 1,415 1,425 1,400 1,375

Polypropylene 1,170 1,350 1,470 1,300 1,360 1,525 1,650 1,600 1,575

PVC 825 890 1,100 925 1,000 1,075 1,200 1,175 1,150

PFY 1,350 1,400 1,550 1,485 1,380 1,640 1,900 1,800 1,750

PSF 1,265 1,360 1,475 1,320 1,310 1,660 1,925 1,800 1,750

Paraxylene 900 1,225 1,200 1,085 1,050 1,125 1,400 1,350 1,315

Chemical margins

LLDPEnaphtha 655 820 850 655 770 725 595 640 645

HDPEnaphtha 630 810 775 600 745 685 545 590 595

PPnaphtha 700 820 745 625 730 795 770 790 795

PVC1.025 x (0.235 x ethylene + 0.86 264 247 396 401 389 367 412 427 431

POYnaphtha 880 870 825 810 750 910 1,020 990 970PSFnaphtha 795 830 750 645 680 930 1,045 990 970

PXnaphtha 430 695 475 410 420 395 520 540 535

POY0.85 x PTA0.34 x MEG 353 329 364 496 341 437 544 525 505

PSF0.85 x PTA0.34 x MEG 268 289 289 331 271 457 569 525 505

PTA0.67 x PX 222 89 121 133 217 281 247 206 204


Exhibit 6 gives the breakdown of revenues, EBITDA and pre-tax profits by segments.

Exhibits 7-9 are our detailed profit & loss, cash flow and balance sheet models.


8/22



Disappointment in upstream segment EBITDA growth to impact overall EBITDA growthSegment breakdown of Reliance's consolidated financials, March fiscal year-ends, 2006-11, standalone financials, March fiscal year-ends, 2012-2014E(Rs mn)

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

Revenues

Chemicals 295,579 480,207 496,602 523,673 560,220 632,240 766,430 714,475 705,335Refining & marketing 661,079 834,161 1,004,123 1,094,889 1,703,143 2,291,646 2,736,533 2,419,372 2,307,638

Others (incl. Upstream) 17,707 24,681 23,260 43,524 47,407 66,110

Upstream 27,022 35,808 126,491 173,222 131,533 128,048 144,061

Inter-divisional sales (148,544) (203,348) (179,540) (185,654) (399,863) (505,112) (293,073) (266,281) (264,919)

Total 825,822 1,135,701 1,371,467 1,512,240 2,037,397 2,658,106 3,341,424 2,995,615 2,892,115

EBITDA

Chemicals 60,006 93,703 95,745 93,317 107,811 117,557 120,077 120,088 126,886

Refining & marketing 70,186 95,065 123,012 118,608 94,346 131,484 144,288 151,233 165,502


Upstream 23,260 28,364 100,969 140,946 104,133 100,309 112,857

Unallocated (2,282) (184) (2,185) 1,485 5,960 9,118 (900) (945) (992)

Total 141,249 205,789 246,256 257,060 330,797 415,036 367,599 370,686 404,253

EBIT

Chemicals 44,267 67,423 71,631 69,468 86,404 95,404 97,437 97,651 100,962Refining & marketing 52,879 76,643 103,728 97,696 60,562 91,818 105,310 111,685 125,279

Sales tax incentives 3,418 2,000


Upstream 15,198 21,308 51,993 57,999 76,747 70,129 75,277

Unallocated (2,700) (274) (2,628) 797 4,236 6,621 (900) (945) (992)

Total 108,982 158,794 193,639 200,550 221,339 264,656 278,593 278,520 300,526

Pretax profits

Chemicals 42,766 63,316 63,908 62,465 84,083 90,599 87,756 92,993 98,394

Refining & marketing 45,601 67,328 100,687 84,176 42,801 72,220 94,847 106,356 122,092

Sales tax incentives 3,418 2,000


Upstream 15,198 21,308 51,993 57,999 69,122 66,784 73,363

Other income 6,829 4,783 8,953 20,599 24,605 30,517 38,283 42,972 52,638

Unallocated (2,700) (274) 44,702 (2,903) 4,236 6,621 (811) (900) (967)

Total 107,031 150,154 239,159 196,926 225,861 270,770 289,196 308,205 345,520



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Profit model of Reliance Industries, March fiscal year-ends, 2006-2014E (Rs mn)

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

Net sales (a) 809,113 1,114,927 1,334,430 1,418,475 1,924,610 2,481,700 3,341,424 2,995,615 2,892,115

Inc/(dec) in stock 21,312 6,546 (18,672) 4,276 39,479 32,431

Raw materia ls (574,119) (793,449) (910,071) (1,085,442) (1,503,187) (1,951,555) (2,808,325) (2,456,513) (2,311,707)

Finished goods (25,161) (18,213) (60,077) (22,053) (29,958) (14,643)

Royalty on gas/crude oil (1,345) (2,169) (2,653) (3,501) (7,740) (9,763) (8,067) (7,703) (8,386)

Employee costs (9,785) (20,941) (21,193) (23,975) (23,504) (26,242) (28,079) (30,044) (32,147)

Other costs (80,024) (88,239) (88,708) (54,641) (93,894) (130,670) (129,355) (130,670) (135,622)

EBITDA 139,991 198,462 233,056 233,139 305,807 381,257 367,599 370,686 404,253

Other income 6,829 4,783 8,953 20,599 24,605 30,517 38,283 42,972 52,638

Interest (8,770) (11,889) (10,774) (17,452) (19,972) (23,276) (27,680) (13,287) (7,644)

Depreciation (34,009) (48,152) (48,471) (50,767) (57,390) (63,561) (63,856) (64,306) (68,957)

Depletion (1,186) (47,575) (72,515) (25,149) (27,859) (34,771)

Pretax profits 104,041 143,205 182,764 184,332 205,474 252,422 289,196 308,205 345,520

Extraordinaries 3,000 2,000 47,335

Current taxation (9,307) (16,574) (26,520) (12,634) (31,118) (43,204) (55,188) (72,518) (80,667)

Deferred taxation (7,040) (9,196) (8,999) (18,605) (12,000) (6,355) (11,284) (3,625) (4,170)Net profits 90,693 119,434 194,580 153,093 162,357 202,863 222,724 232,062 260,683

Adjusted profits 87,954 117,662 152,605 153,093 162,357 202,863 222,724 232,062 260,683

Shares outstanding (mn)

Yearend 2,786 2,907 2,907 3,147 3,270 3,273 3,273 3,273 3,273

Primary 2,786 2,907 2,907 3,027 3,270 3,273 3,273 3,273 3,273

Fully diluted 2,786 2,907 2,907 3,027 3,270 3,273 3,273 3,273 3,273

EPS (Rs)

Primary 32 40 52 51 50 62 68 71 80

Fully diluted 32 40 52 51 50 62 68 71 80

Cash flow per share (Rs)

Primary 43 57 64 58 68 93 86 86 96

Fully diluted 43 57 64 58 68 93 86 86 96



10/22



Cash flow model, March fiscal year-ends, 2006-2014E (Rs mn)

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

Operating

Profit before tax 107,041 145,205 230,101 184,332 205,474 252,422 289,196 308,205 345,520

DD&A 34,009 48,152 48,471 51,953 104,965 136,076 89,005 92,165 103,728Taxes (9,415) (19,050) (24,847) (18,955) (30,819) (42,040) (55,188) (72,518) (80,667)

Interest expenses 8,770 11,889 10,774 17,452 19,972 23,276 27,680 13,287 7,644

Interest paid (15,684) (17,213) (19,064) (45,933) (35,313) (27,801) (29,489) (15,746) (9,693)

Other income (5,439) (5,542) (11,983) (14,446) (41,867) (37,960) (38,283) (42,972) (52,638)

Extraordinaries 237 1,127 (47,178) 105 191 337

Working capital (a) (32,188) (13,075) (31,071) (37,983) (53,015) 695 (36,260) 8,514 3,404

Total operating 87,332 151,493 155,203 136,526 169,590 305,004 246,662 290,936 317,297

Operating, excl. working capital (b) 119,520 164,567 186,275 174,508 222,605 304,310 282,922 282,421 313,893

Investing

Capital expenditure (c) (94,273) (82,541) (191,112) (247,128) (219,427) (123,661) (55,073) (93,797) (103,519)

Investment in group companies (d) (2,782) (126,849) (47,098) 418 39,111 (75,406)

Other investments net (28,423) 25,929 37,360 23,711 (51,165) (65,259)

Loans (to)/from companies (1,160) (5,867) (44,960) (34,521) 26,260 (54,775)

Asset sales 170 297 146 484 1,132 92,456 236,600

Interest/dividends received (e) 5,159 3,361 6,114 16,195 22,043 23,316 38,283 42,972 52,638Total investing (121,309) (185,670) (239,551) (240,842) (182,045) (203,329) 219,809 (50,825) (50,881)

Financing

Share issuance 5 2,611 16,824 151,648 535 1,926

Loans (net) 31,198 51,449 91,970 150,695 (53,024) 57,430 (332,602) (190,907) (1,216)

Dividends (f) (11,853) (33,786) (19,085) (22,195) (24,309) (31,185) (34,650) (38,115)

Others

Total financing 19,350 20,274 108,794 283,259 (74,684) 35,047 (363,787) (225,558) (39,331)

Net change in cash (14,626) (13,904) 24,447 178,942 (87,139) 136,722 102,684 14,553 227,085

Opening cash 36,088 32,257 18,353 42,823 221,765 134,627 271,349 374,033 388,586

Closing cash 21,462 18,353 42,800 221,765 134,627 271,349 374,033 388,586 615,671

Gross cash flow (b) 119,520 164,567 186,275 174,508 222,605 304,310 282,922 282,421 313,893

Free cash flow (b)+(a)+(c)+(d)+(e) (34,146) (34,475) (84,493) (104,800) (13,587) 9,220 229,871 240,111 266,416

Excess cash flow (b)+(a)+(c)+(d)+(e)+(f) (45,999) (68,260) (84,493) (123,884) (35,782) (15,089) 198,686 205,460 228,301



11/22



Balance sheet, March fiscal year-ends, 2006-2014E (Rs mn)

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

Equity

Share capital-equity 13,932 14,534 14,534 16,428 32,704 32,734 32,734 32,734 32,734

Share capital-preference Reserves a nd surplus 501,253 662,262 854,884 1,193,099 1,314,604 1,491,644 1,683,183 1,880,595 2,103,162

Extraordinary adjustments (17,142) (37,125) (54,932) 54,203 24,398 (8,974) (8,974) (8,974) (8,974)

Total equity 498,043 639,671 814,486 1,263,730 1,371,706 1,515,403 1,706,942 1,904,354 2,126,922

Deferred taxation liability 49,708 69,820 78,725 97,263 109,263 115,618 126,902 130,527 134,697

Minority interest

Liabilities

Secured loans 113,882 135,750 126,682 148,915 156,514 223,274 216,313 65,168 63,952

Unsecured loans 104,774 142,507 238,114 590,130 468,433 450,693 128,543 79,551 88,781

Total borrowings 218,656 278,257 364,797 739,045 624,947 673,967 344,856 144,719 152,733

Current liabilities 164,545 185,784 240,381 357,019 404,148 542,206 544,691 487,010 465,316

Total capital 930,952 1,173,533 1,498,389 2,457,057 2,510,064 2,847,194 2,723,391 2,666,610 2,879,667

Assets

Cash 21,462 18,353 42,800 221,765 134,627 271,349 374,033 388,586 615,671

Current assets 224,283 280,780 386,058 325,357 489,165 644,070 772,855 706,660 681,562

Gross block 814,112 959,739 1,006,702 1,380,698 1,634,903 1,667,932 1,595,912 1,610,098 1,753,608

Less: accumulated depreciation 292,534 358,723 423,455 464,670 550,287 637,179 701,036 765,342 834,299

Net fixed assets 521,578 601,016 583,247 916,028 1,084,616 1,030,753 894,876 844,757 919,310

Gross producing properties 35,589 35,589 35,589 115,589 523,744 544,588 315,268 315,268 315,268

Less: accumulated depletion 28,186 75,761 148,276 173,425 201,284 236,055

Net producing properties 35,589 35,589 35,589 87,403 447,983 396,312 141,843 113,984 79,213

Capital work-in-progress 69,578 75,281 230,058 690,438 121,388 128,196 163,269 236,109 207,396

Total fixed assets 626,745 711,886 848,895 1,693,869 1,653,987 1,555,260 1,199,988 1,194,849 1,205,919

Investments 58,462 162,513 220,636 216,065 232,286 376,515 376,515 376,515 376,515

Deferred expenditure

Total assets 930,952 1,173,533 1,498,389 2,457,057 2,510,064 2,847,194 2,723,391 2,666,610 2,879,667

Ratios (%)

Debt/equity 39.9 39.2 40.8 54.3 42.2 41.3 18.8 7.1 6.8

Debt/capitalization 28.5 28.2 29.0 35.2 29.7 29.2 15.8 6.6 6.3

Net debt/equity 36.0 36.6 36.0 38.0 33.1 24.7 (1.6) (12.0) (20.5)

Net debt/capitalization 25.7 26.3 25.6 24.6 23.3 17.5 (1.3) (11.2) (19.2)

ROAE 16.8 17.9 18.0 13.6 11.8 13.1 12.8 11.9 12.1ROACE 13.1 14.1 14.0 10.0 8.6 10.1 10.8 11.1 11.6

Adjusted ROACE 18.0 18.3 20.9 17.3 12.3 12.5 15.4 17.2 18.9



12/22



RIL: Profit model, balance sheet, cash model, March fiscal year-ends, 2006-2014E (Rs mn)

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

Profit model (Rs mn)

Net sales 809,113 1,114,927 1,334,430 1,418,475 1,924,610 2,481,700 3,341,424 2,995,615 2,892,115

EBITDA 139,991 198,462 233,056 233,139 305,807 381,257 367,599 370,686 404,253Other income 6,829 4,783 8,953 20,599 24,605 30,517 38,283 42,972 52,638

Interest (8,770) (11,889) (10,774) (17,452) (19,972) (23,276) (27,680) (13,287) (7,644)

Depreciation & depletion (34,009) (48,152) (48,471) (51,953) (104,965) (136,076) (89,005) (92,165) (103,728)

Pretax profits 104,041 143,205 182,764 184,332 205,474 252,422 289,196 308,205 345,520

Extraordinary items 3,000 2,000 47,335

Tax (9,307) (16,574) (26,520) (12,634) (31,118) (43,204) (55,188) (72,518) (80,667)

Deferred taxation (7,040) (9,196) (8,999) (18,605) (12,000) (6,355) (11,284) (3,625) (4,170)

Net profits 90,693 119,434 194,580 153,093 162,357 202,863 222,724 232,062 260,683

Adjusted net profits 88,152 117,789 152,605 153,093 162,357 202,863 222,724 232,062 260,683

Earnings per share (Rs) 31.6 40.5 52.5 50.6 49.6 62.0 68.0 70.9 79.6

Balance sheet (Rs mn)

Total equity 430,543 673,037 847,853 1,263,730 1,371,706 1,515,403 1,706,942 1,904,354 2,126,922

Deferred taxation liability 49,708 69,820 78,725 97,263 109,263 115,618 126,902 130,527 134,697

Minority interest 33,622 33,622

Total borrowings 218,656 332,927 493,072 739,045 624,947 673,967 344,856 144,719 152,733

Currrent liabilities 164,545 192,305 251,427 357,019 404,148 542,206 544,691 487,010 465,316

Total liabilities and equity 863,452 1,301,712 1,704,700 2,457,057 2,510,064 2,847,194 2,723,391 2,666,610 2,879,667

Cash 21,462 18,449 42,823 221,765 134,627 271,349 374,033 388,586 615,671

Current assets 224,283 286,566 402,720 325,357 489,165 644,070 772,855 706,660 681,562

Total fixed assets 626,745 899,403 1,081,638 1,693,869 1,653,987 1,555,260 1,199,988 1,194,849 1,205,919

Investments (9,038) 97,294 177,519 216,065 232,286 376,515 376,515 376,515 376,515

Deferred expenditure

Total assets 863,452 1,301,712 1,704,700 2,457,057 2,510,064 2,847,194 2,723,391 2,666,610 2,879,667

Free cash flow (Rs mn)

Operating cash flow, excl. working capital 119,520 164,285 180,718 174,508 222,605 304,310 282,922 282,421 313,893

Working capital (32,188) (13,075) (31,071) (37,983) (53,015) 695 (36,260) 8,514 3,404

Capital expenditure (94,273) (247,274) (239,691) (247,128) (219,427) (123,661) (55,073) (93,797) (103,519)Investments (32,364) (105,760) (78,953) (10,392) 14,206 (195,439)

Other income 5,159 4,143 6,132 16,195 22,043 23,316 38,283 42,972 52,638

Free cash flow (34,146) (197,681) (162,865) (104,800) (13,587) 9,220 229,871 240,111 266,416

Ratios (%)

Debt/equity 45.5 44.8 53.2 54.3 42.2 41.3 18.8 7.1 6.8

Net debt/equity 41.1 42.3 48.6 38.0 33.1 24.7 (1.6) (12.0) (20.5)

RoAE 19.9 20.3 18.9 13.6 11.8 13.1 12.8 11.9 12.1

RoACE 13.8 13.9 12.7 10.0 8.6 10.1 10.8 11.1 11.6

Adjusted ROACE 18.0 18.8 21.7 17.3 12.3 12.5 15.4 17.2 18.9



13/22

For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

Ramp-up to 45 mcm/d on existing network in the existing network versus 36 mcm/d at present

GSPL management has guided to increase in its gas transmission volumes to ~45 mcm/d over the

next two years versus 35.6 mcm/d in 4QFY11. This is higher than our revised estimate of 41.1

mcm/d in FY2012E. We find the managements guidance challenging given (1) RIL production

from KG D-6 gas has declined from 4QFY11 levels and may remain at these levels for some time,

(2) PLNGs Dahej terminal was operating at near-full capacity in 4QFY11 and (3) there is no

meaningful source of incremental gas supply till FY2014E. Exhibit 1 gives our estimate of gas

supply in India.

Utilization rate of ~40% on the new pipelines in the first year of operation; banking on LNG

The management was very upbeat on a sharp ramp-up in supply of gas in India to feed its extant

network in Gujarat and the new pipelines. The management expects to achieve ~40% utilization

in the first year of operation of its new pipelines(1) Mallavaram-Vijapur-Bhilwara pipeline

(MVBPL), (2) Mehsana-Bhatinda pipeline (MBPL) and (3) Bhatinda-Srinagar pipeline (BSPL). We

believe this would be an aggressive assumption given (1) large capacity of these pipelines (see

Exhibit 2), (2) stipulated completion of pipeline within three years under the regulations and

(3) limited incremental gas supply in India over the next three years.

No cut in transmission tariffs for existing network

GSPL has submitted data for relating to tariffs for its existing network to the Petroleum and

Natural Gas Regulatory Board (PNGRB) and is awaiting approval of the same. The management

highlighted that the proposed tariff submitted by the company is significantly higher than current

tariffs. The management was confident that even if the regulator did not approve the tariffs

proposed by the company, it did not expect a cut in the tariffs below the current levels.

Retain REDUCE with a target price of `92; revised earnings for lower transmission volumes

We maintain our REDUCE rating given (1) 9% potential downside to our target price of `92, (2)

lack of positive triggers for any potential outperformance and (3) potential downside from cut in

GSPLs transportation tariffs for its existing network. We have revised FY2012E, FY2013E and

FY2014E EPS to `8.1, `9 and `10.7 from `8.6, `10.4 and `10.5 to reflect (1) lower gas

transmission volumes given lower gas production from RILs KG D-6 block and (2) moderatelyhigher tariffs.

GSPL (GUJS)Energy

All transmission companies seem to be bullish on the Indian gas story. GSPLmanagement (in the analyst meeting) painted a bullish scenario on (1) sharp ramp-up in

supply in the existing network, (2) good utilization levels in the recently-awarded pipelinesand (3) no cut in transmission tariffs from existing levels. We retain our REDUCE rating on

the stock given 9% potential downside to our 12-month DCF-based target price of `92.

We have revised our earnings estimates to reflect lower gas transmission volumes.

GSPL

Stock data Forecasts/Valuations 2011 2012E 2013E

52-week range (Rs) (high,low) EPS (Rs) 9.0 8.1 9.0

Market Cap. (Rs bn) 56.4 EPS growth (%) 23.1 (10.3) 11.9

Shareholding pattern (%) P/E (X) 11.1 12.4 11.1

Promoters 37.7 Sales (Rs bn) 10.5 10.3 10.6

FIIs 10.5 Net profits (Rs bn) 5.1 4.5 5.1MFs 10.6 EBITDA (Rs bn) 9.9 9.8 10.0

Price performance (%) 1M 3M 12M EV/EBITDA (X) 6.9 7.1 6.5

Absolute 0.3 9.0 1.4 ROE (%) 25.5 18.2 17.4

Rel. to BSE-30 1.2 9.7 (6.1) Div. Yield (%) 1.0 1.6 2.7

Company data and valuation summary

128-88

REDUCE

JUNE 06, 2011

UPDATE

Coverage view: Cautious

Price (Rs): 100

Target price (Rs): 92

BSE-30: 18,376

QUICK NUMBERS

Transmissionvolumes of 45mcm/d on existing

network in two

years

40% utilization infirst year of

operation of new

pipelines


14/22


We see delays in several domestic projects, which may delay domestic gas supplySupply of natural gas in India, March fiscal year-ends, 2008-17E (mcm/d)

2008 2009 2010 2011E 2012E 2013E 2014E 2015E 2016E 2017E

Mumbai High 45 46 48 48 48 48 48 48 48 48Gujarat 8 7 7 7 7 7 7 7 7 7

North-East 9 9 9 9 10 11 12 12 12 12

Rajasthan 1 1 1 1 1 1 1 1 1 1

TN/AP 7 8 7 7 7 7 7 7 7 7

Eastern offshore

KG-D6 (RIL-Niko) 39 56 50 55 70 80 80 80

KG-D3 (RIL-Hardy)

KG-D9 (RIL-Hardy)

NEC-25 (RIL-Niko) 6

Deen Dayal (GSPC) 3 5 6 6

ONGC 2 3 5 5 5 5

PY-3 0 0 0 0 0 0 0 0 0 0

Ravva 2 2 1 2 1 1 1 1 1 1

Western offshoreLakshmi 1 1 1 1 1 0 0

Panna-Mukta 6 5 5 4 6 5 5 5 4 4

Tapti 9 12 8 7 7 7 6 6 6 5

LNG and CBM

Petronet LNG - Dahej 24 24 30 33 38 38 38 46 44 44

Petronet LNG - Kochi 3 12 15 18 18

RGPPL - Dabhol 1 2 6 8 15 18

Shell Total LNG - Hazira 8 6 3 4 8 11 14 14 14 14

CBM gas 1 2 3 5 5 5

Total gas supply 120 119 160 178 186 202 237 263 272 280


GSPL's new pipelines have large capacityDetails' of GSPL's new pipelines

Length Capacity Capex Levelized tariffs

(kms) (mcm/d) (Rs bn) (Rs/mn BTU)

Mallavaram-Vijapur-Bhilwar a pipeline 1,688 52 65 29.9

Mehsana-Bhatinda pipeline 1,611 42 45 32.6

Bhatinda-Srinagar pipeline 740 31 12 9.0

Source: Company

Other updates from the analyst meeting

Tariffs for new pipelines. GSPL management disclosed the levelized tariffs for therecently awarded pipelines. Exhibit 3 gives details of the same and compares the same

with the tariffs of other pipelines approved by the regulator. We highlight that the

levelized tariffs for GSPLs new pipelines are significantly lower than the approved tariffs

for other new pipelines (RGTILs East-West pipeline and GAILs GREP upgradation).


15/22


Tariffs for GSPL's new pipelines are significantly lower versus other pipelinesTariffs for new pipelines (Rs/mn BTU)

Mallavaram-Vijapur-Bhilwara pipeline (GSPL) 29.9

Mehsana-Bhatinda pipeline (GSPL) 32.6

Bhatinda-Srinagar pipeline (GSPL) 9.0

East-West pipeline (RGTIL) 52.2

GREP upgradation (GAIL) 53.7

Source: Company, Kotak Institutional Equities

Progress on Mundra LNG terminal. GSPL is depending on the construction of MundraLNG terminal to feed its new pipelines. The management highlighted that it has already

completed the front end engineering design (FEED) work on the project. The 5 mtpa

terminal will likely take 42-48 months for completion.

Progress on Deen Dayal block. The management highlighted that it is making steadyprogress on the Deen Dayal block and is currently developing the Deen Dayal West

structure. The wellhead platform was installed on May 28, 2011 and development drilling

will commence soon. GSPC (parent company of GSPL) plans to drill nine new

development wells and expects to commence production by mid-CY2013E. The

production is expected to be at 5-6 mcm/d which is expected to increase to 10 mcm/d

subsequently.

DCF valuation of GSPL (Rs mn)

2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024EEBITDA 9,501 9,696 10,144 10,952 11,659 12,151 12,215 12,176 12,135 12,092 12,046 12,046 12,046

Adjusted tax expense (1,639) (1,654) (1,742) (2,189) (3,152) (3,442) (3,583) (3,673) (3,747) (3,809) (3,860)

Change in working capital (3,690) (968) 912 1,026 329 228 62 18 13 9 6

Operating cash flow 4,173 7,073 9,313 9,789 8,836 8,937 8,693 8,522 8,402 8,293 8,192Capital expenditure (2,705) (250) (250) (250) (250) (250) (250) (250) (250) (250) (1,942)

Free cash flow 1,468 6,823 9,063 9,539 8,586 8,687 8,443 8,272 8,152 8,043 6,250 6,250 6,250

Discounted cash flow 1,338 5,552 6,585 6,188 4,971 4,491 3,897 3,409 2,999 2,642 1,833Discounted cash flow-1 year forward 6,218 7,375 6,930 5,570 5,030 4,365 3,818 3,360 2,958 2,053 1,833

Discounted cash flow-2 year forward 8,260 7,762 6,238 5,635 4,888 4,276 3,763 3,315 2,299 2,053 1,833

Now + 1-year + 2-yearsDiscount rate (%) 12.0 12.0 12.0

Total PV of free cash flow 43,903 49,509 50,321

Terminal value assumption

Growth to perpetuity (%)

FCF in 2022E 6,250 6,250 6,250

Exit FCF multiple (X) 8.3 8.3 8.3Exit EV/EBITDA multiple (X) 4.3 4.3 4.3

Terminal value 52,087 52,087 52,087

PV of terminal value 15,274 15,274 15,274

Total company value 59,178 64,783 65,595

Net debt 12,445 12,892 8,440

Equity value 46,733 51,891 57,155

Shares outstanding (mn) 562 563 563

Estimated share price using DCF 83 92 102

Fiscal Year end (March 31, XXXX) March-12 March-13 March-14 March-15 March-16 March-17 March-18 March-19 March-20 March-21 March-22 March-23 March-24

Today 6-Jun-11 6-Jun-11 6-Jun-11 6-Jun-11 6-Jun-11 6-Jun-11 6-Jun-11 6-Jun-11 6-Jun-11 6-Jun-11 6-Jun-11 6-Jun-11 6-Jun-11

Days left 299 664 1,029 1,394 1,760 2,125 2,490 2,855 3,221 3,586 3,951 4,316 4,682

Years left 0.82 1.82 2.82 3.82 4.82 5.82 6.82 7.82 8.82 9.82 10.82 11.82 12.83

Discount factor at WACC 0.91 0.81 0.73 0.65 0.58 0.52 0.46 0.41 0.37 0.33 0.29 0.26 0.23



16/22


GSPL: Profit model, balance sheet, cash model, March fiscal year-ends, 2007-14E (Rs mn)

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

Profit model (Rs mn)Net sales 3,176 4,179 4,875 9,920 10,465 10,313 10,593 11,098

EBITDA 2,677 3,645 4,249 9,297 9,694 9,501 9,696 10,144

Other income 175 294 243 247 216 282 256 229

Interest (457) (815) (870) (938) (961) (1,365) (1,060) (582)

Depreciation (1,026) (1,632) (1,705) (2,365) (1,299) (1,561) (1,653) (1,631)

Pretax profits 1,369 1,491 1,918 6,242 7,650 6,857 7,239 8,160

Tax (70) (389) (536) (1,878) (1,351) (1,367) (1,443) (1,626)

Deferred taxation (409) (82) (145) (261) (1,235) (949) (713) (540)

Net profits 894 999 1,234 4,138 5,064 4,541 5,083 5,994

Earnings per share (Rs) 1.6 1.8 2.2 7.3 9.0 8.1 9.0 10.7

Balance sheet (Rs mn)Total equity 9,659 11,410 12,152 15,638 20,066 23,548 26,853 30,051

Deferred tax liability 917 999 1,144 1,405 2,641 3,590 4,302 4,842

Total borrowings 8,638 9,660 11,509 12,595 14,835 14,835 10,085 3,585

Currrent liabilities 1,845 5,106 5,331 8,334 7,586 5,492 4,299 4,712

Total liabilities and equity 21,059 27,175 30,137 37,973 45,128 47,464 45,540 43,190

Cash 1,811 2,569 975 1,742 2,390 1,943 1,645 1,175

Current assets 2,126 2,928 4,641 5,808 6,607 8,202 7,978 7,478

Total fixed assets 17,029 21,259 24,132 29,755 35,363 36,552 35,149 33,768

Investments 356 356 666 766 766 766 766

Deferred expenditure 93 63 33 3 2 2 2 2

Total assets 21,059 27,175 30,137 37,973 45,128 47,464 45,540 43,190

Free cash flow (Rs mn)

Operating cash flow, excl. working capital 2,212 2,743 2,918 6,367 7,314 6,724 7,193 7,936

Working capital changes (1,058) 2,460 (1,752) 1,420 (1,547) (3,690) (968) 912

Capital expenditure (4,404) (5,863) (4,579) (7,777) (6,838) (2,705) (250) (250)

Investments (356) (100)

Other income 146 297 157 216 282 256 229

Free cash flow (3,103) (659) (3,116) 167 (855) 612 6,230 8,826

Ratios (%)

Debt/equity 81.7 77.9 86.6 73.9 65.3 54.7 32.4 10.3

Net debt/equity 45.0 43.8 46.4 42.5 39.5 35.3 24.5 9.3

RoAE 8.8 8.8 9.6 27.1 25.5 18.2 17.4 18.2

RoACE 10.0 8.2 8.6 18.5 21.1 16.6 16.0 17.6

CROCI 13.5 16.9 14.8 23.2 19.9 15.4 15.4 16.3

Key assumptions

Volumes-old pipelines (mcm/d) 12.6 12.7 11.1 13.8 13.8 13.8 15.0 15.0

Volumes-new pipelines (mcm/d) 1.7 4.1 3.8 18.2 21.9 23.1 28.6 32.1

Volumes (mcm/d) 14.3 16.8 14.9 32.0 35.6 36.8 43.6 47.1

Average tariff (Rs/cu m) 0.61 0.67 0.83 0.86 0.80 0.77 0.67 0.65



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Disclosures

Kotak Institutional Equities Research coverage universeDistribution of ratings/investment banking relationships

Source: Kotak Institutional Equities As of March 31, 2011

* The above categories are defined as follows: Buy = We expect

this stock to outperform the BSE Sensex by 10% over the next 12

months; Add = We expect this stock to outperform the BSE Sensex

by 0-10% over the next 12 months; Reduce = We expect this stock

to underperform the BSE Sensex by 0-10% over the next 12

months; Sell = We expect this stock to underperform the BSE

Sensex by more then 10% over the next 12 months. These ratings

are used illustratively to comply with applicable regulations. As of

30/09/2010 Kotak Institutional Equities Investment Research hadinvestment ratings on 164 equity securities.

Percentage of companies covered by Kotak Institutional Equities,

within the specified category.

Percentage of companies within each category for which Kotak

Institutional Equities and or its affiliates has provided investment

banking services within the previous 12 months.

12.8%

32.3%

26.8% 28.0%

4.3% 4.3%3.0% 0.0%

0%

10%

20%

30%

40%

50%

60%

70%

BUY ADD REDUCE SELL

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months.

ADD.We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months.

REDUCE. We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months.

SELL. We expect this stock to underperform the BSE Sensex by more than 10% over the next 12 months.

Our target price are also on 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analysts overall fundamental outlook on the Sector. The coverage view will consist of one of the following

designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable

regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic

transaction involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient

fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock

and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.


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3. Note that the research analysts contributing to this report may not be registered/qualified as research analysts with FINRA; and4. Such research analysts may not be associated persons of Kotak Mahindra Inc and therefore, may not be subject to NASD Rule 2711 restrictions on

communications with a subject company, public appearances and trading securities held by a research analyst account.

Kotak Securities Limited and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We along with

our affiliates are leading underwriter of securities and participants in virtually all securities trading markets in India. We and our affiliates have investment banking

and other business relationships with a significant percentage of the companies covered by our Investment Research Department. Our research professionals

provide important input into our investment banking and other business selection processes. Investors should assume that Kotak Securities Limited and/or its

affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research

professionals who were involved in preparing this material may participate in the solicitation of such business. Our research professionals are paid in part based on

the profitability of Kotak Securities Limited, which include earnings from investment banking and other business. Kotak Securities Limited generally prohibits its

analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that

the analysts cover. Additionally, Kotak Securities Limited generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or

advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals may provide oral or written market commentary

or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may

make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of

the foregoing, among other things, may give rise to real or potential conflicts of interest. Additionally, other important information regarding our relationships with

the company or companies that are the subject of this material is provided herein.

This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would

be illegal. We are not soliciting any action based on this material. It is for the general information of clients of Kotak Securities Limited. It does not constitute a

personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice

or recommendation in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The

price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any

investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Kotak Securities

Limited does not provide tax advise to its clients, and all investors are strongly advised to consult with their tax advisers regarding any potential investment.

Certain transactions -including those involving futures, options, and other derivatives as well as non-investment-grade securities - give rise to substantial risk and are

not suitable for all investors. The material is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it shouldnot be relied on as such. Opinions expressed are our current opinions as of the date appearing on this material only. We endeavor to update on a reasonable basis

the information discussed in this material, but regulatory, compliance, or other reasons may prevent us from doing so. We and our affiliates, officers, directors, and

employees, including persons involved in the preparation or issuance of this material, may from time to time have long or short positions in, act as principal in,

and buy or sell the securities or derivatives thereof of companies mentioned herein. For the purpose of calculating whether Kotak Securities Limited and its affiliates

holds beneficially owns or controls, including the right to vote for directors, 1% of more of the equity shares of the subject issuer of a research report, the holdings

does not include accounts managed by Kotak Mahindra Mutual Fund. Kotak Securities Limited and its non US affiliates may, to the extent permissible under

applicable laws, have acted on or used this research to the extent that it relates to non US issuers, prior to or immediately following its publication. Foreign currency

denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of or income derived from the

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options involve risks and are not suitable for all investors. Please ensure that you have read and understood the current derivatives risk disclosure document before

entering into any derivative transactions.

This report has not been prepared by Kotak Mahindra Inc. (KMInc). However KMInc has reviewed the report and, in so far as it includes current or historical

information, it is believed to be reliable, although its accuracy and completeness cannot be guaranteed. Any reference to Kotak Securities Limited shall also be

deemed to mean and include Kotak Mahindra Inc.

06 june 2011 india daily

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