d:velsdaily morning brief 1aprmorning insight 5 apr...

APRIL 5, 2011

Economy News4 The Supreme Court issues a notice to the central government on the

appeal of the Federation of Indian Airlines (FIA) challenging on the newground handling policy, which was scheduled to come into force fromApril 1. The SC has sought an explanation from government on why thepresent system was being disturbed when it was working efficiently. Thecourt will hear the case again on April 25 after receiving the reply of thecivil aviation ministry and other authorities. (BL)

4 The price of the Indian basket of crude averaged $85.09 per barrel in2010-11, up 22 per cent from the $69.8 per barrel in 2009-10. Thisresulted in an estimated gross loss of Rs 780 Bn for the public sector oilmarketing companies (OMCs) — Indian Oil, Bharat Petroleum andHindustan Petroleum in the previous financial year. (BS)

4 The Union health ministry has constituted a taskforce to address issuesfaced by the pharmaceutical industry and evolve a long-term strategy forthe sector. Prevention of takeover of domestic pharma companies byMNCs is one of the areas that the taskforce will look at. (BS)

4 The Securities and Exchange Board of India (Sebi) will address theconcerns of the central bank while framing the guidelines for allowingforeign individual investors to invest directly in registered mutual funds.(BS)

Corporate News4 Tata Motors which sold 8,707 units in March 2011, nearing its all-time

peak of 9,000 units sold in July last year,would double production plansfor the small car by up to 20,000 units a month in FY12. (BL)

4 Bharat Heavy Electricals Ltd (BHEL) announced a 40 % rise in netprofit to Rs 60.21 Bn in FY11. BHEL has a capex programme of Rs 17 Bn inFY12. It secured record orders worth Rs 605.07 Bn in FY11 taking thefigure for total orders in hand to Rs 1.64 Tn. (BS)

4 Hyderabad-based GVK group has been shortlisted to acquire HancockCoal. GVK has signed an exclusivity pact; deal size likely at $8 billion. (BS)

4 Suzlon Energy which owns 95.16 % stake in REpower through itssubsidiary AE-Rotor Holding BV (AERH) directly and indirectly has initiatedsteps to acquire the remaining stake in the German entity. (BL)

4 Aditya Birla Group which owns 47% stake in Idea Cellular had deniedselling stake in the company as reported by Bloomberg. (ET)

4 Gravita India has acquired 60% stake in Jammu- based KM Udyog, whichhas an installed lead manufacturing and refining capacity of 7,200 tonneper annum. The addition of KM Udyog, Jammu, is expected to improvethe top and bottom line of the company by around Rs 650 Mn and Rs 30Mn respectively in FY12. (ET)

4 SpiceJet will recruit 150 pilots and 300 cabin crew to launch the regionalservice connecting smaller towns with metro cities in south India in nearterm. The airline currently has 15 Bombardier Q400 turboprop aircraft onorder for the same. (ET)

4 L&T Finance Holding has filed the draft paper with Securities andExchange Board of India (Sebi) for an Rs 17.5 Bn IPO. (ET)

4 Edinburgh-based Cairn Energy Plc will need to take consent of partnerONGC before selling its majority stake in its Indian unit to Vedanta, OilSecretary S Sundareshan said today. (BS)

Equity% Chg

4 Apr 11 1 Day 1 Mth 3 Mths

Indian Indices

SENSEX Index 19,702 1.4 6.6 (3.0)NIFTY Index 5,908 1.4 6.7 (2.8)BANKEX Index 13,424 1.8 7.9 4.6

BSET Index 6,660 2.2 6.9 (2.7)BSETCG INDEX 13,662 2.4 5.5 (10.1)BSEOIL INDEX 10,301 1.2 6.7 (3.6)

CNXMcap Index 8,227 1.2 7.5 (6.4)BSESMCAP INDEX 8,595 2.8 7.4 (11.8)

World Indices

Dow Jones 12,400 0.2 1.9 5.8Nasdaq 2,789 (0.0) 0.2 3.2FTSE 6,017 0.1 0.4 (0.4)

Nikkei 9,719 0.1 (10.2) (7.5)Hangseng 23,802 - 3.2 1.7

Value traded (Rs cr)4 Apr 11 % Chg - Day

Cash BSE 3,180 8.6Cash NSE 11,919 (3.8)Derivatives NA NA

Net inflows (Rs cr)1 Apr 11 % Chg MTD YTD

FII 1,044 (30.5) 6,967 (3,118)

Mutual Fund (359) 43.9 28 2,052

FII open interest (Rs cr)1 Apr 11 % Chg

FII Index Futures 16,544 (14.8)

FII Index Options 41,911 (29.0)FII Stock Futures 30,178 (7.2)FII Stock Options 383 (66.3)

Advances / Declines (BSE)4 Apr 11 A B S Total % total

Advances 177 1,935 322 2,434 85Declines 26 339 111 365 13

Unchanged 1 55 17 73 3

Commodity % Chg

4 Apr 11 1 Day 1 Mth 3 Mths

Crude (NYMEX) (US$/BBL) 108.3 (0.2) 3.7 19.9Gold (US$/OZ) 1,433.6 0.5 0.6 4.4Silver (US$/OZ) 38.5 2.1 9.8 32.1

Debt / forex market4 Apr 11 1 Day 1 Mth 3 Mths

10 yr G-Sec yield % N/A N/A 7.93 8.07Re/US$ 44.59 44.76 45.27 44.71

Sensex

Source: ET = Economic Times, BS = Business Standard, FE = Financial Express,BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange

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Apr-10 Jul-10 Oct-10 Jan-11 Apr-11

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2

MORNING INSIGHT April 5, 2011

BHELPRICE: RS.2174 RECOMMENDATION: ACCUMULATETARGET PRICE: RS.2632 FY12E P/E: 15.1X

q BHEL's provisional results for FY11 are in line with expectations ifadjusted for accounting changes. For the quarter, revenue and earninggrowth is up 33% and 47% yoy respectively.

q Order intake in Q4 at Rs.239.8 bn is up 6% yoy. Stock performance hasbeen a function of momentum in order intake. However, due to highbase of previous year and significant completion of 12th plan orders,order intake has been more or less the same as in FY10, which is in turntranslating into subdued stock performance. BHEL has to further contendwith rising competition to its market share for 12th plan orders.However, management has guided for 10% increase in order intake inFY12, optimistic in our view.

q We regard BHEL as a value BUY given reasonable valuations, earningsvisibility, substantial cash surplus and market leadership. Concernsinclude moderating growth in order intake, upcoming competitiondomestic players and continued preference of Chinese sets by some largeprivate players. We value the stock based on DCF and arrive at a targetprice of Rs 2632.

The Provisional results summary

(Rs mn) FY11 FY10 % change Q4FY11 Q4FY10 % change

Revenue 434510 341540 27.2 193359 145258 33.1

PBT 90160 65910 36.8 42984 28986 48.3

PAT 60210 43110 39.7 28078 19099 47.0

Source: Company

Strong quarterly numbers even if adjusted for accountingchangesFor the quarter, the company registered revenues of Rs 193.3 bn driven by robustexecution of orders as also contribution from change in accounting policy (Rs 20 bnfor the quarter).

The company reported PBT of Rs 42.9 bn, up 48% for the fourth quarter.Contribution of change in accounting policy at PBT level for the quarter was Rs 3.26bn.

Accounting changes pertaining to treatment of WarrantyprovisionsDuring the year, the company changed its Accounting Policy on Provision forWarranty Obligation for Construction Contracts.

Previously, the company would replace the provision for contractual obligation @2.5% of contract value on completion of trial production with equivalent provisionfor Warranty Obligation.

However, on review of provisions, the company found that the total provision foroutstanding contracts ranged between 1% to 5% of contract value (as against2.5%). To correct this anomaly and to ensure that provisions reflect 2.5% ofcontract value, the company reviewed the accounts and concluded that estimatedcosts were more than actual costs and hence the reversal in provisions.

Summary table

(Rs mn) FY10 FY11E FY12E

Sales 333,549 434,510 487,044Growth (%) 24.8 30.3 12.1EBITDA 49,859 89,420 105,875

EBITDA margin (%) 14.9 20.6 21.7PBT 65,904 90,160 106,946Net profit 43,104 60,210 70,585

EPS (Rs) 88.1 123.0 144.2Growth (%) 37.3 39.7 17.2CEPS (Rs) 97.4 134.7 157.0

BV (Rs/share) 325.2 421.0 538.0Dividend/share (Rs) 23.3 23.3 23.3ROE (%) 27.1 29.2 26.8

ROCE (%) 35.4 43.6 40.5Net cash (debt) 96,624 94,947 143,524NW Capital (Days) 7.7 38.9 34.6

EV/Sales (x) 2.9 2.2 1.9EV/EBITDA (x) 19.4 10.8 8.7P/E (x) 24.7 17.7 15.1

P/BV (x) 6.7 5.2 4.0

Source: Company, Kotak Securities - PrivateClient Research

PROVISIONAL RESULT UPDATE

Sanjeev [email protected]+91 22 6621 6305



Furthermore, the company moved to providing Warranty cost at 2.5% of therevenue progressively as and when it recognizes the revenue and maintains thesame through the warranty period. This is against the earlier policy of deferringwarranty provision and corresponding revenue till the completion of Trial Operation.

The impact of the above change, considered in the results are:

a) Increase in Turnover by Rs.24.6 bn.

b) Increase in Profit Before Tax by Rs.4.1 bn.

Company meets guidance on order intake in FY11. Expects 10%increase in orders in FY12BHEL managed to meet its order intake guidance for FY11 at Rs 600 bn aidedmainly by 10% rise in power sector orders. Order intake may be partly supported byincrease in "EPC" (close to Rs.40 mn/MW) orders in the order book as against"BTG" (approx Rs 24 mn/MW). During the year, the company bagged 1600 MWRaichur Power Corp order and KPCL Bellary order on EPC basis.

Ongoing power projects based on Supercritical technology

MW

NTPC Barh stage II 1320

JP Bara 1980

Raichur Power Corp (EPC) 1600

Raichur Power Corp 800

KPCL Bellary (EPC) 700

Source: Company

Order intake for Q4 FY11 stood at Rs 239.8 bn up 6% yoy and for the full year itstood at Rs.600 bn vs Rs.590 bn in FY10.

Order intake in the fourth quarter was driven by 2x660 MW order for STG fromNTPC/DVC, APGENCO (600 MW, Rs.14.4 bn), Bajaj Hindustan (1980 MW, Rs.54 bn)and Sagardighi (1000 MW, Rs.32.2).

Order backlog at Rs 1641.3 bn is highest ever and translates into a revenue visibilityof 49.5 months of trailing four quarter revenues.

In terms of segment, the company received orders worth Rs 463 bn from the powersector, equivalent to 15071 MW.

The company is assured of 5-6 boiler units of 660 MW when NTPC opens the bulktender. The ordering of this tender has been delayed due to dispute between NTPCand Ansaldo. Post Delhi HC ruling in favour of Ansaldo, NTPC has referred thematter to the Supreme Court and a decision is expected in the current month. Alsoscheduled in the current fiscal is the 9x800 MW bulk tender from NTPC. BHEL wouldbe counting on these two tenders for meeting its order intake target for FY12.

OutlookThe BHEL stock has been derated due to stagnation in order intake and threat ofcompetitive pressure. At the current price, BHEL is trading at 15.1x FY12 earnings.We maintain our DCF based price target of Rs 2632.

ConcernsBHEL enjoys close to 60% market share in domestic power generation equipmentmarket, which may come under pressure following the entry of new players.However, the company contends that new entrants will have to cope with highercost of imported components. BGR-Hitachi JV and L&T-MHI JV would have to copewith appreciation in Yen vs Rs.

We recommend BUY on BHELwith a price target of Rs.2632



OIL & GAS INDUSTRY OVERVIEW

Key observationsUncertainty and fear driving the oil price higher.

Brent crude oil price surged to USD$120/bbls (05th April'11), the key factorssupporting the oil prices are the prolonged disruption in Libya, Bahrain,Yemen, Syria, concern of unrest spreading to other oil rich countries such asSaudi Arabia (second largest crude producer today, after Russia) and dollardepreciation.

We believe the two major events influencing the oil price in the short termare disruption in Libya (supply side) and devastating tsunami in Japan(demand side). We expect the implication will be two-tiered. First, thedisaster will cause a temporary reduction in Japanese oil demand, partlyoffsetting the Libyan supply shortfall, Second, in the longer term it isexpected that the Japanese disaster will cause oil demand to rebound whenthey get underway reconstruction efforts to partly cover the losses fromnuclear power generation.

In Mar'11, OPEC total crude oil supply decreased by 143k bopd (YoY) to 29.02 Mnbopd with Libya's crude supply falling by 1.135 Mn bopd (YoY) to 390k bopd,Angola's supply falls by 185k bopd (YoY) to 1.75 Mn bopd.

On the other hand, due to the loss of refining capacity in Japan (two refineries withcapacity of ~4.5 Mn bopd are shut) the price of refined products has increased as aresult world over refiners is seeing their gross refining margins improving. InMarch'11, the Singapore refining margin has improved by 16.5% (MoM) toUSD$7.2/bbls, similarly, Gas oil price has increased by 11.6% (MoM) to USD$133.4/bbls, followed by Naphtha price increased by 9.9% (MoM) to USD$107.4/bbls.

We believe rising crude oil price will lead to higher under-recoveries for OMCs(BPCL, HPCL and IOC) as the government had not increased retail fuel price due tohigh inflation and state elections. However, complex refineries (RIL, Essar, MRPL)are expected to declare major surge in refining margins due to higher product priceand wide spread between sweat and sour crude.

There are multiple factors which can bring down the crude oil prices such as step-ping down of Libyan leader Muammar Qaddafi, an early ending to QE2, a strength-ening US Dollar, and profit taking in some of the commodity related funds that in-clude Gold, Silver, and Oil.

Sensex v/s Oil and Gas sector performance analysisIn the last one month, Sensex had given a return of 6.6% whereas Bse Oil and GasIndex had given 6.7% return. In March'11, Essar Oil (acquired Shell refinery) hadgiven the highest return of 15.6% followed by Aban Offshore 12.5% (higher crudeprices improved exploration outlook), Shiv-vani oil 11.5% and Gujarat Gas 9.3%.Ageis logistics was the only stock in the oil and gas space which had given negativereturns.

Share Price Performance (%)

Companies 1M 3M 6M 1Y

RIL 4.8 (2.1) 2.8 (2.1)ONGC 7.0 (9.0) 2.8 (2.1)CAIRN 3.1 6.5 4.7 6.5

GAIL 4.2 (9.6) (4.4) (9.6)IOCL 7.1 (2.8) (20.4) (2.8)BPCL 3.7 (8.0) (19.8) (8.0)

HPCL 7.4 (10.0) (31.5) (10.0)Essar Oil 15.6 (7.8) (3.9) (7.8)Aban 12.5 (21.4) (24.6) (21.4)

Shivvani 11.5 (25.0) (36.1) (25.0)IGL 3.0 (11.6) (6.8) (11.6)PLNG 7.0 0.2 15.1 0.2

OIL 9.6 (20.0) (29.1) (20.0)GGAS 4.1 (2.9) (3.5) (2.9)GUJS 9.3 (13.6) (9.0) (13.6)

Ageis (1.8) (15.7) (20.7) (15.7)

Source: Bloomberg

INDUSTRY OVERVIEW

Sumit [email protected]+91 22 6621 6313

Details

BSE Oil and Gas INDEX (9 Stocks)

BSE Oil and Gas Index 10241

Market Cap. (Rs. Tn.) 87Index PE (x) 12.84Index PB (x) 2.18

BSE Sensex (30 Stocks)

BSE Sensex 19445Market Cap. (Rs. Tn.) 295Index PE (x) 17.3

Index PB (x) 3.4As on 31st March'11

Source: BSE and Bloomberg



Sector Synopsis

Particulars Unit Mar Mar Feb MoM YoY2011 2010 2011 (%) (%)

Oil and Gas

Brent Crude Oil $/bbls 114.9 79.2 103.9 10.5 45.0

Henry Hub Natural Gas Price $/mmbtu 3.97 4.29 4.10 (3.2) (7.4)

Spreads

WTI - Brent $/bbls -10.9 0.7 -10.0 9.8 -1714.2

Brent - Henry Hub Natural Gas $/boe 88.9 54.0 79.7 11.6 64.8

Brent-Dubai $/bbls 5.9 2.57 4.50 31.1 130.0

Arab Light-Heavy $/bbls 8.2 4.2 6.1 35.1 95.4

Dollar Index X 76 81 78 -1.9 -5.4

Refining Margins

Singapore Refining Margins $/bbls 7.2 3.7 6.2 16.5 91.1

Product Prices

Light Distillates

Naphtha Price $/bbls 107.4 80.0 97.8 9.9 34.2

Gasoline 92 Octane Price $/bbls 118.8 88.3 109.6 8.4 34.5

LPG $/ton 844 721 814 3.7 17.1

Middle Distillates

Gasoil 50 PPM Sulfur $/bbls 133.4 88.6 119.5 11.6 50.6

Jet/Kero $/bbls 131.9 87.5 120.1 9.8 50.8

Heavy Distillates

High Sulfur Residual Oil 380 Centistoke $/ton 633 459 597 6.1 37.9

Product Spreads

Naphtha-Crude $/bbls -1.1 2.7 -2.5 54.4 -142.9

Gasoline 92-Crude $/bbls 10.2 11.0 9.4 8.9 -6.8

Gasoline 92-Naphtha $/bbls 11.4 8.3 11.9 -4.4 36.9

Gasoil-Crude $/bbls 21.8 10.4 17.1 27.5 110.3

Jet/Kero-Crude $/bbls 23.3 10.1 19.8 17.3 130.9

Jet/Kero-Gasoil $/bbls 1.5 -0.3 2.7 -46.4 611.4

Source: Bloomberg



Brent Crude Price Movement

Particulars Mar'11 Mar'10 Feb'11 MoM (%) YoY (%)

Brent Crude Oil 114.9 79.2 103.9 10.5 45.0

Source: Bloomberg

OIL AND GAS SECTOR UPDATE

Dated Brent Crude Oil Price (USD$/bbls)

Source: Bloomberg

Crude oil prices on a roller coasterThe series of events like supply disruption in Libya followed by near-term disruptionof oil demand in Japan have sent crude oil prices on a roller coaster. If we look atthe prices just before Libya issue (14th Feb'11), Brent was around $103/bbls, how-ever post that Brent increased almost $14/bbls (02 Mar'11).

Brent crude oil price remained firm to USD$120/bbls; key factors pushing the oilprices higher are the escalating Middle East tension, unrest in Bahrain and North Af-rican crisis, also concerns about the spread of unrest across the Middle East and G-7 nation intervene in currency markets. IEA estimated the output loss in Libya at~1.3 Mn bopd. Though Bahrain is not a major oil producer but it's geographicallylocation is critical. Two major events which are influencing crude oil price in theshort term are disruption in Libya (supply side, IEA estimated the output loss in Libyaat ~1.3 Mn bopd) and devastating earthquake and tsunami in Japan (demand side).

Demand Side:Brief background:

Japan, the world's third largest economy, has suffered one of the worst earthquakes(8.9 magnitude earthquake) followed by a tsunami. It contributes ~8.7% to the glo-bal GDP, with total trade of ~US$ 27.6 Tn. Its total trade to India is US$464bn.However, on a positive side the earthquakes and tsunami had spared its industrialheartland.

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Japan earthquake

Source: The New York Times

Japan depends significantly on nuclear power to meet its electricity needs

Source: EIA and Kotak Securities - Private Client Research

Japan has few domestic energy resources, and imports significant quantities of coal,crude oil, and liquefied natural gas. In 2009, Japan produced 27% of its electricityfrom nuclear power.

Supply Side:

Key factor pushing prices up:Brent crude oil prices surged due to the concern that Libya's violence can disruptexports from Africa's third biggest supplier and spread to other crude producing na-tion is west Asia.

Libya is a major energy exporter, especially to EuropeIn 2010, Libya produced around 1.8 Mn bopd of crude oil (North Africa's secondlargest producer of crude oil and liquids) and exported ~83% of its production tovarious counties in the world. As per EIA data, ~ 85% of Libyan oil exports go toEurope, including Italy (28%), Germany (10%), France (15%), and Spain (10%).About 3% (150,000 bbl/d) of China's oil imports came from Libya in 2010.

Due to civil unrest in Libya from mid-Feb'11, Libyan oil and natural gas productionhas been cut by 60 to 90 percent, affecting Libya's energy exports. Oil exports havefallen with production and Libya's natural gas exports to Italy via the Green streampipeline stopped in late Feb'11.

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Nuclear

Coal

Natural Gas

Petroleum

Hydro

Other Renewables



Chart showing region wise crude oil exports from Libya (Mn Bpd)

Source: EIA and Kotak - Private Client Research

Liquid fuels production in MENAIn 2010, MENA (Middle Eastern and North African) countries exported ~30 Mn bopd(more than one-third of the estimated world daily supply of 86.3 Mn bopd) of liquidfuels. Three countries: Saudi Arabia (10.07 Mn bopd), Iran (4.25 Mn bopd), and theUnited Arab Emirates (2.81 Mn bopd), accounted for about 57 percent of totalMENA liquid fuels production on average between Jan and Nov'10. Together, Alge-ria and Libya comprised about 5 percent of global liquid fuels production, or nearly 4Mn bopd.

Liquid fuels production in MENA

Source: EIA

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Henry Hub Natural Gas Spot Price (USD$/mmbtu)

Source: Bloomberg

n In 2009, Libya produced an estimated 562 billion cubic feet (Bcf) of dry naturalgas, one third of which is domestically consumed. Libya exports the remainder ofits natural gas.

n Libya became a liquefied natural gas (LNG) exporter in 1971, the second countryin the world to export LNG after Algeria.

n All Libyan natural gas exports go to Europe. In 2009, Libya exported 349 Bcf, thevast majority by pipeline, with a small volume exported in the form of LNG.

n Libyan natural gas accounted for 13% of total Italian gas imports in the first 11months of 2010, the top destination country, according to the International En-ergy Agency.

Henry Hub Natural Gas Price Movement


Henry Hub Natural Gas Price 4.0 4.3 4.1 (3.2) (7.4)

Source: Bloomberg

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WTI and Brent Crude Oil Spread ($/bbls)


WTI less Brent Crude Oil (10.9) 0.7 (10.0) 9.8 (1,714.2)

Source: Bloomberg

WTI vs Brent

Source: Bloomberg

The spread between Brent and WTI crude oil continues to widen, with Brent oilprices trading at around a $11/bbls premium to WTI.

US West Texas Intermediate (WTI) and ICE Brent crude (Brent) are the world's twomain oil price benchmarks. Brent is a light crude oil but WTI is lighter. Hence, WTItypically trades at a premium to Brent, reflecting its superior, lower-sulfur composi-tion and also the additional cost of shipping crude to the US, until recently.

Perspective from Indian MarketsThe Indian crude oil basket consists of average of Oman & Dubai and Brent crude oilin the ratio of 67.6 (Sour) and 32.4 (Sweat) as on 1st April'10. Hence, with thesurge in Brent crude oil prices and also Dubai crude, the Indian crude oil price hasalso increased.

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Crude oil and Natural Gas Spread (USD$/boe)

Source: Bloomberg, Kotak Securities - Private Client Research

The above chart shows that the spread between Brent crude oil and Henry HubNatural gas price had already touched the last three years high. This reflects that thenatural gas prices failed to keep pace with the price of crude oil mainly on accountof fear of shale gas supply glut in the US and major spurt in crude oil prices due togeo-political tension.

Brent Crude Oil and Henry Hub Natural Gas Price Spread Analysis


Brent - Henry Hub Natural Gas 88.9 54.0 79.7 11.6 64.8

Source: Bloomberg

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Brent vs Dubai Crude Oil Spread (USD$/bbls)


BDCS is trading above the last three years average price and is expected to remainhigh.

Brent crude oil is lighter crude as compared to Dubai crude, so Brent crude oil tradesat a premium to Dubai crude oil. All complex refineries have the capacity to processheavy crude like Dubai crude. The spread between the heavy crude and light crudeoil gives an indication of the incremental margins that a complex refinery will makeover the simple refinery.

As opined earlier, the companies having complex refining capacity like RIL, EssarOil, MRPL had shown significant improvement in GRMs in Q4FY11.

Brent and Dubai Crude Oil Spread


Brent-Dubai 5.9 2.6 4.5 31.1 130.0

Source: Bloomberg

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Arab Light & Heavy Spread (USD$/bbls)

Source: Bloomberg

The chart reflects that ALHS is trading slightly above the last three years averageprice from quite some time. However, on sequential basis it had increased by35.1%.

Brent Forward Curve (USD$/bbls)

Source: Bloomberg

Henry Hub Gas Forward Curve ($/mmbtu)

Source: Bloomberg

Arab Light and Heavy Crude Oil Spread


Arab Heavy-Light 8.2 4.2 6.1 35.1 95.4

Source: Bloomberg

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Relationship between Dollar Index and Crude Oil


During the period under-review, the correlation between Dollar Index and Crude oilis - 0.76 which reflects strong inverse relation.

n All global commodities are mainly traded in US dollar. Hence, price of dollar-denominated commodities tend to rise when the US currency weeks i.e. thereexists an inverse relationship between the US dollar and the other asset classes.

n The US dollar Index tracks the US currency's progress against a basket of sixleading currencies - EUR (Euro), JPY (Japanese yen), GBP (Pound sterling), CAD(Canadian dollar), CHF (Swiss franc) and SEK (The Swedish krona).

n The US Dollar Index (USDX) indicates the general intrinsic value of the USD. TheUSDX does this by averaging the exchange rates between the USD and six majorcurrencies.

Hence, one of the key factors strengthening the crude oil prices is the weakening ofthe US Dollar.

Brent Crude Oil Price and Dollar Index Relation


Dollar Index 76.3 80.7 77.8 (1.9) (5.4)

Source: Bloomberg

30

65

100

135

170

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Dollar Index Brent



Singapore Refining Margins (USD$/bbls)

Source: Bloomberg, Kotak Securities - Private Client Research; Note: We have calculated refiningmargins based on the data available on the Bloomberg. However, we have not considered refiningcost in the same. Singapore is Asia's biggest oil-trading and storage center.

n The surge in refining margin was led by an increase in Naphtha spread (54.4%,MoM), Gasoil spread (27.5%, MoM) and Jet/Kero-spread (17.35%, MoM).

Refining Margins


Singapore Refining Margins 7.2 3.7 6.2 16.5 91.1

Source: Bloomberg

-4

0

4

8

12

16

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11



Petroleum Product-wise Spreads

A). Light Distillates

Naphtha Prices


Naphtha Price 107.4 80.0 97.8 9.9 34.2

Source: Bloomberg

Naphtha Spot Price (USD$/bbls)

Source: Bloomberg

Naphtha and Crude oil Spread (USD$/bbls)

Source: Bloomberg

Naphtha and Dubai Crude Spread


Naphtha-Crude (1.1) 2.7 (2.5) 54.4 (142.9)

Source: Bloomberg

0

40

80

120

160M

ar-0

8

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Naphtha Spot Prices Max Min 3-Years Avaerge

-30

-15

0

15

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Naphtha and Crude Spread Max Min Mean



Gasoline 92 Octane Price (USD$/bbls)

Source: Bloomberg

n In summers demand for gasoline is expected to go up in US. Also, the retailprices in US are expected to increase due to seasonal changes such as the shiftfrom winter to more expensive summer-grade gasoline.

Gasoline 92 Dubai Oil Spread (USD$/bbls)

Source: Bloomberg

Gasoline 92 Octane Prices


Gasoline 92 Octane Price 118.8 88.3 109.6 8.4 34.5

Source: Bloomberg

Gasoline 92 and Dubai Crude Spread


Gasoline 92-Crude 10.2 11.0 9.4 8.9 (6.8)

Source: Bloomberg

0

40

80

120

160

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Gasoline Singapore 92 Octane Max Min 3-Year Average

-10

-5

0

5

10

15

20

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Spread Max Min 3-Year Average



Gasoline to Naphtha Spread (USD$/bbls)

Source: Bloomberg

n Asian gasoline's premium to naphtha has fallen by 4.4% (MoM). Gasoline's pre-mium to naphtha reduced to $11.4 a barrel. A wider reforming margin meansthe profit from turning naphtha into gasoline is increasing.

n Currently, GNS is trading above its last three years average spread.

n Naphtha is used primarily as feedstock for producing a high-octane gasolinecomponent via the catalytic reforming process. The reforming margin (gasoline'spremium to naphtha) measures increased demand for chemicals used plasticpipes to shopping bags.

n Bigger gap signals naphtha is less valuable to refiners relative to gasoline. A nar-rower reforming margin could prompt Asia's refiners to switch to naphtha fromgasoline.

Asia Gasoline's Premium to Naphtha


Gasoline 92-Naphtha 11.4 8.3 11.9 (4.4) 36.9

Source: Bloomberg

-7

0

7

14

21

28

35

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Gasoline to Naphtha Spread Max Min Mean



LPG Price Movement (USD$/Ton)

Source: Bloomberg; Kotak Securities - Private Client Research

n After touching 3-years high, LPG price is now trading below its peak in the lastthree years. LPG is the generic name for propane and butane gas. The mixture ispredominantly propane in winter and butane in summer.

n India is the largest consumer of LPG in Southeast Asia, and it meets its domesticdemand by importing about 3Mn MTPA of cooking gas. The country's depen-dence on LPG imports is increasing due to a 5-8% annual growth in consump-tion.

n We expect the demand will soar with the implementation of the Rajiv GandhiLPG Vitrak Yojana that envisages covering 75% of India's population by 2015.

Liquefied Petroleum Gas (LPG) Prices


LPG ($/ton) 844.0 721.0 814.0 3.7 17.1

Source: Bloomberg

300

550

800

1050

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

.LPG U Index Max Min 3-Years Average



B). Middle Distillate

Gasoil/Diesel 50 PPM Sulfur


Gas oil 50 PPM Sulfur 133.4 88.6 119.5 11.6 50.6

Source: Bloomberg

Diesel (50 PPM Sulfur) Price Movement

Source: Bloomberg

n Currently, the diesel price is trading far above the last three years average price.

Gas oil and Dubai Crude Spread


Gas oil-Crude 21.8 10.4 17.1 27.5 110.3

Source: Bloomberg

Gasoil and Dubai Crude Spread (USD$/bbls)

Source: Bloomberg

40

80

120

160

200

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Diesel Max Min 3-Years Average

0

10

20

30

40

50

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Gasoil and Dubai crude spread Max Min 3-Years Average



n Currently, the Jet Kerosene fob spot price is trading above the last three yearsaverage.

n We believe that with the improvement in the economy the demand for Jet fuelwill increase.

JET/KERO


Jet/Kero 131.9 87.5 120.1 9.8 50.8

Source: Bloomberg

JET / Kero Spot Prices (USD$/bbls)

Source: Bloomberg

Jet/Kero Dubai Crude Oil Spread


Jet/ Kero-Crude 23.3 10.1 19.8 17.3 130.9

Source: Bloomberg

Jet/Kero and Dubai Crude Spread (USD$/bbls)

Source: Bloomberg

n Currently, JDCS is trading above its last three years average spread.

0

50

100

150

200

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

JET/Kero Max Min Mean

0

10

20

30

40

50

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Jet Kero Dubai spread Max Min 3-Years Average



Jet Fuel to Gasoil Spread (USD$/bbls)

Source: Bloomberg

n Jet fuel premium to gasoil widening indicates aviation-fuel production is moreprofitable compared with diesel and vice-versa.

Jet fuel to Gasoil Spread


Jet / Kero-Gasoil 1.5 (0.3) 2.7 (46.4) 611.4

Source: Bloomberg

-6

-3

0

3

6

9

12

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Jet fuel to gasoil spread Max Min Mean



Sensex Vs Oil & Gas Sector Performance

Sensex and Oil and Gas Index Performance

Source: ACE Equity

n The correlation between Sensex and Bse Oil and Gas Index is ~ 90.6%.

n In the last one month, Sensex has given a return of 6.6% and Bse Oil and GasIndex has given a return of 6.7%.

n We are bullish on Cairn India, Selan Exploration and HOEC and believe thisrising crude oil prices will improve the margins.

C). Heavy Distillate

Fuel Oil Prices


High Sulfur Residual Oil

380 Centistoke 633.1 459.0 596.8 6.1 37.9

Source: Bloomberg

High Sulfur Residual Oil 380 Centistoke Prices (USD$/MT)

Source: Bloomberg

150

250

350

450

550

650

750

850

Feb

-08

Aug

-08

Feb

-09

Aug

-09

Feb

-10

Aug

-10

Feb

-11

Fuel Oil Max Min 3-Years Average

40

60

80

100

120

140

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

BSE OIL Sensex



1M Performance

Source: Bloomberg

Share Price Performance of Oil & Gas Companies

3M Performance

Source: Bloomberg

6M Performance

Source: Bloomberg

1Y Performance

Source: Bloomberg

4.8

3.1

4.27.1

3.7

7.415.6

12.511.5

3.07.0

9.64.1

9.3-1.8

7.0

-5 0 5 10 15 20

RIL

ONGCCAIRN

GAILIOCL

BPCL

HPCLEssar Oil

AbanShivvani

IGLPLNG

OIL

GGASGUJS

Ageis

-2.1

6.5

-9.6

-2.8

-8.0

-10.0

-7.8

-21.4

-25.0

-11.6

0.2

-20.0

-2.9

-13.6

-15.7

-9.0

-30 -25 -20 -15 -10 -5 0 5 10

RIL

ONGC

CAIRN

GAIL

IOCL

BPCL

HPCL

Essar Oil

Aban

Shivvani

IGL

PLNG

OIL

GGAS

GUJS

Ageis

2.8

4.7

-4.4

-20.4

-19.8

-31.5

-3.9

-24.6

-36.1

-6.8

15.1

-29.1

-3.5

-9.0

-20.7

2.8

-40 -30 -20 -10 0 10 20

RIL

ONGC

CAIRN

GAIL

IOCL

BPCL

HPCL

Essar Oil

Aban

Shivvani

IGL

PLNG

OIL

GGAS

GUJS

Ageis

-2.1

6.5

-9.6

-2.8

-8.0

-10.0

-7.8

-21.4-25.0

-11.6

0.2-20.0

-2.9

-13.6

-15.7

-2.1

-30 -25 -20 -15 -10 -5 0 5 10

RIL

ONGCCAIRN

GAIL

IOCL

BPCL

HPCL

Essar OilAban

Shivvani

IGLPLNG

OIL

GGASGUJS

Ageis



India’s Refining Capacity Utlisation

Source: Ministry of Petroleum & Natural Gas

Refinary capacity utilization

Particulars Feb'11 Feb'10 Jan'11 MoM (%) YoY (%)

Capacity utilization (%) 112 113.3 115.4 (2.9) (1.1)

Source: Bloomberg

90

95

100

105

110

115

120

Mar

-08

Aug

-08

Jan-

09

Jun-

09

Nov

-09

Apr

-10

Sep

-10

Feb

-11



Trade details of bulk deals

Date Scrip name Name of client Buy/ Quantity Avg.Sell of shares price

(Rs)

4-Apr Aadi Inds Somesh Hemandas Mulani B 50,000 20.1

4-Apr Acclaim Ind Viral Jayant Furia S 25,000 29.7

4-Apr Aravali Sec Rakeshkumar Mangilal Ranka (HUF) S 162,605 17.4

4-Apr Choksi Lab Sonia Gulati B 50,733 16.2

4-Apr Choksi Lab Shashank Khade S 48,354 16.2

4-Apr Country Club Binnaiferr S Kohli S 515,491 13.2

4-Apr Future Capital Sameer Sushil Sain S 340,500 151.8

4-Apr Jaihind Syn Prasham D Doshi S 36,000 14.4

4-Apr JMD Telefilms Antony Gayen S 527,500 13.4

4-Apr Kanchan Intl Abhay Dattatray Javlekar B 16,096 71.5

4-Apr Kanchan Intl Abhay Dattatray Javlekar S 16,096 69.9

4-Apr Mpil Corp Rajendrabhai Shah Hemantbhai B 3,500 62.0

4-Apr Mpil Corp Dakshaben Dineshbhai Patel S 3,500 62.0

4-Apr Nu Tek India Planet Investments & Finance Pvt Ltd B 814,087 12.5

4-Apr Pithampur Steel Phenomenal Craft Pvt. Ltd. S 250,000 8.4

4-Apr Premco Glob-$ Hemant Rajendrabhai Shah B 23,500 25.6

4-Apr Surana Inds ITF Mauritius B 175,000 291.0

4-Apr Surana Inds Ashvin Kumar S 175,000 291.0

4-Apr Vulcan Engr Suvir Malaney Trust S 48,501 36.0

Source: BSE

Bulk deals



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Gainers & Losers Nifty Gainers & LosersPrice (Rs) chg (%) Index points Volume (mn)

Gainers

Infosys Tech 3,283 2.0 10.4 0.9

Reliance Ind 1,051 1.4 8.0 3.0

HDFC Bank 2,401 2.9 7.9 0.6

Losers

Hindustan Unilever 280 (1.5) (1.5) 1.0

HDFC 706 (0.4) (1.1) 3.3

GAIL India 457 (1.4) (1.0) 1.4

Source: Bloomberg

Research TeamDipen ShahIT, [email protected]+91 22 6621 6301

Sanjeev ZarbadeCapital Goods, [email protected]+91 22 6621 6305

Teena VirmaniConstruction, Cement, Mid [email protected]+91 22 6621 6302

Saurabh AgrawalMetals, [email protected]+91 22 6621 6309

Saday SinhaBanking, NBFC, [email protected]+91 22 6621 6312

Arun [email protected]+91 22 6621 6143

Ruchir KhareCapital Goods, [email protected]+91 22 6621 6448

Ritwik RaiFMCG, [email protected]+91 22 6621 6310

Sumit PokharnaOil and [email protected]+91 22 6621 6313

Amit AgarwalLogistics, [email protected]+91 22 6621 6222

Jayesh [email protected]+91 22 6652 9172

Shrikant ChouhanTechnical [email protected]+91 22 6621 6360

K. [email protected]+91 22 6621 6311

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