Global growth has disappointed again belying expectations of a quick recovery. IMF downgraded growth estimates for 2014 and 2015 for most major economies of the world. The emerging economies particularly China and India, continue to grow at a much faster rate than the advanced countries.

1. Thematic | September 2014
Sector: Commodity
India Strategy
The melting commodities!
Research Team (Rajat@MotilalOswal.com)

2. India Strategy
The melting commodities!
Page No.
Summary ................................................................................................................ 3-4
Story in charts ................................................................................................... 5-7
Global slowdown and transatlantic policy shifts weighs on commodities ...... 8-11
Falling commodities: Advantage India ............................................................. 12-15
OIL & GAS ........................................................................................................... 16-23
AUTO................................................................................................................... 24-26
METALS ............................................................................................................... 27-31
FINANCIAL ..................................................................................................... 32-33
Investors are advised to refer through disclosures made at the end of the Research Report.
15 September 2014 2

3. India Strategy
The melting commodities
Economy and many sectors poised to reap dividends
Global slowdown and transatlantic policy shift weighs on commodities
Global growth has disappointed again belying expectations of a quick recovery. IMF
downgraded growth estimates for 2014 and 2015 for most major economies of the
world. The emerging economies particularly China and India, continue to grow at a
much faster rate than the advanced countries. On the other hand, withdrawal of
extraordinary monetary accommodation by US contrasts with continued
accommodation by Europe, Japan and China. This transatlantic policy divergence is
creating ripples in the financial market with sharp increase in USD contrasting with a
sharp drop in both oil and many other hard and soft commodities.
Falling commodities has wide ranging implications on Indian economy, government
finance and external balances and multiple sectors. In our view, direct beneficiaries
of declining commodity prices would be OMCs, upstream oil & gas, Auto and
Financials. Additionally, few companies within Consumers, Cement and Industrials
are also likely to benefit as RM cost eases.
Falling commodity prices raises many questions & interesting possibilities –
our attempt to answer some of them:
1 Should RBI moderate and are markets factoring that already? Refer Pg 13
2 Is Crude turning into a buyer’s market? Refer Pg 17
3 Could Oil Subsidy become a matter of past? Refer Pg 14
4 Can 70-40 become 30-70 for ONGC? Refer pg 20
5 Can OMC’s go back to their old glory? Refer Pg 21
6 Would the trend of dieselization be reversed? Refer Pg 24
7 Are steel prices heading for a sharp correction? Refer Pg 27
8 What will be the impact of falling commodity prices on Indian Financials? Refer
Pg 32
Indian economy is poised to reap rich dividends of these trends
WPI inflation is headed downwards due to significant weight of manufacturing
in the WPI basket. However, the benefit would largely be secondary in case of
CPI with a much larger weight of agriculture and services into its composition. At
the current crude price WPI inflation estimates would be scaled down to 5% in
place of 5.8% for FY15. Similarly CPI inflation would soften by 20bp to 7.5%.
These estimates for FY16 would stand revised from 5.5% to 3.5% for WPI and
from 6.5% to 6% for CPI.
Benefit to government finance and external balance too are of consequence. As
per our estimate lower oil price (by USD5-10 per barrel) would nudge the fiscal
deficit to GDP ratio during FY15 to 4% from 4.1% estimated earlier while for
FY16 the estimates would go down to 3.4% from 3.6% estimated earlier. The
CAD/GDP would go down to 1.7% v/s 1.8% for FY15 estimated earlier while FY16
estimates would be scaled down to 1.7% v/s 2% estimated earlier.
Oil has dipped to double
digit levels after 26 months
Brent Crude Oil
Prices US$/BL
118.
11 115
96.7
9
97.2
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Source: IMF, MOSL
124
116
108
100
92
15 September 2014 3

4. India Strategy
Oil and gas: Game changing era for upstream companies and OMCs’
Crude is becoming a buyers’ market driven by uncertain and subdued demand,
significant production increase in the North America and need of oil sales to
support Middle East economies
India is well poised to benefit from this trend through potential lowering of
under recoveries by 70% and its share in GDP coming down from alarming 1.6%
to 0.5%.
These trends will also lead to multifold earnings increase for oil PSU’s and shift
from trading to structural investment plays.
The best plays in our view are ONGC/OINL in upstream also benefiting from
impending gas price hike, and OMC’s (HPCL is most leveraged) whose
profitability will also be boosted by likely increase in marketing margins.
Auto: Petrol-diesel parity could reverse the dieselization trend and lead to
significant demand growth in PVs
Auto sector suffered till recently from the double trouble of high inflation and
low demand.
Reduction in global oil prices, recovering Indian economic growth and reversal in
dieselization trend owing to deregulation of diesel are the three potential
drivers for auto sector.
The best play in our view is MSIL driven by strong volume growth and benefits
of operating leverage.
Financials: Interest rate fall: PSBs and Bulk borrowers to benefit the most
Looking at the liquidity situation, lower demand and improving twin deficit,
systemic rates may come down in the near term
This trend will benefit (a) Bulk borrowers like NBFCs, Small private banks and
PSU banks (b) PSU banks especially due to higher share of G-Sec portfolio (MTM
gain on AFS portfolio) and (c) overall growth and asset quality in the system.
To play expected fall in bulk rates and G-Sec rates our top picks are YES, AXSB,
PNB, LICHF, SBIN and CBK.
Metals: Declining steel prices to put pressure on integrated steel producers;
non-integrated players to remain resilient led by declining iron ore prices
Steel prices have corrected driven by weakness in Chinese HRC export prices
and global trade. Slowdown in steel demand in China, along with surging
supplies continues to impact steel raw material prices.
International Iron ore prices are making new lows every day, down 15% over the
last 2-3 weeks. Coking coal is also down 3%-4% in the last few days.
Iron ore supply is likely to ease with permission being granted for liquidation of
inventories lying at mines. This will ease the supply and put pressure on
domestic iron ore prices.
Integrated steel producers (Tata Steel and SAIL) are unlikely to benefit from fall
in iron ore prices instead increased royalty and closure of iron ore mines in
Jharkhand will add to costs. Declining steel price will further put pressure on
margins. Non-integrated steel producers like JSW Steel may not see pressure on
margin as cheaper iron ore and coking coal prices reduce costs for them.
Oil subsidy would become
negligible from current level of
0.8% of GDP
Under recovery (INRb)
Oil subsidy (INRb)
Oil subsidy (as % of GDP)
1.2
0.9
0.6
0.3
0.0
FY04
FY08
FY12
FY16E
Source: MOSL
1,600
1,200
800
400
0
Iron ore prices (62% fines)
have declined further,
down to USD82/t cfr China
INR12/Ltr
FY05
Petrol Diesel
FY06
FY07
FY08
FY09
FY10
INR24/Ltr
FY11
FY12
Period of Diesel price
deregulation
FY13
FY14
1QFY15
Jul'14
INR12/
Ltr
Aug'14
Sep'14
Source: Company, MOSL
75
50
25
0
FY04
Iron ore prices (62% fines)
have declined further,
down to USD82/t cfr China
134
CIF FOB
117
96
82
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Source: Company, MOSL
150
130
110
90
70
15 September 2014 4

5. Story in charts
IMF downgraded world growth projections for 2014 for major
regions and countries
US Policy tightening is reflecting in Dollar gains
86
84
82
80
124
116
108
100
15 September 2014
Source: Bloomberg, MOSL
Oil has dipped to double digit levels after 26 months
Brent Crude Oil Prices US$/BL
Source: Bloomberg, MOSL
-0.3
-0.4
0
-1.1
-0.2
-0.6
-1.1
World
Advanced Ecos
Euro area
United States
EM Developing
Brazil
Russia
IMF 2014 growth …
84.6
78 79.2
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Dollar Index
96.79
118.11
92
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Source: IMF, MOSL
India Strategy
The world however, continue to grow at two speeds for advanced
and EM countries
Source: IMF, MOSL
In contrast, Japan has followed a policy of depreciation
suggesting transatlantic policy split
115
105
95
85
Source: Bloomberg, MOSL
The commodity prices have retraced back to their levels two and
half years ago
0
-0.2
-0.6
India
China
South Africa
3.4
1.8
1.1
1.7
4.6
World
Advanced Ecos
Euro area
United States
EM
2015
84.3
Mar-14
May-14
Jul-14
Sep-14
75
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
115
97.2
Mar-14
Jun-14
Sep-14
Rogers International Commodity Index
3354
3847
4000
3800
3600
3400
3200
3000
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Source: Bloomberg, MOSL
5
1.3
0.2
5.4
7.4
1.7
Developing
Brazil
Russia
India
China
South Africa
96.7
105.3 106.9
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
USD/JPY
3752
3390
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14

6. Commodity fall to bring larger drop in WPI inflation
FY15 old FY15 new FY16 old
500
400
300
200
100
FY16 new
Non-POL items Crude products
Total imports
25
20
15
10
5
0
125
100
75
50
25
15 September 2014
Source: Bloomberg, Government, MOSL
Imports may fall by 1.4% of GDP due to commodities fall
Source: Government, MOSL
Diesel under recoveries: Diesel prices almost de
with recent fortnight loss of INR0.08/ltr (INR/ltr)
Source: PPAC, MoPNG, IOC, MOSL
Oil Price realization (USD/bbl): ONGC net realization set to
increase….
Gross Upstream Discount
Net
Source: PPAC, MoPNG, IOC, MOSL
5.8
7.7
5.0
7.5
5.5
3.5
WPI Inflation CPI inflation
22.3 % of
GDP
0
FY15E (no commodities fall) FY15 (commodities fall)
USDb
20.4
1.5
14.9 13.9
17.1
3.7
(5)
1QFY07
1QFY07
1QFY08
1QFY09
1QFY10
1QFY11
1QFY12
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
38
42 44
53 48
56
54
55
48
0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
India Strategy
CPI however, remained high with gap with WPI expected to widen
12
10
8
6
4
2
CPI -WPI
Source: Government, MOSL
mports External accounts can improve further on
FY15 (commodities fall)
de-regulated
With diesel set to be de-regulated, expect under recoveries
to be down 50% (INRb)
2,000
1,500
1,000
500
Petrol Diesel
HPCL: EPS upsides to reforms
6.5
6.0
0
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
474
RBI's Jan
20.9 % of
GDP
-7.8
5.9
-7.2
Trade deficit Invisible surplus
As % of GDP
FY15E (no commodities fall)
14.5
0.1
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
201
400
494
773
1,033
461
0
FY05 FY06 FY07 FY08 FY09 FY10
41
61 66 68
FY14 FY15E FY16E FY17E
34.7
7.0
Kerosene LPG Total
15.5
Adj. FY14
EPS
Interest
reduction
MM
@INR0.5/ltr
HPCL EPS (INR)
6
account of this
Source: Government, MOSL
Source: Government, MOSL
Source: MOSL, Company
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
203
bp 125
bp
226
bp
Jan-15 target of 8%
-1.9
5.9
-1.3
Current A/c deficit
780
1,381
1,610
1,399
948
750 689
FY11 FY12 FY13 FY14 FY15E FY16E FY17E
54.9
-0.8
Mkt share
loss @15%
New likely
EPS

7. India Strategy
Fuel cost inflation moderating, after over 11% CAGR since
FY11, auguring well for PV demand
Petrol Diesel
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
1QFY15
Jul'14
Aug'14
Sep'14
FY16???
FY17???
Source: Company, MOSL
Reducing petrol-diesel price disparity augurs well for MSIL
due to its relative weakness in diesel engine
58
53 50
37
32 32
Diesel volumes (as % of total) Industry
FY08 FY09 FY10 FY11 FY12 FY13 FY14 1QFY15
Source: Company, MOSL
30
20
10
0
-10
Iron ore prices (62% fines) have declined further, down to
US$82/t cfr China; would benefit non-integrated steel players
CIF FOB
117
96
82
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Source: Bloomberg, MOSL
33 34 35 36
48
13 15 19 18
24
Coking coal after consolidating at US$110-112/t fob Australia
is down to US$108/t
Spot coking coal (fob Australia) - US$/t
113 112
108
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Source: Bloomberg, MOSL
134
150
130
110
90
70
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
153
160
150
140
130
120
110
100
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
15 September 2014 7

8. India Strategy
Global slowdown and transatlantic policy shifts
weighs on commodities
Growth outlook creates policy divergence
1. Renewed slowdown fear: The hope of a quick turnaround in the world economy
been faded with IMF downgrading growth projections for most major
economies of the world. Europe, after seeing a few quarters of anemic recovery,
mainly driven by Germany, have slipped back into stagnation, prompting a fresh
round of monetary stimulus by ECB. Many commentators have sounded
worrying signals about China growth story. However, uneven growth continue
to characterize world economy with relatively muted growth in advanced
countries contrasting with still respectable growth of many emerging
economies, particularly China and India.
IMF downgraded world growth projections for 2014 for major regions and countries
IMF 2014 growth downgrades
China
-0.2
South Africa
-0.6
Source: IMF, MOSL
World
-0.3
Advanced Ecos
-0.4
Euro area
0
United States
-1.1
EM Developing
-0.2
Brazil
-0.6
Russia
-1.1
India
0
The world however, continue to grow at two speeds for advanced and EM countries
7.4
1.7
China
South Africa
Source: IMF, MOSL
3.4
2015
1.8
1.1
1.7
4.6
1.3
0.2
5.4
World
Advanced Ecos
Euro area
United States
EM
Developing
Brazil
Russia
India
2. Transatlantic monetary policy shift: Meanwhile in the US, the extra ordinary
monetary accommodation that was accorded as a post crisis response, is
unwinding. US FED has scaled down the extent of quantitative easing to USD25b
from USD85b earlier. This may be followed by a period of actual shrinking of
money supply in the economy and eventually an increase in rates. However, in
Europe fear of slowdown has led to further monetary stimulus while in Japan
15 September 2014 8

9. India Strategy
accommodation continues as part of a medium term growth strategy. While
China has kept the rates relatively stable, it is yet to begin its tightening cycle.
Thus monetary policy at present is in opposite direction on the two sides of
Atlantic creating varying response from the financial markets. Expectedly, USD
has strengthened sharply in recent times in contrast to currencies of the
countries where monetary accommodation is still underway.
Only US is tightening while other either easing or stable
4-Sep-14 Pol icy rates lowered by 10 bas i s points
7-Aug-14 Pol icy rates left unchanged
3-Jul -14 Detai l s of the targeted longer-term refinancing
17-Jun-14 Extends US dol lar l iquidi ty-providing operations
5-Jun-14 Introduces a negative depos i t faci l i ty interes t rate
Lates t Kept interes t rate s table at 6% from Jul -12 when
benchmark rates were cut by 25bp
20-Jul -14 Sets a two year timetable to l iberal i ze interes t
Source: Central Banks, MOSL
Date US Fed Date ECB
30-Jul -14 Scales down QE to USD25b (USD10b MBS + USD15b
Treasury)
18-Jun-14 Scales down QE to USD35b (USD15b MBS + USD20b
Treasury)
30-Apr-14 Scales down QE to USD45b (USD20b MBS + USD25b
Treasury)
operations announced
19-Mar-14 Scales down QE to USD55b (USD25b MBS + USD30b
Treasury)
beyond 31 July 2014
29-Jan-14 Scales down QE to USD65b (USD30b MBS + USD35b
Treasury)
Date Bank of Japan Date People's Bank of China
4-Sep-14 To continue to target expans ion of monetary base
by YEN 60-70t
8-Aug-14 To continue to target expans ion of monetary base
by YEN 60-70t
rates
15-Jul -14 To continue to target expans ion of monetary base
by YEN 60-70t
13-Jun-14 To continue to target expans ion of monetary base
by YEN 60-70t
21-May-14 To continue to target expans ion of monetary base
by YEN 60-70t
Central bankers diverged in their assessment of the economy and policy response
Mario Draghi, ECB The provi s ion of publ ic guarantees
should be cons idered to support
lending [to smal l and medium-s i zed
enterpri ses , or SMEs ], as other
countries do, such as the US.
Zhou Xiaochuan, PBOC PBOC could use a range of measures
to aid the economy i f growth s trays
too far from the government's targeted
range.
Source: Central Banks, MOSL
Janet Yellen, US FED But i f progres s in the labor market
continues to be more rapid than
anticipated by the Commi ttee or i f
inflation moves up more rapidly than
anticipated, resul ting in fas ter
convergence toward our dual
objectives , then increases in the
federal funds rate target could come
sooner than the Commi ttee currently
expects and could be more rapid
thereafter.
Haruhiko Kuroda, BoJ I told the prime mini s ter that we wi l l
fi rmly proceed wi th the current eas ing,
and make the utmos t efforts to
achieve the 2% target.
15 September 2014 9

10. India Strategy
US Policy tightening is reflecting in Dollar gains
Dollar Index
79.2
84.3
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Source: Bloomberg, MOSL
In contrast Japan has followed a policy of depreciation
USD/JPY
96.7
105.3 107.1
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Source: Bloomberg, MOSL
Sep-13
115
105
95
85
75
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
3. Commodities falling on global factors: The slowing growth coupled with
withdrawal of monetary accommodation in US is causing a rather sharp
correction in global commodities and asset prices. The most striking among all
and one with the most strategic significance, has been the global crude oil
prices. Among the most critical assets, gold - that was the most favored during
periods of uncertainties - has caved in. Even some of the soft commodities
including food are correcting sharply with many of them ruling below their Jan-
11 levels.
84.6
86
84
82
80
78
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Oil has dipped to double digit levels after 26 months
115
97.2
Brent Crude Oil Prices US$/BL
Dec-13
Mar-14
Jun-14
Sep-14
Source: Bloomberg, MOSL
Gold prices corrected by 4% from their peak
1250
Gold ($/OZ)
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Source: Bloomberg, MOSL
96.79
118.11
124
116
108
100
92
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Iron ore prices has slid back by five years
Iron Ore - China (USD/MT)
87
159
82
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Source: Bloomberg, MOSL
1900
2100
1850
1600
1350
1100
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Coal prices too are at multi year low
68
Coal - Richard Bay index (USD/MT)
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Source: Bloomberg, MOSL
188
210
170
130
90
50
67
130
150
125
100
75
50
15 September 2014 10

11. 15 September 2014 11
India Strategy
China HR still near their Sep-12 low
Source: Bloomberg, MOSL
Palm oil near their post crisis lows
Source: Bloomberg, MOSL
Rubber prices at 30% of their peak value
Source: Bloomberg, MOSL
Agriculture product prices are falling rapidly too
Source: Rogers, MOSL
Rice prices are falling since post crisis period
Source: Bloomberg, MOSL
After the spike, wheat prices moderated again
Source: Bloomberg, MOSL
800
761
520
513 524
450
590
660
730
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
China HR Steel (USD/MT)
4100
3927
1700
2027
2300
2038
2900
3500
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Palm Oil - Malaysian Ringit Per MT
90
52
225
198
45 54
135
180
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Thailand Rubber (THB/GRAM)
3,300
3,400
3,500
3,600
3,700
3,800
Jan-14
Jan-14
Feb-14
Mar-14
Mar-14
Apr-14
May-14
May-14
Jun-14
Jul-14
Jul-14
Aug-14
Sep-14
Rogers Agriculture
200
400
600
800
1000
Jan-07
May-07
Oct-07
Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Oct-09
Feb-10
Jun-10
Oct-10
Feb-11
Jun-11
Oct-11
Feb-12
Jun-12
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
Rice
600
650
700
750
800
850
900
Jan-13
Mar…
May…
Jul-13
Sep-…
Nov-…
Jan-14
Mar…
May…
Jul-14
Wheat

12. India Strategy
Falling commodities: Advantage India
Direct benefit for inflation, fiscal and external account
1. WPI is crashing: The most direct beneficiary of the global commodity softening
are the transportation and manufacturing sector where input costs comes down
proportionately. As a result, WPI manufacturing, WPI core and indeed overall
WPI is expected to soften widely. As per our calculations around 66% of the WPI
basket is influenced by international price trend. Thus WPI may soften by 80-
200 bp during FY15 and FY16 respectively, on the back of easing commodities
2. CPI is falling too: While part of the CPI fuel sector would benefit, a large part of
the CPI basket is comprised of food (50%) and services (26%) that are largely
functions of domestic price pressures. We estimate around 17% of the product
basket of CPI being affected by international commodity prices, yielding a
benefit ranging between 20-50bp during FY15 to FY16.
WPI and CPI has very different commodity basket with WPI having more globally linked
commodities
Source: Rogers, MOSL
15 September 2014 12

13. In the past, gap between CPI and WPI has gone up to as high
as 8.6%
11
8
5
2
-1
15 September 2014
Gap between CPI and WPI
-3.3
8.6
FY06
FY08
FY10
FY12
FY14
Source: Government, MOSL
7.2
12
10
8
6
4
2
0
Jan-13
474
Mar-13
May-13
3. Gap between CPI and WPI to widen
Jul-13
Sep-13
Nov-13
Jan-14
India Strategy
CPI -WPI
Source: Government, MOSL
resulted in the two measures of WPI and CPI diverging widely in the past going
as high as 8.6% during FY10. In recent times however, this gap was closing on
the back of gradual decline in food prices. This is set to
widen again due to very
disproportionate nature of benefits of international price moderation on the
two indicators.
4. Should RBI moderate and are markets factoring that already?
already?: The above
phenomena call into question the prudence of selection of
indicator (viz., CPI) as a target inflation indicator. As the brief history of new CPI
series shows that
is a need to revisit the choice of indicator taking into account the
measures of
remained soft despite liquidity challenges on the back of these developments
Similarly the heavily regulated 10
despite RBI maintai
further in the coming months.
This calls for a closer look for choice of indicators for monetary policy
-4
FY84
FY86
FY88
FY90
FY92
FY94
FY96
FY98
FY00
FY02
FY04
12 Avg CPI: 9.5%
10
8
6
4
2
0
The gap between CPI and WPI that has narrowed is
expected to rise again
widen: The differing commodity composition has
exclusively one
on an average CPI rules nearly 3% higher than WPI. Thus
there
broader
inflationary trend. The market determined interest rates have
10-year G-sec too has seen significant softening
maintaining a tight stance. These trend
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
CPI WPI
13
he developments.
trends are likely to accentuate
Source: CSO, MOSL
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
203
bp 125
bp
226
bp
RBI's Jan-15
target of 8%
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Avg WPI: 6.6%

14. India Strategy
The market interest rates have shown softening bias
AAA 1 yr CP 1 yr
9-Jul
23-Jul
6-Aug
20-Aug
3-Sep
Source: Government, MOSL
Even the heavily regulated 10-yr G-sec has fallen too
10-Year G-Sec
9-Jul
23-Jul
6-Aug
20-Aug
3-Sep
Source: Government, MOSL
25-Jun
9.2
9.0
8.8
8.6
8.4
8.2
8.0
2-Apr
16-Apr
30-Apr
14-May
28-May
11-Jun
25-Jun
5. Oil subsidy could become a matter of the past: The subsidy overhang has
stressed the government finance since mid-2000s. A sharp decline in oil price
would help restrain total subsidy bill to 2% of GDP while oil below USD105/bbl
would even create some space to meet the shortfall on account of lower tax
collections, etc. This gives greater credibility to fiscal deficit goals. However,
diesel deregulation reaching its conclusion lowers the extent of benefit the
government can reap on an ongoing basis out of continued drop in oil prices. As
per our calculations, the benefit of every USD10 decline in oil prices, results in
around 10bp drop in fiscal deficit to GDP ratio.
Oil subsidy would become negligible from current level of 0.8% of GDP
Under recovery (INRb) Oil subsidy (INRb) Oil subsidy (as % of GDP)
1.2
0.9
0.6
0.3
0.0
FY16E
FY17E
Source: CSO, MOSL
2,000
1,500
1,000
500
0
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
6. Trade and CAD to improve by 0.3% of GDP: The lower commodity prices would
restrain import growth which can correct by 1.4% of GDP on a full year basis.
While exports too is likely to fall in value as seen in previous such occasions in
the past, the current account can still correct by 0.3% of GDP. This would imply
that FY15 CAD/GDP ratio could be as low as 1.6% providing further stability to
external sector. This would further reduce the dependence on foreign capital
flows and also provide and opportunity to RBI to build forex reserves.
10.0
9.5
9.0
8.5
2-Apr
16-Apr
30-Apr
14-May
28-May
11-Jun
15 September 2014 14

15. India Strategy
Imports may fall by 1.4% of GDP due to commodities fall
Non-POL items Crude products
Total imports
20.9 % of
GDP
FY15E (no commodities fall) FY15 (commodities fall)
Source: Government, MOSL
External accounts can improve further on account of this
FY15E (no commodities fall) FY15 (commodities fall)
-1.9
-1.6
Trade deficit Invisible surplus Current A/c deficit
Source: Government, MOSL
22.3 % of
GDP
USDb
500
400
300
200
100
0
-7.8
5.9
-7.5
5.9
As % of GDP
15 September 2014 15

16. India Strategy
Oil Gas / Auto to benefit from falling oil prices
I. THE BEGINNIG OF A NEW ERA
Is crude becoming a buyers’ market?
1. Crude prices range bound in the last four years: Despite heightened
geopolitical tensions in the oil producing countries benchmark Brent crude price
hovered ~USD110/bbl for the last four years, unlike previous decade where it
varied between USD20/bbl to USD130/bbl. However, now it has fallen below
USD100/bbl and given the underlying factors can fall further.
Unlike previous decade, crude prices range bound in recent years (Brent crude, USD/bbl)
130
120
110
100
90
Brent crude price (USD/bbl)
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14
*Monthly average Source: Bloomberg, MOSL
2. US driving oil supply growth singlehandedly Historically, oil prices have reacted
sharply to any geopolitical issues in the oil producing countries. However, recent
disruptions in the oil producing countries Libyia, Syria and sanctions on Iran
does not seem to have profoundly impacted oil prices significantly. The answer
lies in the shale oil led production increase in US who contributed to 84% of the
last five year production increase at 3.2mmbbl/d. On the consumption side
world oil consumption grew at a slowest 5-year CAGR in 2013 led by recent
global slowdown in the last two decades.
OIL GAS
Please refer to our detailed
report “Breaking free”
released in July 2014
Source: Company, MOSL
Please refer to our detailed
report “Breaking free” part
2 released in August 2014
Source: Company, MOSL
Annual Production Change (mmbbl/d): US/Canada production increase has more than compensated OPEC production decline
World Oil Production Change
2013 over 2008 (mmbbl/d)
(0.3) (0.3) (0.4) (0.4) (0.6) (0.6) (0.7) (0.8) (0.8)
Mexico
Sudan
Syria
Algeria
Venezuela
Norway
UK
Libya
Iran
Source: OPEC, IEA, EIA, BP Statistical review, MOSL
3.9
3.2
0.9 0.8 0.7 0.7 0.6 0.6 0.5 0.4 0.4 0.3 0.3 0.2 0.2
World
US
Saudi Arabia
Russia
Canada
Iraq
UAE
OPEC (net)
Qatar
Colombia
China
Kuwait
Kazakh.
Brazil
Nigeria
15 September 2014 16

17. India Strategy
US oil production on the rise led by shale oil (mmbbl/d)
5.108
8.5
Jun-87 Jun-90 Jun-93 Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-11 Jun-14
Source: EIA, Bloomberg, MOSL
8.364
6.409
9
6
3
0
3. Is crude turning into buyers market? As history has shown, crude markets are
highly unpredictable but the recent data points suggest that there is a high
probability of crude markets turning into buyers market. This we believe will be
driven by
a. Recent discounts offered by Saudi Arabia (Media reports)
b. Continued increase in the North American oil production
c. Relative slowdown in the Chinese economy
d. Uncertain demand scenario reflected in the recent demand forecast
downgrades by IEA, OPEC and EIA.
e. Improved energy efficiencies and focused approach to develop renewable
energy sources.
As we write geopolitical tensions still continue and OPEC could anytime decide to
cut production quotas to defend oil prices. However, with uncertain demand
scenario, oil prices are expected to remain range bound – a positive development
for India.
IEA and EIA has recently downgraded 2014 oil demand forecast
1.5
2014 IEA OPEC EIA
1.2 1.2 1.3
1.0
1.4
1.3
1.2
1.2
1.2
1.3
1.3
1.3
1.0
1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
1.3
Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Jul-14 Aug-14
2013A 2014E 2015E
Source: IEA, EIA, OPEC, MOSL
1.2
1.3
1.4
1.4
1.3
1.3
1.2
1.4
Benefit India – Under recoveries down by more than 50%
1. Government bites the bullet, sets ball rolling for sector reforms: Retail
petroleum prices for controlled products (Diesel, Gasoline, Kerosene and LPG) in
India historically witnessed ad-hoc increases and that too with a lag, leading to
significant under-recovery for the oil marketing companies. With backs to wall
Saudi Arabia 2012
“Our wish and hope is we
can stabilise this oil price
and keep it at a level
around $100 [a barrel],”
Saudi Aramco 2014
“Supply and demand will
play a key role. OPEC will
take the price as it comes.”
15 September 2014 17

18. India Strategy
due to likely sovereign rating downgrade Indian government in January 2013
announced several oil sector reforms like (1) limiting subsidized domestic LPG
cylinders to 12 per year per household, (2) increasing diesel prices monthly by
INR0.5/ltr and (3) bulk diesel to be market priced.
2. Diesel is deregulated, finally!!: After more than 20 months on diesel price
increase the recent under recovery stood at INR0.08/ltr i.e. almost market
pricing. Government had already deregulated petrl in June 2010 and now with
diesel getting deregulated, it will remove one of the largest component of the
under recoveries.
Diesel under recoveries: Diesel prices almost de-regulated with recent fortnight loss of
INR0.08/ltr (INR/ltr)
3.7
14.5
0.1
1QFY07
1QFY07
1QFY08
1QFY09
1QFY10
1QFY11
1QFY12
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Source: PPAC, MoPNG, IOC, MOSL
20.4
1.5
14.9 13.9
17.1
25
20
15
10
5
0
(5)
3. Will LPG / kero reforms follow diesel? PDS kerosene has been an important fuel
for the economically weaker sections in rural India. Hence, we expect the
Government to first take up LPG price deregulation ahead of kerosene. The
initial thrust should be on widening the base for direct benefit transfer scheme,
followed by removal of dual pricing in LPG and kerosene.
4. Under recoveries to reduce by more than 50%: With diesel de-regulation we
expect ~50% reduction in gross under recoveries to INR750b by FY16. And a
realistic kero/LPG hike could cut under-recovery by 70%.
With diesel set to be de-regulated, expect under recoveries to be down 50% (INRb)
Petrol Diesel Kerosene LPG Total
1,399
948
750 689
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Source: PPAC, MoPNG, MOSL
201
400
494
773
1,033
461
780
1,381
1,610
2,000
1,500
1,000
500
0
15 September 2014 18

19. India Strategy
Post Petrol de-regulation in 2010, monthly price hikes helped diesel de-regulation (INR/ltr)
Petrol price (INR/ltr) Diesel price (INR/ltr)
Petrol
de-regulated
Diesel monthly hikes
begin
Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14
Source: MoPNG, PPAC, MOSL
80
60
40
20
5. Indian fiscal situation to improve: Share of under recoveries in India’s GDP and
as a % of import bill to be down significantly.
Gross under recoveries as a % of GDP set to reduce
1.5 1.6
1.2
0.8
0.6 0.5
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
Source: MoPNG, GoI, PPAC, MOSL
Gross under recoveries as a % of oil import bill set to reduce
24.9
30.6 30.2
24.4
15.7
12.4 11.1
FY12
FY13
FY14
FY15E
FY16E
FY17E
Source: MoPNG, GoI, PPAC, MOSL
26.7
19.8
27.6
34.6 35.5
17.4
FY05
FY06
FY07
FY08
FY09
FY10
FY11
With market linked pricing in both petrol and diesel, do not expect further increases
if crude remains subdued and would result in healthy auto fuel demand growth.
Petrol demand dropped during its deregulation period, similar trend witnessed in Diesel
..however with stable prices diesel demand bounces back
Petrol 3M avg YoY Chg (%) Diesel 3M avg YoY Chg (%)
Jul-05 Jan-07 Jul-08 Jan-10 Jul-11 Jan-13 Jul-14
Source: PPAC, IOC, MOSL
0.6
1.1 1.2
1.5
1.8
0.7
1.0
FY05
FY06
FY07
FY08
FY09
FY10
25%
20%
15%
10%
5%
0%
-5%
15 September 2014 19

20. India Strategy
Game changing era for upstream: Can 70-40 become 30-70?
1. High and ad-hoc subsidy has marred ONGC profitability: Upstream companies
have suffered financially a lot in the last decade due to high and ad-hoc subsidy.
While the gross realization for ONGC stood at USD107/bbl in FY14, its net
realization was only at USD41/bbl led by subsidy sharing of USD66/bbl.
2. Can 70-40 become 30-70? Ongoing diesel reforms have the potential to reverse
this upstream subsidy trend from 70-40 (subsidy-net realization) to 30-70 i.e.
subsidy will reduce from USD70/bbl to 40/bbl and net realization will increase
from USD40/bbl to USD70/bbl.
3. ONGC earnings could grow at 20% CAGR: At a Brent crude of USD100/bbl and
at INR60/USD, gross under recovery could stand at INR724b in FY16, 48% lower
than FY14 under recovery of INR1,399b. Upstream subsidy sharing in FY14 was
at 48% and if were to model ~50% sharing in FY15/FY16/FY17 then ONGC’s net
realization could increase to USD61/66/68/bbl (gross @USD100/bbl) resulting in
EPS CAGR of ~20%.
a. For every USD10/bbl increase in ONGC’s net realization its earnings will
improve by INR6/sh.
b. For every USD1/mmbtu increase in ONGC’s gas price its earnings will
increase by INR3/sh.
Oil Price realization (USD/bbl): ONGC net realization set to increase….
61 66 68
Gross Upstream Discount Net
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Source: Company, MOSL
38
42 44
53 48
56
54
55
48
125
100
75
50
25
0
ONGC Cons. EPS (INR): ...resulting in high earnings growth (INR)
41
16.8 18.0
20.8
23.2 23.1 22.7 24.5
30.4 28.3
31.0
41.9
48.8
52.5
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
*Factors upstream subsidy at 50% in FY15/16/FY17 and gas price at USD5.3/6.3/mmbtu in FY16/FY17
Source: Company, MOSL
15 September 2014 20

21. India Strategy
Expected structural policy changes to boost earnings and increase ONGC’s fair value to
INR612 (v/s base case of INR485); while fair value increases to INR865 at nil subsidy
9% 14% 20% 33% 38% 94%
485 505 534
42.3 1.8 2.5
593 612
5.2 1.7
865
22.2
865
75.7
Base EPS
ONGC fair value in grey shade
Kero hike
(INR0.5/ltr
per month)
LPG hike
(INR10/cyl
per month)
Susidy share
(@50%)
Gas Price
(@USD7/
mmbtu)
Nil subsidy
New likely
EPS
*Percentage value in box is stock price upside Source: MOSL
Life changing era for OMCs’: Can they go back to their old glory?
1. OMC’s profitability down due to under recoveries: OMC’s profitability suffered
(RoE’s down from 20-30% to single digit for HPCL and IOCL in recent years) in
the last decade led by (a) controlled petroleum retail prices leading to under
recoveries and higher debt to fund them and (b) delayed and ad-hoc subsidy
sharing. The combined debt of OMCs had increased at 22% CAGR in the last 10
years and interest cost increased at a CAGR of 27%.
HPCL’s debt increased 20x in the last decade primarily due to
delayed subsidy and working capital loans to fund the same…
249
296
323 314
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: Company, MOSL
…leading to significant rise in interest cost
Interest as a % of sales (%)
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: Company, MOSL
15 20
66
104
165
221 211
2.0
1.6
1.2
0.8
0.4
0.0
And largely flat PAT in the last decade (INRb)
RoE moved from healthy double digits to a single digit
RoE(%)
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Source: Company, MOSL
50
40
30
20
10
-
2,500
2,000
1,500
1,000
500
-
PAT - RHS Sales
FY04 FY06 FY08 FY10 FY12 FY14
28
21
14
7
0
15 September 2014 21

22. India Strategy
2. Diesel de-regulation to substantially reduce interest cost: OMC’s interest cost
as a % of sales had increased from lows of 0.1% in FY04 to ~1.2% led by funding
for diesel under recoveries. During the last 12 months diesel under recoveries
have come down significantly leading to meaningful reduction in the OMC’s
working capital requirement. We estimate OMCs debt to reduce by 15-25%,
leading to 8-16% EPS benefit, with HPCL at 16%, followed by BPCL at 9% and
IOCL at 8%.
3. OMC’s in better shape to face private competition: In the previous period of
brief deregulation (FY04-07), private players’ market share had reached ~5% in
gasoline and ~10% in diesel. However, this time around, we do not expect the
journey to be smooth for private players, given that over the last decade, OMCs
have been improving purity perception, extending reach, customer engagement
and increased automation. Further, challenging retail fuel pump economics will
be a major issue for private player expansion.
4. Marketing margins to boost OMC profitability: The marketing margin
component for OMCs’ marketing sales was fixed by the Government in 2006 and
despite the cost increases of 8-10%, OMCs got only ~4% of annual escalation.
This led to a severe reduction in the marketing division’s profitability. Post the
deregulation, we expect OMCs’ marketing division profitability to increase
meaningfully as we expect they will be able to charge higher marketing margins.
Global comparison shows that the current marketing margin in diesel in India at
~INR1.4/ltr is way below the global averages. HPCL being the highest leveraged
to marketing volumes (standalone marketing/refining ratio of 2x), we estimate
an EPS increase of INR15.5/sh for INR0.5/ltr increase in the diesel marketing
margins, followed by BPCL and IOCL.
Global diesel marketing margin meaningfully above India’s level (INR/ltr)
2.8
3.5 3.4
7.3
India US Canada Thailand South
Africa
Australia UK
Source: PPAC, IMF, Shell, Industry, Australia govt, MOSL
1.4
5.4
4.5
15 September 2014 22

23. India Strategy
Fair value sensitivity to reform related upsides (INR/share)
Current Price
Diesel de-regulation + addl. mktg margin of INR0.5/ltr
Diesel de-regulation + addl. mktg margin of INR1/ltr
401
528
588
HPCL BPCL IOCL
Source: Company, MOSL
496
700
646
952
801
1,063
HPCL: EPS upsides to reforms
BPCL: EPS upsides to reforms
BPCL EPS (INR)
43.7
4.2
Adj. FY14
EPS
Interest
reduction
@INR0.5/ltr
IOCL: EPS upsides to reforms
55.8
-1.4
Mkt share
loss @15%
New likely
EPS
39.8
-2.3
Mkt share
loss @15%
New likely
EPS
Source: Company, MOSL
HPCL EPS (INR)
34.7
54.9
7.0
15.5
-0.8
Adj. FY14
EPS
Interest
reduction
MM
@INR0.5/ltr
Mkt share
loss @15%
New likely
EPS
9.3
MM
IOCL EPS (INR)
32.7
2.5
5.4
Adj. FY14
EPS
Interest
reduction
MM
@INR0.5/ltr
HPCL profitability could increase meaningfully if we were to model additional INR1/ltr marketing margin on diesel
INR Billion FY04 FY05 FY06 FY07 FY08 FY09 FY13 FY14 FY15 FY16 FY17 FY18
Marketing sales (mmt) 19.5 20.1 19.4 21.7 24.5 25.4 30.3 31.0 31.9 32.8 33.7 34.5
GRM (USD/bbl) 4.5 5.2 2.3 3.6 5.6 5.2 2.1 3.4 3.2 3.3 3.5 3.5
Net Sales 515 599 709 890 1,047 1,253 2,065 2,231 2,168 2,179 2,143 2,160
EBITDA 32 21 8 24 16 29 39 52 43 52 57 66
Depreciation 6 7 7 7 9 10 19 22 24 26 28 30
Interest 1 1 2 4 8 21 18 15 7 6 6 5
Other Income 4 3 3 7 12 9 12 11 10 10 11 12
PBT 29 16 3 20 12 7 15 26 22 29 34 43
Tax 11 4 (1) 4 (0) 1 6 9 7 10 11 14
PAT 18 13 4 16 12 6 9 17 14 20 23 29
EPS (INR) 54 38 12 46 35 17 27 51 42 58 68 85
Source: Company, MOSL
15 September 2014 23

24. India Strategy
Falling crude prices and petrol-diesel parity could reverse the
dieselization trend and lead to significant demand growth
Fuel prices witnessed high growth since FY11, with petrol prices rising 11% and
diesel prices rising 13.5%. Higher fuel prices coupled with weak economic
environment impacted PV demand, resulting in flat domestic passenger vehicle
volumes since FY11. This was reflected in share of first time buyers declining from
~50% in FY12 to ~37% in FY14.
With falling global crude prices and stable Fx, we expect fuel prices to reduce over
the coming months. This trend coinciding with economic recovery in India, could
lead to significant demand growth for PVs, driven by significant pent-up demand.
Further, fuel price disparity has been corrected significantly with gradually diesel
price deregulation, resulting in price gap between petrol and diesel being at 10 year
low levels at ~INR12/ltr. As a result, we expect reversal of dieselization trend
witnessed during FY11-14 where diesel powered vehicle contribution increased
from ~35% to ~58% (FY13) for the industry (37% v/s 18% for MSIL).
We estimate diesel vehicle contribution to stabilize at 40-45% of total volumes for
the industry (from 1QFY15 level of ~50%).
AUTO
Fuel cost inflation moderating, after over 11% CAGR since
FY11, auguring well for PV demand
Petrol Diesel
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
1QFY15
Jul'14
Aug'14
Sep'14
FY16???
FY17???
Source: Company, MOSL
Pricing gap between petrol diesel at lowest level in last 10
years
INR24/Ltr
Period of Diesel price
deregulation
FY13
FY14
1QFY15
Jul'14
INR12/
Ltr
Aug'14
Sep'14
Source: Company, MOSL
75
50
25
INR12/Ltr
0
FY04
FY05
Petrol Diesel
FY06
FY07
FY08
FY09
FY10
FY11
FY12
MSIL: A key beneficiary of potential reversal in dieselization trend
Higher growth in fuel prices mostly impacted entry level cars, resulting in MSIL’s
entry level car volumes declining 11% CAGR. Reversal of dieselization trend augurs
well for MSIL, considering its strength in petrol engines. While we estimate ~16%
CAGR in volumes for MSIL during FY14-17E, full benefit of above mentioned trend
could result in volume CAGR in excess of 20%.
With strong recovery in entry level vehicle, we estimate discounts to narrow
meaningfully from peak of 1QFY15. This coupled with operating leverage benefits,
MSIL can deliver EPS CAGR of over 40% (FY14-17E) v/s our base case CAGR of ~31%.
Strong volume momentum, margin expansion and very strong earnings growth
could drive MSIL stock to potentially be 2x from current levels.
30
20
10
0
-10
15 September 2014 24

25. India Strategy
Stable petrol prices augurs well entry level cars…
MSIL Entry Level Cars Growth (%) Petrol Price Chg (%)
1QFY15
Jul'14
Aug'14
Sep'14
FY16???
FY17???
Source: Company, MOSL
…as demand from First Time Buyers was impacted the most
(% of total MSIL volumes)…
FY08 FY11 FY12 FY13 FY14 1QFY15 FY16???
37
43
50
FY08 FY11 FY12 FY13 FY14 1QFY15 FY16???
Source: Company, MOSL
30
20
10
0
-10
-20
-30
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
…also reflected in drop in contribution of entry level cars for
MSIL
MSIL Entry Level Cars (% of total)
28 28
32
FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 Jul'14
Source: Company, MOSL
35
47
50
40
Reducing petrol-diesel price disparity augurs well for MSIL
due to its relative weakness in diesel engine
58
53 50
37
32 32
Diesel volumes (as % of total) Industry
FY08 FY09 FY10 FY11 FY12 FY13 FY14 1QFY15
Source: Company, MOSL
48 49
45
38 38
Discounts moderation to be driven by recovery in entry level
cars…
17,038
21,000
13,000
MSIL 's blended discounts (INR/unit)
FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 FY16???
Source: Company, MOSL
33 34 35 36
48
13 15 19 18
24
…leading to significant improvement in profitability
45
23
% of realizations % of PBT
35
56
42
49
61
4.1 3.4 3.4 3.9 3.3 4.6 5.7 3.4
40
FY09 FY10 FY11 FY12 FY13 FY14 1QFY15 FY16???
Source: Company, MOSL
10,539 9,610 9,575
12,029 12,049
15 September 2014 25

26. India Strategy
Pent up demand + Conducive fuel prices + economic revival + Improving consumer sentiment = Modi-fied Era
EPS Modi-fied EPS
130
213
166
274
213
FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E
Source: Company, MOSL
91
82
58
FY08-11 FY11-14 FY14-17E (Base) FY14-17E (Modi-fied)
13
27
37
10 11
6
31
43
Volumes EBITDA EPS
… Can lead to stock delivering ~90% return in 1 year
5,500
FY17 Target Price (INR/sh)
Base @ 17.5x Modi-fied @ 20x
Source: Company, MOSL
3,721
MSIL's FY17 earnings sensitivity to JPY/USD
JPY/USD
EBITDA
Margins
(%)
82
EPS (INR)
94
Cash EPS
(INR)
PE (x)
TP (17.5x
Consol.
EPS)
90.000 12.4 174.5 279.9 17.5 3,054
95.000 13.3 190.4 295.8 17.5 3,332
102.000 14.4 210.0 315.4 17.5 3,676
Prevailing rate 107.000 15.1 222.5 327.9 17.5 3,893
110.000 15.5 229.4 334.8 17.5 4,014
115.000 16.1 240.1 345.5 17.5 4,202
120.000 16.6 250.0 355.4 17.5 4,374
Source: Company, MOSL
18
-3
16
22
15 September 2014 26

27. India Strategy
India steel prices under pressure from cheaper Chinese imports
India HRC import prices have declined to US$520/t after holding in the range of
US$535-545/t range for the past 5-6 months. The recent correction has been driven
by weakness in Chinese HRC export prices and global trade. As Indian HRC prices are
moving in tandem with import parity, this will have a direct impact on realization of
Indian steel mills’ flat products.
Long products pricing in India is driven largely by domestic demand and cost of
production of secondary producers. Steel scrap (and sponge iron), being the key
input cost for secondary steel producers, is the key driver of cost of production for
them. Hence, the landed cost steel scrap imports is mostly the key driver of Indian
sponge iron and thereby long product prices. Long product imports rarely worried
Indian steel markets. This however may not hold true. Chinese long products on
landed cost basis are now cheaper by nearly USD60/t. Institutional consumers have
already started importing rebar. The month of august witnessed big surge in imports
of long products. The trend is likely to continue due to further weakness in Chinese
long product prices.
METALS
HRC prices are down by
USD15-20/t WoW after a
long period of stability
Long product prices too are
under threat
India HRC import prices have weakened
Jul-14
Aug-14
Sep-14
Source: MOSL
Indian rebar (TMT) prices are at nearly USD60/t premium
TMT Mumbai (INR/t)
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Source: MOSL, Bloomberg
HRC Mumbai (INR/t)
Feb-14
Mar-14
Apr-14
May-14
Jun-14
38,000
36,000
34,000
32,000
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Indian steel mills are lobbying with steel ministry for anti-dumping duty on Chinese
imports to protect domestic market. It is to be seen if govt. of India will move to
protect domestic steel industry.
India steel demand growth has yet to accelerate
India steel demand has been tepid so far growing by just 0.3% YTD (Apr-Aug 2014),
with the overall positive sentiments yet to flow into actual consumption. Recent
trends indicate demand is likely to pickup in 2HFY15 with cement consumption up
by 11% YTD and passenger vehicle and 2 wheeler sales up by 4.46% and 14.79%
respectively. Overall, Industrial activities are expected to pick up. In terms of trade,
India has again turned a net importer of steel, which we believe is driven by lower
international steel prices, amidst the overall weak demand environment.
43,000
41,000
39,000
37,000
35,000
33,000
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Steel mills lobbying for anti-dumping
duty for long
products
15 September 2014 27

28. India Strategy
Domestic steel demand remains tepid
Source: JPC
While India has turned a net imported to steel YTD July
Apr-14
Jul-14
Source: JPC
India steel consumption yoy (%)
600
400
200
0
-200
-400
Jan-12
Apr-12
India net steel imports ('000 t)
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
China domestic demand weakening; surging exports
China’s domestic steel demand has slowed down considerably with July demand
coming flat YoY. YTD July FY15 apparent steel demand has increased by just 2% as
against 8% for same period last year. Aided by weaker raw material prices, Chinese
steel product prices have corrected sharply driving up exports. China net exports in
July came at 6.3 mt, the highest since 2007 and surging by 74% yoy. YTD July FY15
net exports are up by 57% yoy.
10.0
5.0
0.0
-5.0
-10.0
-15.0
China steel demand weakening – was flat yoy in July…
Apparent steel consumption growth yoy (%)
Feb-11
May-11
Aug-11
Nov-11
Feb-12
May-12
Aug-12
Nov-12
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Source: MOSL, Bloomberg
…driving exports – net exports at their all time highs
China net steel product exports (mt)
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Oct-12
Apr-13
Oct-13
Apr-14
Source: MOSL, Bloomberg
8.0
6.0
4.0
2.0
-
(2.0)
China is the cheapest source of steel products in world. Weakening of Russian
currency (~ 20%) is also making exports attractive for Russian steel mills, potentially
negative for European Mills (e.g. Tata Steel Europe) and US mills.
25%
20%
15%
10%
5%
0%
-5%
-10%
China rebar prices vs. major regions
538 565 570 575 600 583
LatAm
export
fob
EU
import
cfr
US
import
cfr
India
cfr
Source: MOSL, Metal bulletin
China HRC prices vs. major regions
549
620
567
EU
import
cfr
US
import
cfr
India cfr
Source: MOSL, Metal bulletin
433
700
600
500
400
300
200
100
-
China
export
fob
CIS
export
fob
Turkish
export
fob
503
542
595
700
600
500
400
300
200
100
-
China
export
fob
CIS
export
fob
LatAm
export
fob
15 September 2014 28

29. India Strategy
Sliding RM prices driven by oversupply, unlikely to support steel prices
Slowdown in steel demand in China, along with surging supplies continues to impact
raw material prices. China, who gobbled all of exponential growth in raw material
supply, is key driver of raw material prices. A pick up in Chinese steel demand is key
to prevent further slide in raw material prices and thereby steel prices.
Iron ore prices are making new lows every day, down 15% over the last 2-3 weeks at
US$82/dmt cfr China. While coking coal, after consolidating at US$111-113/t (fob
Australia) for nearly six months is down 3%-4% in the last few days.
Iron ore down by 12% over
the last 2-3 weeks, coking
coal down by 2-3%
Iron ore prices (62% fines) have declined further, down to
US$82/t cfr China
CIF FOB
117
96
82
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Source: Bloomberg, MOSL
While coking coal after consolidating at US$110-112/t fob
Australia is down to US$108/t
Spot coking coal (fob Australia) - US$/t
113 112
108
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Source: Bloomberg, MOSL
Apr-14
153
160
150
140
130
120
110
100
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
Export prices of iron ore (USD82/t cfr China), and coking coal (USD108 fob Australia)
are largely in-line with our forecast 2 years ago. HRC prices however are trading at
significant premium perhaps because of demand improvement in rest of world (ex-
China). In seasonally weak second half (of CY2014), there is possibility of gap
narrowing. This doesn’t augur well for Indian steel prices.
Amendment to the mining act; potential risk to Tata SAIL
The government, in July, notified an amendment to the mining act, doing away with
the deemed mining lease extension provision. Thus if a mine is not specifically
granted a mining lease post the expiry of the first extension period, it is presumed to
be de-allocated. This is against the earlier provision which provided deemed lease
extension unless the state government does not act otherwise. Further, the
amendment says mines operating for more than 40 years will not be provided lease
renewals.
Under the amendment, Odisha government de-allocated 6 non-iron ore mines
which were operating under the 2nd deemed extension provision. While for the iron
ore mines, which were ordered to be stopped under the Supreme Court order,
mines of Tata Steel, SAIL and OMC only were allowed to operate and that too only
under an express order and not through lease renewal/extension.
Jharkhand also recently ordered mining stoppage for its iron-ore mines operating
under the 2nd deemed extension provision, including captive mines of Tata Steel and
134
150
130
110
90
70
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Odisha government de-allocated
6 non-iron ore
mines which were
operating under the 2nd
deemed extension provision
15 September 2014 29

30. India Strategy
SAIL. However, unlike the Odisha government, it has not granted work permits to
these captive mines under an alternate route as work in these mines remain on
hold.
It remains difficult to gauge the impact of this amendment due to lack of clarity
from the state governments on their interpretation of the law. We believe, holders
of captive miners are less at risk given their end-use plant and major economic
impact of plant shutdown on the local economy. However, we do highlight the
increase risk profile of these companies (and merchant operators) given the
amendment to the law.
Indian iron ore supply to ease and will put pressure on domestic steel prices
Iron ore supply is likely to ease with permission being granted for liquidation of
inventories lying at mines. Recently, Odisha high court has allowed Ramesh Prasad
Sao (RP Sao) for dispatches of stocked Iron ore at mines head located in mineral rich
belt of Barbil (Odisha). These permits are valid for 3-months (i.e. from 4th Sep- 4th
Dec 2014). However, mining is still restricted. RP Sao is one of the largest merchant
miners in the region, with an annual capacity of 4.5mtpa. According to SteelMint, RP
Sao has about 1mt of Iron fines stocked, which can be liquidated.
As this sets a precedent, more iron ore mines are likely to get permits to liquidate
inventories. According to industry estimates, a total of 40-50mt of iron ore
inventories may become available to steel producers. This will ease the supply and
put pressure on domestic iron ore prices, which have so far remained very resilient
unaffected by volatility in international market. As the supply of iron ore improves,
the prices of pellets, sponge iron and long products will witness correction.
Margin pressure for integrated steel producers but not others
As steel prices come under pressure, the margins for integrated steel producers will
come under pressure. Integrated steel producers (Tata Steel and SAIL) are unlikely
to benefit from fall in iron ore prices instead increased royalty (from 10% to 15%
w.e.f. 1st Sept, 2014) and closure of iron ore mines in Jharkhand will add to costs.
The margins are likely to come under pressure. The target price of Tata steel and
SAIL will be impacted by 10% and 20% respectively for every INR1000/t compression
in EBITDA per ton. Non-integrated steel producers like JSW Steel may not see
pressure on margin as cheaper iron ore and coking coal prices reduce costs for
them.
Jindal steel Power faces risk of coal block de-allocation, which can shave off
INR126/share from our target price. If penalty of INR295/t is imposed on already
mined coal, net debt will increase by further INR30b (INR33/share). If the margins in
steel business come under pressure, there is downside of INR27/share for every
INR1000/t compression in margin.
NMDC iron ore pricing too is likely come under pressure. According to our
calculations, the landed cost of iron ore at west cost of India is 10% more expensive
for fines and 25% more expensive for lumps at IODEX of USD82/dmt cfr north China.
If IODEX doesn’t rebound, NMDC will come under pressure to cut prices as iron ore
supply improves. JSW Steel is top pick among steel stocks.
High Court allows inventory
liquidation for RP Sao iron
ore mine in Odisha…
As this sets a precedent, a
total of 40-50mt of iron ore
may become available
15 September 2014 30

31. India Strategy
Sensitivity of target price w.r.t. change in margins
Company CMP TP
Sensitivity of margins (Rs mn) Remarks
EBITDA EV/Mkt INR/ impact
INR/t INR m at (6.5x) share (%) on TP
Tata Steel 517 650 1000 9,541 62,017 64 10% 9.5mt TSI volumes in FY16
SAIL 79 115 1000 14,705 95,583 23 20% 14.7mt volumes in FY16
JSW Steel 1,348 1,647 1000 12,880 83,720 346 21% margins will be resilient
JSPL 237 403 1000 3,849 25,019 27 7% 3.8mt volumes in FY16
NMDC 177 222 300 10,136 65,881 17 7% 33.8mt domestic volume in FY16
Sensitivity of target price w.r.t. change in EV/EBTIDA
1,647
650
115
At 6.5x At 5.5x
403
222
1,182
507
93
338
199
INR/share
2,000
1,500
1,000
500
-
JSW TSL SAIL JSPL NMDC
Source: MOSL
Our target price are based
on EV/EBITDA of 6.5x
15 September 2014 31

32. India Strategy
Interest rate fall: PSBs and Bulk borrowers to benefit the most
Growth acceleration and fall in stress loans indirect benefit for the system
A decline in commodity prices over the past few weeks augurs well for the
inflationary outlook (especially WPI) in the economy. As the sensitivity of decline in
commodity prices is lower on CPI (key benchmark for policy rates), cut in policy
rates is unlikely to be material in our view. Nevertheless, looking at the liquidity
situation, lower demand and improving twin deficit, systemic rates may come down
in the near term which will benefit (a) Bulk borrowers like NBFCs, Small private
banks and PSU banks (b) PSU banks especially due to higher share of G-Sec portfolio
(MTM gain on AFS portfolio) and (c) overall growth and asset quality in the system.
To play expected fall in bulk rates and G-Sec rates our top picks are YES, AXSB, PNB,
LICHF, SBIN and CBK.
1. Yes Bank would be a key beneficiary of decline in the wholesale deposit rates.
Deposits with maturity of upto 1Yr forms around 73% of o/s deposits (as of
FY14). More than 60% of the deposits are largely corporate/bulk in nature.
Further, it also has large corporate bond portfolio (19% of the customer assets)
and monetization of which will provide capital gains and release capital for
future growth.
2. Axis Bank: Traditionally AXSB had higher share of deposits maturing/re-pricing
within a year vs loans while the ALM profile has improved significantly over the
couple of years, mismatch still remains high. Thus, in our view, re-pricing of
liabilities is likely to be faster than assets which will be margin accretive.
Deposits maturing within a year form ~47% of o/s deposits (as of FY14). Even
AXSB has the higher share of corporate bond book in the overall balance sheet.
3. SBI/PNB is highly levered to macro-economic conditions. Fall in interest rates
would alleviate asset quality and growth fears. PNB has the highest share of AFS
portfolio and duration amongst the PSU banks. Every 100bp change in yields will
lead to 28bp ROA (pre-tax) improvement for PNB.
4. CBK has a high share of bulk deposits in overall deposits. AFS portfolio forms
~27% of the overall investments book. Every 100bp decline in yields will lead to
25bp ROA (pre-tax) improvement on account of MTM gains.
5. LICHF Will benefit from cooling wholesale rates; as 65% of LICHF’s funding is via
NCD route (which have seen rates cool off by ~50bps over last three months).
LICHF will see NCDs reprising of INR 44b in 2HFY15 (will happen at lower rates)
and loans reprising of INR60b, moreover incremental funding of ~INR 100b will
happen via this route. LICHF also plans to replace bank borrowings by NCDs
(since funding via NCD route is cheaper by 100bp vis-à-vis bank borrowings). On
the assets side 56% of LICHF’s book is at fixed rates and remaining is unlikely to
be reprised as banks are already lending at base rates. This will help improve the
spreads by 10-15bps.
FINANCIALS
15 September 2014 32

33. India Strategy
Wholesale funded banks perform better with falling inflation
15
10
5
0
-5
1000
500
0
AXSB YES CBK
SBIN PNB Bankex
Inflation (WPI, RHS)
Jan-06
Jun-06
Nov-06
Apr-07
Sep-07
Feb-08
Jul-08
Dec-08
May-09
Oct-09
Mar-10
Aug-10
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
Feb-13
Jul-13
Dec-13
May-14
* Stock prices rebased to 100 as on Jan-2006 Source: Company, MOSL
Maturity profile of deposits for banks (% of total deposits): YES and CBK high share of short term deposits
Upto 6M 6M-1Y
13.4
30.6
36.2 32.5
26.1
39.0
UNBK PNB SBIN BOI CBK BOB
Source: Company, MOSL
12.9
Upto 6M 6M-1Y
17.8 23.4
10.9
23.4
5.1 50.0 49.2
22.6 24.0 28.8 25.2
HDFCB ICICIBC AXSB FB IIB YES
PNB and CBK to be biggest beneficiary (for 100bp decline in yields)
Banks
Gross Inv.
Book
(INR b)
AFS Inv.
(INR b)
AFS (%) to
Gross Inv.
AFS
11.6 13.7 13.5
24.3 24.5 25.6
Duration
(Yrs)
MTM Gains
(INR b)
FY15E PBT
(INR b)
% of FY15E
PBT
% of FY15E
Avg Assets
SBIN 3,983 797 20.0 3.10 25 225 11.0 0.13
PNB 1,383 388 28.1 4.24 16 83 19.9 0.28
BOB 1,217 197 16.2 3.40 7 81 8.3 0.10
BOI 1,207 333 27.6 4.10 14 45 30.4 0.22
UNBK 918 211 23.0 2.63 6 34 16.2 0.15
CBK 1,299 345 26.6 3.80 13 37 35.3 0.25
OBC 596 138 23.1 3.84 5 20 26.3 0.23
INBK 457 101 22.2 3.00 3 16 18.7 0.16
Source: Company, MOSL
15 September 2014 33

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Anosh Koppikar Kadambari Balachandran
Email:anosh.Koppikar@motilaloswal.com Email : kadambari.balachandran@motilaloswal.com
Contact(+65)68189232 Contact: (+65) 68189233 / 65249115
Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931
Motilal Oswal Securities Ltd
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
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Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com