Harshad Borawake (HarshadBorawake@MotilalOswal.com); +91 22 3982 5432

25 August 2015

Update | Sector: Oil & Gas

IOC CMP: INR395 TP: INR570 (+44%) Buy

Investors are advised to refer through disclosures made at the end of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Largest OMC; diversification offers earnings stability Marketing margins and Paradip to drive earnings; valuations attractive with 4% dividend yield Ongoing sector reforms reduced IOCL’s debt and we expect marketing margins to

improve over the next 12-18 months owing to pricing freedom. We believe IOCL’s large asset base in refining and marketing is non-replicable and

its well-diversified earnings provide stability to earnings. While refining margins would be governed by global demand-supply; likely higher

marketing margins provide predictability to its earnings and should lead to re-rating, in our view.

The stock trades at 7.2x FY17E EPS of INR55. Our SOTP-based fair value stands at INR570, implying 44% upside. Valuations attractive with 4% dividend yield. Buy.

Reforms beneficiary; debt reduced, now on to marketing margins Indian oil sector witnessed unprecedented reforms (such as auto fuel de-

regulation) in the last two years, leading to more than 80% reduction in under-recoveries.

IOCL’s debt reduced ~45% and the company is expected to benefit from higher marketing margins owing to pricing power. We model marketing margins at INR1.6/2.0/liter in FY16/FY17 v/s regulated margins of INR1.4/liter in auto fuels.

Diversified earnings give stability; large non-replicable asset base Of the three OMCs, IOCL’s earnings are the most diversified—share of

refining at ~40%, marketing at ~30%, pipeline at 24% and petchem at 6%. We believe IOCL’s asset base in non-replicable, with control over 11 of

India’s 22 refineries (35% capacity share), 71% of downstream pipelines and 46% (24,400) of retail outlets.

Paradip refinery nearing commissioning, full benefit in 2HFY17 IOCL’s 15mmt (INR350b capex, 12.2 Nelson complexity) Paradip refinery is

nearing commissioning, with all units expected to start in 2HFY16. We expect the refinery to stabilize by 2HFY17 and estimate break-even

GRM of USD7-8/bbl, with distillate yield of 81%. 700KTA planned downstream propylene will boost refinery complexity and project IRR.

The medium-term refinery capacity additions will be brownfield (hence cost effective) in nature and include expansion at Gujarat (13.7 to 18mmt), Mathura (8 to 11mmt) and Panipat (15 to 20mmt).

Valuation and view Key risks include crude price (inventory losses) and INR/USD volatility and

any delay in the commissioning of Paradip refinery. We value IOCL at 5.5x for refining/petchem and 8x for marketing to arrive

at a fair value of INR570, implying a 44% upside. The stock trades at 7.2x (lowest among the three OMCs) FY17E EPS of INR55 and 1.1x FY17E BV.Buy.

BSE Sensex S&P CNX 26,032 7,881

Stock Info Bloomberg IOCL IN

Equity Shares (m) 2,428.0

52-Week Range (INR) 465/307

1, 6, 12 Rel. Per (%) -6/31/12

M.Cap.(INR b)/(USD b) 962.3/14.7

AvgVal(INRm)/Vol ‘000 503/1357

Free float (%) 31.4

Financial Snapshot (INR Billion) Y/E Mar 2015 2016E 2017E

Sales 4,483 3,057 3,374

EBITDA 93.4 253.0 264.9

Adj. PAT 32.4 126.5 133.8

Adj. EPS (INR) 13.4 52.1 55.1

EPS Gr. (%) -39.2 289.9 5.8

BV/Sh.(INR) 283.5 323.8 359.0

RoE (%) 4.7 17.2 16.1

RoCE (%) 6.4 16.4 15.5

P/E (x) 29.7 7.6 7.2

P/BV (x) 1.4 1.2 1.1

EV/EBITDA (x) 15.8 5.8 5.3

Div. Yield (%) 1.7 4.0 4.3

Shareholding pattern (%)

Jun-15 Mar-15 Jun-14 Promoter 68.6 68.6 68.6

DII 4.7 4.6 4.6

FII 2.4 2.6 2.4

Others 24.3 24.2 24.4 Notes: FII includes depository receipts

Stock Performance (1-year)

300

350

400

450

500

Aug-

14

Oct

-14

Dec

-14

Feb-

15

Apr-

15

Jun-

15

Aug-

15

I O C LSensex - Rebased

IOC

25 August 2015 2

Pricing reforms lead to significant debt reduction Expect marketing margins to move up

Indian oil sector witnessed unprecedented reforms (such as auto fuel de-regulation) in

the last two years, leading more than 80% reduction of in under-recoveries.

IOCL’s debt reduced ~45% and the company is expected to benefit from higher

marketing margins owing to pricing power. We model marketing margins at

INR1.6/2.0/liter in FY16/FY17 v/s regulated margins of INR1.4/liter in auto fuels.

Oil sectors reforms in the final leg Background: Indian oil sector has historically been heavily regulated, led by

controlled pricing in auto (diesel, gasoline) and domestic fuels (LPG, kerosene). Consequently, retail prices continued to be lower than the required pricing; this resulted in under-recoveries, which in turn were to be shared by the government, upstream and downstream companies. As a result, the government and oil companies faced financial stress—leading to high debt, and lower profitability and shareholder returns.

What has changed? Having suffered from the above approach, the government decided to commence policy reforms in June 2010 with gasoline de-regulation—as this was the easiest reform, given the lower volume and gasoline being largely considered as urban fuel. In FY12 and FY13, owing to rising under-recoveries (peaked at INR1.6t in FY13) and adverse remarks from global rating agencies, the government finally began reforms in the diesel and LPG segment. The government initiated monthly diesel price hike of INR0.5/liter in Jan-13

and finally de-regulated it completely in Oct-14. Also, in Jan-13, the government de-regulated diesel for bulk consumers. On the LPG front, the government initially limited the subsidized cylinders to

12 per household per year and recently transferred the LPG subsidy disbursal through direct cash transfer with a view to curtail the practice of having multiple connections and ensure that only true beneficiary receives the subsidy.

What is the impact? Policy reforms reduced under-recoveries and debt levels of oil marketing companies, leading to improvement in profitability.

What’s the current status? While gasoline and diesel are fully de-regulated, LPG subsidy is now disbursed through direct cash transfer; kerosene is expected to follow LPG and we expect kerosene direct cash transfer pilot projects to be launched soon.

Subsidy sharing: On the subsidy sharing front, OMCs were sharing ~3% for the last few years; but with LPG subsidy now being given by the government through budget (INR18/kg) and kerosene subsidy at INR12/liter and rest to be borne by upstream, we do not model any subsidy sharing for OMCs.

IOC

25 August 2015 3

Exhibit 1: Gross under-recoveries have reduced >85% from the peak in FY13; LPG now part of the government budget

Source: PPAC, MoPNG, MOSL

Exhibit 2: We model nil subsidy sharing for OMCs from FY16

(INR b) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Fx Rate (INR/USD) 44.9 44.3 45.2 40.3 46.0 47.5 45.6 47.9 54.5 60.6 61.1 64.0 65.0 Brent (USD/bbl) 42 58 64 82 85 70 86 114 111 108 86 60 65 Product-wise gross under-recoveries (INR b)

Petrol 2 27 20 73 52 52 27 0 0 0 0 0 0 Diesel 22 126 188 353 523 93 348 819 915 628 109 0 0 Kerosene 95 144 179 191 282 174 200 278 296 306 248 165 174 LPG 84 102 107 156 176 143 205 284 399 465 366 0 0

Total 201 400 494 773 1,033 461 780 1,385 1,610 1,399 723 165 174 Sharing of gross under-recoveries (INR b)

Government 0 115 241 353 713 260 410 829 1,000 707 273 102 95 Upstream 59 140 205 257 329 145 303 552 600 671 428 63 79 OMC's 142 138 48 163 (9) 56 67 0 10 21 22 0 0

Total 201 400 494 773 1033 461 780 1,385 1,610 1,399 723 165 174 Sharing of gross under-recoveries (%)

Government 0 29 49 46 69 56 53 60 62 51 38 62 55 Upstream 30 35 42 33 32 31 39 40 37 48 59 38 45 OMC's 70 35 10 21 (1) 12 9 0 1 2 3 0 0

Total 100 100 100 100 100 100 100 100 100 100 100 100 100

Source: PPAC, MoPNG, MOSL

IOCL’s debt reduced meaningfully, balance sheet strengthened During the controlled price regime, OMCs (HPCL, BPCL and IOCL) had to bear the

losses in case of rising international prices till the time government compensated through subsidy (which was typically delayed by 3-5 months).

Delayed government support led OMCs to use debt to fund working capital requirement, thus straining their balance sheets and income statements. Interest on under-recovery-related debt was not compensated by the government.

However, diesel de-regulation and lowering of crude prices have reduced OMCs’ debt significantly and thereby interest outgo.

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E

LPG 84 102 107 156 176 143 205 284 399 465 366 0

Kerosene 95 144 179 191 282 174 200 278 296 306 248 165

Diesel 22 126 188 353 523 93 348 819 915 628 109 0

Petrol 2 27 20 73 52 52 27 0 0 0 0 0

Total 201 400 494 773 1,033 461 780 1,385 1,610 1,399 723 165

201 400

494

773

1,033

461

780

1,385

1,610 1,399

723

165

Petrol Diesel Kerosene LPG Total

IOC

25 August 2015 4

Combined net debt of all the three OMCs reduced ~45%, with similar decline seen in all.

Exhibit 3: OMCs’ net debt reduced ~45%, led by policy reforms and lower oil price (INRb)

*BPCL and IOCL on consolidated basis Source: Company, MOSL

Exhibit 4: IOCL debt profile: Meaningful reduction seen in FY15 INR Billion FY11 FY12 FY13 FY14 FY15 Long term debt

Forex 52 55 140 262 288 Domestic 149 182 129 157 82

Sub-total 201 237 269 418 370 % Forex 26% 23% 52% 63% 78% Short term debt

Forex 154 224 324 316 98 Domestic 223 339 296 215 116

Sub-total 377 563 620 531 214 % Forex 41% 40% 52% 60% 46% Total debt

Forex 206 279 464 578 386 Domestic 372 521 425 372 198

Total 578 800 889 949 584 % Forex 55% 35% 52% 61% 66%

Source: Company, MOSL

Marketing margins improvement to drive next earnings growth Post the interest cost reduction, the next meaningful earnings growth is

expected from improvement in the marketing margins on auto fuels, pricing for which is now market determined.

IOCL’s (OMCs’) auto fuel marketing margins were fixed in November 2006 at INR1.4/liter and, in later years, were not increased in line with the actual costs or global trends.

Global comparison shows that the controlled marketing margin of INR1.4/liter is ~60% below the global average.

Also, private competitors’ operating costs will be higher than OMCs that have well-entrenched logistics network and would require higher profitability to make decent returns.

187 176

443 486

687

914 949 1,056

1,376 1,479 1,476

825 808 717

-100

300

700

1,100

1,500

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E

HPCL BPCL IOC Total

IOC

25 August 2015 5

In the de-regulated scenario, we expect OMCs’ marketing division profitability to increase meaningfully. However, we do not expect this increase to happen suddenly but gradually over the next 12-18 months.

We model marketing margins at INR1.6/2.0/liter in FY16/FY17 v/s regulated margins of INR1.4/liter in auto fuels.

Exhibit 5: Global diesel marketing margins well above India’s regulated margins level (INR/liter)

Source: Industry, MOSL

1.40

3.00

1.50 1.60

4.80

3.01

4.50

2.83

1.77

3.49 3.40

Indi

a (r

egul

ated

)

Indi

a (4

QFY

15)

Indi

a (1

QFY

16)

Indi

a (F

Y16E

)

Chev

ron

(New

Zea

land

)

CST

(US)

Park

land

Fue

l (C

anad

a)

Thai

land

S.Af

rica

-Pe

trol

S. A

fric

a -D

iese

l

Aus

tral

ia

IOC

25 August 2015 6

Diversified earnings give stability Large un-replicable asset base a big advantage

Of the three OMCs, IOCL’s earnings are the most diversified—share of refining at

~40%, marketing at ~30%, pipeline at 24% and petchem at 6%.

We believe IOCL’s asset base in non-replicable, with control over 11 of India’s 22

refineries (35% capacity share), 71% of downsteam pipelines and 46% (24,400) of retail

outlets.

IOCL has well-diversified earnings IOCL has the most diversified earnings profile among the three OMCs, with

meaningful contribution (apart from refining and marketing) from pipeline and petrochemicals.

While HPCL is the most levered to increase in marketing margins, IOCL’s diversification provides earnings support in times of crude price and exchange rate volatility. Its large pipeline network provide annuity like earnings (~24% of total) and ongoing capex on new pipelines would further increase these stable earnings.

Exhibit 6: EBITDA break-up in %: IOCL is the most diversified among the three OMCs

*Average of FY11-FY15 EBITDA, FY11-FY14 for IOCL to normalize refining share which was impacted by huge inventory loss in FY15 Source: Company, MOSL

Huge unreplicable asset base IOCL will be the largest refiner in India post the commissioning of Paradip

refinery, with control over 35% of the refining capacity with its 11 refineries. The company has a pipeline (crude + product) network of 11,000+km, with

overall capacity of 80.5mmtpa. In the petroleum market, IOCL it ~47% market share in volume terms and

~43,000 touch points (include 24,400 auto fuel retail outlets). IOCL has diversified crude sourcing avenues, with majority of the imports

coming from Middle East (~64%) and Africa (~28%).

26 37 29

17 7 24 - -

6

57 57 41

HPCL BPCL IOCL

Marketing

Petchem

Pipelines

Refining

IOC

25 August 2015 7

Exhibit 7: IOCL is the largest refining and marketing company in India

*Includes Paradip in IOCL refining capacity Source: Company, MOSL

Exhibit 8: IOCL refinery locations are well diversified, giving it a logistical advantage

Source: Company, MOSL

IOC

25 August 2015 8

Exhibit 9: IOCL’s pipeline network covers 11,000km, with overall capacity of ~80mmtpa

Source: Company, MOSL

Exhibit 10: Retail petroleum stations: IOCL has ~24,400 retail fuel stations, giving it a dominant share of 46%

Source: Company, MOSL

5 5 5 6 7 8 8 8 9 10 11 12 13 13 5 5 5 6 7 8 8 8 9 9 10 12 13 13 9 9 11 13 15 16 18 18 19 19 21 22 24 24

- - -0

2 3 3 3 3 3 3

3 3 3

18 19 22 26

31 35 37 38 39 42 45

49 52 53

49 50 52 51 47 47 48 48 47 47 46 46 46 46

FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15

HPCL BPCL IOCL Private Total IOCL outlet share (%)Retail outlets ('000)

IOC

25 August 2015 9

Paradip refinery to fully commission in 2HFY16 Full benefit expected in 2HFY17

IOCL is in the midst of commissioning its 15mmt (INR350b capex, Nelson complexity at

12.2) greenfield Paradip refinery with expected start of all units in 2HFY16.

We expect refinery to stabilize by 2HFY17 and estimate break-even GRM of

USD7-8/bbl with distillate yield of 81%. 700KTA planned downstream propylene will

further boost its complexity and project IRR.

Its medium-long term refinery capacity additions will be brownfield (hence cost

effective) in nature and include expansion at Gujarat (13.7 to 18mmt), Mathura (8 to

11mmt) and Panipat (15 to 20mmt).

Paradip refinery to fully commission in 2HFY16 IOCL’s first port-based 15mmtpa (largest on India’s east coast) refinery at

Paradip is nearing commissioning. It will be the most complex refinery, with Nelson Complexity index of 12.2,

distillate yield of 81% and an estimated capex of INR330b. While the recent greenfield refineries of HPCL (Bhatinda – 9mmtpa) and BPCL

(Bina – 6mmtpa) witnessed teething issues in stabilization, we believe IOCL’s refinery has an advantage of lower capex which minimizes the asking rate for break-even GRM. We estimate a break-even GRM of USD7-8/bbl and expect it to stabilize by 2HFY17.

Addition of the INR36b downstream 700KTA polypropylene unit will boost overall complex IRR.

We expect Paradip refinery to be a medium-term earnings driver for IOCL. Assuming a GRM of USD10/bbl and opex of USD2/bbl, it could add INR6/sh to IOCL’s earnings on a normalized basis (i.e. from FY18).

Exhibit 11: Paradip refinery to boost IOCL group refinery capacity by 23%

Source: Company, MOSL

New capex plans diversified, but focused on core business IOCL’s medium- to long-term capex plans include brownfield refinery capacity

additions, new pipelines and LNG terminal at Ennore.

60.2 61.7 65.7 65.7 65.7 65.7 65.7

80.7

93.0

0

25

50

75

100

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Medium-term

Digboi Guwahati Koyali Barauni Haldia Mathura Panipat Bongaigaon CPCL Paradip Total

Paradip refinery complexity will be highest – comparable with RIL’s Jamnagar refinery complex

Refinery Index Digboi 11.0 Panipat 10.5 Haldia 10.4 Gujarat 10.0 Mathura 8.4 Bogaigaon 8.2 Barauni 7.8 Guwahati 6.7 Current avg 9.6 Paradip 12.2

IOC

25 August 2015 10

Refinery capacity expansion projects include expansion at Gujarat (13.7 to 18mmt), Mathura (8 to 11mmt) and Panipat (15 to 20mmt).

While we believe the brownfield expansions and pipeline projects will go ahead, Ennore LNG terminal could get delayed due to LNG economics and new pipeline issues (as witnessed in Petronet LNG’s Kochi-Mangalore-Bangalore pipeline connectivity).

On the E&P front, IOCL has stakes in 17 blocks—of which 10 are overseas. The company’s recent investment was USD1.1b for 10% stake purchase in Canada-based Progress Energy for its proposed LNG export facility. Going forward, IOCL expects to invest additional USD3b for development.

As against the capex of USD2.3b in FY15, IOCL expects a capex of USD1.7b in FY16; this includes USD660m for refining, USD200m for pipeline, USD508m for marketing and the rest toward Petchem, E&P and others.

Exhibit 12: Paradip refinery project is nearing completion Project / description Capex (USDm) Completion date

15mmtpa Paradip Refinery 5,528 Oct-15 Pipelines

Paradip–Raipur–Ranchi 287 Mar-15 Paradip–Haldia–Durgapur LPG 146 Jun-15

Other key capex Polypropylene unit at Paradip 504 Sep-15 Distillate Yield Improvement at Haldia 492 Sep-15 Ennore LNG Terminal 824 4Q - 2018

Total 7,781

Source: Company, MOSL

IOC

25 August 2015 11

Valuation and view We believe the ongoing reforms have the potential to transform OMCs into a

structural investment play, led by (a) higher earnings predictability and (b) increase in profitability leading to higher RoE’s.

OMCs profitability is set to improve owing to pricing freedom post the diesel de-regulation, led by (a) lower interest cost—diesel de-regulation and lower oil prices to reduce working capital loans; (b) higher auto fuel marketing margins—parity with international peers and relatively high cost for private marketers provide ample room for improvement.

We believe OMCs’ economic moat is widening, led by (1) scope for meaningful increase in marketing margin and, hence, profitability; (2) slower ramp-up by private marketers; (3) high volume growth aided by expected GDP boost; (4) improving balance sheet with increasing cash flow.

Likely increase in diesel marketing margins: The next big earnings jump for OMCs’ would come from likely higher marketing margins in diesel. We believe OMCs will earn additional marketing margins of at least INR0.5-1/liter; even if private players take market share as high as 15%, on OMCs will benefit on a net basis. An INR0.5/liter increase in diesel marketing margins raises IOCL’s EPS by ~12%. We model gross per liter diesel margins of INR1.6/2.0 in FY16/FY17.

We value IOCL at 5.5x for refining/petchem and 8x for marketing to arrive at a fair value of INR570, implying a 44% upside. The stock trades at 7.2x FY17E EPS of INR55 and 1.1x FY17E BV. Maintain Buy.

Exhibit 13: IOCL – Key Assumptions FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E Exchange Rate (INR/USD) 45.8 47.5 45.7 47.9 54.5 60.6 61.1 64.0 65.0 65.0 Brent Crude (USD/bbl) 84.8 69.6 86.5 114.5 110.0 107.8 86.0 60.0 65.0 70.0 Market Sales Volume (MMT) 66.8 69.8 72.9 75.7 76.2 75.5 76.5 77.9 79.7 81.7 GRM (USD/bbl)

IOCL GRM (USD/bbl) 3.7 4.5 5.9 3.6 2.2 4.2 0.3 5.8 5.5 5.7 Reuters Singapore GRM 5.8 3.6 5.2 8.2 7.6 5.6 6.4 6.7 7.0 7.0 Prem/(disc) (2.1) 0.9 0.8 (4.5) (5.4) (1.4) (6.1) (0.9) (1.5) (1.3)

Refining capacity 49.7 51.2 54.2 54.2 54.2 54.2 54.2 66.2 66.2 69.0 Refining capacity utilization (%) 103% 99% 98% 103% 101% 98% 99% 82% 100% 95% Refinery throughput (mmt) 51.4 50.7 53.0 55.6 54.7 53.1 53.6 54.4 63.5 65.6 Under recoveries Sharing (INRb) Gross under recoveries 586 259 431 755 858 729 398 105 111 113 Net sharing (0) 32 38 0 5 11 12 - - - Net sharing (%) 0% 12% 9% 0% 1% 1% 3% 3% 0% 0%

Source: Company, MOSL

Exhibit 14: OMCs: Comparative valuations

M Cap (INR) Var. EPS (INR) P/E (x) P/B (x) RoE (%) Dvd

USDb CMP TP TP (%) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Yld %

HPCL 4.3 824 1,190 44 81 98 106

10.2 8.4 7.7

1.7 1.5 1.3

17.6 19.3 18.4

3.6 BPCL* 9.5 865 1,198 38 66 84 89 11.3 8.9 8.4 2.1 1.8 1.6 23.0 24.9 22.9 3.1 IOCL 14.7 396 576 44 13 52 55 29.7 7.6 7.2 1.4 1.2 1.1 4.7 17.2 16.1 4.0

*P/B, P/E adj. for E&P valueof INR115/sh; Dividend yield on FY16E basis

Please refer our recent detailed update on OMCs

IOC

25 August 2015 12

Exhibit 15: We value IOCL at INR570/sh EV/EBITDA Valuation

Investment valuation

FY17 EBITDA

Multiple (x) INRb INR/sh

Investments INRb INR/sh

Refining 103 5.5 564 232

CPCL 10 4 Post 25% discount Marketing & others 76 8.0 605 249

Gail (India) 7 3 Post 25% discount

Petchem 33 6.0 199 82

ONGC 128 53 Post 25% discount Pipeline 39 8.0 310 128

Petronet LNG 13 5 Post 25% discount

EV

1,677 691

Oil India 10 4 Post 25% discount Less: Net Debt

479 197

Treasury Shares

Equity Value

1,198 494

Treasury Sh (BRPL) 10 4 Post 25% discount Investment value

186 77

Treasury Sh (IBP) 8 3 Post 25% discount

Fair value

1,385 570

Total 186 77 CMP

395

% upside/(downside)

44%

Source: Company, MOSL

Exhibit 16: IOCL: Fair value sensitivity to GRM (USD/bbl) and marketing margins (INR/KL) Marketing Margins (INR/KL)

570.3 1,400 1,900 2,400 2,900 3,400 3,900

GRM

(U

SD/b

bl)

3.0 308 384 460 536 612 688 4.0 377 453 529 604 680 756 5.0 445 521 597 673 749 825 6.0 513 589 665 741 817 893 7.0 582 658 733 809 885 961 8.0 650 726 802 878 954 1,029

Source: Company, MOSL

Exhibit 17: IOCL: FY17E PES Sensitivity to GRM (USD/bbl) and marketing margins on diesel Marketing Margins (INR/KL) 55.1 1,400 1,900 2,400 2,900 3,400 3,900

GRM

(U

SD/b

bl)

3.0 26 33 39 46 52 58 4.0 35 41 48 54 61 67 5.0 43 50 56 63 69 75 6.0 52 58 65 71 77 84 7.0 60 67 73 79 86 92 8.0 69 75 81 88 94 101

Source: Company, MOSL

Please refer to our recent 1QFY16 result updates for OMCs BPCL: 14 August 2015 HPCL: 11 August 2015 IOC: 13 August 2015

IOC

25 August 2015 13

Exhibit 18: OMCs: One-year relative performance—IOC has underperformed partly due to OFS overhang

Source: Bloomberg, MOSL

Exhibit 19: Government holding in OMCs (%)

*Post 10% stake sale by the Government Source: Company, MOSL

Exhibit 20: FII holding in OMCs (%)

Source: Company, MOSL

Exhibit 21: FII holding in OMCs as a % of free float (%)

Source: Company, MOSL

80

120

160

200

240

Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15

HPCL BPCL IOC

66.2 66.2 66.2 66.2 66.2 64.3 64.3 64.3

54.9 54.9 54.9 54.9 54.9 54.9

54.9

51.0 51.0 51.0 51.0 51.0 51.0 51.1 51.1 51.1 51.1 51.1 51.1 51.1 51.1 51.1

82.0 82.0 82.0 82.0 82.0 82.0 80.4 80.4 78.9 78.9 78.9 78.9

68.6 68.6

58.6

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Aug-

15*

B P C L H P C L I O C L

0

8

16

24

32

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Jun-

15

B P C L H P C L I O C LFII as a % of total

0

15

30

45

60

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

Jun-

15

B P C L H P C L I O C LFII as a % of free float

IOC

25 August 2015 14

Story in charts

Exhibit 22: IOCL’s GRM is hovering at a discount to Singapore GRM since FY12 (USD/bbl)

Source: Company, MOSL

Exhibit 23: Marketing sales grew at a 3% CAGR, whereas refinery throughput at a CAGR of 2% in the last six years (FY08-14)

Source: Company, MOSL

Exhibit 24: Diesel de-regulation to reduce working capital, leading to lower interest costs

Source: Company, MOSL

Exhibit 25: Expect D/E to decline as earnings increase (x)

Source: Company, MOSL

Exhibit 26: Expect return ratios to improve in coming years (%)

Source: Company, MOSL

Exhibit 27: IOCL: One-year forward P/E chart

Source: Company, MOSL

2

1 1

5

5

1

6

1 2

3.7

4.5 5.9

3.6

2.2 4.2

0.3

5.8 5.3

5.8

3.6 5.2

8.2 7.6

5.6 6.4 6.7 7.0

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Prem/(Disc) to Singapore IOCL GRMSingapore GRM

67 70 73 76 76 76 77 78 80

51 51 53 56 55 53 54 5464

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Marketing Sales (mmt) Refinery Throughput (mmt)

450 446 527 754 783 806 497 552 552

40

15 27

56 64

51

34 24

30

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

Total Debt (INRb) Interest Cost (INRb)

1.0

0.91.0

1.3 1.31.2

0.70.7

0.6

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

D/E Ratio

622

14

20

7

85

17

16

8

16

1113

8

9

6

16

15

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

RoE (%) RoCE (%)

8.48.9

11.510.5

0

7

14

21

28

Aug

-00

Oct

-01

Dec

-02

Feb-

04

Apr

-05

Jun-

06

Jul-

07

Sep-

08

Nov

-09

Jan-

11

Mar

-12

Apr

-13

Jun-

14

Aug

-15

P/E (x) 15 Yrs Avg(x)

IOC

25 August 2015 15

Financials and valuations

Income Statement (Consolidated) (INR Million) Y/E March 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Net Sales 2,501,053 3,081,315 4,072,314 4,607,497 4,872,595 4,483,152 3,057,185 3,373,577 3,744,213 Change (%) -12.6 23.2 32.2 13.1 5.8 -8.0 -31.8 10.3 11.0 Finished Gds Pur. 1,007,775 1,275,911 1,572,508 1,555,286 1,560,457 1,408,174 1,224,966 1,045,748 1,148,493 Raw Materials Cons 1,158,063 1,445,071 2,041,610 2,590,820 2,767,619 2,583,039 1,255,663 1,745,272 2,089,025 Other Operating Costs 206,462 235,028 277,923 334,015 384,808 398,514 323,602 317,692 207,842 EBITDA 128,753 125,305 180,273 127,377 159,711 93,424 252,955 264,864 298,853 % of Net Sales 5.1 4.1 4.4 2.8 3.3 2.1 8.3 7.9 8.0 Depreciation 35,552 49,326 53,093 56,915 63,600 52,190 51,897 63,730 74,222 Interest 17,262 29,803 58,947 70,835 59,079 41,746 29,880 36,584 32,984 Other Income 74,547 54,964 48,797 45,416 45,278 53,975 32,487 37,676 40,501 Excep/Prior period items 0 0 -77,078 0 17,468 16,681 16,725 0 0 PBT 150,486 101,140 39,953 45,042 99,778 70,143 220,391 202,226 232,149 Tax 40,499 20,284 -2,700 8,770 30,113 21,426 76,163 67,511 77,148 Rate (%) 26.9 20.1 -6.8 19.5 30.2 30.5 34.6 33.4 33.2 PAT 109,987 80,856 42,653 36,273 69,666 48,718 144,228 134,715 155,001 Minority interest -2,855 -2,549 -393 8,217 1,190 402 -1,022 -892 -848 Group net profit 107,132 78,307 42,260 44,490 70,856 49,120 143,206 133,823 154,153 Adj. net profit 107,132 78,307 119,338 44,490 53,388 32,439 126,480 133,823 154,153 Change (%) 312.1 -26.9 52.4 -62.7 20.0 -39.2 289.9 5.8 15.2

532,911

Balance Sheet (INR Million) Y/E March 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Share Capital 24,280 24,280 24,280 24,280 24,280 24,280 24,280 24,280 24,280 Reserves 500,344 551,473 579,454 606,092 654,851 664,043 761,798 847,329 947,509 Net Worth 524,623 575,752 603,734 630,372 679,130 688,323 786,077 871,609 971,789 Minority interest 18,330 19,930 19,437 12,618 11,706 10,733 11,755 12,647 13,494 Loans 494,726 578,376 800,153 867,894 889,325 581,541 601,551 601,551 529,071 Deferred Tax 54,170 70,282 59,696 63,323 64,228 68,356 100,825 102,798 105,064 Capital Employed 1,091,849 1,244,341 1,483,020 1,574,207 1,644,389 1,348,952 1,500,209 1,588,606 1,619,419

Gross Fixed Assets 788,886 1,008,694 1,076,256 1,151,002 1,269,522 1,375,223 1,478,123 1,911,023 2,003,923 Less: Depreciation 334,111 382,229 430,447 484,133 544,856 608,119 660,015 723,745 797,967 Net Fixed Assets 454,775 626,465 645,809 666,869 724,666 767,104 818,107 1,187,277 1,205,956 Capital WIP 227,678 142,842 154,496 272,400 380,609 403,781 403,781 73,781 73,781

Investments 214,298 186,469 175,879 173,508 158,950 160,687 160,687 160,687 160,687 Goodwill 224 235 244 870 878 705 705 705 705 Cash & Bank Balance 15,984 15,374 8,220 12,198 37,045 12,211 80,012 134,336 156,053 Inventory 410,765 549,171 638,510 666,043 723,394 499,174 463,147 505,269 548,754 Debtors 56,062 76,546 115,518 125,021 125,517 76,448 79,988 86,852 94,197 Loans & Advances 152,070 233,573 436,202 456,188 470,905 385,358 363,996 364,062 364,128 Other assets 15,264 15,060 23,387 44,148 44,484 31,487 31,802 32,120 32,441 Curr. Assets, L & Adv.

Liabilities 351,658 532,103 561,218 619,702 751,018 707,229 623,426 677,893 738,693 Provisions 103,612 69,291 154,028 223,335 271,040 280,773 278,590 278,590 278,590 Net Current Assets 194,874 288,330 506,591 460,560 379,287 16,676 116,929 166,156 178,291 Application of Funds 1,091,849 1,244,341 1,483,020 1,574,207 1,644,389 1,348,952 1,500,209 1,588,606 1,619,419 E: MOSL Estimates

IOC

25 August 2015 16

Financials and valuations

Ratios Y/E March 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E Basic (INR)

Adj. EPS 44.1 32.3 49.2 18.3 22.0 13.4 52.1 55.1 63.5 Reported EPS 44.1 32.3 17.4 18.3 29.2 20.2 59.0 55.1 63.5 Cash EPS 58.8 52.6 71.0 41.8 48.2 34.9 73.5 81.4 94.1 Book Value 216.1 237.1 248.7 259.6 279.7 283.5 323.8 359.0 400.3 Dividend 13.0 9.5 5.0 6.2 8.7 6.6 16.0 17.0 19.0 Payout (incl. Div. Tax.) 36.1 38.4 12.2 35.2 35.2 52.0 36.7 36.8 35.7 Valuation (x)

P/E

18.0 29.7 7.6 7.2 6.2 Cash P/E

8.2 11.4 5.4 4.9 4.2

EV / EBITDA

10.9 15.8 5.8 5.3 4.4 EV / Sales

0.4 0.3 0.5 0.4 0.4

Price / Book Value

1.4 1.4 1.2 1.1 1.0 Dividend Yield (%)

2.2 1.7 4.0 4.3 4.8

Profitability Ratios (%)

RoE 21.9 14.2 20.2 7.2 8.2 4.7 17.2 16.1 16.7 RoCE 16.0 11.2 12.9 7.6 8.8 6.4 16.4 15.5 16.5

Turnover Ratios

Debtors (No. of Days) 7.6 7.9 8.6 9.5 9.4 8.2 9.3 9.0 8.8 Asset Turnover (x) 3.4 3.4 3.9 4.1 4.0 3.4 2.1 2.0 1.9

Leverage Ratio

Debt / Equity (x) 0.9 1.0 1.3 1.4 1.3 0.8 0.8 0.7 0.5

Cash Flow Statement (INR Million) Y/E March 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E OP/(Loss) before Tax 150,486 101,140 39,953 45,042 99,779 70,144 220,391 202,226 232,149 Depreciation 35,677 49,529 49,839 57,103 63,691 51,904 51,897 63,730 74,222 Interest Paid 17,263 29,832 59,016 71,184 59,101 41,746 29,880 36,584 32,984 Direct Taxes Paid -27,296 -40,032 -4,066 -11,690 -18,956 -23,442 -43,694 -65,538 -74,882 (Inc)/Dec in WC -182,446 -50,193 -132,204 -44,530 54,506 348,952 -32,452 5,098 9,582 Other op activities -9,774 -19,684 -20,192 -23,715 -16,081 -29,542 0 0 0 CF from Op. Activity -16,090 70,592 -7,654 93,395 242,040 459,762 226,021 242,100 274,054

(Inc)/Dec in FA & CWIP -138,236 -137,164 -170,184 -127,995 -218,243 -131,590 -102,900 -102,900 -92,900 Free Cash Flow -154,325 -66,572 -177,838 -34,600 23,797 328,172 123,121 139,200 181,154 (Pur)/Sale of Investments 174,184 53,856 39,652 1,153 -1,889 -1,918 0 0 0 CF from Inv. Activity 35,948 -83,308 -130,532 -92,936 -185,944 -101,770 -102,900 -102,900 -92,900

Inc / (Dec) in Debt 21,257 83,652 222,728 96,681 55,975 -304,857 20,010 0 -72,480 Dividends Paid -10,907 -38,124 -28,057 -14,922 -18,501 -26,090 -45,451 -48,292 -53,973 Interest Paid -24,276 -33,418 -63,643 -78,240 -68,722 -51,879 -29,880 -36,584 -32,984 CF from Fin. Activity -13,925 12,110 131,028 3,519 -31,248 -382,827 -55,321 -84,876 -159,437

Inc / ( Dec) in Cash 5,933 -606 -7,158 3,978 24,847 -24,835 67,801 54,324 21,717 Add: Opening Balance 10,052 15,985 15,379 8,221 12,199 37,046 12,212 80,012 134,337 Closing Balance 15,985 15,379 8,221 12,199 37,046 12,212 80,012 134,337 156,054 E: MOSL Estimates

IOC

25 August 2015 17

N O T E S

IOC

25 August 2015 18

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