>INDIA OIL & GAS (MORGAN STANLEY)

First Positive Move toward Decontrol

Quick Comment: The Indian Government has revised petrol and diesel prices upwards by Rs 4/litre (US$ 10/bbl) and Rs 2/litre (US$6/bbl), respectively. The country has revisited retail pump prices after a gap of six months. The government has, however, left LPG and kerosene prices unchanged. With the above price increase, we estimate the total subsidy burden for the
country will fall by US$4bn on an annualized basis from US$9.4bn previously to US$5.4bn, assuming crude oil prices average about US$70/bbl for F2010. We believe the weighted average crude basket for India increased from US$57/bbl to US$62/bbl.

Key beneficiaries:1) Upstream companies (Oil & Natural Gas Corp. (ONGC.BO, UW, Rs1052.6) & GAIL (India) (GAIL.BO, OW, Rs287.85): Since the overall subsidy in the system reduces, upstream companies would be positively impacted as they have to share a lower subsidy burden. 2) Downstream companies (Hindustan Petroleum (HPCL.BO, OW,
Rs311.25), Bharat Petroleum (BPCL.BO, OW, Rs453.7), and Indian Oil Corp. (IOCL.BO, OW,
Rs541.2): With the price rise, we estimate that downstream companies would reduce losses on sales of petrol and diesel to Rs0.5/litre (US$1.0/bbl) on petrol and Rs 0.25/litre(US$0.9/bbl) on diesel sales. They were earning Rs 4.5/litre and Re 2.25/litre on petrol and diesel, respectively, before the price cut. However, losses on sales of kerosene and LPG would still continue.

Estimate impact on wholesale price inflation will be about 45 basis points: We estimate the price increase will have a direct impact of about 21 basis points on wholesale price inflation, which was at -1.14% YoY during the week ending June 13, 2009. This price rise could have a cascading impact of approximately the same magnitude that could be felt in the next 3-4 months.

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