>INDIA OIL & GAS (MORGAN STANLEY)

■ Investment conclusion: We raise our industry view to Attractive, because we believe valuation for the overall sector looks reasonable; most of the companies’ execution risks are behind them and the government is taking the right steps towards total decontrol of petroleum products. Our three top Overweight rated
stocks are Reliance Industries (RIL), Cairn and BPCL.

The pace of decontrol is difficult to ascertain; however, implementation of the Kirit Parikh recommendations could lead to a re-rating of the entire sector; with earnings moving to our bull case.

■ Key changes suggested are: 1) decontrol of petrol and diesel; 2) partial increase of kerosene prices by Rs6/litre and LPG by Rs100/cylinder; 3) provide some leverage to upstream players (ONGC) on crude oil, however tax 80% of incremental prices above US$90/bbl. Even partial implementation would improve earnings visibility for the government-owned oil companies and hence a P/E re-rating; earnings too could rise by 30% to 50%.

■ Execution risks in RIL’s two big projects are behind us: The 580 kbpd refinery and its KG D6 gas project are
both commissioned and we expect the company’s profits to growth at a CAGR of 28% p.a. F2009-11.

■ Cairn is in the midst of commissioning its pipeline as well as two of its trains during 1H2010, and moving
towards generating free cash flows. Post attaining full production in F2012, based on US$85/bbl, we estimate
the company will have YoY cash flows of US$2.3bn p.a., i.e. 20% of its market cap.

■ BPCL gains on three counts: 1) refinery capacity addition at Kochi and Bina; 2) balance sheet has improved due to oil bonds and cash received; 3) decontrol would improve visibility of cash flows.

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