ril macquarie 10 july 06

Please refer to the important disclosures on inside back cover of this document, or on our website www.macquarie.com.au/research/disclosures.

Reliance Industries INDIA

10 July 2006

RIL IN Outperform Stock price as of 07 Jul 06 Rs 1,032 12-month target Rs 1,295 Upside/downside % +25.5 BSE Sensex as of 07 Jul 06 10,510 30-day avg turnover US$m 216.2 Market cap US$m 31,330

Investment fundamentals Year end 31 Mar 2006A 2007E 2008E 2009E Total revenue bn 830.2 1,134.0 1,292.2 1,437.6 Adjusted profit bn 94.9 106.2 128.4 161.1 EPS adj 68.15 76.26 92.18 115.66 EPS adj growth % 25.1 11.9 20.9 25.5 PE adj x 15.1 13.5 11.2 8.9 DPS 11.42 13.78 16.20 17.80 Yield % 1.1 1.3 1.6 1.7 ROE % 22.3 19.9 20.3 22.2 Net debt/equity % 44.6 35.3 30.4 14.6 Price/book x 3.1 2.4 2.2 1.8

Analyst Jal Irani 91 22 6653 3040 [email protected] Unmesh Sharma 91 22 6653 3042 [email protected]

The world is not enough We initiate coverage with an Outperform recommendation Our target price of Rs1,295 provides 26% upside. We estimate that 89% of the sum-of-parts value comprises well-defined businesses; while relatively uncertain, but potentially large options for growth contribute the balance.

Mammoth US$14bn capex plan to fuel aggressive growth India’s largest private-sector company, RIL, recently embarked on significantly stepped-up growth plans. We estimate that it will spend a staggering US$13.6bn on capex, in addition to US$5.6bn for organised retail, over the next five years. This would more than double its balance sheet size. Importantly, we forecast that free cashflow will be sufficient to fund capex.

Earnings poised to double Oil & gas could reach ONGC’s reserves: Stated reserves are already ~15%

of ONGC’s, which could increase EBITDA by ~47% over five years (Figure 1).

Refining & petrochem: US$7.6bn expansion plans could double EBITDA.

Retail: US$5.6bn capex to cause paradigm shift in US$220bn retail industry.

Importantly, ROE to rise consistently despite large capex RIL has consistently created value for shareholders, due to its ability to successfully execute large projects. Despite giant-sized investments, we forecast ROE to rise consistently, on a rising contribution from high return businesses, eg, oil & gas, with average ROE of 30% for five years of full production.

Falling debt levels to enable even larger capex Importantly, consistent deleveraging from cash generated would result in gearing levels dropping to 15% by FY09E. Realistically, it is more likely that RIL would use this financial flexibility to raise further debt of >US$5bn. We believe the bulk of this would go into oil & gas E&P, enabling resource accretion, which has been a significant stock price driver in the past three years.

Derating risk unlikely to materialise We believe that stock derating risk similar to 1994 – given equity issuances – is unlikely to materialise as RIL now enjoys strong positive free cashflow. A conglomerate discount following diversification into retailing is likely to be offset by a positive NPV from the project.

Fig 1 Division-wise contribution to profits, value and investments Contribution to… Capex- EBIDTA growth

(FY11E over FY06)Target price

(Rs/share)next five yrs

(US$bn) Comment

Oil & Gas 47% 154 4.5 Target price includes growth option Refining and petrochem

87% 879 7.6 Includes RPL & IPCL

Auto fuel retail 24% 84 1.5 Organised retail Potentially 11%* 60 5.6* *Conservatively not included in

consolidated earnings Aggregate 158% 1,295 19.2 Treasury stock of Rs 118 added to

above values Source: Macquarie Research, July 2006

Macquarie Research Equities - Report Reliance Industries

10 July 2006 2

RIL IN Outperform Stock price as of 07 Jul 06 Rs 1,032 12-month target Rs 1,295 Upside/downside % +25.5 Valuation Rs 1,439 - DCF (WACC 12.3%) BSE Sensex as of 07 Jul 06 10,510 GICS sector energy Market cap Rs bn 1,438 30-day avg turnover US$m 216.2 Market cap US$m 31,330 Number shares on issue m 1,394

Investment fundamentals Year end 31 Mar 2006A 2007E 2008E 2009E Total revenue bn 830.2 1,134.0 1,292.2 1,437.6 EBIT bn 108.5 135.9 165.9 205.8 EBIT growth % 19.7 25.2 22.1 24.0 Reported profit bn 93.9 106.2 128.4 161.1 Adjusted profit bn 94.9 106.2 128.4 161.1 EPS rep 67.44 76.26 92.18 115.66 EPS adj 68.15 76.26 92.18 115.66 EPS adj growth % 25.1 11.9 20.9 25.5 PE rep x 15.3 13.5 11.2 8.9 PE adj x 15.1 13.5 11.2 8.9 DPS 11.42 13.78 16.20 17.80 Yield % 1.1 1.3 1.6 1.7 ROA % 12.7 12.7 13.3 15.6 ROE % 22.3 19.9 20.3 22.2 Net debt/equity % 44.6 35.3 30.4 14.6 Price/book x 3.1 2.4 2.2 1.8

RIL IN rel SENSEX performance, & rec history

Source: Datastream, Macquarie Research, July 2006 (all figures in INR unless noted)

RIL's shareholding pattern

Others4%

FIIs27%

Banks/ MFs/ FIs

8%Promoter

& Promoter

Group48%

Indian public14%

Source: Company data, Macquarie Research, July 2006

Reliance Industries Company profile Reliance Industries Ltd (RIL) is India’s largest private sector company by revenue, profit and asset size. It contributes ~3% of India’s GDP and ~8% of exports. RIL shares have a ~12% weight on the BSE Sensex and ~9% weight on the NSE Nifty, the two major broad-based indices in India.

Business profile

Refining and petrochemicals

⇒ RIL is among the world's largest refiners and petrochemical producers. Its existing Jamnagar refinery and petrochemicals complex (33mmtpa) is the largest and most complex refinery in India. The company is also India’s largest petrochemicals producer with vertically integrated capacities across western India.

⇒ RIL recently completed an IPO for its export-oriented subsidiary, Reliance Petroleum, to double refining capacity. This will create the world’s largest refining and petrochemicals complex and will come on-stream in record time (by December 2008).

Auto-fuel retailing

⇒ Two years ago, RIL entered the Indian auto fuel (gasoline and diesel) retail outlet market with a license to set up 5,000 outlets. It has set up >1,200 outlets to capture 13% market share.

Oil & gas E&P

⇒ RIL’s foray into oil & gas E&P started in the early 90s, when it acquired a 30% equity stake in a JV (with ONGC and British Gas) and has since emerged as the largest Indian private E&P (and now integrated) player.

⇒ It has bid and won multiple exploratory oil & gas and coal bed methane (CBM) blocks in India, some of which have hit gas, oil and CBM gas at various locations. The company also holds interest in overseas oil & gas assets (Yemen and Oman).

New ventures

⇒ The company has announced its intention to invest a whopping US$5.6bn in its latest foray in organised retail. The company also plans to venture into special economic zones and urban infrastructure, life-sciences and healthcare.

Fig 2 Revenue split by business group

0200400600800

1,0001,2001,4001,6001,8002,000

2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E 2011E

(Rs bn)

Petrochem Refining Auto-fuel retail KG gas RPL- export refinery



10 July 2006 3

The world is not enough We initiate coverage with an Outperform recommendation We initiate coverage on Reliance Industries (RIL) with an Outperform rating. Our target price of Rs1,295 provides 26% upside. We estimate that 89% of the sum-of-parts value comprises well-defined businesses (refining & petrochemicals), while relatively uncertain, but potentially large options for growth (oil & gas and retailing) contribute the balance.

Mammoth US$14bn capex plan to fuel aggressive growth India’s largest private-sector company, RIL, recently embarked on significantly stepped-up growth plans. We estimate RIL will spend a staggering US$13.6bn in addition to US$5.6bn for organised retail over the next five years, more than doubling its balance sheet size. Importantly, we forecast that free cashflows would be sufficient to fund capex.

Earnings poised to double We predict a commensurate near-doubling in earnings unaided by a cyclical upturn. A combination of new vistas (retail, oil & gas) and expansion of existing business (refinery, petrochemical) should fuel the growth.

Oil & gas reserves could reach ONGC’s level: Stated reserves are already ~15% of ONGC, which could increase EBITDA by ~47% over five years. Preliminary studies show potential to nearly reach ONGC’s reserves.

Refining & petrochem: Recent plans to double refining capacity to become the world’s largest refinery complex and petrochem expansions could double turnover and EBITDA.

Retail: RIL recently announced vague, but large US$ 5.6bn investment plans. RIL could catalyse a paradigm shift in the US$220bn nascent retailing industry which has 3% penetration by organised sector and 30% CAGR.

Fuel retailing: Steep ramp up in market share is likely to continue overcoming near-term concerns surrounding negative marketing margins.

Importantly, ROE to rise consistently despite large projects RIL has consistently created value for shareholders in the past, due to its ability to successfully execute large projects. Despite giant-sized investments, we forecast ROE to rise consistently, due to the increasing contribution from high return businesses, eg, oil & gas, with average ROE of 30% for five years of full production.

Falling debt levels to enable even larger capex Importantly, cash generated from RIL’s existing businesses should result in consistent deleveraging. We believe the strength of its balance sheet would provide RIL with financial flexibility to fund more significant investments. We forecast gearing to drop to 15% by FY09E. Realistically, it is more likely that RIL would use this financial flexibility to raise further debt of >US$5bn. We believe the bulk of this would go into oil & gas E&P, enabling resource accretion, which has been a significant stock price driver in the past three years.

Derating risk unlikely to materialise We believe that RIL faces the risk of derating on two counts, but is unlikely to materialise:

During 1994 and 1995 Reliance stock had underperformed BSE Sensex by 27% following a disproportionately large capex requiring financing by new equity issuances.

RIL is currently generating positive free cash flows and hence is unlikely to resort to large-scale equity raisings by parent company. In fact, recent equity issuance by subsidiary, Reliance Petroleum, saw RIL shareholders gain substantially as 60% of the pre-IPO stake issued at Rs10/share currently quotes at Rs 62/share following the IPO.

Diversification into unrelated businesses such as organised retail would result in RIL becoming a conglomerate, which could result in discounts to valuation. We believe any conglomerate discount is likely to be offset by a positive estimated NPV of Rs67/share from RIL’s organised retail initiative.


10 July 2006 4

Investing heavily to fuel aggressive growth RIL’s earnings could more than double over the next four years unaided by a cyclical upturn. A combination of new vistas (retailing, oil & gas) and expansion of existing businesses (refinery, petrochem) shall fuel growth.

Growth driver 1: Oil & gas a key driver to add NPV of Rs 172/share World class oil & gas finds

RIL holds interests in 38 other onshore, shallow water and deepwater and three other CBM blocks across India, in addition to overseas assets in Yemen and Oman.

RIL is the operator and has a 90% interest in the 7,645sq km deep water KG-D6 block (off the Indian east coast). To date, drilling has resulted in 18 consecutive discoveries on this block – an incredible 100% success rate. RIL's E&P partner in the KG basin (off the Indian east coast), Niko Resources (NKO CN, Not rated) recently announced that an independent engineering report prepared by Gaffney, Cline and Associates has revised upwards P2 reserves (proved + probable; 50% probability of materialising) from 7.9tcf to 18.8tcf. This confirms D6 block’s reputation as being a world-class petroleum province.

RIL also struck resources in NEC-25 eastern offshore shallow waters (2.3tcf in-place gas), Sohagpur coal bed methane (3.65tcf in-place gas) and the recent oil find in KG-D6 east coast deep waters (1 bn bl of in-place oil, Source: press reports).

RIL’s finding cost is among the lowest globally

According to RIL, its finding cost could be among the lowest amongst global E&P majors. RIL’s finding cost at US$0.6/bl compares favourably to ONGC’s at US$2/bl and the global average of approximately US$1.8/bl (Figure 3).

Fig 3 Finding cost for RIL v/s global peers

0.59

1.4

1.8

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

RIL Oil majors (sisters)* Global average

(US$/bl)

* ExxonMobil, Chevron, BP and Royal Dutch Shell Source: Company, Macquarie Research, June 2006

Rs172/share value, further potential for upside

We attribute a DCF value of Rs78/share to the current estimates of KG-D6 gas and Rs172/share to RIL’s entire oil and gas assets (Refer to figure 21 in ‘Appendix 1: Oil & Gas E&P- Next frontier’ for details). However, we believe that significant upside is possible:

Potential from KG-D6 remains high as <50% of the KG-D6 acreage has been explored.

Initial evidence of this potential upside is now in place. RIL’s partner in the KG-D6 block, Niko, recently announced that an independent engineering report has revised D6 Block P2 reserves upwards by ~200% with scope for further increase.

According to a presentation made to the government of India, RIL’s total recoverable reserves could be a staggering 8bn boe- 63% higher than reserves currently stated in Niko’s release.


10 July 2006 5

Untapped demand, fiscal benefits should fuel surge in revenue and profit

We believe that RIL will face no problems in finding buyers for the oil and gas produced due to latent demand and the attractiveness of gas as a substitute for high-cost LNG imports and naphtha. This should result in a surge in both revenue and profit, especially as RIL’s finding cost could be among the lowest globally. In addition, no fixed cess (Rs2,500/ toe) is applicable to NELP blocks and deep water blocks attract less royalty and a tax holiday for the first seven years. We believe the KG-D6 gas production could contribute 22% to RIL’s FY11E PAT, the third year of production.

Fig 4 Key financials for Krishna Godavari gas FY09E FY10E FY11E

Net sales (Rs m) 41,622 49,662 93,373Contribution to RIL's consolidated revenues 3% 3% 5%EBITDA (Rs m) 28,768 34,325 67,746EBITDA margin 69% 69% 73%Recurring Net Income (Rs m) 12,936 16,948 50,870PAT margin 31% 34% 54%Contribution to RIL's consolidated PAT 8% 8% 22%Source: Company, Macquarie Research, July 2006

Growth driver 2: Retail - Nascent but exciting. Rs67/sh option value Domestic organised retail holds massive potential. It constitutes only 3% of an estimated US$ 220bn total retail in India and is forecast to grow >30% CAGR through 2009–10E. RIL has announced a US$5.6bn outlay to enter organised retail across segments and product groups on a pan-India basis and across several verticals. It aims to drive volumes through the mass-market segment and margins by tying up with luxury brands such as Armani (refer to Appendix 2: Retail-Nascent but exciting)

RIL has a history of successfully executing large non-core business projects

RIL has proved its mettle in non-core businesses and has consistently succeeded in creating accretive value for shareholders in virtually every venture including diversifications such as telecom. Strategic logic remains the same. RIL will apply its financial wealth to pursue a high-growth, capital-intensive industry, whose regulatory framework is becoming more pro business. Demographic and lifestyle changes, such as increasing brand consciousness, widespread use of plastic money and impulse purchases have also contributed to this trend.

Mitigation of execution risk and supply chain management are key to success

However the key risk is execution. Recognising that the initiative has to be driven by experienced talent, RIL has been in the news consistently for poaching top talent from related businesses (such as Electrolux, Unilever, Titan, Pantaloon, etc).

RIL also realises that effective supply chain management is the key to success in this business. The company intends to deliver better value across the chain - farmers, producers and consumers, through a world-class integrated model, with an agricultural hub, cold chain and procurement of agricultural produce without use of middle-men. Press reports suggest that RIL is also considering importing non-perishable items.

For now, we value retailing ‘option’ at Rs67/share

With the scarcity of details available around the retail venture, we find it difficult to accurately forecast earnings and value the business and we have added this as “option value” to the value we have attributed to RIL’s core businesses. We reach an NPV-based value of Rs67/ share for the retail foray. However, we believe that as the details of the investment and strategy are uncovered, this value will change.


10 July 2006 6

Fig 5 Key financials for organised retailing business FY06 FY07E FY08E FY09E FY2010E FY2011E

Net sales* (Rs m) 0 34,493 72,270 96,360 120,450 151,110EBITDA* (Rs m) 0 1,380 2,891 5,782 9,636 15,111EBITDA margin nm 4% 4% 6% 8% 10%Recurring Net Income* (Rs m) 0 -806 -1,124 -15 1,787 4,833PAT margin nm -2% -2% 0% 1% 3%* As a consevative measure, we have not included contriution from organised retail in RIL’s consolidated earnings Source: Company, Macquarie Research, July 2006

Growth driver 3: Refining & petrochem - NPV of Rs802/share Greenfield refinery through 75% subsidiary to exploit strength in GRMs

Global shortages and enhanced crack spreads took refining margins to record highs in FY04 and FY05, followed by a sharp dip in 2HFY06. Margins will likely rebound in the near term given limited global refinery capacity additions and vintage US capacities (one-fifth of global capacity) constrained to process scarce light sweet crude.

RIL’s existing refinery will benefit from this over the next four years. We expect RIL’s existing refinery to continue its outperformance of regional benchmarks like the Singapore complex. It is worth noting that the RIL refinery has consistently outperformed the Singapore complex by US$3-6/bl. This is due to economies of scale and, more importantly, refinery complexity. The highly complex refinery allows RIL to process multiple varieties of crude and increases flexibility of the product slate to maximise spread between product prices and cost of crude.

Beyond FY09, however, GRMs are likely to revert to their longer-term range between US$2-4/bl. RIL has started implementing plans for a mammoth (27mmtpa) export oriented refinery, next to the existing refinery, through its 75% subsidiary Reliance Petroleum (RPL). In May 2006, RIL raised ~US$2.4bn through an equity IPO and private placement and US$3.5bn for financing the world’s largest refining complex, which will come on-stream by 3QFY09E (Figure 6).

Fig 6 Refinery expansion to create world's largest refining complex

Source: Company, Macquarie Research, July 2006

The refinery will create value by:

Unique in-house engineering capabilities will enable it to commission the refinery by December 2008. This is much faster than the 5-7 years typically required for a project of this scale.

Completion of the project will result in enormous economies of scale.

It will also be among the world's most complex refineries, allowing high crack spreads and margins, which are US$4-5/bl higher than global benchmarks. Integrated petrochemicals (propylene) complex will help capture an additional GRM of US$0.5/bl.

458,000493,500495,000520,000

557,000605,000

650,000817,000

940,0001,240,000

Shell Eastern, Singapore

Exxon M obil, Baton Rouge, USA

Hovensa LLC, Virgin Islands

S - Oil Corp, South Korea

Exxon M obil, Baytown, USA

Exxon M obil, Singapore

LG - Caltex, South Korea

SK Corp, South Korea

Paraguana Refining, Venezuela

World's largest refining complex

(bpd)Proposed refineryExisting refinery


10 July 2006 7

The export oriented refinery will emerge in a special economic zone (SEZ), allowing it to import plant and machinery without duty and delivering significant tax benefits (five-year tax holiday, 50% tax holiday for the next five years and 50% tax holiday for the subsequent five years, on reinvested reserves).

Significant expansion in petrochemical capacities to drive volume growth

Petrochemicals typically follow a 10-year boom-bust cycle with the last peak in the cracker/polymer chain occurring in 2004, while the polyester chain peaked in 1994. We forecast capacity expansions, especially in China and the Middle East, to result in lower capacity utilisations in the cracker-polymer petrochemical stream. On the other hand, higher utilisation rates may enhance polyester chain margins (Appendix 5: Mixed petrochemical outlook).

RIL is already among the largest petrochemical producers for a number of products. The company continues to focus on significant capacity expansions to drive volume growth and enhance economies of scale (Figure 7). Petrochemicals along with refining will continue to dominate Reliance’s earnings and value.

Fig 7 RIL’s key petrochemical and refinery expansion plans Petrochemicals capacity (tpa) FY06

FY09E

% expansion by FY09E

Polyester filament yarn (PFY) 430,000 595,000 38%Polyester staple fibre (PSF) 550,000 800,000 45%Purified terephthalic acid (PTA) 1,350,000 1,980,000 47%Paraxylene (PX) 1,856,000 1,956,000 5%Polypropylene (PP) 1,150,000 1,430,000 24%Styrene - 550,000 Propylene (within RIL) 486,667 486,667 Propylene (within RPL-RIL’s stake= 75%)

- 900,000

Refining capacity (m tpa) Within Reliance Industries 33.0 33.0 Reliance Petroleum (RIL’s stake= 75% ) - 27.0 Source: Company, Macquarie Research, July 2006

Fig 8 Key financials for refining and petrochemical businesses FY06 FY07E FY08E FY09E FY2010E FY2011E

Net sales (Rs m) 812,113 1,004,631 1,022,849 980,742 901,001 842,970Contribution to RIL's consolidated revenues 98% 89% 79% 68% 53% 47%EBITDA (Rs m) 142,991 179,269 203,445 219,576 247,438 231,711EBITDA margin 18% 18% 20% 22% 27% 27%Recurring net income (Rs m) 90,693 109,478 128,721 141,473 170,478 161,738PAT margin 11% 11% 13% 14% 19% 19%Contribution to RIL's consolidated PAT 96% 100% 95% 88% 84% 69%Source: Company, Macquarie Research, July 2006

Driver 4: Auto-fuel to overcome near-term concerns - Rs93/share In the short span of two years, new entrant RIL has taken a 13% market share in the auto-fuel retail space from incumbent PSU oil marketing companies, IOC, BPCL and HPCL (Figure 9). It is notable that RIL has achieved retail throughputs per outlet at 350-370MT per outlet, which is nearly three times the average PSU throughput.


10 July 2006 8

Fig 9 Auto fuel retail market share: RIL gains rapidly

20%

25%

30%

35%

40%

45%

50%

Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-060%

2%

4%

6%

8%

10%

12%

Retail market share: IOC/ IBP (LHS) HPCL (LHS) BPCL (LHS) RIL (RHS)

Source: Industry, Macquarie Research, June 2006

Long-term competitive parameters indicate further gains for RIL

Incumbent PSU OMCs are forced to set up petrol pumps at unviable locations. We expect the steep ramp up in RIL’s market share with higher throughputs to continue as the company expands outlets along highways and into major and second-tier cities. We believe that retail/ restaurant/ lodging services currently available at the RIL’s outlets should result in higher IRRs as compared to PSU OMC incumbents. This should rise as RIL unleashes its retail strategy in the hyper-market cum auto-fuel retail outlet format stores in the next two-to-five years.

Negative marketing margins raise near-term concerns

Government controlled retail prices for petrol and diesel have resulted in negative margins of Rs6-8/litre, despite the recent price hike. While PSU OMCs would benefit from discounts by government-owned upstream companies and refiners and oil bonds, private players (eg, RIL) have not been offered any such packages.

RIL has decided to go ahead and raise diesel and petrol prices by Rs2-3/ litre above prices offered by PSU OMCs. This helps cut the losses, but RIL’s throughputs have reduced by 75-80%. We believe this is only a near-term concern especially as <10% of refinery throughput was dedicated to the retail outlets in FY06 and RIL retains the ability and option to export the refinery output.

Growth in number of outlets added not expected to slow

We believe that the pace of addition to retail outlets will continue with throughputs returning to normal as the government and RIL work out a solution and oil prices come down to an average US$65/bl for the next 2 years. Support from the retail outlets as distribution outlets and hubs for the foray in organised retail should boost IRRs from the investment in auto-fuel retail.

Fig 10 Key financials for auto fuel retail business FY06 FY07E FY08E FY09E FY2010E FY2011E

Net sales (Rs m) 52,753 129,337 269,370 332,896 372,279 417,717Contribution to RIL's consolidated revenues 6% 11% 21% 23% 22% 23%EBITDA (Rs m) -2,468 4,258 14,472 20,817 27,001 33,752EBITDA margin -5% 3% 5% 6% 7% 8%Recurring Net Income (Rs m) -4,345 294 6,036 9,477 13,112 17,278PAT margin -8% 0% 2% 3% 4% 4%Contribution to RIL's consolidated PAT -5% 0% 5% 6% 6% 7%Source: Company, Macquarie Research, July 2006


10 July 2006 9

Profitable growth Earnings poised to more than double over four years We forecast Reliance’s EBITDA to grow by 23% CAGR and EPS by 21% CAGR over the next four years. Investments in unrelated businesses, such as organised retail, will probably continue, but these are unlikely to change the face of the company – oil & gas related businesses will remain at its core. We expect petrochemicals and refining to remain the key earnings generators, the cash cows of the company. We believe oil & gas E&P will likely emerge as the significant profit driver (Figure 11).

Fig 11 EBITDA breakdown: Steep ramp up in contribution from new businesses

0

50

100

150

200

250

300

350

FY2005 FY2006 FY2007E FY2008E FY2009E FY2010E

(Rs bn)

Refining Petrochemicals KG gas Auto fuel retail Reliance Petroleum

Source: Macquarie Research, July 2006

Can Reliance enhance shareholder value? Nevertheless, the question arises whether RIL can grow profitability? We use a combination of ROCE and EVA analysis, and a qualitative competitive matrix to conclude that RIL can indeed create shareholder value.

EVA and ROCE show a rising trend

RIL has earned a positive EVA spread over the past two years. We expect EVA from businesses, with firmed up operating and capex schedules, to face a temporary dip this year, as capital-work-in-progress peaks in FY07E. We expect this to be followed by a sharp rise (Figure 12).

Similarly, we forecast RIL’s ROCE to increase, primarily driven by KG D6 gas production (Figure 13).


10 July 2006 10

Fig 12 Economic value-added and spread over cost of capital

-5

5

15

25

35

45

55

65

75

2004 2005 2006 2007E 2008E 2009E 2010E 2011E

(Rs bn)

-50

50

150

250

350

450

Economic Value Added (LHS) Spread in basis points (RHS)


Fig 13 ROCE contribution of individual divisions: KG basin gas emerges as profit driver

-10%

0%

10%

20%

30%

40%

FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007E FY2008E FY2009E FY2010E FY2011E

RIL (consolidated) Refining & Petrochem KG gas Fuel retail


Qualitative peer group comparison confirms competitive edge We have qualitatively compared RIL with its domestic peer group on a number of parameters such as economies of scale, expansion plans, fuel marketing ability, impact of potential policy changes, etc. From Figure 14 it is evident that RIL is competitive on most parameters and hence can potentially deliver a positive economic spread.

Macquarie R

esearch Equities - R

eport R

eliance Industries

10 July 2006 11

Fig 14 Competitive matrix for Indian refining & fuel retailing companies

Refining and Marketing playersIndian Oil Corporation (IOC)

Bharat Petroleum (BPCL)

Hindustan Petroleum (HPCL)

Reliance Industries (RIL)

Quality/ scale of

operationsExpansion

plans

Resilience of retail market

share

Retail throughput per outlet

Automobile fuel

branding

Upside from differential

pricing

Subsidy rebalance potential

Refining business Retailing/ Marketing business Policy changes Other businessesUpside from

sale of cross-holdings

Pipeline business

Other business(eg.p

etrochem)

Source: Macquarie Securities, July 2006


10 July 2006 12

Free cashflow to finance mammoth capex Reliance Industries to invest US$8.3bn over three years As in the past, RIL continues to “think big”, when it comes to strategic investments to fuel growth. We expect Reliance Industries to incur capital expenditure of ~Rs375bn (US$8.3bn) between FY07 and FY09E (Figure 15). Key investments include existing core businesses, refining and petrochemical expansion and auto-fuel retail outlets and newer businesses such as oil & gas E&P and a foray into organised retail.

Fig 15 Break-up of Reliance Industries’ 3-year capex plan FY07- FY09E

Petrochemical expansions 40,653 ~20% expansion in petrochemical facilities Auto fuel retailing 36,900 2,200 new retail outlets by FY09E Krishna-Godavari gas field development 71,863 Oil & Gas E&P 83,234 E&P expenses for other oil & gas and CBM

blocks Reliance Petroleum 50,625 RIL's contribution to the export oriented refinery Maintenance capex (including contingency) 90,000 Estimated at Rs30bn pa RIL's total capex 373,275 Source: Company, Macquarie Research, July 2006

In fact, we estimate that the Reliance group (including 75%-owned subsidiary, Reliance Petroleum) may spend up to US$19bn in the next five years (Figure 16). Our capex estimates do not include investments forays into urban infrastructure and special economic zones, organised retail as details surrounding the magnitude and timing of cashflow remain uncertain. However, we believe this could add another Rs125-150bn to capex within three years.

Fig 16 Break up of Reliance’s US$19bn capex plans in next five years (US$bn)

Greenfield ref inery*, 6.0

Oil & Gas E&P, 4.5Petrochemical expansion, 1.6

Auto-fuel retail, 1.5

Organised retail, 5.6

* Through Reliance Petroleum (75% subsidiary). RIL's equity contribution is ~US$600m Source: Company presentations, Macquarie Research, July 2006

Strong free cashflow and modest debt position However we believe that RIL will have no problems financing its aggressive capex plans. This is because: We forecast RIL’s free cashflow (pre-capex) in the next three years to be ~Rs475bn, exceeding capex requirements.


10 July 2006 13

Fig 17 Free cashflow to fund bulk of capex requirements

0

50

100

150

200

250

FY2005 FY2006 FY2007E FY2008E FY2009E

(Rsbn)

Free cash flow (pre-capex) Planned capex


RIL’s net-debt equity ratio is currently ~45% and interest-coverage multiple >9x providing flexibility to leverage if necessary.

RIL has a reputation of successfully implementing mammoth projects involving significant capex and creating value for shareholders through equity offerings. This has been evident from the record response generated by both Reliance Petroleum offerings (1993 and 2006). RIL holds the option to tap the primary markets to raise funds. We foresee this possibility in the case of RIL’s (100%) organised retail subsidiary.

The potential for raising significant debt and equity along with a robust free cashflow position, leaves RIL well placed to continue its strategy of investing heavily to fund growth.


10 July 2006 14

Valuation: Price target provides 26% upside The inherent varied nature of RIL’s businesses, assets, investments and projects in gestation periods requires and justifies use of a non-uniform approach for valuing individual assets and businesses within the company. We have used a ‘sum-of-parts’ methodology for valuing RIL. We estimate that 89% of RIL’s sum-of-parts value comprises well-defined existing and growth initiatives (refining and petrochemicals) while uncertain, but potentially large options (such as oil & gas, retailing) contribute towards the balance (Figure 18).

(1) Well-defined businesses: We use a DCF-based valuation methodology for businesses whose cashflows can be reasonably predicted. This includes:

⇒ The refining and petrochemicals business

⇒ Auto-fuel retailing business

⇒ E&P business: KG D6 basin gas (refer to Figure 21 for scenario analysis)

(2) Observed market prices: We value assets and investments, where values can be easily ascertained, based on observed market prices. This includes:

⇒ Value of 75% stake in Reliance Petroleum

⇒ Value of 46% stake in IPCL

⇒ Value of treasury stock, which forms 12.2% of equity capital

(3) Option value: These are businesses where plans are either uncertain or not fully disclosed. Cashflows from reserves arising from oil & gas E&P may be difficult to quantify until a fairly advanced stage in the exploratory stage. We value E&P (in-place and recoverable) resources on the basis of a benchmark EV/ reserves and discounting them back from expected date of commencement of operations (Figures 21, 22). This includes:

⇒ The recent oil find in the KG-D6 block

⇒ The gas find in the NEC-25 block

⇒ Coal bed methane blocks in Sohagpur

⇒ DCF value of newly announced organised retail venture

Refer to ‘Appendix 8: Global peer group valuations’ for domestic and global valuation comparisons.

Fig 18 RIL’s segment wise ‘sum-of-parts’ DCF value Contribution to

value of RIL (Rs m)Contribution to

value of RIL (Rs/share)

Fair value (at a 10% discount)

(Rs/share)

Basis for valuation

(1) Core current businesses Refining and Petrochemicals business* 1,117,797 802 722 DCF based valuation (Figure 56) Auto-fuel retailing 129,561 93 84 DCF based valuation (Figures 33,34) E&P business (KG basin gas) 109,230 78 71 DCF based valuation (Figures 21, 26) Contribution from main business segments 1,356,589 974 876 (2) Other assets and investments Value of 75% stake in Reliance Petroleum 212,625 153 137 Market price based valuation Value of 46% stake in IPCL 29,916 21 19 Market price based valuation Treasury stock (12.2% of equity capital) 182,714 131 118 Market price based valuation Contribution from assets and investments 425,255 305 275 (3) Option value: Projects with unclear plans

E&P business (Recent oil find- KG basin) 51,322 37 33 Using EV/ boe of reserves for ONGC as benchmark (Figures 21, 22)

Other E&P (CBM-Sohagpur and NEC 25 Gas) 78,567 56 51 Using EV/ boe of reserves for ONGC as benchmark (Figures 21, 22)

Organised retail venture 92,831 67 60 DCF based valuation (Figures 33, 34) Total value per share 2,004,563 1,439 1,295 Current stock price (Rs) 1,032 Upside/ (Downside) % 26% * Value of investments in IPCL and RPL stripped out


10 July 2006 15


Derating risk unlikely to materialise We believe that RIL faces the risk of derating on two accounts:

Potential negative sentiment during gestation period of capex

A quick look at the historical PER chart plotted against capex plans shows that sentiment can, and does tend to turn negative when RIL embarks on large-scale capex projects. For example during 1994 and 1995, Reliance stock had underperformed the BSE Sensex by 27% following a disproportionately large capex requiring financing by new equity issuances (Figure 19).

Fig 19 RIL: PER reflects capex cycle

-

5

10

15

20

Apr-92 M ar-93 M ar-94 Feb-95 Feb-96 Jan-97 Jan-98 Dec-98 Dec-99 Nov-00 Nov-01Oct-02 Oct-03 Sep-04 Sep-050%

10%

20%

30%

40%

50%

60%

70%

Capital w ork in progress/ Gross f ixed assets (RHS) PER (LHS)

(x)

Source: Bloomberg, Macquarie Research, July 2006

Potential conglomerate discount

Multi-directional forays into organised retail, agriculture and food processing, urban infrastructure and SEZs, healthcare, would result in RIL becoming a sprawling conglomerate. This could result in conglomerate discounts to valuation.

We believe derating risk is unlikely to materialise

RIL is currently generating positive free cashflows (post-capex) and hence it is unlikely to resort to large-scale equity raisings by the parent company. In fact, recent equity issuance by 75%-owned subsidiary, Reliance Petroleum, saw shareholders of RIL gain substantially as 60% of the pre-IPO stake issued at Rs10/share currently quotes at Rs62/share following the recent IPO.

We believe any conglomerate discount is likely to be offset by a positive estimated NPV of Rs67/share from RIL’s organised retail initiative.


10 July 2006 16

Profit & Loss 2002A 2003A 2004A 2005A Profit & Loss 2006A* 2007E 2008E 2009E

Revenue m 420,958 459,101 520,253 665,977 Revenue m 830,248 1,133,967 1,292,219 1,437,615Gross Profit m 107,255 118,974 144,218 168,638 Gross Profit m 221,503 225,125 263,457 322,669Cost of Goods Sold m 313,703 340,127 376,035 497,339 Cost of Goods Sold m 608,745 908,842 1,028,762 1,114,947EBITDA m 78,656 83,831 98,438 127,966 EBITDA m 143,487 183,526 217,917 275,288Depreciation m 28,162 28,375 32,508 37,274 Depreciation m 34,949 47,651 51,995 69,481Amortisation of Goodwill m - - - - Amortisation of Goodwill m - - - -Other Amortisation m - - - - Other Amortisation m - - - -EBIT m 50,494 55,456 65,929 90,692 EBIT m 108,537 135,875 165,922 205,807Net Interest Income m -13,098 -10,386 -9,197 -11,048 Net Interest Income m -4,426 -15,409 -17,047 -23,715Associates m - 798 581 - Associates m 4,747 3,157 3,114 3,425Exceptionals m 4,117 - - 306 Exceptionals m -995 - - -Other Pre-Tax Income m 3,136 2,865 5,788 11,305 Other Pre-Tax Income m 2,380 2,511 2,762 2,900Pre-Tax Profit m 44,649 48,734 63,101 91,255 Pre-Tax Profit m 110,243 126,134 154,751 188,418Tax Expense m -11,860 -8,701 -11,411 -14,972 Tax Expense m -16,295 -19,891 -26,452 -30,603Net Profit m 32,789 40,033 51,690 76,282 Net Profit m 93,948 106,243 128,300 157,815Minority Interests m - - - - Minority Interests m - - 120 3,324

Reported Earnings m 32,789 40,033 51,690 76,282 Reported Earnings m 93,948 106,243 128,420 161,138Adjusted Earnings m 28,672 40,033 51,690 75,976 Adjusted Earnings m 94,943 106,243 128,420 161,138

EPS (rep) 25.87 28.68 37.03 54.72 EPS (rep) 67.44 76.26 92.18 115.66EPS (adj) 22.75 28.68 37.03 54.5 EPS (adj) 68.15 76.26 92.18 115.66EPS Growth (adj) % 17.64 26.06 29.12 47.17 EPS Growth (adj) % 25.1 11.9 20.9 25.5 PE (rep) x 15.3 13.5 11.2 8.9 PE (adj) x 15.1 13.5 11.2 8.9

DPS 5.26 5.00 5.00 8.59 DPS 11.42 13.78 16.20 17.80 Yield % 1.1 1.3 1.6 1.7Weighted Average Shares m 1,267 1,396 1,396 1,394 Weighted Average Shares m 1,393 1,393 1,393 1,393Period End Shares m 1,396 1,396 1,396 1,393 Period End Shares m 1,393 1,393 1,393 1,393

Profit and Loss Ratios 2006A* 2007E 2008E 2009E Cashflow Analysis 2006A* 2007E 2008E 2009ERevenue Growth % 24.7 36.6 14.0 11.3 EBITDA Growth % 12.1 27.9 18.7 26.3 EBITDA m 143,487 183,526 217,917 275,288EBIT Growth % 19.7 25.2 22.1 24.0 Tax Paid m -16,295 -19,891 -26,452 -30,603Gross Profit Margin % 26.7 19.9 20.4 22.4 Changes in Working Capital m -29,650 -54,981 -13,044 -2,947EBITDA Margin % 17.3 16.2 16.9 19.1 Net Interest Paid m -4,426 -15,409 -17,047 -23,715EBIT Margin % 13.1 12.0 12.8 14.3 Other m 43,605 -9,264 11,896 1,055Net Profit Margin % 11.3 9.4 9.9 11.0 Operating Cashflow m 136,720 83,981 173,271 219,078Payout Ratio % 16.8 18.1 17.6 15.4 Acquisitions and Investments m 164,172 8,206 -35,000 -35,000EV/EBITDA x 10.0 7.8 6.6 5.2 Capex m -367,389 -168,516 -46,431 -70,154EV/EBIT x 12.7 10.3 8.5 6.9 Asset Sales m - - - -

Other m 2,380 2,511 2,762 2,900Balance Sheet Ratios Investing Cashflow m -200,837 -157,799 -78,669 -102,254ROE % 22.3 19.9 20.3 22.2 Dividend (Ordinary) m -15,907 -19,198 -22,569 -24,804ROA % 12.7 12.7 13.3 15.6 Equity Raised m 1 - - -ROIC % 17.3 17.0 16.1 19.4 Debt Movements m 45,257 115,186 -8,059 -38,743Net Debt/Equity % 44.6 35.3 30.4 14.6 Other m - - - -Interest Cover x 24.5 8.8 9.7 8.7 Financing Cashflow m 29,351 95,988 -30,628 -63,547Price/Book x 3.1 2.4 2.2 1.8 Book Value per Share 330.5 435.7 471.4 569.2 Net Change in Cash/Debt m -34,766 22,170 63,974 53,277

Balance Sheet 2006A* 2007E 2008E 2009E Cash m 26,164 125,381 132,984 182,938 Receivables m 43,517 59,151 63,255 64,778 Inventories m 103,453 137,280 136,775 126,716 Investments m 66,668 58,462 93,462 128,462 Fixed Assets m 602,093 747,294 745,382 765,647 Intangibles m - - - - Other Assets m 76,988 93,623 101,437 102,009 Total Assets m 918,883 1,221,191 1,273,294 1,370,549 Payables m 124,541 136,252 134,680 124,252 Short Term Debt m 66,659 43,499 43,499 20,000 Long Term Debt m 166,769 305,115 297,056 281,812 Provisions m 42,017 38,910 38,910 38,910 Other Liabilities m 53,876 65,029 77,283 90,698 Total Liabilities m 453,862 588,805 591,428 555,672 Shareholders' Funds m 510,280 653,575 703,176 839,510 Minority Interests m 4,573 25,313 25,192 21,869

* FY06A is significantly skewed due to de-merger of telecom and power businesses Other m -49,832 -46,502 -46,502 -46,502All figures in INR unless noted. Total Shareholders' Equity m 465,021 632,386 681,866 814,877Source: Macquarie Research, July 2006 Total Liabilities & Shareholders' Funds m 918,883 1,221,191 1,273,294 1,370,549


10 July 2006 17

Appendix 1: Oil & Gas E&P – Next frontier Significant discoveries since RIL entered E&P in the early ‘90s Panna-Mukta Tapti (PMT) JV: The first step

Producing asset

RIL’s foray into oil & gas E&P started in the early 90s, when it acquired a 30% equity stake in a JV (with ONGC and British Gas). The JV started direct marketing of gas in FY06 and supplies gas to consumers such as Gujarat State Petroleum Corporation, Indian Petrochemicals Corporation Limited, Gujarat Gas Company Limited, Gas Authority of India Limited etc.

The Panna-Mukta fields produced 1.6m tonnes of crude oil and 46.7 bcf of gas and the Tapti field produced ~79.0 bcf of gas during FY06.

The JV is implementing an expanded plan of development (EPOD) of the Panna Mukta field, which is likely to result in additional recovery of oil and gas of 4.1m tonnes and 237 bcf from December 2006. Additionally, a newly revised plan of development (NRPOD) for Tapti is being implemented, which would result in additional gas of 210 mmscfd from 2007.

KG-D6 gas: The most significant discovery

Reliance is the operator and has a 90% interest in the 7,645 sq km deep water KG-DWN-98/3 (a.k.a. KG-D6) block. To date, drilling has result in 18 consecutive discoveries on this block. Recent new discoveries and increased reserves estimates confirm the D6 block’s reputation as being a world-class petroleum province.

Asset under development

In 2002, RIL announced the largest gas find in the world that year in the block. Initial estimates for the in-place resources were ~14tcf. RIL's E&P partner in the KG basin (off the Indian east coast), Niko Resources (NKO CN, Not rated), announced its FY06 results on 27 June 2006. Along with its results, the company announced that an independent engineering report prepared by Gaffney, Cline and Associates has revised the in-place resources in the D6 Block upwards by ~200%, from 12tcf to 35.4tcf. This is notable since Niko has been conservative in its estimates in the past. However, we find it more notable that the P2 reserves (proved + probable; 50% probability of materialising), have gone up from 7.9tcf to 18.8tcf.

KG-D6 oil: Significant oil discovery in deep waters

Recently discovered

In April 2006, newspapers reported that RIL had struck a significant 1bn barrels of oil in KG6 (Indian east coast) deep water. This find was later confirmed at RIL’s annual general meeting (AGM), but the size of the strike is not confirmed yet.

At the AGM, RIL also announced that it struck oil at two shallow water blocks. Details are yet to be announced.

NEC 25: Eastern offshore block

Declared as commercial reserves

In June 2004, RIL struck gas in its NEC-OSN-97/2 block off the Orissa (east India) coast. RIL (90% interest) and Niko (10% interest), have confirmed the six discoveries made to date as commercial. Current estimate for the in-place gas resources is 2.3tcf. The first commercial natural gas deliveries into the Kolkata natural gas market are expected in early 2009.

Coal Bed Methane (CBM) Blocks

Established reserves

RIL won 5 CBM blocks and has struck gas in the Sohagpur East and West Blocks. The Director General of Hydrocarbons (DGH) has confirmed that the in-place resources at these gas blocks is 3.65tcf.


10 July 2006 18

Overseas assets

The company has been expanding its oil exploration and production business consistently. RIL acquired interests in exploration of overseas blocks, one each in Yemen and Oman. Reliance is also pursuing an aggressive plan for acquisition of oil and gas assets overseas, including Sudan, Iraq, Madagascar and Libya.

Yemen: Producing asset

In Yemen, it struck oil in the onshore Malik-9 block. We estimate recoverable crude oil reserves from this block to be between 40-60m barrels. The asset is currently producing 10,000bpd of which 25% is RIL’s share.

Oman: Preliminary surveys

In FY05, RIL successfully bid for a 100% stake in offshore exploration block in Oman. Existing seismic data has been collected and 2D reprocessing of data is underway.

Our conservative valuation of RIL’s E&P reserves is Rs172/share We have valued RIL’s oil & gas assets at Rs172/share based on a sum-of-parts basis. The sum-of-parts value comprises a value of Rs78/share for RIL’s KG-D6 gas reserves and a potentially large value of Rs93/share from RIL’s oil & gas KG-D6 oil finds, NEC-25 gas find and CBM block in Sohagpur (Figure 21).

Scenario analysis for KG-D6 gas reserves: Assets to add Rs78/share NPV The KG-D6 basin gas price to NTPC (NATP IN, Not rated) and Reliance natural resources (RNR IN, Not rated) of US$3.27/mmbtu (delivered) is currently below market price and is applicable currently to the first 40m scmd of gas produced for the next 17 years.

Our pessimistic-case scenario (Rs55/share, 30% probability) assumes no increase in size of the 14tcf in-place resources (contrary to RIL and Niko’s expectations) and a price of US$3.27/mmbtu for the production (40m scmd), entirely attributable to NTPC and RNRL.

Our base-case scenario (Rs73/share, 55% probability) assumes an increase in size of reserves (as mentioned in Niko’s annual results) to only the P2 reserves (ie, 18.8tcf, which has 50% probability of materialising) and a delivered price of US$4.5/mmbtu for the incremental production above 40m scmd. We note that this price is ~6% below the price negotiated by the PMT JV for PMT gas and about half the prevalent spot market gas prices.

Our optimistic-case scenario (Rs145/share, 15% probability) assumes an increase in size of reserves (as mentioned in RIL’s presentation to the government) to 70% (recovery rate) of the estimate of in-place resources (i.e. 60tcf, 10% probability of materialising) and delivered price of US$4.75/mmbtu for the incremental production above 40m scmd. We note that this price is equal to the price negotiated by the PMT JV for PMT gas and a little over half the prevalent spot market gas prices.

All the scenarios incorporate all terms of the production sharing contracts (PSCs). The Government of India is entitled to a 10% interest in the profit oil and gas produced if operators (in this case RIL and Niko Resources) have recovered less than 150% of their investment in the field from cash flows. The government share escalates as a greater multiple of the investment is recovered (For NEC-25 and D6, see Figure 20)


10 July 2006 19

Fig 20 Share of profit attributable to Government of India GoI entitlement Investment multiple Block: KG-D6 Block: NEC-25

0.0-1.5x 10% 10%1.5-2.0x 16% 16%2.0-2.5x 28% 22%2.5-3.0x 85% 28%>3.0x 85% 70%Source: Niko Resources

Additional reserves valued at Rs93/share

We value KG-D6 oil reserves, NEC-25, and CBM-Sohagpur gas reserves using benchmark EV/ reserves for ONGC’s assets and discounting them back from expected date of commencement of operations.

Fig 21 Valuation of RIL's oil & gas assets KG-D6 gas reserves

Pessimistic scenario Base case

Optimistic scenario

Recoverable reserves (tcf) 10 19 42Peak production (mscmd) 40.0 60.0 125.0 Capex / additional tcf of reserve as % of original capex n/a 80% 60%DCF value per share (Rs) 55 73 145Value per boe (US$) 0.96 0.67 0.61 Probability of occurrence 30% 55% 15%Value of KG-D6 gas per RIL share (Rs) 78 KG-D6 oil reserves Recoverable reserves (m bl) 315 405 495Value of KG-D6 oil per RIL share (Rs)* 29 37 45 NEC-25 Recoverable reserves (tcf) 1.2 1.4 1.7Value of NEC-25 gas per RIL share (Rs)* 23 27 30 CBM block- Sohagpur Recoverable reserves (tcf) 1.1 1.5 1.8Value of CBM gas per RIL share (Rs)* 22 30 37 Total value of oil & gas assets per share (Rs) 129 172 258* based on ONGC's current EV/ reserves discounted back from expected date of production Source: Niko Resources, Macquarie Research, July 2006

Fig 22 Details of valuation for KG-D6 oil, CBM-Sohagpur and NEC-25 resources Recent oil find in KG-D6 CBM-Sohagpur NEC 25 (eastern offshore) Pessimistic

scenario Base case

Optimistic scenario

Pessimistic scenario

Base case

Optimistic scenario

Pessimistic scenario

Base case

Optimistic scenario

In-place gas resources (tcf) - 3.7 2.3In-place resources (m boe) 1,000 657 414RIL's share of in-place resources (%) 90 100 90RIL's share of in-place resources (m boe)

900 657 373

Recovery rate (%) 35 45 55 30 40 50 60 70 80Recoverable reserves (tcf) 1.1 1.5 1.8 1.2 1.4 1.7Recoverable reserves (m barrels) 315 405 495 197 263 329 224 261 298EV/reserves (US$/bl)* 5 5 5Impact on Enterprise value (Rsbn) 70 90 110 44 58 73 49 58 66Impact on EV/share (Rs) 50 64 79 31 42 52 36 41 47 WACC (%) 11.8 11.8 11.8Number of years to production 5 3 4Present value of impact on EV (Rsbn) 39.9 51.3 62.7 31.2 41.6 52.0 31.7 36.9 42.2Impact on EV/share (Rs) 29 37 45 22 30 37 23 27 30* ONGC’s EV/ reserves used as benchmark Source: Macquarie Research, July 2006


10 July 2006 20

Blue sky scenario: Potential reserves could nearly replicate ONGC According to a presentation made to the government of India, RIL’s total in-place gas resources could be as high as 11bn boe. Of this, ~3bn boe could be attributed to current and prospective finds from the KG D6 block alone. As mentioned earlier, this is in-line with the independent engineering report prepared by Gaffney, Cline and Associates for Niko resources. The recent oil find in the KG-D6 block could add another 1bn bl of oil to RIL’s in-place resources.

We have not built these values into our valuation for RIL shares as exploratory drilling is yet to commence at most areas and these estimates are yet to receive approval from the Director General of Hydrocarbons (DGH) for classification as reserves.

Fig 23 Potential reserves could nearly replicate ONGC In-place resources Proved reserves (bn bl oil equivalent)*

tcf bn bl oil equivalent Conversion rate* = 30%

Conversion rate* = 40%

Conversion rate* = 50%

D6 gas (original announcement) 14.0 2.5 0.8 1.0 1.3 D6 gas (increase in reserve estimate)** 18.0 3.2 1.0 1.3 1.6 Gas in other RIL blocks 28.0 5.0 1.5 2.0 2.5 Total- Gas 60.0 10.8 3.2 4.3 5.4 Recent D6 oil find 1.0 0.3 0.4 0.5Total- Oil + Gas 11.8 3.5 4.7 5.9 % of ONGC's current proved reserves 54% 72% 90%* % of in-place resources which are finally classified as proved reserves ** In line with independent engineering report prepared by Gaffney, Cline and Associates for Niko resources Source: Company, Niko resources filings, Macquarie Research, July 2006

ONGC (ONGC IN, Underperform) is India’s largest E&P company with proved reserves of ~6.5bn boe. RIL’s current proved reserves (according to the disclosure by partner Niko Resources) are already ~15% of ONGC’s proved reserves. This includes only the proved gas reserves (5.7tcf) in the KG-D6 basin. If we assume a 40% conversion rate (from in-place to proved reserves), the estimate of proved reserves for RIL could be as high as 72% of ONGC’s total current proved reserves. An optimistic conversion rate of over 50% could potentially replicate ONGC’s oil & gas assets (Figure 23).


10 July 2006 21

Fig 24 RIL: Oil & Gas block details Round

Basin

Block

Date of signing contract

Area (sq km)

Consortium

Type of block

Petroleum exploration licences 5 (Pre-NELP) Gujarat-Kutch GK-OS/5 Jul 16, 1998 3,750 RIL, TIOL and OKLAND Offshore 7 (Pre-NELP) Saurashtra SR-OS-94/1 Apr 12, 2000 6,860 RIL Offshore JV (Pre-NELP) Gujarat-Kutch GK-OSJ-3 Sep 06, 2001 5,725 RIL, ONGC, OIL Offshore NELP-I Krishna Godavari KG-DWN-98/1 Apr 12, 2000 10,810 RIL Deep water NELP-I Krishna Godavari KG-DWN-98/3 Apr 12, 2000 7,645 RIL, Niko Deep water NELP-I Mahanadi MN-DWN-98/2 Apr 12, 2000 7,195 RIL Deep water NELP-I Gujarat-Kutch GK-OSN-97/1 Apr 12, 2000 1,465 RIL Shallow offshore NELP-I Saurashtra SR-OSN-97/1 Apr 12, 2000 5,040 RIL Shallow offshore NELP-I Mumbai MB-OSN-97/3 Apr 12, 2000 5,740 RIL Shallow offshore NELP-I Kerala-Konkan KK-OSN-97/2 Apr 12, 2000 19,450 RIL Shallow offshore NELP-I Krishna-Godavari KG-OSN-97/4 Apr 12, 2000 4,020 RIL Shallow offshore NELP-I Krishna-Godavari KG-OSN-97/3 Apr 12, 2000 2,460 RIL Shallow offshore NELP-I Krishna-Godavari KG-OSN-97/2 Apr 12, 2000 4,790 RIL Shallow offshore NELP-I Bengal NEC-OSN-97/2 Apr 12, 2000 10,755 RIL, Niko Shallow offshore NELP-II Kerala-Konkan KK-DWN-2000/1 Jul 17, 2001 18,113 RIL Deep water NELP-II Kerala-Konkan KK-DWN-2000/3 Jul 17, 2001 14,889 RIL Deep water NELP-II Gujarat-Saurashtra GS-OSN-2000/1 Jul 17, 2001 8,841 RIL, HEPI Shallow offshore NELP-II Upper Assam AS-ONN-2000/1 Jul 17, 2001 6,215 RIL, HEPI Onland NELP-III Kerala-Konkan KK-DWN-2001/1 Feb 04, 2003 27,315 RIL, HEPI Deep water NELP-III Kerala-Konkan KK-DWN-2001/2 Feb 04, 2003 31,515 RIL, HEPI Deep water NELP-III Cauvery CY-DWN-2001/2 Feb 04, 2003 14,325 RIL, HEPI Deep water NELP-III Cauvery-Palar CY-PR-DWN-2001/3 Feb 04, 2003 8,600 RIL, HEPI Deep water NELP-III Cauvery-Palar CY-PR-DWN-2001/4 Feb 04, 2003 10,590 RIL, HEPI Deep water NELP-III Palar PR-DWN-2001/1 Feb 04, 2003 8,255 RIL, HEPI Deep water NELP-III Krishna-Godavari Kg-DWN-2001/1 Feb 04, 2003 11,605 RIL, HEPI Deep water NELP-III Krishna-Godavari KG-OSN-2001/1 Feb 04, 2003 1,100 RIL, HEPI Shallow offshore NELP-III Krishna-Godavari KG-OSN-2001/2 Feb 04, 2003 210 RIL, HEPI Shallow offshore NELP-IV Mahanadi-NEC NEC-DWN-2002/1 Feb 06, 2004 25,565 RIL, HEPI Deep water - Blocks NELP-V Kerala-Konkan KK-DWN-2003/1 Sep 23, 2005 18,245 RIL Deep water - Blocks NELP-V Kerala-Konkan KK-DWN-2003/2 Sep 23, 2005 12,285 RIL Deep water - Blocks NELP-V Krishna-Godavari KG-DWN-2003/1 Sep 23, 2005 3,288 RIL, HEPI Deep water - Blocks NELP-V MahanadiI-NEC MN-DWN-2003/1 Sep 23, 2005 17,050 RIL, NR(V)L Deep water - Blocks NELP-V Cambay CB-ONN-2003/1 Sep 23, 2005 635 RIL Onland Development of small and medium-sized discovered fields 1 (Pre-NELP) Mumbai offshore Mid and south Tapti Dec 22, 1994 1,471 BGEPIL, RIL, and ONGC Medium-sized fields 1 (Pre-NELP) Mumbai offshore Panna Dec 22, 1994 430 BGEPIL, RIL, and ONGC Medium-sized fields 1 (Pre-NELP) Mumbai offshore Mukta Dec 22, 1994 777 BGEPIL, RIL, and ONGC Medium-sized fields NELP: New Exploration Licensing Policy Source: Director General of Hydrocarbons, July 2006

Fig 25 RIL: Coal bed methane (CBM) block details Coal field

Block

Consortium (Participating interest)

Date of signing

Area (sq km)

CBM - round I Sohagpur East/ Madhya Pradesh SP(E)-CBM-2001/1 RIL(100) Jul 26, 2002 495Sohagpur West/ Madhya Pradesh SP(W)-CBM-2001/1 RIL(100) Jul 26, 2002 500CBM - round II Sonhat/ Chatisgarh & MP SH(North)-CBM-2003/II RIL(100) Feb 06, 2004 825Barmer/ Rajasthan BS(1)-CBM-2003/II RIL(100) Feb 06, 2004 1,045Barmer/ Rajasthan BS(2)-CBM-2003/II RIL(100) Feb 06, 2004 1,020Source: Director General of Hydrocarbons, July 2006

Fig 26 Snapshot of key operating parameters (base case scenario) for KG gas FY09E FY10E FY11E

Initial (Proved + Probable) reserves (tcf) 18.8 Total Sales (m scmd) 32 40 60 Sales (mscmd) to NTPC and RNRL 32 40 40 Producer price (US$/mmbtu) to NTPC & RNRL 2.4 2.4 2.4 Sales (mscmd)- open market - - 20 Producer price (US$/mmbtu)- open market 3.6 3.9 4.3 Govt Share 10% 10% 10%Net Sales (Rs m) 41,622 49,662 93,373Recurring Net Income (Rs m) 12,936 16,948 50,870PAT margin 31% 34% 54%Source: Macquarie Research, July 2006


10 July 2006 22

Fig 27 Snapshot of key valuation assumptions (base case scenario) for KG gas WACC Calculations Rationale behind

assumptions DCF calculation

Risk-free rate (%) 8.0 10-year government bond yield

WACC (%) 11.8

Market risk premium (%) 7.0 PV of FCF to total depletion of 101,437Total market return (%) 15.0 reserves (Rs m) Beta (x) 1.04 RIL's prospective beta Cost of equity (%) 15.3 NPV-Base case scenario (Rs m) 101,437Gross cost of debt (%) 8.0 NPV per RIL share (Rs) 73Tax rate (%) 33.6 Marginal tax rate Net cost of debt (%) 5.3 Debt/capital ratio (%) 35.0 Contribution of KG gas to price 71 WACC (%) 11.8% target (Rs) Source: Macquarie Research, July 2006


10 July 2006 23

Appendix 2: Retail - Nascent but exciting Domestic organised retail holds massive potential. It constitutes only 3% of an estimated Rs10tr (US$220bn) total retail in India and is forecast to grow >30% CAGR through 2009–10. RIL has announced a US$5.6bn outlay to enter retail across segments and product groups on a pan-India basis and across several verticals. On a preliminary basis, we believe RIL’s retail plans could add Rs67/share of option-value or 5% of the total NPV we have attributed to RIL.

RIL retail: Aiming to tap the great Indian retail boom Reliance Industries has identified organised retail as the next growth driver for the group. Apart from a brief mention of the retail initiative in the annual general meeting (AGM), the details of the company’s strategy are currently unknown. At the AGM, held in June 2006, the chairman, Mr Mukesh Ambani, announced that the company plans to enter retail across segments (mass market and premium segments, domestic and international brands) and product groups (food products to luxury goods).

RIL announced that the foray in retail would be through a 100% subsidiary and described a significantly stepped-up outlay of US$5.6bn (v/s US$750m announced in January 2006) as the "overwhelming theme". Retailing would entail a pan-India footprint covering 1,500 cities and across several verticals (food, clothes, travel, health, leisure, education, etc).

Penetration of organised retail is miniscule, and growth prospects large

Domestic organised retail constitutes only 3% of total retail in India and is forecasted to grow >30% CAGR through 2009–10. We expect this growth to be driven by shifting domestic demographics, higher disposable incomes, consumer lifestyles and favourable changes in government policies.

The potential due to low penetration of organised retail in India looks even bigger if we compare this with other Asian countries such as Taiwan, where penetration levels (80%) have gone to levels seen only in developed countries such as the US and UK. According to CRIS INFAC, even countries such as China, which first permitted FDI in retail in six cities, has seen the top 11 retailers in these six cities account for around half of the overall sales of FMCG in the country.

Fig 28 Organised retail penetration: Long road ahead for India Country Share of organised sector (%)

Taiwan 81Malaysia 45Thailand 40Indonesia 30China 15India 3Source: CRIS INFAC, July 2006 The government has started recognising the need for organised retail

We believe the domestic retail sector is not only poised for strong growth, but also that consolidation within the sector should enable larger formats. The government recognised that it had to reverse policies that were designed to encourage small formats. Driven by various government initiatives such as allowing 51% FDI in single brand retail and the introduction of value added tax (VAT) in addition to a tax holiday for multiplexes and malls, we expect the penetration level of organised retail in India to increase multiple times over the next decade.

RIL’s strategy targets the mass market segment to drive volumes…

RIL especially aims to drive a surge in volumes and top-line growth by tapping the mammoth “food beverage and tobacco” sub-sector, which currently constitutes 76% of total retail but organised retail has managed only a 1% penetration.


10 July 2006 24

Fig 29 Organised retail: Low penetration, strong potential Total retail Organised retail Category Estimated market

size 2005 (Rs bn)Market

share (%)Market size

(Rs bn) Market

share (%)Penetration

(%)

Food beverage and tobacco 7,738 75.8 65 19 1Clothing and textile 716 7 141 40 20Consumer durables 416 4.1 43 13 10Jewelleries and watches 416 4.1 25 7 6Home décor and furnishing 300 2.9 25 7 8Beauty care (products) 214 2.1 7 2 3Footwear 104 1 32 9 31Books, music and gifts 87 0.8 11 3 13Total 9,990 100 349 100 3Source: CRIS INFAC, July 2006

… and premium retail to drive margins

The consumption pattern of Indian households suggests that 40% of income is spent on food and edibles. ‘Engel’s law’ of micROEconomics states that as per-capita incomes rise, food and edibles lose share of total spend, resulting in increased levels of average disposable income. The number of households in the middle and rich class are expected to increase 50% by 2009/10.

Fig 30 Shifting Indian demographics: The burgeoning upper and middle class

40%

50%

60%

70%

80%

90%

100%

1995-96 2001-02 2005-06P 2009-10P

Deprived (<US$2,000 pa) Middle class (US$2,000 to 4,500 pa) Upper Class (>US$4,500 pa)

Source: NCAER, CRIS INFAC, Macquarie Research, March 2006

An increasing proportion of young population, thus reducing the ‘dependency ratio’ should also help spur consumption growth (Figure 31).

Awareness and availability and consequently penetration of credit and plastic money and growing fashion consciousness amongst Indians, stimulate impulsive buying which should lead to growth in premium segment retail.

CAGR (till 2010)

+15%

+9%

-4%


10 July 2006 25

Fig 31 India's population: Growing 'young' with time

0%

20%

40%

60%

80%

100%

1990 1995 2000 2005 2010 2015

< 15 years 15-60 years > 60 years

Source: Census 2001, CRIS INFAC, Macquarie Research, March 2006

It is our view that the scope for margin expansion is higher in premium and branded retail. By its tie up with Armani, RIL has made its intention clear to ensure that this opportunity is addressed in its mammoth organised retail strategy.

The key risk to be mitigated is execution Robust supply chain management remains the key

The global experience shows that branding and retailing typically allow 4x mark-up over producer prices. Nevertheless, high lead times and inventory obsolesce can sharply erode margins (Figure 32).

Fig 32 Net profit margin of global retailers

0

2

4

6

8

10

12

Linens 'nThings

JC Penney Walmart Tesco TommyHilf iger

Target Marks andSpencer

Bed Bath &Beyond

(%)

Source: Bloomberg, March 2006

RIL realises this and intends to deliver better value across the chain - farmers, producers and consumers, through a world-class integrated model. The company has already acquired land in Punjab (Northwest India) to act as the agricultural hub. RIL plans to set up a cold chain, buy dedicated cargo airplanes and procure agricultural produce straight from the ‘mandis’ to capture the margins typically captured by numerous wholesalers and middle-men. Press reports suggest that RIL is also considering importing non-perishable items from Thailand and China. We believe that the scale at which RIL plans to operate will also help it negotiate prices from FMCG majors, leading to lower prices and higher margins.


10 July 2006 26

RIL is hiring the right people for the right jobs

RIL has built its franchise in its current businesses by hiring the most appropriate talent. Recognising that the initiative has to be driven by experienced talent, RIL has been in the news consistently for poaching top talent from related businesses (for example, Rajeev Karwal of Electrolux, Gunender Kapur of Unilever- Nigeria, Bijou Kurien of Titan, Raghu Pillai of Pantaloon. Source: Press reports).

RIL eventually intends to directly employ 0.5m staff at retail outlets. We believe that RIL should have no trouble attracting and retaining the best talent given its strong brand, high-profile, reputable team and commitment as displayed by the size of its investment foray.

We value the organised retail venture at Rs67/share With the scarcity of details available around the retail venture, we find it difficult to accurately forecast earnings and value the business. Nevertheless, RIL has demonstrated during the past that it is capable of creating value in virtually every venture including diversifications such as telecom. Hence, retailing is a value that cannot be ignored. Such businesses, with potential but uncertain value, have added as “option value” to the value that we have attributed to RIL’s core businesses.

We estimate that the current limited details justify an NPV-based value of Rs67/share for RIL’s retail foray. However, we believe that as the details of the investment and the strategy are uncovered, this value would change. Key announcements, which would force us to reconsider the value we have assigned to this business, are:

The size, scale and geographical spread of the operations

Procurement strategy: especially for agri-products

Supply chain: progress on cold chain, agreements with FMCG companies, imported goods, etc

Any announcement regarding debt and eventual IPO of the retail subsidiary

We estimate that the current limited details justify an NPV-based value of Rs67/ share for RIL’s retail foray. However, we believe that as the details of the investment and the strategy are uncovered, this value would change. Key announcements, which would force us to reconsider the value we have assigned to this business, are:

The size, scale and geographical spread of the operations

Procurement strategy: especially for agri-products

Supply chain: progress on cold chain, agreements with FMCG companies, imported goods, etc

Any announcement regarding debt and eventual IPO of the retail subsidiary

Fig 33 Snapshot of key operating parameters for RIL’s retail subsidiary FY07E FY08E FY09E FY10E FY11E FY12E FY13E FY14E FY15E

Revenue worksheet Revenue/ sq ft / day (Rs) 21.0 22.0 22.0 22.0 23.0 23.0 23.0 23.0 24.0 No of stores 1,500 3,000 4,000 5,000 6,000 7,000 7,500 8,000 8,300Total Revenues (Rs m) 34,493 72,270 96,360 120,450 151,110 176,295 188,888 201,480 218,124Net Income (Rs m) -805.9 -1,123.6 -15.3 1,786.6 4,832.8 8,522.3 8,698.5 10,706.4 11,566.3PAT margin -2% -2% 0% 1% 3% 5% 5% 5% 5%Source: Macquarie Research, July 2006


10 July 2006 27

Fig 34 Snapshot of key valuation assumptions for RIL’s retail subsidiary WACC Calculations Rationale behind assumptions DCF calculation

Risk free rate (%) 8.0 10 year government bond yield WACC 12.3%Market risk Premium (%) 7.0 Terminal multiple 10.8Beta of the Stock 1.04 RIL's prospective beta Terminal year growth 3.0%Cost of equity (%) 15.3 PV of FCF to FY2022E (Rs m) 48,446 Gross cost of debt (%) 8.0 Terminal value (Rs m) 283,575 Tax rate (%) 33.6 Marginal tax rate PV of terminal value (Rs m) 44,385 Net cost of Debt (%) 5.3 NPV (Rs m) 92,831 NPV per RIL share (Rs) 67 Debt/capital ratio (%) 30.0 Contribution to price target (Rs) 60WACC 12.3% (including 10% discount) Source: Macquarie Research, July 2006

Eventual IPO of the retail subsidiary would create value for RIL shareholders

RIL has stated that its retail operations are currently through a 100% subsidiary. We believe that an eventual IPO of RIL's retail venture could create value for RIL shareholders as in the case with Reliance Petroleum (RPET IN, Not rated). RIL had created ~Rs100 per share for RIL shareholders, as the RPET IPO was priced at Rs60, while the RIL's equity contribution was issued at Rs10 per share for 60% of its holding.


10 July 2006 28

Appendix 3: Fuel retail – Pain before gain Fuel retail incumbents losing share to RIL Demand for auto-fuel in India has grown at 4–5% CAGR over the last three years, but is witnessing recent signs of stagnation. In the short span of two years, new entrant Reliance Industries (RIL) has taken a 13% market share in the auto-fuel retail space from incumbent PSU oil marketing companies (viz. IOC, BPCL and HPCL) (Figure 9).

However, the market share gains by RIL are not merely due to its presence in the market. While throughputs of IOC, BPCL and HPCL have fallen, RIL has maintained retail throughputs per outlet at 350-370MT per outlet, despite the high fixed-cost nature of the business (Figure 35) This is nearly three times the average PSU throughput.

The gain in market share is likely to continue longer term as profitability will receive a boost in phase two of RIL’s retailing plan, which we believe will target motor spirit retailing in towns and cities through larger formats and hyper malls.

Fig 35 RIL’s throughputs are 3-fold those for incumbent PSU OMCs

75

125

175

225

275

325

375

Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06Thruput for IOC/ IBP HPCL BPCL RIL


Long-term competitive parameters indicate further gains for RIL Effective positioning of outlets by RIL to result in higher market share and throughput

Incumbent PSU OMCs suffer from the disadvantage of being forced to set up petrol pumps at unviable locations and the negative perception of service and product quality. The Pareto’s (80-20) principle holds true for the positioning of retail outlets. As seen in retail outlets in North America (Figure 36), 22% of the most attractive/prominent sites for auto-fuel retail contribute nearly 71% of net profits.


10 July 2006 29

Fig 36 Pareto’s principle: 22% of retail outlets contribute 71% of profits

78%

29%

22%

71%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Share of sites Share of PATOther sites Attractive sites sites

Source: McKinsey and Co

RIL has succeeded due to effective implementation of its strategy revolving around the following rule: focus on positioning retail outlets along highways, rather than a rampant expansion of outlets. This strategy has ensured higher throughput (Figure 37).

Fig 37 Retail competitive landscape

40

90

140

190

240

290

340

390

440

850 950 1050 1150 1250 1350 1450 1550 1650 1750 1850 1950 2050 2150 2250 2350Retail Outlet additions (Since Jan'05)

Retail Throughput(MT/outlet)

BPCLHPCL

IOC & IBP

RIL


Non-fuel retail content boosts IRRs

Outlets with a higher mix of non-fuel retail content result in a higher IRR (Figure 38). The steep ramp up in RIL’s market share in the past two years could continue as the company expands outlets into major and second-tier cities apart from highways. We believe that retail/ restaurant/lodging services currently available at the outlets should result in higher IRRs from RIL retail outlets as compared to PSU OMC incumbents. This should rise as RIL unleashes its retail strategy in the hyper-market cum auto-fuel retail outlet format stores over the next two-to-five years.


10 July 2006 30

Fig 38 Contribution from non-fuel retail could boost returns earned

Fuel/ non fuel sales mix 100% 80% 100% <40% 100%

Typical IRR 4-7% 7% 13-25%

Market examples - India - Brazil - US- China - Italy - France

- Fuel - FuelValue proposition - Vehicle related - Basic convenience - Strong non-fuel

product/ service impulse non-fuel value propositionproducts

Source: McKinsey and Co

Negative marketing margins raise near-term concerns Government finally allowed petrol and diesel prices to be hiked on 5 June 2006

The government did not allow petrol and diesel retail prices to be increased between October 2005 and 5 June 2006. This was despite oil prices having increased by ~15% during the same period. This had resulted in significant under-recoveries for PSU oil marketing companies (OMCs): HPCL, BPCL and IOC.

On 5 June, the government allowed petrol retail prices to be increased by Rs4/litre and diesel retail prices by Rs2/litre and import duties on petrol and diesel were reduced from 10% to 7.5%. This addressed ~27% of the overall expected losses (Rs800bn) for the year. The government also tilted the subsidy burden in favour of OMCs and announced issue of oil bonds to help them remain in the black in FY07E.

No subsidy for private players, including RIL

However, despite the price hike, marketing margins remain negative with petrol and diesel still being sold at a discount of Rs6-8/ litre. While PSU OMCs would benefit from discounts by government owned upstream companies and refiners and oil bonds, private players (e.g. RIL) have not been offered any such package.

Under-recoveries have forced RIL to raise prices above its competition

While RIL management has appealed to the government to look into this discrepancy, the company has decided to go ahead and raise diesel and petrol prices by Rs2-3/ litre above prices offered by PSU OMCs. This helps cut the losses, but RIL’s throughputs have reduced to 20-25% of normal throughputs. We believe this will continue in the near-term as the government and RIL work out a solution and unless oil prices fall below US$64-65/bl.

However, growth in number of outlets added not expected to slow

RIL management is confident that this phenomenon will only remain a concern in the near-term. Only 10% of refinery throughput was dedicated to the retail outlets in FY06. RIL retains the ability and option to export the refinery output and has robust contracts with retail outlets owners. This will help tide over this phase.

We believe that the pace of addition to retail outlets will continue with throughputs returning to normal as the government and RIL work out a solution and oil prices come down below current levels of US$72-73/bl and average US$65/bl for the next two years.

Also, support from the retail outlets as distribution outlets and hubs for the foray in organised retail should boost IRRs from the investment in auto-fuel retail.


10 July 2006 31

Fig 39 Snapshot of key operating parameters for auto-fuel retail business FY06 FY07E FY08E FY09E FY10E FY11E

No. of retail outlets 1,200 1,800 2,600 3,400 4,200 5,000Throughput per outlet/ month (MT) 150 220 300 300 300 300Retail margins Gasoline (Rs/kl) -700 800 1,375 1,513 1,588 1,668High speed diesel (Rs/kl) -1,000 700 1,210 1,331 1,398 1,467Net sales (Rs m) 52,753 129,337 269,370 332,896 372,279 417,717 - from Gasoline 11,480 36,058 72,619 89,840 100,590 112,979 - from High speed diesel 41,273 93,278 196,751 243,056 271,689 304,738Recurring Net Income (Rs m) -4,345 294 6,036 9,477 13,112 17,278PAT margin -8% 0% 2% 3% 4% 4%Source: Macquarie Research, July 2006

Fig 40 Snapshot of key valuation assumptions for auto-fuel retail business WACC calculation (%) Rationale behind assumptions DCF calculation

Risk-free rate (%) 8.0 10-year government bond yield WACC (%) 12.3%Market risk premium (%) 7.0 Terminal Growth rate (%) 3.0Total market return (%) 15.0 PV of FCF to FY13E (Rs m) 33,315Beta (x) 1.04 RIL's prospective beta PV of terminal FCF (Rs m) 119,859Cost of equity (%) 15.3 Total PV (Rs m) 153,174Gross cost of debt (%) 8.0 Less Net Debt (Rs m) 23,613Tax rate (%) 33.6 Marginal tax rate NPV per RIL share (Rs) 93Net cost of debt (%) 5.3 Debt/capital ratio (%) 30.0 Contribution to price target 84WACC (%) 12.3% (including 10% discount) Source: Macquarie Research, July 2006


10 July 2006 32

Appendix 4: GRMs to remain strong until FY09 Global shortages and enhanced crack spreads took refining margins to record highs in FY04 and FY05, followed by a sharp dip in 2HFY06. Margins will likely rebound in the near term given limited global refinery capacity additions and vintage US capacities (one-fifth of global capacity) constrained to process scarce light sweet crude. Beyond FY09, nevertheless, GRMs are likely to revert to their longer-term range between US$2-4/bl. HPCL will benefit from this over the next four years, especially in FY08 and FY09 as new capacities come on-stream. However, note that HPCL is a net buyer/retailer of petroleum products. Hence, earnings are impacted by retail margins more than refining margins.

Global GRMs collapse in 2HFY06 after hitting record levels Global margins peaked in CY05 and have been about US$6/bl higher than the long-term average gross refining margins in the past six quarters.

Fig 41 Global GRMs had collapsed recently after hitting a cyclical peak

Source: CMAI, Macquarie Research, June 2006

This is due to multiple triggers.

Global demand growth outpaces capacity increases: Economic growth in the US, China and India have resulted in increased demand for refined petroleum products. However, incremental refining capacity has failed to keep pace with the increase in demand (Figure 42), notably in the Asia-Pacific region. This has resulted in a decrease in global spare refining capacity, a trend that is expected to continue until 2009.

Fig 42 Global demand growth has outpaced capacity increases

0123456789

10

1993 1997 2001 2005 2006P 2007P 2008P 2009P

(%)

0.00.20.40.60.81.01.21.41.61.82.0

(mn bl/day)

Spare capacity (LHS) Incremental demand (RHS) Incremental capacity (RHS)

Source: CRIS INFAC, BP, EIA, OGJ, Macquarie Research, June 2006

-0.250.751.752.753.754.755.756.757.75

Apr-93 Oct-94 Apr-96 Oct-97 Apr-99 Oct-00 Apr-02 Oct-03 Feb-05 Aug-05 Feb-06

(US$/bl)

Singapore Dubai Hydrocracking


10 July 2006 33

Enhanced crack spreads: Sweet crude oil depletion has led to the increasing availability of crude reserves of the medium and heavy-sour type. Thus, the incremental crude supply will also tilt away from sweet crude increasing crack spreads.

Fig 43 Available mix of reserves (2005)

Fig 44 Supply of crude (2005)

Heavy-sour15%Light-sweet

19%

High acid-sweet

2%

Medium-sour64%

Heavy-sour

14%

Light-sweet30%

High acid-sweet

3%

M edium-sour53%

Source: Valero Energy Corp, June 2006 Source: Valero Energy Corp, June 2006

The inability to process heavy crude at obsolete refineries has led to multiple capacities becoming redundant. This is most notable in the US, which accounts for nearly 21% of global refining capacity. This puts further pressure on spare capacity. In fact, we believe that the current global spare refining capacity, dominated by heavier crudes, has turned negative.

Refining margins poised to rebound in the near term However, the last five months has seen a dip in global refining margins (Figure 41) with margins closer to the long-term average (~US$2/bl). However, margins are likely to rebound in the near term given limited global refinery capacity additions and vintage US capacities (one-fifth of global capacity) constrained to process scarce light sweet crude.

GRMs are expected to taper off beyond FY09 Aggressive global refining capacity expansions expected over the next 3-5 years

It takes around four-to-five years to set up a green-field refinery. Capacity expansions which were planned in the high-GRM scenario will come on-stream only by FY09–10. Hence, the trend of incremental demand outstripping incremental supply is expected to continue until FY09E.

Multiple capacity expansions and new refineries globally and in India are expected to be commissioned over the next three-to-five years. Indian refining capacity is expected to increase nearly 60% to reach 210mmtpa by 2012 (from 132mmtpa currently).

Fig 45 Major domestic capacities proposed start-ups Location Additional capacity (mmtpa) Expected commissioning date

BPCL Mumbai 4.1 Commissioned in July 2005 Essar Oil Vadinar 10.5 1HFY07 IOC Panipat 6.0 1HFY07 HPCL Vishakhapatnam 2.5 FY08 HPCL Mumbai 2.4 FY08 Reliance Industries Jamnagar 29.0 2HFY09 IOC Panipat (phase-2) 3.0 FY09 IOC Haldia 1.5 FY10 BPCL Bina 6.0 FY10 MRPL Mangalore 5.4 FY10 HPCL Bhatinda 9.0 FY10 to FY11 IOC Paradip 15.0 FY11 KRL Cochin 2.5 FY11 MRPL Mangalore SEZ 15.0 Beyond FY11 MRPL Barmer 5.0 Beyond FY11 MRPL Rajasthan 7.5 Beyond FY11 UP refinery Allahabad 7.0 Beyond FY11 Source: Industry, CRIS INFAC, Macquarie Research, June 2006


10 July 2006 34

Consequently, we expect the Singapore (Dubai hydro-cracking) complex margin post FY09E to fall to its long-term average of ~US$2-4/bl.

Progressive regulation to reduce premium of Indian GRM over Singapore complex

Indian refinery GRMs have historically commanded a US$2–3/bl premium over the Singapore complex. However, we believe that reduced import duties have led to lower protection of the import parity price. Also, progressive movement towards free pricing or a trade-parity regime (as suggested in the Rangarajan committee report) should lead to the premium falling to under US$1/bl over the next three-to-five years. We estimate a normalised US¢50/bl premium for Indian refiners beyond FY09E.

Fig 46 Gross refining margin trends and our forecasts

0.00

2.00

4.00

6.00

8.00

10.00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Long-term

(US$/bl)

RIL's GRMs Indian GRMs Singapore cracking margins

Source: FACTS, BPCL, CRIS INFAC, Macquarie Research, June 2006

Fig 47 Snapshot of key operating parameters for refining business FY06 FY07 FY08 FY09 FY2010 FY2011

Installed capacity (m tpa) 33.0 33.0 33.0 33.0 33.0 33.0Capacity utilisation (%) 92.3 100.0 105.0 110.0 110.0 110.0Crude throughput (tpa) 30.5 33.0 34.7 36.3 36.3 36.3 External Sales (m tonnes) Propylene 0.0 0.0 0.1 0.0 0.0 0.0LPG 2.1 2.3 2.4 2.6 2.6 2.6MS 1.9 1.4 0.4 0.0 0.0 0.0Naphtha 0.0 0.0 0.0 0.0 0.0 0.0Reformate (Aromatic naphtha) 0.0 0.0 0.0 0.0 0.0 0.0Kerosene 5.7 6.2 6.5 6.8 6.8 6.8HSD 7.0 5.9 2.9 1.2 0.0 0.0Coke 2.4 2.6 2.7 2.8 2.8 2.8Sulphur 0.6 0.6 0.6 0.7 0.7 0.7 Product prices before excise duty (Rs/kg) Propylene 46.9 47.4 42.3 40.1 38.4 35.8LPG 23.5 28.5 26.9 23.9 21.4 20.0MS 27.5 32.5 30.7 27.3 24.5 22.9Naphtha 23.9 25.1 24.3 21.8 19.9 18.6Reformate (Aromatic naphtha) 26.3 27.7 26.7 24.0 21.8 20.4Kerosene 25.8 27.4 24.8 23.2 20.8 19.4HSD 25.1 28.2 28.0 24.9 22.3 20.8Coke 12.4 14.4 13.6 12.1 10.8 10.1Sulphur 4.7 5.7 5.4 4.8 4.3 4.0 Turnover (External) (Rs m) Propylene 769 1,651 4,325 0 0 0LPG 50,425 66,161 65,599 61,124 54,746 51,139MS 57,706 48,516 11,797 0 0 0Naphtha 631 0 0 0 0 0Reformate (Aromatic naphtha) 754 0 0 0 0 0Kerosene 146,766 168,626 160,577 157,663 141,063 131,770HSD 190,113 179,603 88,202 33,018 0 0Coke 34,210 42,845 42,481 39,583 35,452 33,117Sulphur 3,113 4,084 4,050 3,773 3,380 3,157External turnover (before excise) 484,487 511,486 377,030 295,162 234,640 219,182Source: Company, Macquarie Research, July 2006

Forecast


10 July 2006 35

Appendix 5: Mixed petrochemical outlook Petrochemicals typically follow a 10 year boom-bust cycle with the last peak in cracker/polymer chain during 2004, while the polyester chain peaked during 1994 (Figure 48).

Fig 48 RIL's cracker margins/ plastic stream integrated margins

18

23

28

33

38

43

Oct-92 Jan-94 Apr-95 Jul-96 Oct-97 Jan-99 Apr-00 Jul-01 Oct-02 Jan-04 Mar-05 Jun-06

(Rs/ kg)

Cracker margin (Naphtha route)


We forecast capacity expansions, especially in China and the Middle East, to results in lower capacity utilisations in the cracker-polymer petrochemical stream. On the other hand, higher utilisation rates may enhance polyester chain margins.

Cautious on cracker-polymer stream outlook Macquarie remains cautious on the outlook for petrochemical sector, as we feel increased capacity from China and the Middle East will lead to a steady decline in earnings over the next few years.

Fig 49 Ethylene capacity additions

0

2

4

6

8

10

12

14

2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E

(m tpa)

012345678910

(%)

Chg in capacity ( Chg YoY, LHS) Chg in capacity (Chg YoY, RHS)

Source: CMAI, Macquarie Research, June 2006


10 July 2006 36

Fig 50 Projected ethylene capacity additions Capacity Est startYear Project Location ('000s tpa) date

2005 SECCO China 900 2Q05 BASF-YPC China 600 2Q05 PetroChina-Jilin China 380 3Q05 NPC-Amir Kamir (#6) Iran 880 3Q05 2006 CNOOC/Shell China 800 1Q06 NPC-Marun (#7) Iran 1,100 2Q06 Sinopec Maoming China 640 3Q06 Sabic-Jubail Saudi Arabia 150 3Q06 Sasol/Pars (#9) Iran 1,000 4Q06 NPC-Jam (#10) Iran 1,320 4Q06 2007 Formosa PC Taiwan 1,200 1Q07 YNCC Korea 350 1Q07 Reliance-Hazira India 40 1Q07 PTT Thailand 130 1Q07 PetroChina Lanzhou China 460 1Q07 Sabic Yanbu Saudi Arabia 1,300 4Q07 2008 Honam PC Korea 400 1Q08 BASF Belgium 280 1Q08 PetroChina-Fushun PC China 800 3Q08 PetroChina Daqing PC China 370 3Q08 PetroChina Sichuan China 800 3Q08 Ineos Germany 100 3Q08 Q-Chem II Qatar 1,300 4Q08 Sinopec Fujian China 800 4Q08 NPC-Arvand (#8) Iran 1,000 4Q08 2009 PetroChina Dushanzi PC China 780 1Q09 Sinopec Zhenhai Refining China 1,000 3Q09 Sinopec Tianjin II China 1,000 4Q09 Sinopec Beijing Yanhua China 600 4Q09 Qatar Petroleum/Honam Qatar 900 4Q09Source: Macquarie Research, June 2006

The one risk to our cautious view on the sector is the potential for material delays in new capacity from the Middle East. This is especially the case for Iran given that it has been referred to the UN Security Council.

Any material delays (ie, more than nine months) in new petrochemical capacity from Iran would have a very material impact on global petrochemical demand-supply dynamics. Based on data from CMAI, new ethylene supply in the Middle East will account for roughly 60% of total new supply additions globally from 2006 to 2009. More importantly, new supply capacity from Iran accounts for 30% of new additions in the Middle East (slightly under 20% of new global additions).

It is important to note a few key points about petrochemical production in the Middle East. First, Middle Eastern producers use natural gas as a feedstock, meaning that they can only produce ethylene and ethylene derivatives. Second, there is very little end-demand for petrochemical products in the Middle East. Hence, it is likely that a lot of this production will eventually find its way to Asia. As such, any delays in new Iranian petrochemical capacity would be positive for Asian petrochemical producers. More importantly, it would be most favourable for petrochemical manufacturers with relatively higher exposure to ethylene and ethylene derivative products (more so for downstream products). In Korea, this includes LG Petrochemical and Honam Petrochemical.

That said, we continue to maintain our cautious stance on the petrochemical sector, given our view that there will be no major delays in new Middle East capacity. Unless one has a very strong conviction as to what is going to happen in Iran, we feel buying petrochemical shares now based on the potential scenario of delays in Iranian petrochemical capacity is still a risky trade.


10 July 2006 37

Fig 51 Ethylene demand-supply forecast

Fig 52 Ethylene demand-supply outlook (without Iran)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

99 00 01 02 03 04 05E 06E 07E 08E 09E80.0

82.0

84.0

86.0

88.0

90.0

92.0

94.0

Capacity Demand Operating rate (%)

('000 tpa) (%)

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

99 00 01 02 03 04 05E 06E 07E 08E 09E80.0

82.0

84.0

86.0

88.0

90.0

92.0

94.0

Adjusted capacity Demand Operating rate (%)

('000 tpa) (%)

Source: Macquarie Research, CMAI, June 2006 Source: Macquarie Research, CMAI, June 2006

Scott Weaver (8862) 2734 7512, [email protected]

Polyester chain margins hit a low, could improve

Polyester margins have hit an all-time low recently due to rapid rise in global capacities and a decline in global capacity utilisation rates (Figure 53).

Fig 53 RIL's polyester chain margins and Cotlook A index

10

15

20

25

30

35

40

45

Oct-92 Jun-94 Feb-96 Oct-97 Jun-99 Feb-01 Oct-02 Jun-04 Feb-06

(Rs/kg)

30

40

50

60

70

80

90

100

110

120(USc/pound)

Polyester margins (R) Cotlook A index

Source: Company data, Bloomberg, Macquarie Research, July 2006

We expect utilisation rates to decline further over the next year. However, we believe that rising prices of cotton (due to high demand and reduction in output due to removal of farm subsidies in the US) should increase demand for polyester, which is a substitute limiting a further significant downturn in the near-term. From FY08E onwards polyester margins could revive as capacity utilisation rates once again improve.


10 July 2006 38

Fig 54 Global polyester operating rates likely to improve

75%

79%

83%

87%

91%

95%

2003 2004 2005 2006E 2007E 2008E 2009E 2010EOperating rate for Polyester (PSF) PTA

Source: Company, Macquarie Research, July 2006


10 July 2006 39

Fig 55 Snapshot of key operating parameters for petrochemicals business FY06 FY07 FY08 FY09 FY10 FY11

Installed capacities (tpa) PFY 430,000 595,000 595,000 595,000 595,000 595,000Fabric * 20 20 20 20 20 20PSF 550,000 550,000 800,000 800,000 800,000 800,000PTA 1,350,000 1,980,000 1,980,000 1,980,000 1,980,000 1,980,000LAB 115,000 115,000 115,000 115,000 115,000 115,000Paraxylene 1,856,000 1,856,000 1,956,000 1,956,000 1,956,000 1,956,000MEG/EO 521,000 521,000 521,000 521,000 521,000 521,000PVC 325,000 325,000 325,000 325,000 325,000 325,000HDPE/LLDPE 450,000 450,000 450,000 450,000 450,000 450,000Polypropylene 1,150,000 1,150,000 1,430,000 1,430,000 1,430,000 1,430,000PET 300,000 300,000 300,000 300,000 300,000 300,000Ethylene 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000Propylene 486,667 486,667 486,667 486,667 486,667 486,667Benzene 388,000 388,000 388,000 388,000 388,000 388,000Butadiene 225,000 225,000 225,000 225,000 225,000 225,000Toluene 262,667 262,667 262,667 262,667 262,667 262,667Xylene 220,000 220,000 220,000 220,000 220,000 220,000 Sales (tpa) PFY 382,000 411,500 471,000 590,000 649,500 649,500Fabric * 18 18 18 18 18 18PSF 333,800 330,000 400,000 600,000 800,000 800,000PTA 644,485 745,125 900,000 858,750 664,125 664,125LAB 116,867 117,300 120,750 120,750 126,500 126,500Paraxylene 607,300 705,150 797,700 669,000 669,000 669,000MEG/EO 294,943 281,199 224,349 128,649 50,799 50,799PVC 353,086 357,500 357,500 357,500 357,500 357,500HDPE\LLDPE 420,443 405,000 450,000 450,000 450,000 450,000Polypropylene 1,012,167 1,092,500 1,144,000 1,430,000 1,430,000 1,430,000PET 219,887 240,000 300,000 300,000 300,000 300,000Ethylene 0 6,607 34,907 6,307 27,707 27,707Propylene 0 0 0 0 0 0Benzene 340,303 382,783 196,719 109,819 44,701 44,701Toluene 122,678 150,351 195,416 215,058 247,981 272,879Xylene 242,216 242,216 242,216 242,216 242,216 242,216 Product prices before excise duty (Rs/kg) PFY (Polyester filament yarn) 76.4 76.4 74.0 66.5 63.7 59.5PSF (Polyester staple fibre) 62.3 65.0 67.4 63.7 61.0 57.0PTA (Purified terephthalic acid) 40.8 42.3 44.8 45.0 45.3 42.3LAB (Linear alkyl benzene) 79.5 81.3 78.9 70.9 67.8 63.4Paraxylene 35.9 41.2 38.5 43.8 44.2 41.3Ethylene Glycol (MEG + HEG) 57.6 60.8 55.9 50.2 48.0 44.9Poly vinyl chloride (PVC) 38.2 36.8 33.8 30.4 29.1 27.2Polyethylene (HDPE/LLDPE) 46.7 49.6 49.1 44.1 42.2 39.4Polypropylene 52.3 55.7 54.7 54.6 52.3 48.8PET 75.7 79.4 73.4 73.2 70.1 65.5Ethylene 44.4 47.2 42.5 38.2 36.5 34.1Propylene 47.8 47.4 42.3 40.1 38.4 35.8Benzene 37.9 40.3 36.2 32.5 31.2 29.1Butadiene 55.6 59.1 53.2 47.8 45.7 42.7Toluene 32.7 34.7 31.3 28.1 26.9 25.1Orthoxylene 26.1 27.7 25.0 22.4 21.5 20.0 Turnover (External) (Rs m) PFY (Polyester filament yarn) 30,855 33,995 37,736 42,456 44,738 41,791Fabric 1,777 1,777 1,777 1,866 1,959 2,057PSF (Polyester staple fibre) 24,167 23,224 29,177 41,377 52,809 49,330PTA (Purified terephthalic acid) 26,417 36,632 46,895 44,916 35,001 32,695LAB (Linear alkyl benzene) 10,803 11,098 11,079 9,951 9,979 9,321Paraxylene 22,110 33,792 35,749 34,108 34,368 32,103Ethylene Glycol (MEG + HEG) 19,764 19,887 14,578 7,508 2,838 2,651Poly vinyl chloride (PVC) 15,686 15,318 14,069 12,636 12,095 11,298Polyethylene (HDPE/LLDPE) 22,842 23,383 25,690 23,074 22,086 20,631Polypropylene 61,596 70,818 72,817 90,834 86,948 81,220PET 19,354 22,165 25,605 25,552 24,459 22,848Styrene 0 0 25,056 30,005 35,902 33,537Ethylene 0 363 1,726 280 1,178 1,100Propylene 0 0 0 0 0 0Benzene 18,664 17,926 8,291 4,157 1,620 1,513Toluene 4,105 6,075 7,106 7,024 7,753 7,969Orthoxylene 7,350 7,812 7,030 6,314 6,044 5,646Butadiene 5,855 9,282 13,922 12,504 11,969 11,181Others 614 645 677 711 746 784External turnover 314,597 364,244 417,862 431,696 425,766 399,133Source: Company, Macquarie Research, July 2006


10 July 2006 40

Fig 56 Snapshot of key valuation assumptions for refining and petrochemicals business WACC calculation (%) Rationale behind assumptions DCF calculation

Risk-free rate (%) 8.0 10-year government bond yield WACC (%) 12.3%Market risk premium (%) 7.0 Terminal Growth rate (%) 3.0Total market return (%) 15.0 PV of FCF to FY13E Rs m 587,550Beta (x) 1.04 RIL's prospective beta Present Value of Terminal FCF 870,912Cost of equity (%) 15.3 Enterprise Value 1,458,462Gross cost of debt (%) 8.0 Less Net Debt incl def tax liab 246,903Tax rate (%) 33.6 Marginal tax rate Value for Equityholders 1,211,560Net cost of debt (%) 5.3 NPV per RIL share (Rs) 870Debt/capital ratio (%) 30.0 Contribution to price target* 783WACC (%) 12.3% (including 10% discount) * Includes value of investments in IPCL and RPL Source: Macquarie Research, July 2006


10 July 2006 41

Appendix 6: Oil price outlook Oil price outlook: Significant gas substitution will halve crude prices Crude oil prices have tripled over the past four years. Diminished global spare production capacity coupled with rising global inventories will keep crude oil prices volatile in the near-term. Longer-term however, we believe significant gas substitution will halve crude prices.

Crude oil prices are likely to remain volatile near term

Demand remains robust

Demand continues to grow, driven by the gas guzzling US, Chinese and Indian economies. With no significant near-term signs of a slowdown (Figure 57), crude oil prices are slated to remain firm.

Fig 57 World oil demand growth: No signs of slowing down

* FSU = Former Soviet Union Source: IEA (Monthly oil market report), June 2006

Global crude oil spare production capacity is highly diminished….

Oil producing nations are producing close to full capacity. Estimated spare capacity in 2005 fell to ~1.2m bl per day in 2005, about 1% of global demand. In the 1990s, global spare capacity averaged ~3m bl per day. However, demand growth has outstripped production. This is expected to recover but will still remain below historic levels (Figure 58).

Fig 58 World oil spare production capacity: Demand growth outstrips supply

0

1

2

3

4

5

6

1991-1997

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

(mn bl/ day)

Source: IEA (Monthly oil market report), June 2006

-0.10.20.30.40.50.60.70.8

2005 2006 2007

OECD Non-OECD Asia FSU* & Eastern Europe Others

Forecast

Forecast


10 July 2006 42

…. but crude oil inventory has increased to record levels

On the other hand, OECD crude oil inventories rose above the six year high in most months of 2005 and early 2006 (Figure 59). US inventories have seen a notable rise, especially under the high oil price scenario of the past three years. The short-term negative correlation between inventories and oil prices will invariably lead to volatility in crude oil prices in the near term. OECD crude oil stocks in 2005 and 2006 remained consistently higher than the upper end of the historical range.

Fig 59 OECD crude oil stocks: Above historical levels

800

840

880

920

960

1000

January March May July September November

(mn bl)

Range: 1999-2004 2005 2006

Source: IEA (Monthly oil market report), June 2006 Overall, high but volatile prices likely to prevail in the near-term

Geo-political risk has been a feature of crude oil price behaviour over the past few years. The scenario in Iraq and unrest in Nigeria and Venezuela will likely continue to result in a risk premium for crude oil prices in the near term. Barring the 2Q CY06 seasonal dip in demand, near-term prices are expected to remain both high and volatile (Figure 60).

Fig 60 EIA crude* price forecast: Tapering off during the near term

0

10

20

30

40

50

60

70

80

1976 1980 1984 1988 1992 1996 2000 2004 2008E 2012E

(US$/bl)

WTI crude oil price

Source: BP, Platts, EIA, Macquarie Research, June 2006

Forecast


10 July 2006 43

Longer-term outlook: Current price levels unsustainable

Gas substitution will reduce crude oil prices over the long term

Global crude oil prices are a factor of numerous variables, not all of which are predictable or even foreseeable. We believe that some structural changes in the industry will reduce crude oil prices over the long term by more than 50%. We view the primary structural change will be oil substitution, mainly with gas, for the following reasons:

Growth in proven gas reserves has outpaced those of crude oil. Increased exploratory activity will ensure that these reserves continue to grow (Figure 61).

Fig 61 Gas reserves: Catching up with oil

520

620

720

820

920

1020

1120

1220

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

('000 mn bl)

Crude oil Natural gas (oil equivalent)

Source: BP, Macquarie Research, June 2006 Gas is currently under-utilised as an energy resource compared to crude oil. This is

evident from the fact that the gas reserves-to-production ratio (2005) stands at 65.1 years, which is about 60% higher than crude oil at 40.6 years (Figure 62).

Fig 62 Global gas reserves to production ratio is ~60% higher than crude

25303540455055606570

1980 1984 1988 1992 1996 2000 2004

(yrs)

R/P ratio-Oil Gas

Source: BP, Macquarie Research, June 2006

The problems and costs associated with transportation of gas made it unviable when oil remained below its long-term average of US$20/bl. Relatively high oil prices over the past three years have led to the increased viability of gas as a substitute for oil.


10 July 2006 44

Economics of LNG and GTL become attractive at oil price above US$20/bl

Advances in scale and technology continue to improve the economics of LNG (liquefied natural gas: liquefaction at the source to facilitate large-scale transport and re-gasification at the destination). As seen in Figure 63, LNG becomes viable at oil prices above US$20/bl.

Fig 63 LNG – viable at oil price of US$20/bl US$/mmbtu Oil equivalent (US$/bl)

Gas production 1.00 5.80Liquefaction 1.10 6.38Shipping (average) 1.00 5.80Re-gasification 0.30 1.74Total 3.40 19.72Source: EIA, Macquarie Research, June 2006

Similarly, newer technologies are expected to develop, aimed at exploiting the gas substitution opportunity. A notable example of this is GTL. A previously expensive option, technology advances have reduced the capital costs of this technology by ~80% over the past few years. In fact, ConocoPhillips believes that GTL fuel is cost competitive with diesel fuel at world oil prices above US$20/bl (assuming cost of natural gas is US$1.0/mmbtu).

Fig 64 Cost components for GTL: Viable at US$20/bl Cost Component GTL* Refinery

Natural Gas (at US$1 per mmbtu) $10.00 Crude oil (at US$20/bl) $20.00 Operating Costs $ 4.00 $ 2.50 Capital Recovery, Taxes $14.00 $ 6.50 Total $28.00 $29.00 * Gas-to-liquid technology Source: ConocoPhillips, Macquarie Research, June 2006

Consequently, demand for cheaper fuel is set to encourage continued investment in gas pipelines and LNG liquefaction facilities by gas rich countries such as Qatar, Iran, Nigeria and Russia. Basic demand–supply economics will put downward pressure on long-term oil prices.


10 July 2006 45

Appendix 7: Quant perspective Welcome to the Alpha Model This section introduces another part of the Macquarie Research product: the Macquarie Alpha Model. The Alpha Model is our quantitative model that ranks stocks based on seven criteria that we have found effective in differentiating outperforming stocks from underperforming stocks (see details below).

Developed over five years ago, the Alpha Model has been successful in distinguishing outperforming versus underperforming stocks across Asia-Pacific markets including India. We believe the Alpha Model is among the first of its kind for India.

Details behind the Alpha Model The Macquarie Alpha Model – or the Alpha Model – is our quantitative model that ranks stocks based on seven criteria, that we have found effective in differentiating outperforming stocks from under performing stocks.

The seven attributes, or ‘factors’, that we look at are:

⇒ Earnings revisions (from I/B/E/S).

⇒ Value (using a combination of forward earnings yield and dividend yield).

⇒ Consensus recommendations from I/B/E/S.

⇒ The change in consensus recommendations.

⇒ Earnings certainty, which is the dispersion of analysts EPS forecasts.

⇒ Long-term price momentum (12 months).

⇒ Short-term price reversion (1 month).

The quant view on a stock may not necessarily be in line with the view based on fundamental analysis. However, we believe that this presents a different perspective on the stock, which we believe investors will find useful.

Quant Perspective on Energy Stocks The current aggregate market cap weighted Macquarie Alpha score for the energy industry stocks is 0.36%. This indicates the Macquarie Alpha model currently holds a neutral to mildly positive view on the energy sector in India. This is mainly due to ONGC, which is the largest stock in the sector, having a strong positive Alpha score. All the other stocks in the energy sector had negative Alpha scores.

Fig 65 Macquarie Alpha’s ranking of energy stocks Code Name Market Cap

($USbn) ST Alpha Rank

ONGC OIL & NATURAL GAS CORP. 34.15 4.60% 1NATP NTPC LTD 21.69 -0.30% 2IOCL INDIAN OIL CORP LTD 10.67 -1.60% 3RIL RELIANCE INDUSTRIES LTD 31.75 -1.70% 4PLNG PETRONET LNG LTD 0.77 -3.70% 5TPWR TATA POWER 1.98 -4.60% 6SUEL SUZLON ENERGY LTD 6.09 -5.20% 7Source: Macquarie Research, July 2006

The Quant team, Macquarie Research Equities

Martin Emery 852 2823 3582 [email protected] Viking Kwok 852 2823 4735 [email protected] George Platt 612 8232 6539 [email protected] Riccardo Briganti 612 8232 4089 [email protected] Scott Hamilton 612 8232 3544 [email protected] Raelene de Souza, CFA 612 8232 8388 [email protected] Richard Lawson 612 8232 4391 [email protected] Burke Lau 612 8232 0481 [email protected]


10 July 2006 46

Reliance Industries Ltd (RIL) Reliance Industries has a negative overall alpha score of -1.7% in the alpha model. This is mainly due to poor valuation ratios, with a below market average dividend yield of 1% and a above market average prospective PE of 14.9x. This weakness in valuation metrics may be due to the strong price performance of RIL over the last 12 months, which has seen RIL’s stock price jump over 50%. Recent downward changes in analyst sentiment has also affected RIL’s ranking in the Alpha Model, giving it a poor recommendations revisions quant factor score.

Quant Scorecard Historic & Forecast Valuation Data

Factor Raw Std Mkt Sect Ind

Earn Rev 0.6 0.7 20 5 1

Composite Value -0.5 -0.7 112 24 7

Rec'd 1.9 0.1 76 15 4

Rec Revision -0.3 -0.6 82 16 2

Earn. Certainty 12% -0.3 84 14 3

12 Mnth Mom 91% 1.0 21 7 1

1 Mnth Reversion 7% -2.0 143 26 8

Overall 98/145 20/26 5/8Source: Macquarie Research and Thomson Financial I/B/E/S Source: Thomson Financial I/B/E/S

Forecast Earnings Revisions Consensus Recommendation

Source: Thomson Financial I/B/E/S Source: Thomson Financial I/B/E/S

The Good … And Bad …

Very Strong 12 Month Momentum Extremely Poor 1 Month Reversion PotentialRanked 21 out of 145 stocks in market Ranked 26 out of 26 stocks in sector

Strong Earnings Revisions Poor Composite ValuationRanked 20 out of 145 stocks in market Ranked 24 out of 26 stocks in sector

Source: Macquarie Research and Thomson Financial I/B/E/S Source: Macquarie Research and Thomson Financial I/B/E/S

RELIANCE INDUSTRIES LTD (RIL)Price: $1,011.95; Market Cap: $1,410.2b; Sector: Consumer Goods; Industry: Textiles & Apparel

Score Rank

$0.00

$20.24

$40.48

$60.72

$80.96

2004 2005 2006 2007 2008 20090%

2%

4%

6%

8%

Yie

ld

EPS DPS

IRR = 6.7%; Stage 2 EPS Growth = 8.2%

$65.0

$69.5 $68.9

$59.3

$63.0$64.5

$54.00

$56.00

$58.00

$60.00

$62.00

$64.00

$66.00

$68.00

$70.00

$72.00

-3 months -1 month Latest

FY1 (Mar 07) FY2 (Mar 08)

1.63 1.63 1.63

1.94

1.0

2.0

3.0

4.0

5.0-3 months -2 months -1 month Latest

Strong Buy

Buy

Hold

Sell

Strong Sell


10 July 2006 47

Appendix 8: Global peer group valuations

Fig 66 Global peer group relative valuation Company

Country

Market

Cap (US$m)

Price Perf.

(1 yr %)

2 yr fwd EPS

CAGR (%)

EBIDTA Margin

(%)

Current EV/

EBIDTA (x)

Current PER

(x)

1 yr fwd

PER (x)

2 yr fwd

PER (x)

P/BV (x)

RoCE (%)

ROE(%)

Integrated players (1 year historic) HessCorp USA 15,020 41.9 9.1 13.7 6.2 9.8 7.8 8.2 2.2 14.0 20.1BG group plc UK 13,825 55.7 0.1 46.9 9.7 14.1 14.5 14.1 4.0 24.0 28.4BP Plc UK 68,596 1.7 4.3 15.5 6.5 11.2 10.8 10.3 3.0 23.0 28.5ChevronTexaco USA 139,088 7.2 4.6 15.0 5.1 8.9 8.0 8.1 2.2 21.9 26.1China Petroleum China 61,107 73.6 3.3 12.7 6.7 12.6 12.1 11.8 2.3 11.7 19.6Exxon Mobil USA 376,028 3.3 4.4 15.1 5.9 11.2 10.2 10.2 3.3 31.5 33.9Petrobras Brazil 93,633 59.0 16.4 34.3 4.8 7.5 5.9 5.5 2.2 24.3 33.6Petrochina China 193,541 42.4 6.9 44.4 6.4 11.5 9.8 10.0 3.0 24.8 28.3Reliance Industries* India 31,330 121.2 16.3 17.3 10.0 15.1 13.5 11.2 3.1 16.3 22.3Royal Dutch Shell Holland 98,642 NA (6.4) 16.1 4.9 9 9.5 10.0 2.4 25.7 28.8Total SA France 100,171 6.1 1.8 20.6 4.8 9.5 9.1 9.2 2.8 24.9 34.0Average 108,411 41.2 5.5 22.9 6.6 11.0 10.2 9.9 2.8 22.0 27.6 Exploration & Production companies Anadarko Petroleum USA 22,353 11.0 3.7 77.7 4.6 8.4 8.7 7.8 2.0 18.7 24.5Apache Corp USA 22,734 (0.7) 4.6 75.3 8.5 8.5 8.3 7.7 2.0 22.9 28.2CNOOC China 35,131 32.6 1.5 60.8 6.2 10.5 9.2 10.1 3.6 31.2 38.9Gazprom Russia 9,388 NA 26.1 38.7 19.2 19.8 13.6 12.4 2.6 8.8 10.4 ONGC* India 34,744 14.5 9.5 41.8 4.7 10.2 8.7 8.5 3.0 34.4 30.7 Average 24,870 14.4 9.1 58.9 8.6 11.5 9.7 9.3 2.6 23.2 26.6 Refining & Marketing companies Bharat Petroleum* India 2,238 (5.9) 115.1 1.9 10.5 33.1 13.3 7.1 1.3 2.6 4.0Formosa Petrochemical Taiwan 17,387 4.3 1.2 16.0 9.6 9.8 10.4 9.6 2.7 17.7 29.4Hindustan Petroleum* India 1,726 (24.5) 120.4 1.5 9.4 22.9 8.8 4.7 0.7 2.2 3.7 Indian Oil Corp India 10,528 (1.4) 8.2 7.2 7.2 9.8 8.6 8.4 1.8 14.5 21.3SK Corp S. Korea 8,263 10.1 (3.2) 15.4 1.8 4.8 5.2 5.1 1.0 13.5 22.6S-Oil Corp S. Korea 8,086 (18.6) 6.3 8.9 6.7 8.8 7.3 7.8 2.1 18.4 25.5Sunoco Inc USA 9,136 13.8 0.5 6.6 5.3 9.7 9.6 9.6 4.5 26.3 53.3Tesoro Petroleum USA 5,097 50.1 (0.2) 5.7 4.7 9.9 8.9 10.0 2.7 23.2 31.6Valero Energy USA 41,174 57.5 0.8 4.6 7.3 9.5 8.2 9.4 2.7 23.2 31.7Average 11,515 9.5 27.7 7.5 6.9 13.1 8.9 8.0 2.2 15.7 24.8 Petrochemicals companies Formosa Chemical & Fibre Taiwan 8,382 (8.6) (1.9) 15.2 11.1 6.8 8.7 7.1 1.7 18.6 27.0Formosa Plastics Taiwan 8,038 (6.6) (0.4) 16.3 10.7 7.6 7.8 7.7 1.7 15.8 22.7Honam Petrochemical South Korea 1,595 9.7 n/a 18.6 1.2 3.0 6.6 n/a 0.7 21.6 27.6IPCL India 1,397 47.7 (17.1) 19.3 4.4 7.3 9.4 10.6 2.2 20.0 30.4LG Chemicals S. Korea 2,109 (17.7) 9.1 13.8 2.4 5.6 5.7 4.7 0.8 11.9 17.2LG Petrochemical S. Korea 888 (25.6) NA 15.5 2.6 4.4 4.4 NA 1.0 24.7 25.5Sinopec Shanghai Petrochem

China 4,657 71.1 14.0 9.0 10.2 22.3 26.2 17.2 2.2 8.5 9.9

Sinopec Yizheng Chemical & Fibre

China 1,521 83.0 n/a -0.6 nm n/a 235.6 1256.7 1.9 -10.1 -11.3

Average 3,574 19.1 0.7 13.4 6.1 8.1 38.1 217.3 1.5 13.9 18.6 Gas Distribution companies Aus Gas Light Co Australia 10,694 21.2 (27.0) 23.1 11.5 9.4 19.9 17.6 2.4 18.9 26.9GAIL India 4,665 12.5 (1.5) 29.6 5.6 9.3 9.6 9.6 2.4 20.8 25.1Gujarat Gas India 287 17.7 8.8 19.9 7.8 13.5 13.0 11.4 3.5 27.7 29.2H. K. & China Gas HK 12,159 8.2 (2.9) 41.5 26.2 18.1 17.0 19.2 5.8 n/a 34.1Indraprastha Gas India 331 9.4 17.6 41.1 8.1 14.4 12.3 10.4 4.9 28.3 32.9Korea Gas S. Korea 2,612 7.4 (10.5) 9.3 8.9 9.3 11.5 11.6 0.7 4.7 7.5Panva Gas HK 429 11.0 63.1 22.8 9.0 21.3 10.3 8.0 NA 7.8 9.8Petronas Gas Myanmar 4,697 6.8 3.1 59.9 10.0 17.6 16.6 16.6 2.4 12.8 14.1Tokyo Gas Japan 13,360 30.3 27.1 n/a n/a 26.1 17.0 16.2 2.3 5.8 9.1Transcanada corp Canada 14,286 (0.8) 1.3 50.1 9.4 17.1 17.7 16.6 2.2 9.5 17.6Xinao Gas China 881 42.3 22.7 30.1 15.3 22.3 17.5 14.8 3.0 8.9 14.3Average 5,855 15.1 9.2 32.7 11.2 16.2 14.8 13.8 3.0 14.5 20.0 Cumulative average 34,398 20.8 11.2 24.4 7.9 12.4 16.1 40.1 2.4 17.6 23.4 * Macquarie estimates. All other estimates are based on consensus (Source: Bloomberg) Source: Bloomberg, Macquarie Research, July 2006


10 July 2006 48

Appendix 9: RIL’s product flow chart

Fig 67 Oil & Gas and Petrochemicals value chain

Oil & GasProductionOil & GasProduction

RefiningRefining

ATFATFMSMSHSDHSD SulfurSulfurCokeCokeLPGLPG

Fuel OilFuel Oil Naphtha/NGLNaphtha/NGL KeroseneKerosene

EthyleneEthylenePropylenePropylenePPPP Butene-1Butene-1

EOEOEDCEDCVCMVCM

MEGMEGDEGDEGPVCPVC TEGTEG HDPE/LLDPEHDPE/LLDPE

PXPX

PTAPTA

PETPET

PFYPFY PSFPSF

Oil

Ref

inin

g Retail

Poly

mer

/Cra

cker

Inte

grat

ed p

olye

ster

Texturised/Twisted dyed yarn

Texturised/Twisted dyed yarn Spun yarnSpun yarn

FabricsFabrics

Wool viscoseSilk Linen


Acetic acidAcetic acid

NPNP

LABLAB

Oil & GasProductionOil & GasProduction

RefiningRefining

ATFATFMSMSHSDHSD SulfurSulfurCokeCokeLPGLPG

Fuel OilFuel Oil Naphtha/NGLNaphtha/NGL KeroseneKerosene

EthyleneEthylenePropylenePropylenePPPP Butene-1Butene-1

EOEOEDCEDCVCMVCM

MEGMEGDEGDEGPVCPVC TEGTEG HDPE/LLDPEHDPE/LLDPE

PXPX

PTAPTA

PETPET

PFYPFY PSFPSF

Oil

Ref

inin

g Retail

Poly

mer

/Cra

cker

Inte

grat

ed p

olye

ster

Texturised/Twisted dyed yarn

Texturised/Twisted dyed yarn Spun yarnSpun yarn

FabricsFabrics



Acetic acidAcetic acid

NPNP

LABLAB

Source: Company


10 July 2006 49

Important disclosures:

Recommendation definitions Macquarie Australia/New Zealand Outperform – return >5% in excess of benchmark return (>2.5% in excess for listed property trusts) Neutral – return within 5% of benchmark return (within 2.5% for listed property trusts) Underperform – return >5% below benchmark return (>2.5% below for listed property trusts) Macquarie Asia Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10% Recommendations – 12 months

Note: Quant recommendations may differ from Fundamental Analyst recommendations

Volatility index definition* This is calculated from the volatility of historic price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to Australian/NZ stocks only

Financial definitions Adjusted profit = net profit - individually significant items + tax on individually significant items - preference dividends - minority interests + goodwill amortisation. ROA = EBIT / average total assets ROE = reported profit / average shareholders funds All reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions Macquarie Australia/New Zealand Outperform 44.29% Neutral 43.93% Underperform 11.79% Macquarie Asia Outperform 54.93% Neutral 28.06% Underperform 17.01% For quarter ending 30 June 2006

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June 06

Research Sectors Automobiles/Auto Parts Kurt Sanger (Japan, Asia) (813) 3512 7859 Liny Halim (Indonesia) (6221) 515 7343 Eunsook Kwak (Korea) (822) 3705 8644 Francis Eng (Malaysia) (603) 2059 8986 Peter So (China) (852) 2823 3586 Banks and Non-Bank Financials Ismael Pili (Asia, Singapore, India) (65) 6231 2840 Nick Lord (Hong Kong) (852) 2823 4774 Chris Esson (Hong Kong) (852) 2823 3567 Christina Fok (China) (852) 2823 3584 Liny Halim (Indonesia) (6221) 515 7343 Kentaro Kogi (Japan) (813) 3512 7865 Mark Barclay (Korea) (822) 3705 8658 Young Chung Mok (Korea) (822) 3705 8668 [email protected] Chin Seng Tay (Malaysia/S’pore) (65) 6231 2837 [email protected] Gilbert Lopez (Philippines) (632) 857 0898 Chris Hunt (Taiwan) (8862) 2734 7526 Matthew Smith (Taiwan) (8862) 2734 7514 Alastair Macdonald (Thailand) (662) 694 7741 Seshadri Sen (India) (9122) 6653 3053 Metals and Mining Simon Francis (Asia) (852) 2823 3590 Samuel Thawley (Japan) (813) 3512 7876 Rakesh Arora (India) (9122) 6653 3054 Christina Lee (Korea) (822) 3705 8670 Felix Lam (China/HK/Taiwan) (852) 2823 3575 Oil and Gas Scott Weaver (China, Taiwan) (8862) 2734 7512 Kitti Nathisuwan (Thailand) (662) 694 7724 Edward Ong (Malaysia) (603) 2059 8982 Mark Barclay (Korea) (822) 3705 8658 Haksoo Ha (Korea) (822) 3705 8645 Jal Irani (India) (9122) 6653 3040 Chemicals/Textiles Scott Weaver (China, Taiwan) (8862) 2734 7512 Kitti Nathisuwan (Thailand) (662) 694 7724 Jal Irani (India) (9122) 6653 3040 Conglomerates Gilbert Lopez (Philippines) (632) 857 0898 Mark Simpson (Hong Kong) (852) 2823 3557 Peter So (China) (852) 2823 3586 Consumer Ramiz Chelat (Asia) (852) 2823 3587 Chris Clayton (Thailand) (662) 694 7829 Woochang Chung (Korea) (822) 3705 8667 Paul Hwang (Korea) (822) 3705 8678 Christina Lee (Korea) (822) 3705 8670 Edward Ong (Malaysia) (603) 2059 8982 Laksono Widodo (Indonesia) (6221) 515 7334 Nadine Javellana (Philippines) (632) 857 0890 Duane Sandberg (Japan) (813) 3512 7867

Sectors cont’d Insurance Chris Esson (China, Taiwan) (852) 2823 3567 Media Ramiz Chelat (Asia) (852) 2823 3587 Property Matt Nacard (Asia) (852) 2823 4731 Francis Eng (Malaysia) (603) 2059 8986 Eva Lee (Hong Kong) (852) 2823 3573 Gilbert Lopez (Philippines) (632) 857 0898 Monchai Jaturanpinyo (Thailand) (662) 694 7998 Tuck Yin Soong (Singapore) (65) 6231 2838 [email protected] Takashi Sakai (813) 3512 7884 Emerging Leaders PJ King (Asia) (852) 2823 3566 Paul Quah (Hong Kong) (852) 2823 4627 Vincent Fernando (Thailand) (662) 694 7985 Scott Weaver (Taiwan) (8862) 2734 7512 Woochang Chung (Korea) (822) 3705 8667 Paul Hwang (Korea) (822) 3705 8678 Nadine Javellana (Philippines) (632) 857 0890 Robert Burghart (Japan) (813) 3512 7853 Yoshiko Kuwahara (Japan) (813) 3512 7879 Oliver Cox (Japan) (813) 3512 7871 Saurabh Jain (India) (9122) 6653 3046 Pharmaceuticals Shubham Majumder (India) (9122) 6653 3049 Technology Kishore Suratkal (Asia) (852) 2823 3583 Michael Bang (Korea) (822) 3705 8659 Do Hoon Lee (Korea) (822) 3705 8641 [email protected] David Gibson (Japan) (813) 3512 7880 George Chang (Japan) (813) 3512 7854 Yoshihiro Shimada (Japan) (813) 3512 7862 Damian Thong (Japan) (813) 3512 7877 Jessica Chang (Taiwan) (8862) 2734 7518 Dominic Grant (Taiwan) (8862) 2734 7528 Cheryl Hsu (Taiwan) (8862) 2734 7522 Daniel Chang (Taiwan) (8862) 2734 7516 Nicholas Teo (Taiwan) (8862) 2734 7523 Warren Lau (Taiwan) (852) 2823 3592 Patrick Yau (Singapore) (65) 6231 2835 Telecoms Dominic Grant (Taiwan) (8862) 2734 7528 Richard Moe (Thailand) (662) 694 7753 Joel Kim (Korea) (822) 3705 8677 Prem Jearajasingam (Malaysia) (603) 2059 8989 Nathan Ramler (Japan) (813) 3512 7875 Shubham Majumder (India) (9122) 6653 3049 Transport & Logistics Anderson Chow (China, Hong Kong) (852) 2823 4773 Michael Chan (China) (852) 2823 3595 [email protected] Eunsook Kwak (Korea) (822) 3705 8644

Sectors cont’d Utilities Rohan Dalziell (Asia) (852) 2823 3589 Sylvia Chan (Asia) (852) 2823 3579 Gary Chiu (Hong Kong) (852) 2823 3576 Prem Jearajasingam (Malaysia) (603) 2059 8989 Chris Clayton (Thailand) (662) 694 7829

Data Services Liz Dinh (Asia) (852) 2823 4762 Brent Borger (Japan) (813) 3512 7852

Economics Bill Belchere (Asia) (852) 2823 4636 Richard Gibbs (Australia) (612) 8232 3935 Richard Jerram (Japan) (813) 3512 7855 Paul Cavey (China) (852) 2823 3570 Roland Randall (Asean) (612) 8232 6934 Tim Bowring (Asean) (612) 8232 3649 Daniel McCormack (Int'l) (612) 8232 2999

Quantitative Martin Emery (Asia) (852) 2823 3582 Viking Kwok (Asia) (852) 2823 4735 George Platt (Australia) (612) 8232 6539

Strategy Tim Rocks (Asia) (852) 2823 3585 Desh Peramunetilleke (Asia) (852) 2823 3564 Mark Simpson (Hong Kong) (852) 2823 3557 Peter So (China) (852) 2823 3586 Peter Eadon-Clarke (Japan) (813) 3512 7850 Eugene Ha (Korea) (822) 3705 8643 Chris Hunt (Taiwan) (8862) 2734 7526 Uday Jayaram (Malaysia) (603) 2059 8988 Gilbert Lopez (Philippines) (632) 857 0898 Laksono Widodo (Indonesia) (6221) 515 7334 Tuck Yin Soong (Singapore) (65) 6231 2838 [email protected] Kitti Nathisuwan (Thailand) (662) 694 7724 Jal Irani (India) (9122) 6653 3040

Find our research at Macquarie: www.macquarie.com.au/research Thomson: www.thomson.com/financial Reuters: www.rbr.reuters.com Bloomberg: MAC GO Contact Gareth Warfield for access (612) 8232 3207 Email addresses [email protected] eg. [email protected] unless otherwise specified

Sales Regional Heads of Sales Greg Gordon (Asia) (852) 2823 3509 Angus Kent (Thailand) (662) 694 7601 Lena Yong (Malaysia) (603) 2059 8888 Ulrike Pollak-Tsutsumi (Frankfurt) (49) 69 7593 8747 Daniel Fust (Geneva) (41) 22 818 7710 Thomas Renz (Geneva) (41) 22 818 7712 Darwin Sutanto (Jakarta) (62) 21 515 1555 Derek Wilson (London)(N Asia) (44) 20 7065 5856 Louie Bate (Manila) (632) 857 0808 Mark Lawrence (New York) (1 212) 231 2516 Ajay Bhatia (India) (9122) 6653 3200 Stuart Smythe (India) (9122) 6653 3200 Luke Sullivan (New York) (1 212) 231 2507 Julien Roux (London) (44) 20 7065 5887

Regional Heads of Sales cont’d Sheila Schroeder (San Francisco) (1 415) 835 1235 Eugene Ha (Korea) (822) 3705 8643 K.Y. Nam (Korea) (822) 3705 8607 Giles Heyring (Singapore) (65) 6231 2888 Mark Duncan (Taiwan) (8862) 2734 7510 Nick Cant (Tokyo) (813) 3512 7821 Dominic Henderson (Tokyo) (813) 3512 7820 Charles Nelson (UK/Europe) (44) 20 7065 2032 Rob Fabbro (UK/Europe) (44) 20 7065 2031

Sales Trading Anthony Wilson (Asia) (852) 2823 3511 Mona Lee (Hong Kong) (852) 2823 3519

Sales Trading cont’d Howard Yoon (Korea) (822) 3705 8601 Bruce Budd (Singapore) (65) 6231 2888 Stuart Goddard (Europe) (44) 20 7065 2033 Robert Risman (New York) (1 212) 231 2555 Kenichi Ohtaka (Tokyo) (813) 3512 7830 Vijay Gussain (India) (9122) 6653 3205 Isaac Huang (Taiwan) (8862) 2734 7582 Alternative Strategies Hedge Fund Sales - Jamie Boyton (852) 2823 3532 Convertibles - Roland Sharman (852) 2823 4628 Futures - Tim Smith (852) 2823 4637 Depository Receipts - Robert Ansell (852) 2823 4688 Derivatives - Vipul Shah (852) 2823 3523 Structured Products - Andrew Terlich (852) 2249 3225

AXXXXX/HK.MA

ril macquarie 10 july 06

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