Institutional Equity Research Adani Gas NOT RATED loomberg...

Adani Gas Oil & Gas | India

Institutional Equity Research

Non Deal Road Show | September 19, 2019

1

NOT RATEDCMP* (Rs) 139

Bloomberg Ticker ADGAS IN

Market Cap. (Rs bn) 153

Free Float (%) 25

Shares O/S (mn) 1,100

1 Year Stock Price Performance

Note: * CMP as on September 18, 2019

Share price (%) 1 mth 3 mth 12 mth

Absolute performance (9.3) (16.0) 19.1

Relative to Nifty (7.7) (9.0) 24.3

Shareholding Pattern (%) Jun-19 Mar-19

Promoter 74.8 74.8

Public 25.2 25.2

A Day with Adani Gas

We hosted a Roadshow with Adani Gas (ADGAS) in Mumbai attended by Mr. Suresh Manglani (CEO) and Mr. Parag Parikh (CFO). The key takeaways of the same are enumerated hereunder.

Adani Gas – Growth prospects remain intactCurrently 5 GAs are operational (Ahmedabad, Faridabad, Vadodara, Kurj and Palwal) and started operations at Porbandar led to total tally of CNG stations to 86. ADGAS owns only 22 stations, while the rest are co-located with the OMCs. In 9th CGD round, ADGAs won 13 new GAs, where the company will invest Rs55bn over the next 5 years. ADGAS has acquired land in most GAs and has spent capital of Rs5bn till Aug’19. In total (considering 10th CGD GA), ADGAS will incur Rs90bn capex over period of next 8 years. Pipeline laying work has been commenced at Chittor, Bhilwara, Surendranagar. The GA’s which are connected by pipelines will be monetised at co-locations, where very few permissions are needed. Most south Indian geographical areas, which are not connected to national gas grid, the company will use LNG tankers to feed gas for CNG stations in initial years. In Faridabad and Palwal, the company received good response with 139 applications for DODO CNG set up and Gujarat (300) and Rajasthan (50). The company expects steady state of 20% + kind of IRR from these GAs. Initially new GA will take some time to improve throughput in non- ecosystem zone to that extent for shorter period, lower EBITDA/scm but in longer term EBITDA/scm will recoup and guided to be in range of Rs 7/8 per scm. The company has also highlighted that in PNG industrial segment, EBITDA is Rs 5 per scm despite taking price cut of Rs1.5/scm in Sept’19. Higher margins in industrial segment is on account of large proportion of small industrial customer.

Open Access Policy – A long way to go Open access is stated in a policy from 2007 in PNGRB act. From 9th CGD round, marketing exclusivity has been increased to 8 years. Even if marketing exclusivity of any GA gets over, PNGRB has to declare that area for open access. While the same matter has challenged in Delhi High Court. PNGRB needed to formulate the code for open access policy. The PNGRB has recently floated concept paper, which will likely take longer time to finalise the code. In historical evidences, to finalize the transportation tariff of pipelines, discussions consumed more time than expected. Along with this, the PNGRB has to overcome the matter in Delhi High Court. ADGAS believes it is opportunity to gain access to prime markets (Mumbai, Delhi) and other untapped markets. We believe it could be threat for the existing players, where competition can squeeze margin and hit RoE.

Premium Valuation: At CMP, the stock trades at 46x of FY21 EPS, which is ~100% premium to CGD peers. Higher multiple is led by: (1) based on a recent news flow, TOTAL SA is planning to acquire 30% stake in ADGAS at valuation of US$800mn, which implies 56x of FY21EPS. The Management has also indicated that more parties are interested to buy stake, the details of which will be updated to the investors on final confirmation; (2) supporting infrastructure (LNG terminals) on both coast of India is in place/likely to be ready in the near-term to cater gas demand from PNG industrial segment, which managed to make higher EBITDA per scm (Rs6/scm). No other peers having the same arrangement at arm’s length. We expect ADGAS to witness 13% earning CAGR through FY19-21E backed by 11% strong sales volume growth.

Research Analyst : Yogesh Patil

Contact : (022) 4303 4632

Email : [email protected]

Key Financials (Rs mn) FY17 FY18 FY19 FY20E FY21ENet Sales 10,870 13,737 17,190 18,513 21,017

EBITDA 2,770 3,653 4,546 4,869 5,826

PAT 1,012 1,646 2,287 2,589 2,910

EPS (Rs) 0.9 1.5 2.1 2.4 2.6

P/E 83.7 52.3 48.1 59.5 52.9

P/BV 11.8 9.7 10.0 11.3 9.3

Source: Company, RSec Research

50

70

90

110

130

150

170

190

Nov

-18

Dec

-18

Jan-

19

Feb-

19

Mar

-19

Apr

-19

May

-19

Jun-

19

Jul-

19

Aug

-19

Sep-

19




2




Free Float (%) 25


f CNG expansion plans in new GA: 35-40% of new stations would be co-located with access to 25,000 retail outlets of IOCL (JV with IOCL). Only 5-10% would be owned by ADGAS and rest would be DODO.

f Expects favourable SC verdict in Ahmedabad CGD case: In Nov’18 interim order, the Supreme Court allowed ADGAS to supply natural gas to commercial and industrial units in the areas of Sanand, Bavla and Dholka of Ahmedabad district of Gujarat till further orders. However, it refused to allow Gujarat Gas to go ahead with the work of laying pipelines for the three areas till next hearing. Future potential of the business is good from this region and current volume contributes only 40,000scm/day, which is 2.6% of the total sales volume of ADGAS. This matter is under judicial consideration and the Company expects a favourable ruling in this case.

Exhibit 1: Adani Gas Sales volume break up Exhibit 2: Adani Gas realisation

Source: Company; RSec Research Source: Company; RSec Research

5.6

6.8 6.87.6

8.4 8.5 8.7

2.4 2.1 2.53.4

4.2 4.5 4.4

34.1

29.626.6

28.731.8 32.3 31.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

0.01.02.03.04.05.06.07.08.09.0

10.0

FY15 FY16 FY17 FY18 FY19 FY20 FY21

Rs/scmRs/scm

EBITDA/SCM PAT/SCM Net Realisation (RHS)

f Rising Share of Non APM to Increase Gas Cost : The Company believes the government will continue to accord top priority to CNG & PNG household in domestic gas allocation policy. While the domestic gas would be the mix of APM and non-APM, which can increase the overall gas cost to the CGD companies. During the last few years, decline in gas output from KG-D6 field led to fall in overall domestic gas production, which is likely to recover in 2020/21. ONGC and other private players are heavily investing to commence production from the East Coast gas block (KG 98/2). Along with this, we also see rise in gas production from RJ fields and CBM blocks as well. New gas production would peak at ~53mmscmd in FY23E, which will take India’s total gas production to ~120mmscmd. Out of new gas production, 59% will flow from deep water gas fields (likely to be priced at >US$6.0/mmbtu) and 8% will flow from CBM and RJ fields (likely to be priced at >US$6/mmbtu). Thus, total 68% of new gas would be at higher gas price, while only 32% will be sold at APM price.

199 201 204 209 221 248 276 297 359

202 208 189 172 188231

264 276310

61 6570 70

8290

110

0

20

40

60

80

100

120

0

100

200

300

400

500

600

700

800

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

mmscm

CNG PNG CNG stations (RHS)




3




Free Float (%) 25


High Dependence on Spot Gas Sourcing for Commercial and Industrial segments:ADGAS believes that global LNG oversupply will continue till 2024 and the prices will be softer in spot market. To cater the demand of industrial and commercial segments (40% of total sales volume), ADGAS continues to highly depend on spot LNG for the next 3-4 years.

Exhibit 3: Adani Gas Sourcing mix for FY19, no RLNG on long term basis

Exhibit 4: Spot LNG prices in Asia region

Source: Company; RSec Research Source: Bloomberg; RSec Research

46%

12%

42%

0%

APM PMT SPOT RLNG

0

2

4

6

8

10

12

14

16

Oct

-14

Jan-

15

Apr-

15

Jul-1

5

Oct

-15

Jan-

16

Apr-

16

Jul-1

6

Oct

-16

Jan-

17

Apr-

17

Jul-1

7

Oct

-17

Jan-

18

Apr-

18

Jul-1

8

Oct

-18

Jan-

19

Apr-

19

$/mmbtu

Exhibit 5: Additional Gas production from FY18 to FY20E, break up Source wise ( excluding decline from Mature fields) ( Deep water gas production 19% of total addition)



19%

10%

22%

28%

3%0%

8%

10% ONGC - New-KG Deep Water

ONGC - New-Shallow & Marginal field

ONGC - New-Shallow

RIL -R Series

RIL - Satellites

RJ-ON-90/1

CBM

19%

17%

43%

7%

14%ONGC - New-KG Deep Water


ONGC - New-Shallow

RJ-ON-90/1

CBM




4




Free Float (%) 25


18%

8%

21%

26%

12%

0%

7%

8%ONGC - New-KG Deep Water


ONGC - New-Shallow

RIL -R Series

RIL - Satellites

RJ-ON-90/1

CBM


Exhibit 8: Additional Gas production from FY18 to FY23E, break up Source wise ( excluding decline from Mature fields) (( Deep water gas production 68% of total addition)


21%

7%

20%23%

15%

0%

5%

9% ONGC - New-KG Deep Water


ONGC - New-Shallow

RIL -R Series

RIL - Satellites

RJ-ON-90/1

CBM

India Gas Exchange: For a real gas exchange working in India, tax laws need modification and gas should come under GST. Our tax law recognises a movement of commodity with corridor. We need exchange operator to control gas availability and transmission, which will take several years.

Exhibit 9: Forward-Looking Footprint

Source: Company; RSec Research




5




Free Float (%) 25


6%3%

61%

30%

Vadodra Khurja Ahmedabad Faridabad

Exhibit 10: Adani Gas & IOCL both has portfolio of 38 GA ( New + Existing)

Exhibit 11: Shareholding break up of Adani Gas limited (%)

Source: Company; RSec Research Source: Company; RSec Research

Exhibit 12: Geographical Sales volume break up of ADani Gas in FY19

Source: Company; RSec Research

4

15

5

9

10

8

0

5

10

15

20

25

30

Existing New Operational

AGL (100%) IOCL +AGL (JV with 50%)

74.8

0.5

21.7

3

Promotors MF/Banks/FI FII/FPI Public/other

Company Overview Adani Gas Limited (ADGAS) is the CGD arm of Adani Group. It develops CGD network to supply Piped Natural Gas (PNG) to the industrial, commercial, domestic and Compressed Natural Gas (CNG) to the transportation sector. The company has already set up CGD network in Ahmedabad and Vadodara in Gujarat, Faridabad and Palwal in Haryana and Khurja in Uttar Pradesh. In the recent PNGRB rounds (9th & 10th), ADGAS won 15 GAs and along with IOCL, it won 10 more GAs, taking total tally to 38 GAs, which comprise of 71 districts, covering 15 states with 8% of population.

Adani Gas OIl & Gas | India


6

CMP* (Rs) 139

Bloomberg Ticker ADGAS INNOT RATED

Profit & Loss Statement Y/E Mar (Rs mn) FY17 FY18 FY19 FY20E FY21E

Total Operating Income 10,870 13,737 17,190 18,513 21,017

Cost of natural gas and traded items

6,787 8,724 10,872 11,706 13,163

Other expenses 1,314 1,360 1,771 1,938 2,028

Total expenses 8,100 10,084 12,643 13,644 15,191

EBITDA 2,770 3,653 4,546 4,869 5,826

EBITDA/scm 6.8 7.6 8.4 8.5 8.7

EBITDA Margins (%) 25% 27% 26% 26% 28%

Other income 405 801 867 431 385

Finance costs 443 1253 899 546 746

Depreciation 562 610 673 718 928

Less: Exceptional items -610 0 -276 0 0

PBT 1,561 2,590 3,565 4,036 4,537

Total Tax Expense 549 944 1,278 1,447 1,626

PAT 1,012 1,646 2,287 2,589 2,910

PAT/scm 2.5 3.4 4.2 4.5 4.4

Net Profit margins (%) 9% 12% 13% 14% 14%

EPS (Rs) 0.9 1.5 2.1 2.4 2.6

DPS (Rs) 0 0 0.25 0 0



7

CMP* (Rs) 139


Balance Sheet Y/E Mar (Rs mn) FY17 FY18 FY19 FY20E FY21E

Share capital 2,567 1,100 1,100 1,100 1,100

Reserves and surplus 4,581 7,594 9,920 12,509 15,419

Share holders fund 7,148 8,694 11,020 13,609 16,519

Long-term borrowings 3,207 12,343 3,458 5,457 7,457

Other non current liabilities 2,928 3,344 3,783 3,783 3,783

Total Non current liabilities 6,134 15,687 7,240 9,240 11,240

Trade payable 2,227 1,372 1,039 1,113 1,251

Security deposits 37 34 36 36 36

Other current liabilities 1,052 2,239 1,147 1,147 1,147

Total current liabilities 3,315 3,645 2,221 2,295 2,434

Total Liabilities 16,598 28,025 20,481 25,144 30,193

Fixed assets 8,019 8,682 9,508 14,508 19,508

Other non current asset 2,220 12,834 4,238 4,238 4,238

Total Non current asset 10,239 21,516 13,746 18,745 23,745

Current investments 55 653 - - -

Inventories 387 422 440 473 532

Trade Receivables 562 1,412 828 862 979

Cash and bank balances 157 245 1,598 1,192 1,066

Other current asset 5,198 3,779 3,871 3,871 3,871

Total current asset 6,359 6,510 6,736 6,398 6,447

Total Assets 16,598 28,025 20,481 25,144 30,193



8

CMP* (Rs) 139


Cash Flow Statement Y/E Mar (Rs mn) FY17 FY18 FY19 FY20E FY21E

PBT 1561 2590 3565 4036 4537

Depreciation 562 610 673 718 928

Others 732 453 438 0 0

Cash flow from operating activities

2855 3653 4677 4754 5465

Changes in inventories 0 (35) (18) (34) (59)

Change in receivable (148) (876) 439 (34) (117)

Change in payable 82 844 (609) 74 138

Change in other current liabilities

205 (83) 191 0 0

others 61 152 105 0 0

Net Cash flow from operating activities after WC

200 3 109 6 (37)

income taxes paid (471) (887) (1224) (1447) (1626)

Net Cash flow from operating activities

2584 2769 3561 3313 3801

Cash flow from investing activities

(3033) (9877) 7910 (5000) (5000)

Cash flow from financing activities

502 7788 (10771) 1282 1072

Net change in cash 53 680 700 (405) (127)

Opening balance 159 212 892 1592 1187

Closing balance 212 892 1592 1187 1060

Key Ratios Y/E Mar FY17 FY18 FY19 FY20E FY21E

Valuation Ratio (x)

P/E 83.7 52.3 48.1 59.5 52.9

P/CEPS 32.8 30.6 30.9 46.5 40.5

P/BV 11.8 9.7 10.0 11.3 9.3

Dividend yield (%) NA NA 0.3 NA NA

EV/EBITDA 31.7 26.5 24.6 32.5 27.5

BVPS 6.5 7.9 10.0 12.4 15.0

Per Share Data (Rs)

EPS 0.9 1.5 2.1 2.4 2.6

Cash EPS 2.3 2.5 3.2 3.0 3.5

DPS NA NA 0.3 NA NA

Returns (%)

RoCE (%) 16.6 12.5 21 18 18

RoE (%) 14.2 18.9 21 19 18

Turnover ratios (x)

Inventory (days) 21 18 15 15 15

Receivables (days) 15 30 16 17 17

Payables (days) 120 57 35 35 35



9

CMP* (Rs) 139


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Rating GuidesRating Expected absolute returns (%) over 12 monthsBUY >10%

HOLD -5% to 10%

REDUCE >-5%

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