KEY DATA Petronet LNG - Myirisbreport.myiris.com/FSL/PETLNG_20120306.pdfMarch 6, 2012 For Private...

Petronet LNG

Shareholding % 4Q 1Q 2Q

Promoters 50.0 50.0 50.0

MF/Banks/Indian FIs 9.0 8.0 8.0

FII/ NRIs/ OCBs 23.0 25.0 25.0

Indian Public 18.0 17.0 17.0

KEY DATA

Market Cap (INR bn) 121.5

Market Cap (USD mn) 2430.0

52 WK High / Low 185 / 108

Avg Daily Volume (BSE) 305129

Face Value (INR) 10

BSE Sensex 17173

Nifty 5222

BSE Code 532522

NSE Code PETRONET

Reuters Code PLNG.BO

Bloomberg Code PLNG IN

Performance Chart

CMP : INR 162Rating : BuyTarget : INR 203

Initiating Coverage

In India's energy security, liquefied natural gas (LNG) remains indispensable. The demand for

gas continues to be robust while gas production is likely to remain flat in the medium term, the

importance of LNG is only going to increase. Petronet LNG (PLNG) is well poised to cater to

the opportunities provided by the widening demand-supply gap of natural gas. We initiate

coverage on the stock with a buy rating.

Robust natural gas demand, amid flat to declining domestic supplies, augurs good

for LNG demand

India's natural gas demand is likely to grow at a CAGR of 11%-20% while the domestic natural

gas supplies are likely to remain flat to declining in the medium term, LNG will hold the key to

plug the widening demand-supply deficit. To cater to the increasing demand, PLNG is increasing

its regassification capacity from the current 10 mmtpa to more than 25 mmtpa by FY16-17, as

the company is increasing its capacity at the Dahej plant coupled with commissioning of the

Kochi plant and a 5 mmtpa green-field regassification plant in Gangavaram in Andhra Pradesh.

Long term contract and robust gas demand ensures strong volume visibility

PLNG has signed 7.5 mmtpa long term Supply Purchase Agreement (SPA) with Rasgas, Qatar

on take or pay basis and subsequent back to back Gas Sales Purchase Agreement (GSPA) with

the GAIL, BPCL and IOC. As per GSPA, the responsibility of volume intake lays with the off

takers. Thus, PLNG is effectively shielded from volume risk on the long term contract. Over

and above the long term Rasgas contract, the regassification cargoes of GAIL and GSPC coupled

with strong demand for spot cargoes ensures strong volume visibility.

Regassification margin hikes ensures strong earning visibility

PLNG has contractual agreement wherein it escalates the regassification margin 5% annually.

The company has effectively increased the regassification tariff for the last seven years. Also,

the decline in domestic gas production and company's low cost terminal wards off any pressure

on the regassification margins. Also, PLNG charges marketing margin on spot cargoes it purchases

for customers. For 9M FY12, PLNG has earned marketing margin of ~ Rs. 20-23 per mmbtu on

spot cargoes.

Valuations

AT CMP, PLNG is trading at a PE multiple of 10.9x FY13E and 7.7x EV/EBIDTA FY13E.We

value PLNG on DCF basis with a 12- month target price of Rs. 203, implying a potential return

of 25.3% from the current levels. We believe, long term LNG tie up, higher than expected

marketing margins and Kochi terminal's regassification charges will lead to further upgrades in

the stock.

March 6, 2012

For Private Circulation OnlyFINQUEST research also available on BLOOMBERG FSPL <GO> and REUTERS.

Financials F11 F12E FY13E(INR bn.)

Revenue 132.0 239.1 340.0

EBIDTA 12.2 18.7 20.3

EPS 8.3 14.6 14.9

PE 19.6 11.1 10.9

Harishchandra SableResearch AnalystTel. : 4000 [email protected]

For Private Circulation OnlyMarch 6, 2012 2

PARTICULARS (INR mn) F11 F12E F13E F14E

Valuation RatiosP/E (x) 19.6 11.1 10.9 10.3P/E Excl. Extra-ordinaries (x) 19.6 11.1 10.9 10.3P/BV (x) 4.5 3.4 2.6 2.2P/CEPS (x) 15.1 9.5 9.0 7.8EV/EBITDA (x) 12.5 8.2 7.7 6.5Market Cap. / Sales (x) 0.9 0.5 0.4 0.3Div.Yield (%) 1.2% 1.2% 1.2% 1.2%

Per Share DataDiluted EPS 8.3 14.6 14.9 15.8Diluted Cash EPS 8.3 14.6 14.9 15.8Book Value Per share (Rs.) 35.7 48.3 61.2 75.0

P&LTotal Revenue 131,973 239,073 340,023 439,046Total Operating Expenditure 119,810 220,371 319,754 415,964EBIDTA 12,163 18,702 20,269 23,082EBIT 10,316 16,856 17,890 19,282Interest Paid 1,931 1,618 2,440 3,481Profit Before tax 9,064 16,106 16,717 17,752Tax 2,868 5,159 5,567 5,912Net Profit 6,196 10,947 11,150 11,841Net Profit Excl. extra-ordinaries 6,196 10,947 11,150 11,841

Growth RatesRevenue 24% 81% 42% 29%EBIDTA 44% 54% 8% 14%PAT 53% 77% 2% 6%

LiabilitiesNet Worth 26,802 36,249 45,899 56,240Total Loans 32,161 38,161 43,161 49,661Other Liabilities 3,480 3,480 3,480 3,480Capital Employed 62,443 77,890 92,540 109,381

AssetsNet Block 27,024 27,579 57,470 65,284Capital WIP 22,029 32,627 13,357 10,743Investments 11,649 11,649 11,649 11,649Cash and Bank Balance 1,540 5,606 9,466 20,877Net current Assets (net of Cash) 201 429 599 829Capital Applied 62,443 77,890 92,540 109,381

Cash FlowEBITA 10,316 16,856 17,890 19,282Less: Adjusted Taxes 3,264 5,399 5,957 6,421NOPLAT 7,052 11,456 11,933 12,861Plus: Depreciation 1,847 1,847 2,379 3,801Gross Cashflow 8,899 13,303 14,312 16,662Less: Increase in Working Capital 1,472 4,180 3,653 3,647Operating Cashflow 7,427 9,123 10,659 13,015Less: Net Capex 8,888 13,000 13,000 9,000Less: Increase in Net Other Assets (1,040) (490) (1,464) (1,436)FCF From Operation (421) (3,387) (877) 5,451FCF after Investment (421) (3,387) (877) 5,451Total FCF (421) (3,387) (877) 5,451

Profitability & Solvency RatiosEBIDTA Margin (%) 9.2% 7.8% 6.0% 5.3%RoE (%) 24.3% 33.9% 26.7% 22.9%RoCE (%) 13.1% 17.0% 14.9% 13.9%Net Debt/Equity (x) 1.2 1.1 0.9 0.9Interest Coverage (x) 6.3 11.6 8.3 6.6

Company Description

PLNG is the first company to set up LNG importand regassification terminal in India. ONGC,BPCL, IOC and GAIL each has 12.5% stakewhile GDF international, Asian DevelopmentBank (ADB) and other investors hold 10%, 5.2%and 34.8% of the stakes in the companyrespectively. PLNG hold 26% equity in AdaniPetronet (Dahej) Port Pvt Ltd, a joint venturecompany with Adani Ports and SpecialEconomic Zone Ltd (APSEZ) and PLNG, todevelop a solid port in Dahej. The port has anannual capacity of 20 mmtpa to handle dry bulkcargos.www.petronetlng.com

Sector

Oil & Gas

Key Management Personnel

Dr. A. K. BalyanCEO and Managing Director

R K GargDirector - Finance

Abhilesh GuptaChief Manager Finance

PRICE PERFORMANCE (%)

3 M 6 M 12 M

Absolute (2.7) (7.2) 43.5

Relative (6.0) (11.1) 48.3

Valuation Thesis

In India, the demand for gas remain robust whilegas production is likely to remain flat in themedium term, the importance of LNG is onlygoing to increase. Petronet LNG (PLNG) is wellpoised to cater to the opportunities provided bythe widening demand-supply gap of natural gas.Net sales and PAT are likely to increase at aCAGR of 35.5% and 4.0% respectively overFY11-FY14E while EBIDTA is expected to growat a CAGR of 11.1%. We initiate coverage onPLNG with a Buy rating with a 12-month DCFbased target price of Rs.203 per share, implyinga potential return of 25.3% from the currentlevels.

Financial Summary


PLNG capacity to increase from 10 mmtpa to 25 mmtpa by FY16-17

PLNG well positioned to cater to the widening demand-supply gap

Petronet LNG terminal at Dahej has a capacity of 10 mmtpa, after the construction of additional jetty

and associated unloading facilities at the Dahej the operable capacity of the plant is likely to increase

to 12.5-13 mmtpa. The additional jetty is expected to be commissioned by November 2013. Also,

PLNG is expanding the capacity at the Dahej plant from 10mmtpa to 15 mmtpa at a capital expenditure

of around 22-25 bn. The regassification charges for the expanded capacity are likely to be closer to

the existing regassification charges.

Kochi terminal to cater to the southern states gas demand

PLNG is coming with a regassification terminal at Kochi with an initial capacity of 2.5 mmtpa, with

likely commissioning in Q3 CY2012, which will be increased to 5 mmtpa in a span of six months of

the initial 2.5 mmtpa capacity commissioning. Kochi terminal has achieved completion of about

95%.

Kochi terminal capacity utilization is likely to ramp up over a period of 2-3 years. The company has

tied up a long term 1.44 mmtpa of LNG supply contract for the Kochi terminal from the Exxon Mobil's

Gorgon project in Australia with the potential for additional volumes. The LNG supply from the long

term contract is likely to start by the end of 2014. PLNG is likely to run the Kochi terminal on spot

cargoes till the long term supplies begins. GAIL is constructing Kochi-Koottanand- Mangalore-Bangalore

in the southern states. The first phase, 50 km in length, of the pipeline is likely to commission by

August 2012 while the second phase, 720 km in length, will be completed by December 2012. The

pipeline passes through three states- Kerala, Karnataka and Tamilnadu, will thus cater to the latent

demand for gas across the states.

PLNG initially plans to replace liquid fuels used in fertilizer, refineries and other industries and later

would develop CGD network. The company has estimated initial demand of around 18 mmscmd

from customers like BPCL, FACT and liquid fuel based power plants of Kerala states. The demand is

likely to increase as to 44 mmscmd as the GAIL's pipeline increase connectivity of the terminal.

PLNG is likely to charge regassification margin for the Kochi terminal at a rate which will be

commensurate to 16% Internal rate of return (IRR) on equity. Since the capex incurred for the plant is

higher than that required for the Dahej terminal, the regassification charges for the terminal is likely to

be high. We assume a regassification margin of Rs 50 per mmbtu.

Kochi- Koottanad- Bangalore-Mangalore Pipeline

Source: Company, FQ Research

GAIL's Kochi-Koottanand- Mangalore-

Bangalore passes through three states-

Kerala, Karnataka and Tamilnadu,

thus, increasing connectivity of the

Kochi terminal.

Petronet LNG terminal at Dahej has a

capacity of 10 mmtpa, after the

construction of additional jetty and

associated unloading facilities at the

Dahej the operable capacity of the

plant is likely to increase to 12.5-13

mmtpa.


Greenfield 5 mmtpa regassification terminal at Ganagavaram…

PLNG board has given consent to carry out a Detailed Feasibility Report (DFR) for a 5 mmtpa greenfield

regassification plant at Ganagavaram port in Andhrapradesh. The terminal is close to customers like

HPCL's Vizag refinery and Vizag steel plant and RIL's East-West pipeline (EWPL) (100 km away from

the likely terminal). The DFR is likely to be completed by April 2012 which will be followed by

board's approval for the Final Investment decision (FID). The terminal is likely to commission in

FY16-17.

PLNG Capacity Expansion plans


Annual escalation in regassification tariff continues…

PLNG has contractual agreement wherein it escalates the regassification tariff 5% annually which is

set to ensure 16% IRR on equity which is a contractual agreement between the company and the off

takers. We believe the increase in gas demand coupled with domestic gas supplies likely to remain

flat in the medium term will ward off any pressure on the regassification margin. Also, the capex

which the company incurred for the Dahej regassification terminal and its subsequent expansion is

lower than that likely to be incurred by the upcoming regassification plant. PLNG incurred is likely to

incur capex of Rs20 bn for the additional expansion from 10 mtpa to 15 mtpa at the Dahej terminal.

For a 5 mmtpa greenfield regassification plant the capital expenditure would be around Rs. 42-45 bn

depending on the plant locations. Thus, PLNG has edge over other players for the regassification

margins. We assume the regassification margin to increase 5% annually till FY16 and remain constant

thereafter on account of increase in domestic supplies.

Not just marketing margin but operating efficiency also aids in the gross marginexpansion…

PLNG gross margin trend


PLNG has effectively increased the

regassification tariff for the last seven

years. Also, robust gas demand

coupled with domestic gas supplies

likely to remain flat in the medium

term will ward off any pressure on the

regassification margin.


PLNG gross margins are on an increase on account of increase in the regassification margins coupled

with increase in the marketing margin which the company charges on the spot/short term cargoes. In

3QFY12, the gross margin increased to Rs 40 per mmbtu while the marketing margin was around

Rs.33 per mmbtu. Gross margins are also supported by an increase in the operating efficiencies on

account of an increase in the capacity utilization. However, there are concerns that the marketing

margin could be brought under purview of Petroleum and Natural gas Regulatory Board (PNGRB).

We note that the oil ministry allowed GAIL to charge marketing margin of Rs 200 per 1000 mmscmd

on APM gas while RIL charges marketing margin of around $0.13 per mmbtu. PLNG management

was of the view that the marketing margin issue was related to the domestic natural gas (APM) where

prices are regulated by the government while LNG prices are market driven. We assume marketing

margin of Rs.25-20 per mmbtu on spot cargoes/ short term cargoes over FY12-FY15E and long tern

marketing margin of Rs. 10 per mmbtu, thus, not ruling out upside to our assumptions.

Demand remains buyout despite high spot prices…

PLNG's capacity utilization is on upswing despite concerns over high spot LNG prices curbing the

demand for LNG; thus, underscores the demand for LNG. We believe the demand for LNG to remain

robust despite high spot prices as LNG remains competitive over other liquid fuels and thus can

replace the fuels in sectors like CGD (City gas distribution), refineries, CPP (captive power plants),

etc. Also, the decline in the domestic gas production is further likely to give impetus to LNG demand.

In Q3 FY12, PLNG achieved capacity utilization of 115%. It should be noted that the company had

achieved a capacity utilization of 125% in FY09 i.e the company regassified 1.3mmtpa excess over

the nameplate capacity of 5 mmtpa.

PLNG capacity utilization


No volume risk on long term contracts…

The company has tied up 7.5 mmtpa long term SPA (Supply Purchase Agreement) contract with

Rasgas, Qatar gas with a back to back Gas Sales and Purchase Agreement (GSPA) with GAIL, IOC and

BPCL (offtakers) in the ratio of 60%, 30% and 10% respectively. As per GSPA, the responsibility of

volume intake lays with the off takers. Thus, PLNG is effectively shielded from volume risk on the

long term contract. Of the 5 mtpa expansion, PLNG has tied up a total of 3.5 mmtpa of the expanded

capacity on take or pay basis with GAIL and GSPC taking 2.5mmtpa and 1 mmtpa of the expanded

capacity respectively. Also, the company has signed up 1.5 mmtpa long term LNG contract for 20

years with Exxon Mobil's Gorgon LNG plant in Australia for its Kochi terminal.

PLNG's capacity utilization is on

upswing despite concerns over high

spot LNG prices curbing the demand

for LNG; thus, underscores the

demand for LNG. It should be noted

that the company had achieved a

capacity utilization of 125% in FY09

i.e the company regassified 1.3mmtpa

excess over the nameplate capacity of

5 mmtpa.

PLNG gross margins are on an

increase on account of increase in the

regassification margins coupled with

increase in the marketing margin.

Gross margins are also supported by

an increase in the operating

efficiencies on account of an increase

in the capacity utilization.


Concerns

Regulation of regassification and marketing margins

As per media reports, the ministry of Petroleum and Natural gas (MoPNG) has formally asked the

Petroleum and Natural gas Regulatory Board (PNGRB) to regulate the marketing margins on the sale

of natural gas on the basis of the costs. PNGRB has initiated the process by collecting data from gas

marketers. We believe the decision was taken to protect the end consumers from high gas prices.

However, there is no clarity whether marketing margin on LNG would be brought under the purview

of regulations and the timeline of the implementation.

High LNG prices

Higher than the anticipated LNG prices for a prolonged period will lead to other fuels (fuel oil,

Naphtha etc) becoming cost competitive and, thus, will choke off the demand for LNG.

PNGRB has initiated process for

determining the quantum of marketing

margin on sale of natural gas by

collecting data form gas marketers.


Indian Natural Gas Scenario

India a gas deficit country…

India is an energy deficit country and with the country's limited oil resources and volatility in oil

prices, significant interest is being generated in the natural gas sector. Natural gas is a clean & green

fuel and more economical in comparison to crude oil. India's total energy requirement is projected to

grow at a CAGR of 7% between 2010-11 and 2016-17 to 738.07 MMTOE. The import dependence

on natural gas is projected to increase from 19.0% in 2010-11 and 28.4% in 2016-17.

The share of natural gas in India's overall primary energy basket stands at 11%, as against the global

share of 24%, primarily on account of supply side constraints. By 2025, natural gas will comprise

20% of the Indian primary energy basket. Natural gas will substitute crude oil for a host of applications

due to its non-polluting and economic nature.

Primary Energy Consumption

Source: Company & FQ Research

Natural gas production in India in mmscmd

Source: Company data, FQ Research estimates

Domestic natural gas production to remain flat in the medium term...

After a strong growth of 44.8% Y-o-Y in domestic natural gas production to 47.5 billion cubic meter

(bcm) in FY10, on account of rapid ramp up in the KG D6 gas production to 60 mmscmd. The

domestic production of natural gas registered a modest growth of 10% Y-o-Y to 52 bcm in FY11, as

KG D6 gas production started to decline, reaching to 50.5 mmscmd in Q4 FY11. In 3QFY12, the gas

production from the KG D6 came down to 41 mmscmd on account of reservoir complexities and

higher than expected water ingress in the fields. With media reports of RIL projecting KG D6 gas

production to decline from current levels to 27.6 mmsmcd and 22.6 mmsmcd by 2012-13 and 2013-

2010-11 2016-17

The share of natural gas in India's

overall primary energy basket stands

at 11%, as against the global share of

24%, primarily on account of supply

side constraints.


14 respectively, the demand -supply situation is only going to worsen. Gas production from Pre-NELP

blocks like Panna-Mukta-Tapti (PMT) and Ravva fields are also on natural decline. In the near term,

the domestic production is likely to come from ONGC's marginal field and Deendayal block of

Gujarat State Petroleum Corporation (GSPC) which is likely to start production of in mid-2013 coupled

with increase in production CBM blocks. With no significant near term ramp up in the domestic gas

supply from other sources, we believe that the domestic natural gas production to remain flat in the

medium term ~ 135 - 140 mmscmd over 2012-14 (assuming KG D6 gas production of 40 mmscmd)

Natural gas demand to remain robust…

Natural gas demand estimate

(mmsmmd) 2010-11 2011-12 2012-13 2013-14 2014-15

Power 87.71 149.11 185.52 212.73 243.34

Fertilizer 49.39 57.48 68.08 68.08 68.08

City Gas 13.7 17.53 22.44 28.72 36.76

Petchem-Refinery 24.44 25.42 26.43 27.49 28.59

Sponge Iron 3.71 3.82 3.93 4.05 4.17

Total 178.94 253.36 306.41 341.08 380.95

Source: Company reports, FQ research units: million standard cubic meter per day (mmscmd)

Industry wise offtake of natural gas in India in mmscmd in 2009-10

Source: Company reports, FQ Research

Over the years, the demand for natural gas is expected to increase significantly, with bulk of the

demand to come from the power and fertilizer sector. In 2009-10, R-LNG constituted 15% of the

combined Power and Fertilizer sectors natural gas consumption and 7% of the CGD/CNG sector

natural consumption while in 2010-11, R-LNG formed 12% of the total Power and Fertilizer sectors

natural gas consumption while its contribution increased to almost 38% in the CGD/CNG sector. But

availability of additional sources of long term gas at optimal prices will determine the actual demand

growth for these sectors. While high prices proscribe usage of R-LNG for power generation but a mix

of RLNG and domestic gas can be used to meet the peaking power demand coupled with in Merchant

power generation where the tariffs are market determined.

In 2009-10, R-LNG constituted 15%

of the combined Power and Fertilizer

sectors natural gas consumption and

7% of the CGD/CNG sector natural

consumption while in 2010-11,

R-LNG formed 12% of the total Power

and Fertilizer sectors natural gas

consumption while its contribution

increased to almost 38% in the CGD/

CNG sector.


Fertilizer and power comes first for domestic gas allocation…

Allocation

mmscmd Firm Fallback Total

Power 32.7 12.0 44.7

Fertilizers 15.7 0.0 15.7

CGD 1.2 2.2 3.4

Steel 4.2 0.0 4.2

Refineries 5.0 6.0 11.0

Petrochemicals 1.9 0.0 1.9

LPG 3.0 0.0 3.0

Captive Power 0.0 10.0 10.0

Total 63.715 30.165 93.88


In the gas utilization policy for sale of gas under NELP contractors, domestic gas is preferentially

allocated to the Fertilizer and power sectors. Fertilizer sector will require additional gas requirement

of 28 mmscmd on account of liquid fuel replacement (switching of LSHS/FO and naphtha/ 10 mmscmd),

de-bottlenecking (4 mmscmd) and new plants (14 mmscmd) by 2016-17. In power sector, gas based

power capacity is around 16,676MW which requires gas of around 81 mmscmd (PLF=90%) as against

an allocation of 64.5 mmscmd while the gas supply was below the supply/consumption was 52.6

mmscmd on account of gas supply shortage. Another, 12,200 MW of gas based power plants are

likely to be commissioned by 2013-14 which will require an additional gas requirement of 61 mmscmd.

Also, 20,000-25,000 MW gas based capacity is considered which will need gas of about 80-100

mmscmd. We believe any incremental natural gas supplies will also be allocated as per the gas

utilization policy. Thus the non-priority sectors will have to depend on LNG for bulk of their

requirements.

LNG to replace liquid fuels in CGD, refineries, CPP …

The demand for natural gas from the City gas distribution (CGD) business is likely to grow at 28%

CAGR to 36.7 mmscmd by 2015, as the number of cities under CGD is likely to increase. The

development of gas transportation and distribution will lead to the increase in the latent demand for

natural gas from small cities and towns on account of last mile connectivity. LNG is a competitive fuel

for Captive power plants which consumes high cost liquid fuels like naphtha, FO/LSHS and Light

Diesel Oil (LDO) and thus can replace the liquid fuels. Apart from these sectors, there will also be a

rise in demand from LPG production, cement, ceramics, glass, along with other industries that can

replace the liquid fuels with LNG for captive consumption. Going forward, CGD and industrial units

will be the main drivers for LNG consumption. With domestic supplies likely to remain stagnant in

the near future, India will continue to imports liquefied natural gas (LNG) to satisfy the unmet demand.

The development of gas transportation

and distribution will lead to the

increase in the latent demand for

natural gas from small cities and

towns on account of last mile

connectivity. LNG is a competitive

fuel for Captive power plants which

consumes high cost liquid fuels like

naphtha, FO/LSHS and Light Diesel

Oil (LDO) and thus can replace the

liquid fuels.

In the gas utilization policy for sale of

gas under NELP contractors, domestic

gas is preferentially allocated to the

Fertilizer and power sectors. Fertilizer

sector will require additional gas

requirement of 28 mmscmd on

account of liquid fuel replacement.

The non-priority sectors will have to

depend on LNG for bulk of their

requirements.


R-LNG to fill the unmet natural gas demand…

Imports of LNG in India

million metric tonne (MMT) 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

LNG imports 5.06 6.811 8.249 7.958 8.922 8.859

Source: FQ Research

LNG Regassification terminals in India

2011-12 2015-16 2019-20

Existing

PLNG, Dahej 10 13 18

PLNG, Kochi 0 5 5

Shell & Total, Hazira 3.5 3.5 5

RGPPL, Dabhol 0 5 5

Total (mmtpa) 13.5 26.5 33

Total (MMSCMD) 48 95 118

Proposed

PLNG, Gangavaram 0 5 5

Adani - GSPC, Mundra 0 5 5

IOC, Ennore 0 5 5

Total (mmtpa) 0 15 15


Possible

Swan Energy-Pipavav terminal 0 2.5 5

Hirandani, West Coast 0 0 2.5

RIL-BP JV,Jamnagar/ Kakinada 0 0 5

Total (mmtpa) 0 2.5 12.5


Grand Total (mmtpa) 13.5 44 60.5

Total (MMSCMD) 48.33 157.52 216.59


India's LNG import has grown at a CAGR of 11.8% to 8.85 MMT by FY11 which is likely to increase

further on account of increase in domestic demand coupled with a increase in the capacity of LNG

terminals. We believe with the domestic natural gas production likely to remain stagnant in the

medium term coupled with the increase in the availability of the transmission and distribution

infrastructure the demand for LNG would get added fillip. The key driver for LNG demand in India

will be India's ability to source long term LNG at competitive prices.

At present India have 2 LNG terminals

with capacity of about 13.5 mmtpa

which is expected to go up to 41.5

mmtpa (149mmscmd) by 2015-16.

India's LNG import has grown at a

CAGR of 11.8% to 8.85 MMT over

2005-06 to 2010-11. We believe with

the domestic natural gas production

likely to remain stagnant in the

medium term coupled with the

increase in the availability of the

transmission and distribution

infrastructure the demand for LNG

would get added fillip.


At present India have 2 LNG terminals with capacity of about 13.5 mmtpa. Petronet LNG terminal at

Dahej has a capacity of 10 MMT which is likely to be increased to 15 mmtpa. Shell Hazaria LNG

terminal has capacity of 3.5 mmtpa which operates on tolling basis. Petronet LNG is coming with a

5.0 mmtpa LNG terminal at Kochi while Ratnagiri Gas and Power private limited (RGPPL) is setting

up a 5 MMT LNG terminal at Dhabol which is likely to commission in FY13. India's LNG capacity is

expected to go up to 41.5 mmtpa (149mmscmd) by 2015-16. In additions, a slew of LNG projects

have been announced like, Adani- GSPC in Mundra; Indian oil corporation (IOC) in Ennore; Swan-

Energy-Pipavav terminal, Hirandani West coast and projects along the east coast includes PLNG, RIL-

BP JV, Reliance power-Shell. The bulk of the natural gas demand is coming from the price sensitive

power and fertilizer sector, we believe that high spot LNG prices as against domestic gas prices of

USD 4.2- 5.5 per mmBtu could remain a big constrain for the demand.

Global LNG supplies set to increase…

Global LNG Liquefaction Capacity (mmtpa)


Global LNG Market

Source: Cheniere Energy, FQ Research

Global LNG supply is set to increase

to 319.8 mmtpa by 2020 from the

current capacity of 244.3mmtpa, on

account of a commissioning of a host

of liquefaction facilities in Australia,

Nigeria, Russia,Papua New Guinea


Global LNG supply is set to increase to 319.8 mmtpa by 2020 from the current capacity of 244.3

mmtpa, on account of a commissioning of a host of liquefaction facilities in Australia, Nigeria, Russia,

Papua New Guinea etc. Australia is set to emerge as a new LNG hub with the commissioning of 7

new conventional LNG liquefaction plants with capacity of 47.4 mmtpa and another 4 unconventional

projects of 26.8 mmtpa CBM LNG under proposed /under construction/possible stages.

US net gas imports on decline …

Net gas imports declined ~1.7 tcf over 2005-11

Source: EIA, FQ Research

US Natural gas production by source 1990-2035 (TCF)

Source: EIA, FQ Research

The increase in the shale gas production has lead to decrease in the natural gas (pipeline and LNG)

imports in the US. Over 2005-10, the natural gas imports in the US declined from 11.9 bcf per day to

10.2 bcf per day while the LNG imports declined from 1.7 bcf per day to 1.2 bcf per day. With the

increase in the shale gas production and the consequent lower capacity utilization of the existing

plants, several of the new LNG re-gasification terminals were suspended and three terminals were

even granted permission by the US department of energy to re-export previously imported LNG.

Surplus natural gas production coupled with persistent low Henry Hub natural gas prices have resulted

in increased interest in setting up new LNG terminals to exports natural gas to Asia-Pacific region

where LNG prices are crude oil linked. Countries, which earlier used to export LNG to the US, could

also start diverting their LNG cargos to the Asia-Pacific region. Thus, increasing the LNG supplies in

the Asia-Pacific region. GAIL has signed a Sales and Purchase Agreement (SPA) with Sabine Pass

Liquefaction LLC, a subsidiary of Chenier Energy partners, for supply of 3.5 mmtpa over a 20 year

with an extension option of up to 10 years. The LNG pricing is linked to the Henry -Hub natural gas.

GAIL also acquired 20% stake in Carrizo's Eagle Ford shale.

In the US, surplus natural gas

production coupled with persistent

low Henry Hub natural gas prices

have resulted in increased interest in

setting up new LNG terminals to

exports natural gas to Asia-Pacific

region where LNG prices are crude oil

linked.

The increase in the shale gas

production has led to a decline in the

natural gas (pipeline and LNG)

imports in the US.


LNG pricing formula varies from region to region…

LNG pricing formula differs from region to region. LNG is priced against the destined market. In Asia,

LNG prices are linked to Japanese crude cocktail (JCC), which is an average CIF price of crude oil for

Japan, while for the European continent the prices are linked to petroleum products and Brent crude

oil prices. The LNG prices for US and British purchases are determined by the supply /demand dynamics

at domestic natural gas trading points, Henry Hub for US and the National Balancing Points (NBP) in

Britain. Global spot LNG prices increased after the earthquake and tsunami in Japan that led to the

closure of Nuclear and Thermal plants in the country, thus, increasing the demand for spot LNG as a

substitute for the power generation. The short term prices which were around 11% of crude in the first

quarter of 2011 firmed up post -Japan Earthquake around 14-15% of crude. However, we believe the

increasing LNG movement from the US to the Asia-Pacific region is likely to put downward pressure

on the pricing of the LNG contracts in the Asia-Pacific region.

Natural gas and LNG Prices

Source: Bloomberg, FQ Research

CNG remains competitive on energy equivalent basis with HSD and petrol. HSD, a subsidized product,

has current under recovery of around Rs.12 per liters while petrol though decontrolled is being sold

at 3-3.5 Rs per liters below its market prices. Any increase in the HSD and petrol prices will further

increase the competitiveness of CNG.

Cost competitiveness of CNG vis-à-vis transport fuels


In domestic segment, PNG remains cost competitive with domestic LPG despite a Rs.439 per cylinder

current under recovery on LPG.

As a rule of thumb, LNG contracts

indexed to oil prices are in the range

of 11%-15% of crude oil prices. The

short term prices which were around

11% of crude in the first quarter of

2011 firmed up post -Japan

Earthquake around 14-15% of crude.

LNG prices remains cost competitive

vis-à-vis other liquid fuels in energy

equivalent terms.


Cost competitiveness of PNG vis-à-vis LPG

Source: Company, FQ Research D: Domestic LPG, LPG -U: Unsubsidized LPG

As seen from the below figure, currently LNG prices are at discount to other industrial fuels in energy

equivalent terms.

Cost competitiveness of LNG vis-à-vis Industrial fuels

Source: Bloomberg, FQ Research


Company

PLNG is the first company to set up LNG import and regassification terminal in India. ONGC, BPCL,

IOC and GAIL each has 12.5% stake while GDF international, Asian Development Bank (ADB) and

other investors hold 10%, 5.2% and 34.8% of the stakes in the company respectively. PLNG has a

regassification terminal at Dahej which commissioned with an initial capacity of 5.0 mmtpa in 2004

and later was expanded to 10 mmtpa in July 2009. The capacity of the terminal is increased of is

being increased to 15 mmtpa by 2015-16. The total regassification capacity of the company is likely

to increase to 25 mmtpa by 2015-16. The company is constructing a second jetty at Dahej which will

help in mitigating of operating on single Berth and will facilitate berthing of tankers upto 260,000

CBM (Q-Max). The Dahej terminal is connected to major trunk pipelines like Hazira- Vijaypur-

Jagdishpur (HBJ) and Dahej Uran pipeline (DUPL) of GAIL India and GSPL network in Gujarat. PLNG

hold 26% equity in Adani Petronet (Dahej) Port Pvt Ltd, a joint venture company with Adani Ports and

Special Economic Zone Ltd (APSEZ) and PLNG, to develop a solid port in Dahej. The port has an

annual capacity of 20 mmtpa to handle dry bulk cargos. PLNG plans to set up an integrated power

plant at Dahej. The company has completed Detailed Feasibility Report (DFR) for a 1200 MW power

plant of 3x 365 MW, single shaft Combined Cycle Gas Turbine (CCGT) with an anticipated cost of $

870 mn and aggregate gas requirement of 1-1.1 mmtpa. However, the project is likely to remain on

the back burner for sometime in want of customers on account of high LNG prices.

Shareholding pattern of PLNG


The Dahej terminal is connected to

major trunk pipelines like Hazira-

Vijaypur- Jagdishpur (HBJ) and Dahej

Uran pipeline (DUPL) of GAIL India

and GSPL network in Gujarat.

PLNG is constructing a second jetty at

Dahej which will help in mitigating of

operating on single Berth and will

facilitate berthing of tankers upto

260,000 CBM (Q-Max).


Business Highlights

During 2006-11, PLNG's sales volume has increased at a CAGR of 12.3% driven by increase in the

Dahej capacity coupled with a robust demand for natural gas. We estimate the sales volume to

increase at a CAGR of 5.8% over FY12-15E as the capacity of PLNG increase from the current capacity

of 10 mmtpa to 15 mmtpa by FY14E due to increase in operable capacity at the Dahej terminal and

starting of the Kochi terminal. We believe the demand for LNG likely to remain robust despite high

prices on account of reduction in domestic supplies.

Sales volume and capacity utilization (FY06-FY14E)


Financial Highlights

Revenue & profit trend

Net Sales and PAT set to increase at a CAGR of 35.5% and 4.0% over FY12-14E

During 2006-11, PLNG net sales increased at a CAGR of 28.0% to Rs.132.0 bn, mainly on account of

an increase in the regassification volume coupled with an increase in the RLNG prices, while PLNG

sales volume increased at a CAGR of 12.3% to 440.3 Tbtu. Going forward, we expect PLNG's net

sales to increase at a CAGR of 35.5% to 439.0 bn driven by increase in the regassification volume and

the regassification margins while PAT to increase at a CAGR of 4.0% to 11.8 bn over the same period.

Net Sales and PAT (FY08-14E)



EBIDTA and EBIDTA margin

EBIDTA to increase at a CAGR of 11.1% to Rs. 23.1 bn over FY12-14E

During FY06-11, EBIDTA increased at a CAGR of 19.9% to Rs.12.2 bn driven by increase in the

regassification margin and increase in the regassification volume. Going forward, the EBIDTA is

likely to increase at a CAGR of 11.1% over FY12-FY14E to 23.1 bn driven by increase in regassification

and marketing margin coupled with increase in the regassification volume.

EBIDTA and EBIDTA Margin (FY08-14E)


ROE and ROCE

PLNG likely to maintain ROE over 20%

PLNG has maintained ROE of 24%-32% while ROCE was 13%-17% during FY08-11. We estimate

PLNG's ROE is likely to maintain ROE of 23%-34% while ROCE to be around 14%-17% over FY12-

FY14E.

ROE and ROCE (FY08-14E)



Valuations

Net sales and PAT are likely to increase at a CAGR of 35.5% and 4.0% respectively over FY11-FY14E

while EBIDTA is expected to grow at a CAGR of 11.1% in the same period on account of increase in

the regassification volume coupled with increase in the regassification margins. We assume 5%

escalation in the regassification tariff at the Dahej terminal till FY15E and remain flat after wards and,

for the Kochi terminal; we assume a regassification margin of Rs. 50 per mmbtu. We assume marketing

margin of Rs.25-20 per mmbtu on spot cargoes/ short term cargoes over FY12-FY15E and long tern

marketing margin of Rs. 10 per mmbtu, thus, not ruling out upside to our assumptions.

We use DCF method for valuation, with a WACC and terminal growth assumption of 12.0% and 3%

respectively. We believe, long term LNG tie up, higher than expected marketing margins and Kochi

terminal's regassification charges will lead to further upgrades in the stock. AT CMP, PLNG is trading

at a PE multiple of 10.9x FY13E and 7.7x EV/EBIDTA FY13E. We initiate coverage on PLNG with a

Buy rating with a 12-month DCF based target price of Rs.203 per share, implying a potential return of

25.3% from the current levels.

DCF valuation summary

PV of FCFE in mn 78,465

PV of Terminal Value in mn 107,268

Enterprise Value in mn 185,732

Net Debt in mn 33,696

Equity Value in mn 152,037

Shares Outstanding in mn 750

Value per share 203

CMP 162

Assumptions

Volume assumptions

MMTPA FY11 FY12E FY13E FY14E

Dahej 9.1 10.9 11.5 11.9

Kochi 0 0 0.5 2.0

Total 9.1 10.9 12.0 13.9

Margins assumptions

Regassification margin, Rs per mmbtu FY11 FY12E FY13E FY14E

Dahej 32.2 33.8 35.5 37.2

Kochi 50 50 50 50

Source: FQ Research

Target price sensitivity to WACC and terminal growth rate assumptions

0% 1% 2% 3%

10% 213 230 252 280

11% 186 199 215 236

12% 164 174 187 203

13% 144 152 162 174

Source: FQ Research


PLNG 1yr forward PE band


PLNG 1yr forward EV/EBIDTA band


PLNG 1yr forward P/BV band



Profit and Loss StatementParticulars (INR mn) FY11 FY12E FY13E FY14E

Total Revenues 131,973 239,073 340,023 439,046Net Sales Growth (Y-oY) 23.9% 81.2% 42.2% 29.1%Total Expenditure 119,810 220,371 319,754 415,964EBIDTA 12,163 18,702 20,269 23,082EBIDTA Margin (%) 9.2% 7.8% 6.0% 5.3%EBIDTA Growth (Y-o-Y) 43.7% 53.8% 8.4% 13.9%Other Income 680 869 1,267 1,952Depreciation/Amortization 1,847 1,847 2,379 3,801Interest 1,931 1,618 2,440 3,481PBT 9,064 16,106 16,717 17,752PBT Margin (%) 6.9% 6.7% 4.9% 4.0%Net Profit 6,196 10,947 11,150 11,841Net Profit Excl. extra-ordinaries 6,196 10,947 11,150 11,841

RatiosParticulars FY11 FY12E FY13E FY14E

Valuation Ratio (x)P/E (x) 19.6 11.1 10.9 10.3P/E Excl. Extra-ordinaries (x) 19.6 11.1 10.9 10.3P/BV (x) 4.5 3.4 2.6 2.2P/CEPS (x) 15.1 9.5 9.0 7.8EV/EBITDA (x) 12.5 8.2 7.7 6.5Market Cap. / Sales (x) 0.9 0.5 0.4 0.3Div.Yield (%) 1% 1% 1% 1%

Leverage RatiosDebt/Equity (x) 1.2 1.1 0.9 0.9Interest Coverage (x) 6.3 11.6 8.3 6.6

Per Share DataDiluted EPS 8.3 14.6 14.9 15.8Diluted Cash EPS 8.3 14.6 14.9 15.8Book Value Per share (Rs.) 35.7 48.3 61.2 75.0

Returns (%)RoE (%) 24.3% 33.9% 26.7% 22.9%RoE (%)- Excl. extra-ordinaries 24.3% 33.9% 26.7% 22.9%RoCE (%) 13.1% 17.0% 14.9% 13.9%RoCE (%)-Excl. extra-ordinaries 13.1% 17.0% 14.9% 13.9%Dividend Payout 28.1% 13.7% 13.5% 12.7%

Du-Pont AnalysisEBIDTA/Sales (%) 9.2% 7.8% 6.0% 5.3%Sales/Operating assets (x) 2.6 3.9 4.4 5.0EBIDTA/Operating Assets (%) 24% 30% 26% 26%Operating Assets/Net Assets (x) 0.9 0.9 0.9 0.9Net Earnings/EBIDTA (%) 51% 59% 55% 51%Net Assets/Net Worth (x) 2.2 2.2 2.0 1.9RoE (%) 24% 34% 27% 23%

Margins (%)EBIDTA margin 9.2% 7.8% 6.0% 5.3%PBT margin 6.9% 6.7% 4.9% 4.0%PAT margin 4.7% 4.6% 3.3% 2.7%

Growth (%)Revenue 23.9% 81.2% 42.2% 29.1%EBIDTA 43.7% 53.8% 8.4% 13.9%PAT 53.2% 76.7% 1.9% 6.2%APAT 53.2% 76.7% 1.9% 6.2%

Operating CycleDebtors 24 20 20 20Creditors 25 25 25 25Inventory 8 7 7 7Cash conversion Cycle 6 2 2 2

Balance SheetParticulars (INR mn) FY11 FY12E FY13E FY14E

Liabilities

Equity Capital 7,500 7,500 7,500 7,500

Reserves & Surplus 19,302 28,749 38,399 48,740

Equity 26,802 36,249 45,899 56,240

Net Worth 26,802 36,249 45,899 56,240

Deferred tax liability 3,480 3,480 3,480 3,480

Total Loans 32,161 38,161 43,161 49,661

Capital Employed 62,443 77,890 92,540 109,381

Assets

Gross Block 35,537 37,939 70,209 81,823

Less: Depreciation 8,513 10,360 12,739 16,540

Net Block 27,024 27,579 57,470 65,284

Capital WIP 22,029 32,627 13,357 10,743

Investments 11,649 11,649 11,649 11,649

Current Assets

Inventories 2,480 4,226 6,132 7,977

Sundry Debtors 8,472 13,100 18,631 24,057

Cash and Bank Balance 1,540 5,606 9,466 20,877

Loans and Advances 1,336 2,490 3,500 4,490

Other Current Assets 47 120 170 220

Total Current Assets 13,875 25,542 37,899 57,621

Less:Current Liabilities & Provisions

Sundry Creditors 8,318 15,094 21,901 28,491

Provisions 1,786 827 834 839

Other Current Liabilities 2,030 3,586 5,100 6,586

Total Current Liabilities & Provisions 12,134 19,507 27,835 35,915

Capital Applied 62,443 77,890 92,540 109,381

Cash Flow StatementParticulars (INR mn) FY11 FY12E FY13E FY14E

EBITA 10,316 16,856 17,890 19,282

Less: Adjusted Taxes 3,264 5,399 5,957 6,421

NOPLAT 7,052 11,456 11,933 12,861

Plus: Depreciation 1,847 1,847 2,379 3,801

Gross Cashflow 8,899 13,303 14,312 16,662

Less: Increase in Working Capital 1,472 4,180 3,653 3,647

Operating Cashflow 7,427 9,123 10,659 13,015

Less: Net Capex 8,888 13,000 13,000 9,000

Less: Increase in Net Other Assets (1,040) (490) (1,464) (1,436)

FCF From Operation (421) (3,387) (877) 5,451

FCF after Investment (421) (3,387) (877) 5,451

Total FCF (421) (3,387) (877) 5,451

Consolidated Financials


DISCLAIMER: This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession thisdocument may come are required to observe these restrictions. Opinion expressed is our current opinion as of the date appearing on this material only. While we endeavor to update on a reasonable basis the informationdiscussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and maybe subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. The information in this documenthas been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and are for general guidance only. While every effort is made to ensure the accuracy andcompleteness of information contained, the company takes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or causeof action. Recipients of this material should rely on their own investigations and take their own professional advice. Each recipient of this document should make such investigations as it deems necessary to arrive at anindependent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of suchan investment. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions - futures, options and other derivatives as wellas non-investment grade securities - involve substantial risks and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock’s price movement and trading volume, as opposedto focusing on a company’s fundamentals and as such, may not match with a report on a company’s fundamentals. We do not undertake to advise you as to any change of our views expressed in this document. While wewould endeavor to update the information herein on a reasonable basis, FINQUEST, its subsidiaries and associated companies, their directors and employees are under no obligation to update or keep the information current.Also there may be regulatory, compliance, or other reasons that may prevent FINQUEST and affiliates from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictionsand may be subject to change without notice. FINQUEST and affiliates, including the analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sellthe securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect tocompany/ies mentioned herein or inconsistent with any recommendation and related information and opinions. FINQUEST and affiliates may seek to provide or have engaged in providing corporate finance, investmentbanking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.

BUY HOLD SELL

More than 10% return Between 5-10% return Less than 5% return

ANALYST DISCLAIMER: Each analyst of FINQUEST Securities (P) Ltd. whose name appears on page 1 of the research reports accessible on this website hereby certifies that (i) the recommendations and opinionsexpressed in the research report accurately reflect the research analyst's personal views about any and all of the securities or issuers discussed herein that are within the analyst’s coverage universe and (ii) no part of theresearch analyst's compensation was, is, or will be, directly or indirectly, related to the provision of specific recommendations or views expressed by the research analyst in the research report.

FINQUEST Securities (P) Ltd.602 Boston House, Next to Cinemax, Suren Road, Andheri (East) Mumbai 400 093.Tel.: 91-22-4000 2600 Fax: 91-22-4000 2605 Email: [email protected]

Website: www.finquestonline.com

KEY DATA Petronet LNG - Myirisbreport.myiris.com/FSL/PETLNG_20120306.pdfMarch 6, 2012 For Private...

Documents

Transcript of KEY DATA Petronet LNG - Myirisbreport.myiris.com/FSL/PETLNG_20120306.pdfMarch 6, 2012 For Private...