CMP: INR346 TP: INR411(+19%) Buy Opportunity in the blip

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1 BSE SENSEX S&P CNX 25,87 7,98 26 December 216 Update Sector: Oil & Gas Petronet LNG CMP: INR346 TP: INR411(+19%) Buy Opportunity in the blip Expect LNG prices to soften Stock Info Bloomberg PLNG IN Equity Shares (m) Week Range (INR) 411 / 23 1, 6, 12 Rel. Per (%) -5/24/44 M.Cap. (INR b) M.Cap. (USD b) M Avg Val (INR M) 59 Free float (%) 5. Financials Snapshot (INR b) Y/E Mar E 218E Net Sales EBITDA PAT EPS (INR) Gr. (%) BV/Sh (INR) RoE (%) RoCE (%) P/E (x) P/BV (x) Shareholding pattern (%) As On Sep-16 Jun-16 Sep-15 Promoter DII FII Others FII Includes depository receipts Stock Performance (1-year) Petronet LNG Sensex - Rebased Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Spot LNG prices in Asia-Pacific increased from USD4.2/mmbtu in May 216 to USD8. in December 216 and as much as USD9.2 for February delivery. As a result, LNG import in November declined to 1.5mmt, 5% below monthly import in 1HFY17. However, import in November was still 15% higher YoY. Consequently, Petronet s stock price has declined ~8% this month. However, we believe that LNG prices would correct soon, and see the recent sharp fall in the stock price as an excellent investment opportunity. Sudden rise in LNG demand due to severe winter Japan, the largest consumer of LNG, imported 7.54mmt of LNG in November 216, up 12.7% YoY due to severe winter. China has also been battling a severe winter. As a result, it imported 2.66mmt of LNG in November (+47% YoY). Reuters data suggest that import in December could be even higher at 3.33mmt. amid supply outages pushes prices up Chevron s Gorgon LNG Train 1 has remained shut intermittently after it started in March 216. The Gorgon Train 2 was also shut temporarily in early December. Since resumption of exports in June 216, Chevron s 5.2mmtpa Angola LNG terminal has also been battling a series of unplanned outages. We believe LNG prices would correct downward Our research shows that Henry Hub prices have delinked from WTI since 29 due to abundance in supply of shale gas. Average slope over 2-8 stood at 13.2%, and has come down to 6.5% in 216. Global LNG trade stood at 245mmt in 215. A total of 142mmtpa of LNG liquefaction capacity is under various stages of construction. This makes us believe that LNG prices would remain structurally weak for a long time, even if oil prices were to rise. Reiterating Buy with price target of INR411 As against expanded capacity of 15mmtpa, Petronet has got firm usage for 16.75mmtpa. It already operated at annualized rate of 12.4mmt in 1HFY17. Hence, we do not have much of a concern about utilization of Dahej facility. We do not see much of a threat from the upcoming LNG terminals. We believe that while GSPC s Mundra terminal may be completed in mid-217, the lack of pipeline connectivity may remain a problem for next two years. Ennore terminal is also likely to be completed in 218. There is no progress on pipeline there too. Swarnendu Bhushan (Swarnendu.Bhushan@MotilalOswal.com); Abhinil Dahiwale (Abhinil.Dahiwale@motilaloswal.com); Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital.

2 Story in charts Exhibit 1: Recent rally in spot LNG prices Spot LNG (USD/mmBtu) Brent (USD/bbl)-RHS Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov Source: Bloomberg, Platts, MOSL Exhibit 2: Linkage of LN with JCC Spot Asian LNG Price (USD/mmBtu) % slope to JCC Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Source: Bloomberg, Platts, MOSL Exhibit 3: HH delinks with WTI given abundant shale Natural Gas Total Marketed Production (bcfd) % slope 85 4 HH delinks with WTI Jan- Mar-1 May-2 Jul-3 Sep-4 Nov-5 Jan-7 Mar-8 May-9 Jul-1 Sep-11 Nov-12 Jan-14 Mar-15 May-16 Source: EIA, MOSL Exhibit 5: Volume growth led by capacity ramp-up Total vol- Dahej/Kochi (mmt) Exhibit 4: 142mmtpa of liquefaction capacity under construction Africa Asia Pacific Europe FSU Latin America North America Middle East Exhibit 6: Dahej to reach 16.75mmtpa sales by Dahej total vol (mmt) Source: IGU, MOSL Dahej has a total of 16.75mmtpa of contracts against expanded capacity of 15mmtpa FY12 FY2E FY12 FY2E 26 December 216 2

3 Exhibit 7: Not building in tariff hike at Dahej from 221 Dahej tariff (INR/mmBtu) Marketing margin on shot-term/spot (INR/mmBtu) Exhibit 8: Not building in any tariff hike at Kochi from 218 Kochi tariff (INR/mmBtu) FY12 (3.8) FY2E FY12 Exhibit 9: EPS to grow 3x over -19E Adj EPS EPS Growth (%)-RHS Exhibit 1: Not building in any tariff hike at Kochi from 218 RoE RoCE FY2E FY2E 26 December 216 3

4 Valuation and view While global LNG trade stood at 245mmt in 215, a total of 142mmtpa of new capacity is under various stages of construction. Compared to this, demand is likely to grow at a much slower pace. Japan, the largest consumer of LNG (at ~88mmtpa), would see a decline in consumption as its nuclear reactors restart. Additionally, Japan s Fair Trade Commission has started an enquiry into destination clauses of the LNG contracts. If the clause is removed, then there will be additional supplies into the market, pushing down prices. This makes us believe that for a long time to come, LNG prices would remain structurally weak. We also believe that the ample supply would delink LNG prices from crude, just like it happened with Henry Hub in 29. We expect Dahej facility to ramp up to 15mmtpa by FY18. The facility is expected to expand to 17.5mmtpa in the next phase. Additionally, work has started on the Kochi-Mangalore pipeline. Even if this is not completed, we expect Kochi refinery expansion to raise utilization of Kochi LNG terminal to 2% in FY18. Once the Kochi-Mangalore pipeline is completed, utilization would ramp up to 5%. For long-term growth, the company is also contemplating on LNG terminals overseas. We do not see much competition despite upcoming LNG terminals. The upcoming GSPC s Mundra terminal seems to be battling the same problem as Kochi. While the terminal would be completed by mid-217, tenders for the 6km Mundra-Anjar pipeline are yet to be awarded. Additionally, the existing Anjar-Chitola network has capacity of only 3mmtpa. For full utilization of the terminal, the 18 pipeline needs to be augmented, for which, no tenders have been awarded so far. Indian Oil s Ennore LNG terminal is expected to be operational only in 218. Tender for breakwater facility of Dabhol LNG terminal is yet to be awarded. After award, it would take four years for completion. Petronet completed its 5mmtpa expansion at Dahej at a cost of INR2b. Any greenfield LNG terminal of 5mmtpa would cost ~INR5b. This makes Dahej the cheapest alternative available to the consumers. We value Petronet using DCF and a WACC of 12%. With a target price of INR411, we have a Buy rating on the stock. Exhibit 11: Our DCF fair value stands at INR411 FY2E FY21E FY22E Total volume (mmt) PAT (INR mn) 7,119 8,825 9,14 14,173 2,132 27,28 27,614 35,393 36,98 Depr (INR mn) 3,81 3,154 3,216 3,527 3,979 5,76 5,885 6,1 6,135 Change in net working capital (INR mn) (7,559) (13,279) 14,713 (2,489) 2, Capex (INR mn) (7,647) (8,599) (9,931) (1,) (5,) (5,) (5,) (5,) (5,) FCFF (INR mn) (5,6) (9,899) 17,138 5,211 22,5 28,395 28,869 36,89 38,411 WACC (%) 12% NPV (INR mn) 18,72 Terminal growth (%).% Terminal value (INR mn) 181,627 Total value (INR mn) 289,699 Net debt FY18 (INR mn) (18,82) Target market cap (INR mn) 38,51 Target share price (INR) December 216 4

5 Financials and Valuations Standalone - Income Statement (INR Million) Y/E March Total Income from Operations 314, , ,1 271, ,693 28, ,426 Change (%) Raw Materials 292,98 358, ,19 25, , ,34 324,75 Employees Cost ,341 Other Expenses 2,819 3,53 3,94 3,958 4,32 6,352 8,655 Total Expenditure 295, ,491 38,62 255, ,43 25, ,72 % of Sales EBITDA 19,388 14,984 14,39 15,93 22,65 3,438 4,725 Margin (%) Depreciation 1,866 3,81 3,154 3,216 3,527 3,979 5,76 EBIT 17,522 11,93 11,236 12,687 19,123 26,459 34,965 Int. and Finance Charges 1,184 2,196 2,935 2,388 1,596 1, Other Income ,548 1,74 2,957 3,735 4,468 PBT bef. EO Exp. 17,23 1,545 9,849 12,4 2,484 28,759 38,869 EO Items PBT after EO Exp. 17,23 1,545 9,849 12,4 2,484 28,759 38,869 Total Tax 5,71 3,426 1,24 2,864 6,31 8,628 11,661 Tax Rate (%) Reported PAT 11,493 7,119 8,825 9,14 14,173 2,132 27,28 Adjusted PAT 11,493 7,119 8,825 9,14 14,173 2,132 27,28 Change (%) Margin (%) Standalone - Balance Sheet (INR Million) Y/E March Equity Share Capital 7,5 7,5 7,5 7,5 7,5 7,5 7,5 Total Reserves 36,997 42,361 49,386 56,264 66,458 8,937 1,55 Net Worth 44,497 49,861 56,886 63,764 73,958 88,437 18,5 Total Loans 27,182 28,965 23,738 2,61 25, 16, 1 Deferred Tax Liabilities 3,91 5,53 7,27 8,71 8,71 8,71 8,71 Capital Employed 75,589 84,356 87,894 93,84 17, , ,815 Gross Block 35,796 77,946 87,869 9,377 92, , ,446 Less: Accum. Deprn. 12,217 15,295 18,443 22,19 25,635 29,614 35,374 Net Fixed Assets 23,579 62,65 69,426 68,268 67,311 84,332 81,72 Capital WIP 43,35 8,799 7,469 15,342 22,773 6,773 9,273 Total Investments 1,399 1, Curr. Assets, Loans&Adv. 42,546 46,278 33,392 39,97 49,431 57,351 69,317 Inventory 1,366 9,557 8,826 2,461 6,83 6,864 9,17 Account Receivables 16,898 2,157 13,428 9,885 1,726 12,316 16,457 Cash and Bank Balance 12,685 12,327 3,641 21,829 27,45 34,82 39,658 Loans and Advances 2,596 4,237 7,497 5,795 5,172 3,368 4,32 Curr. Liability & Prov. 35,239 34,771 23,292 31,396 32,747 36,29 43,746 Account Payables 32,94 32,42 21,356 28,811 29,345 31,377 37,216 Provisions 2,299 2,729 1,936 2,585 3,42 4,831 6,53 Net Current Assets 7,36 11,57 1,1 8,574 16,685 21,142 25,57 Appl. of Funds 75,589 84,356 87,894 93,84 17, , ,815 E: MOSL Estimates 26 December 216 5

6 Financials and Valuations Standalone - Income Statement Petronet LNG (INR Million) Y/E March Total Income from Operations 314, , ,1 271, ,693 28, ,426 Ratios Change (%) Raw Y/E March Materials 292,98 358, ,19 25, , ,34 324,75 Employees Basic (INR) Cost ,341 Other EPS Expenses ,819 3, ,94 3, , , ,655 Total Cash EPS Expenditure 295, , , , , , , BV/Share % of Sales EBITDA DPS 19, , , , , , , Payout Margin (%) (%) Depreciation Valuation (x) 1,866 3,81 3,154 3,216 3,527 3,979 5,76 EBIT P/E 17,522 11,93 11, , , , , Int. Cash and P/E Finance Charges 1,184 2, ,935 2, , , Other P/BV Income , , , , , PBT EV/Sales bef. EO Exp. 17,23 1,545 9, ,4 1. 2, , ,869.6 EO EV/EBITDA Items PBT Dividend after Yield EO Exp. (%) 17,23.7 1, , ,4.7 2, , , Total Tax 5,71 3,426 1,24 2,864 6,31 8,628 11,661 FCF per share Tax Rate (%) Return Ratios (%) Reported PAT 11,493 7,119 8,825 9,14 14,173 2,132 27,28 RoE Adjusted PAT 11,493 7,119 8,825 9,14 14,173 2,132 27,28 RoCE Change (%) RoIC Margin (%) Working Capital Ratios Standalone Asset Turnover - Balance (x) Sheet (INR Million) 3.2 Inventory (Days) Y/E March Equity Debtor Share (Days) Capital 7,5 2 7,5 19 7,5 12 7,5 13 7,5 16 7,5 16 7,5 16 Total Leverage Reserves Ratio (x) 36,997 42,361 49,386 56,264 66,458 8,937 1,55 Net Debt/Equity Worth 44, , , , , , ,5 -.4 Total Loans 27,182 28,965 23,738 2,61 25, 16, 1 Deferred Standalone Tax - Liabilities Cash Flow Statement 3,91 5,53 7,27 8,71 8,71 8,71 (INR Million) 8,71 Capital Y/E March Employed 75,589 84,356 87,894 93,84 17, , ,815 OP/(Loss) before Tax 17,23 1,545 9,849 12,4 2,484 28,759 38,869 Gross Depreciation Block 1,866 35,796 3,81 77,946 3,154 87,869 9,377 3,216 92,946 3, ,946 3, ,446 5,76 Less: Direct Accum. Taxes Paid Deprn. -5,71 12,217-3,426 15,295-1,24 18,443-2,864 22,19-6,31 25,635-8,628 29,614-11,661 35,374 Net (Inc)/Dec Fixed in Assets WC 5,194 23,579-7,559 62,65-13,279 69,426 14,713 68,268-2,489 67,311 84,332 2,895 81, Capital CF from WIP Operations 18,552 43,35 2,641 8,799-1,3 7,469 27,7 15,342 15,211 22,773 27,5 6,773 33,395 9,273 Total Others Investments 1, ,62 1,399 7,74 9 6, CF from Operating incl EO 18,832 7,261 6,44 33,51 15,211 27,5 33,395 Curr. Assets, Loans&Adv. 42,546 46,278 33,392 39,97 49,431 57,351 69,317 (Inc)/Dec in FA -1,635-7,647-8,599-9,931-1, -5, -5, Inventory 1,366 9,557 8,826 2,461 6,83 6,864 9,17 Free Cash Flow 8, ,159 23,578 5,211 22,5 28,395 Account Receivables 16,898 2,157 13,428 9,885 1,726 12,316 16,457 (Pur)/Sale of Investments 499 Cash and Bank Balance 12,685 12,327 3,641 21,829 27,45 34,82 39,658 Loans Others and Advances 2,596 4,237 7,497 5,795 5,172 3,368 4,32 Curr. CF from Liability Investments & Prov. -1,635 35,239-7,647 34,771-8,1 23,292-9,931 31,396-1, 32,747-5, 36,29-5, 43,746 Account Issue of Shares Payables 32,94 32,42 21, , ,345 31,377 37,216 Provisions Inc/(Dec) in Debt -3,158 2,299 1,782 2,729-5,227 1,936-3,128 2,585 4,39 3,42-9, 4,831-15,9 6,53 Net Dividend Current Paid Assets -2,194 7,36-1,755 11,57-1,755 1,1-2,194 8,574-3,98 16,685-5,653 21,142-7,64 25,57 Appl. Others of Funds 75,589 84,356 87,894 93,84 17, , ,815 E: CF MOSL from Fin. Estimates Activity -5, ,27-5, ,653-23,54 Inc/Dec of Cash 2, ,686 18,188 5,621 7,352 4,855 Opening Balance 9,839 12,685 12,327 3,641 21,829 27,45 34,82 Closing Balance 12,685 12,327 3,641 21,829 27,45 34,82 39, December 216 6

7 N O T E S 26 December 216 7

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