PETRONET LNG LTD. (PLNG)

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1 RESULT UPDATE Sumit Pokharna PETRONET LNG LTD. (PLNG) PRICE: RS.165 RECOMMENDATION: ACCUMULATE TARGET PRICE: RS.180 FY14E P/E: 10X Good show: Higher marketing margin, higher volumes and better operational efficiency. Now, progress on Kochi terminal and overall LNG prices to watch out for. Petronet LNG Ltd. has reported Q3FY13 results which are better than our estimates supported by decent volume growth and higher marketing margins. The Company operated Dahej terminal at a capacity utilization of ~109%. PLNG has reported a PAT of Rs Bn in Q3FY13 higher by 7.8% YoY and by 1.2% QoQ. For FY14E, we expect revenues of Rs. 427 bn (up 31.9% YoY), operating margin of 5.5% and PAT of Rs.12.4 bn, accordingly, we expect PLNG to report EPS of Rs and CEPS of Rs.21.7 in FY14E. On the basis of our estimates, the stock at current market price of Rs.165 is fairly valued at 6.0x EV/EBIDTA, 10.0x P/E, 7.6x P/CEPS and 2.26x P/BV on FY14E earnings. We recommend Accumulate on PLNG with a price target of Rs.180 (earlier Rs.178). We believe the progress on Kochi terminal and overall LNG prices needs to be closely monitored. Summary table (Rs mn) FY12 FY13E FY14E Net Sales 224, , ,161 Growth (%) EBIDTA 18,351 21,037 23,531 EBIDTA margin (%) PBT 15,525 18,343 18,534 Net profit 10,575 12,290 12,418 EPS (Rs) Growth (%) CEPS (Rs) Book value (Rs/share) DPS (Rs) ROE (%) ROCE (%) Net Cash (Debt) (17,302) (24,034) (15,749) NW Capital (Days) EV/Sales (x) EV/EBIDTA (x) P/E (x) P/BV (x) P/CEPS (X) Source: Company, Kotak Securities - Private Client Research Key Developments: In Q3FY13, the company has operated at 109% of its capacity (nameplate capacity of the Dahej terminal being 10 MMTPA) which was higher by ~3% (Q2FY13). In terms of RLNG prices, management has guided that spot and short term cargo prices have increased on account on seasonal factors. Management has guided that there is a strong demand of LNG from refineries, petrochemicals and CGDs customers reflecting spot LNG to replace liquid fuels. Hence, going forward volumes are expected to improve. On the other hand, domestic natural gas supply was lower on account of falling gas production from RIL's KG-D6. Project development status: Kochi: PLNG is expected to commission Kochi LNG terminal (5 Mn MTPA, investment of Rs.42 bn), in April'13. However, it will operate at full capacity from FY 2016, as the pipeline linking the terminal with customers in Bangalore and Mangalore has been delayed. The first phase of laying a 44 km pipeline by Gail India from Kochi Gas Terminal to nine companies, including Cochin Refineries, FACT plant at Udyogamandal and Amalammukel power plant at Brahmapuram, is expected to be commissioned in April'13. The plan to supply natural gas for domestic use through pipe connection to residences is also under consideration. The second phase of routing natural gas to the NTPC Power plant at Kayamkulam and to Mangalapuram and to Bangalore via Palakkad would be taken up later. Dahej: PLNG plans to invest ~Rs 30 Bn on expanding its Dahej plant's capacity to 15 mmtpa (50% capacity expansion) from the present 10 mmtpa. It is also setting up a second jetty at Dahej, which will enable it to improve utilization of its existing capacity by another 20-25%. Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6

2 Andhra Pradesh- East Coast at Gangavaram: In order to meet the rising domestic natural gas demand, PLNG is setting up third RLNG terminal with a capacity of 5 MMTPA at Andhra Pradesh (east coast of India) and is expected to commission by To bring gas early into the market, Petronet has also started work on a floating terminal which is being targeted for end 2014 or early The Board granted final investment approval to set up its third LNG terminal. Petronet LNG Limited and Gangavaram Port Limited (GPL) have signed a firm and binding term sheet for developing a land based LNG Terminal at Gangavaram Port. The LNG Terminal at Gangavaram Port will comprise of facilities for receiving, storage and regasification of LNG and will be developed with an approximate investment of Rs 45 Bn. The Gangavaram LNG Terminal will help meet the growing energy demand of the Andhra Pradesh and will also cater to the increasing gas requirements of eastern and central part of India. Demand and Supply status: Currently, PLNG is importing 7.5 mmtpa (~@ $10/mmbtu) from Qatar on a longterm basis and additional 1.5 mmtpa from Gas Natural (of Spain). It is in touch with countries like Qatar and Australia for long-term contracts for sourcing LNG. If USA further allows exporting of LNG then it will be significantly positive for the Company. Petronet's ability to sign any long-term supply contract could improve visibility to its earnings growth and prove a major trigger for appreciation. India's gas demand is currently pegged at ~179 mmscmd, while the domestic supply is constrained at around 140 mmscmd. Key Risk and Concerns: 1). Availability of LNG at reasonable prices on a long term basis has remained a key worry. 2). Regulatory risk: Any capping of margins by PNGRB will negatively impact its earnings and growth. However, management has indicated that imported LNG does not fall under the preview of PNGRB. 3). Project execution risk. 4). Kochi terminal is expected to be commissioned by April but initially it will operate at less than 10% of the capacity in absence of pipeline connecting Kochi to Bangalore and Mangalore. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 7

3 Results table (Rs.mn) Q3FY13 Q3FY12 YoY (%) QoQ (%) Net Sales 83,753 62, Total Expenditure 78,939 58, EBIDTA 4,814 4, (7.1) Depreciation EBIT 4,343 3, (7.9) Other income (29.9) Interest-net (15.5) (8.0) PBT , Extra ordinary Exp/(Inc) Tax 1,490 1, (0.7) Current Tax 1,490 1, (0.7) Defferred tax 75 (100) PAT 3,185 2, Equity Capital 7,500 7, EPS (Rs) Reserves 36,739 27, Book Value Per Share Cash Balance at the end Cash EPS Margins (%) EBITDA Margin (1.1) (1.1) EBIT Margin (1.0) (1.1) Adj PAT Margin (0.9) (0.4) Other Income/PBT (%) (34.2) 8.0 Tax/PBT (%) (0.0) (0.4) Expenses (Rs. Mn) Raw Material consump (Incl. Forex) 78,089 57, staff costs+fbt (12.0) Other Expenditure (1.3) Forex Fluc (88.4) (106.4) Total 78,939 58, Ratio (%) RM/Sales (0.4) Employee Cost to Sales (0.0) (0.0) Other Expenditure/Sales (0.1) (0.1) Forex Fluc to sales (0.9) 1.6 Source: Company Volumes: During Q3FY13, PLNG sold TBTUs (Long 96.6 TBTUs, Spot 30.5 TBTUs and service cargo 13.5 TBTUs) of re-gasified LNG as against TBTUs in Q2FY13 which is down by 3.0% YoY basis but up by 4.1% on QoQ basis. PLNG has operated at 109% capacity in Q3FY13. Core and Non-core sectors (industries including power and fertilizer) find re-gasified LNG to be a cheaper option when compared to the liquid fuels, which will ensure high capacity utilization for Petronet even in future. In Q3FY13, PLNG has imported ~35-36 cargos, out of this ~majority of them are long-term contracts and balance was short term spot cargos. There is a strong appetite in refineries and CGDs to consume costly spot LNG to replace liquid fuels. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 8

4 Revenue and Realization: Revenues for Q3FY13 were at Rs Bn which is substantially up by 34.6% YoY basis and by 11.6% on sequential basis. The average net realization (LNG sold and service provided) is up 38.7% YoY basis and by 7.1% QoQ basis to Rs. 599 per mmbtu. Demand Outlook: Petronet LNG has been benefiting from a decline in local production of natural gas that has pushed up LNG imports. Natural gas output at Reliance's D6 block in the Krishna Godavari basin is currently around 23 million standard cubic meters a day, significantly down. Also, it is expected that it will take more than one years to ramp-up the production. Raw material cost: RLNG for Q3FY13 was at Rs Bn up by 37.0% YoY basis and 10.5% on sequential basis. This is mainly on account of increase in LNG prices. The key factors which have supported the LNG prices are the increased demand from Japan, China and India. Raw material as a percentage of sales has increased by 3.02% QoQ and 1.61% YoY to 92.71%. Hence, PLNG imported LNG at average cost of Rs per mmbtu in Q3FY13 which is up by 41.2% YoY basis and by 6.1% on sequential basis. Net Back (Net Revenue less Raw Material Cost) for Q3FY13 was at Rs Bn up by 10.2% on YoY basis and by 26.8 % QoQ basis. Resulting in average net back of Rs per mmbtu up by 13.6% YoY basis and by 21.8% on sequential basis. Staff Cost: Employee cost has increased significantly by 18.9% YoY but was down by 12.0% QoQ to Rs.76 Mn. Other expenditure has fallen by 1.3% QoQ but up by 21.9% YoY to Rs.701 Mn. Forex fluctuation: PLNG has reported a forex loss of Rs.73 Mn which is related to spot purchases. However, Company said this is mere accounting entry as it does not carry any price risk in its books. Operating Profit: For Q3FY13, the operational profit was up by 22.8% YoY and by 2.0% on sequential basis to Rs. 5.3 Bn. The Company recorded EBIDTA margin of 6.3%, which is down by 60 basis YoY basis and by 60 bps QoQ basis. Finance cost has fallen by 8.0% QoQ and by 15.5% YoY to Rs.291 Mn. As on 30th Sep'12, the Company has a debt of Rs. 32,452 Mn. PBT for Q3FY13 was at Rs bn up 6.5% YoY and by 0.6% on sequential basis. PAT for Q3FY13 was at Rs bn up by 7.8% YoY and by 1.2% on sequential basis thereby translating into quarterly EPS of Rs.4.25 and CEPS of Rs Quarterly sale volume (TBTU) & YoY growth (%) (60.0) Quarterly sales volumes (TBTU - LHS) YoY Growth (% - RHS) Source: Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 9

5 Price target revised to Rs.180 We have valued PLNG on DCF-based method of valuation with 12.68% WACC and 3% terminal growth rate. The 9M price target is revised to Rs.180. Valuation & Recommendation For FY14E, we expect revenues of Rs. 427 bn (up 31.9% YoY), operating margin of 5.5% and PAT of Rs.12.4 bn, accordingly, we expect PLNG to report EPS of Rs and CEPS of Rs.21.7 in FY14E. On the basis of our estimates, the stock at current market price of Rs.165 is fairly valued at 6.0x EV/EBIDTA, 10.0x P/E, 7.6x P/CEPS and 2.26x P/BV on FY14E earnings. We recommend Accumulate on PLNG with 9-month price target of Rs.180 (earlier Rs.178). We maintain ACCUMULATE on Petronet LNG with a revised price target of Rs.180 Company back ground: Petronet LNG is India's largest importer of liquefied natural gas (LNG) at its Dahej plant. It has expanded the Dahej capacity to 10 MMTPA. PLNG has a firm supply contract with Qatar's RasGas for 7.5 MTPA for which it has a back-to-back sales contract. It also imports LNG on a spot basis depending on its ability to market the same in domestic market. Similarly, it also imports cargos on behalf of other importers for a fee. The company currently charges Rs per MMBTU as regasification charges, which are set to go up 5% every year in January. Notes: LNG is natural gas in its highly compact liquid form. When natural gas is cooled to minus 260 degrees Fahrenheit (or minus 162 degrees Celcius), it is reduced to one six-hundredth of its original volume and becomes a clear, non-toxic liquid. LNG offers a safe and economical means for transporting natural gas over long distances to locations beyond the reach of pipelines. LNG is loaded on specialized ships and delivered to a regas- sification terminal where it is reheated, turned into gas and distributed to customers through a pipeline network. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 10