BSE SENSEX S&P CNX 17,236 5,229 Bloomberg PLNG IN Equity Shares (m) 750.0 52-Week Range (INR) 186/122 1,6,12 Rel. Perf. (%) 3/-11/-10 M.Cap. (INR b) 109.7 M.Cap. (USD b) 2.0 1 August 2012 1QFY13 Results Update Sector: Oil & Gas Petronet LNG CMP: INR146 TP: INR205 Buy 1QFY13 numbers ahead of estimates: Petronet LNG's (PLNG) reported numbers for 1QFY13 were ahead of consensus/our estimates. EBITDA was INR4.6b v/s our estimate of INR4b. PAT was up 5% YoY and 10% QoQ at INR2.7b v/s our estimate of INR2.3b. Profitability was higher than we had expected despite lower volumes (127tbtu v/s our estimate of 131tbtu) due to: (a) higher implied marketing margin of USD0.64/mmbtu (v/s our estimate of USD0.28/mmbtu), and (b) INR200m savings on account of dry docking of one charter ship. Variation (in percentage terms) is higher at the PAT level due to lower interest expense and higher other income. Capacity expansion projects on track: PLNG expects to commission its Kochi terminal by December 2012 and also expects simultaneous completion of phase-i (44km) of its Kochi-Bangalore pipeline, through which it will supply gas. Further, it expects to complete (a) its second jetty project at Dahej by 4QFY14 (additional capacity of 3mmt), (b) Dahej expansion by the end of 2015 (taking overall capacity to 18mmt), and (c) Gangavaram terminal by the end of 2016 and interim FSRU (floating storage and re-gasification unit) by the end of 2014. Valuation and view: We expect PLNG to continue to benefit from India's large gas deficit through (a) higher utilization (>100%) levels, and (b) higher marketing margins on spot volumes. FY13 earnings would be muted - while the company would begin to account for Kochi terminal's depreciation in FY13, corresponding revenue contribution would start only in FY14. PLNG's next earnings growth cycle would come post FY13, led by (1) volume ramp-up at Kochi, and (2) commissioning of the second jetty at Dahej. We model Dahej volumes at 10.6/11.5mmt and Kochi volumes at 0.2/1.1mmt for FY13/14. The stock trades at 9.8x FY14E EPS of INR15. Our target price of INR205 is based on the average of two valuation methodologies (1) P/E (13x FY14E EPS), and (2) DCF (INR215). Maintain Buy. Harshad Borawake (HarshadBorawake@MotilalOswal.com); +91 22 3982 5432 Deepak Dult (Deepak.Dult@MotilalOswal.com); +91 22 3982 5445 Investors are advised to refer through disclosures made at the end of the Research Report. 1
Key concall highlights Spot LNG prices now prevailing at ~USD11/mmbtu: Management indicated that the spot LNG prices has fallen down to USD11/mmbtu. With the increase merchant power rates and fall in LNG prices, PLNG feels that the merchant power plants should be comfortable to buy LNG. In-talks with Yamal LNG project: Management confirmed that it is partner to the ongoing talks for 15% stake by consortium of ONGC, IOC in 15mmtpa Yamal LNG project in Russia. However, talks are at initial stages and decision would be taken in next two months. Too early to discuss Kochi Power Plant: Management indicated that, though the Kerala govt. has invited PLNG to setup a power plant in Kochi, it is too early to discuss the same as the talks are in the preliminary stage. INR200m savings on ship charter due to dry-docking: For its long-term volumes, PLNG charters 3 LNG ships (on day-rate basis), and dry-docking of one ship for a month saved INR200m for PLNG; while volumes will be compensated by efficient scheduling of other cargoes. As on 30 June 2012, cash balance and current investments stood at INR8.7b and INR2.5b, respectively. Gross Debt stood at INR30b, which includes INR20b for Kochi terminal. Volumes were down QoQ led by fertilizer plant shutdown; capacity utilization at 101% As against our estimate of 131tbtu, re-gasified volumes in 1QFY13 stood at 127tbtu (2.5mmt) v/s 133.4tbtu (2.7mmt) in 1QFY12 and 135btu (2.7mmt) in 4QFY12. Sales volumes during 1QFY13 were impacted by lower offtake by fertilizer companies which took seasonal shutdown in March and April. Also, the shutdown of fertilizer plants resulted in APM gas being available to other customers who shifted from LNG to APM gas in 1QFY13. Long term volume at 96tbtu was higher than FY12 average volume of 94tbtu. However, there was a sharp decline in re-gasification services volume from 15tbtu in 4QFY12 to 10.7tbtu in 1QFY13 and also in pure short term volumes from 26.5tbtu to 20.5tbtu. Strong marketing margins on short-term cargoes Adjusting for INR200m savings from ship charter, we estimate PLNG's marketing margins on spot cargoes at INR35/mmbtu (USD0.6/mmbtu). These are over and above its base re-gasification charges of INR35/mmbtu. Domestic gas scarcity to benefit PLNG RIL's KG-D6 gas production has fallen below 31mmscmd and is not expected to recover before FY15. Even production from other domestic fields is either flat or increasing at a very small pace. We believe that domestic gas scarcity augurs well for PLNG as imported LNG will be needed to meet the domestic shortfall. We expect continued natural gas demand-supply gap in India will help Petronet LNG to earn higher marketing margins in near to medium term. 1 August 2012 2
Capacity utilization down at 101% Re-gasification volumes declined QoQ (tbtu) 1QFY13 EPS at INR3.6; annualized EPS of INR14.4 (FY12 EPS INR14.1) Source: Company, MOSL Expansion projects updates PLNG plans to expand its capacity from current 10mmtpa to 28mmtpa (Dahej: 10+2.5+5, Kochi: 5 and Gangavaram: 5). Kochi terminal to get complete by Dec-12: Management is confident of commissioning 5mmtpa Kochi terminal by Dec-12 and also expects completion of Phase-1 of Kochi-Bangalore pipeline by the same time. PLNG has spent INR34b so far of the total capex of ~INR45b, out of which INR14b was from internal accruals. Management guides for 16% IRR for its contracts at Kochi terminal with regasification charge ~USD1/mmbtu. Dahej second jetty completion by end of 4QFY14: PLNG expects to complete work on second jetty of Dahej by 4QFY14 which will increase capacity of terminal to 13mmtpa. The company has spent INR1b out of total project capex of INR10b. 1 August 2012 3
Dahej capacity expansion by 2015-end: PLNG has plan to complete nameplate capacity expansion at Dahej terminal from 10mmtpa to 15mmtpa by 2015-end. Management expects FEED completion and EPC awarding to get complete by end- 2012. PLNG has tied up 2.5mmtpa and 1mmtpa of its new capacity with GAIL and GSPC, respectively. GAIL and GSPC, in turn, will make equity investments and the advances will be adjusted against re-gas charges for quantity processed for them. Gangavaram project FEED under progress; target project completion by 2016-end: PLNG plans to set-up a 5mmtpa terminal at Gangavaram in Andhra Pradesh. Management expects completion of land terminal by 2016-end. For interim period, company has plan of leasing a floating storage re-gasification unit (FSRU). It expect to complete marine facilities required for FSRU handling by 2014-end. PLNG capacity to expand to 28mmtpa by FY16/17 Source: Company, MOSL Valuation and view We expect PLNG to continue to benefit from India's large gas deficit through a) higher utilization levels (>100% utilization) and b) marketing margins on spot volumes. FY13 earnings will be muted as Kochi terminal's depreciation would start coming in, corresponding revenue contribution would start accruing only in FY14. PLNG's next earnings growth cycle would come post FY13 led by (1) volume rampup at Kochi and (2) second jetty commissioning at Dahej. We model Dahej volumes at 10.6/11.5mmt and Kochi volumes at 0.2/1.1mmt in FY13/14, respectively. We are increasing our FY13 EPS by ~3% to factor in strong 1QFY13 results. The stock trades at 9.8x FY14E EPS of INR15. Our target price of INR205 is based on the average of two valuation methodologies (1) P/E (13x FY14E EPS), and (2) DCF (INR215). Maintain Buy. 1 August 2012 4
Our Key Assumptions FY09 FY10 FY11 FY12 FY13E FY14E Exchange Rate (INR/USD) 46.1 47.6 45.5 47.9 53.5 52.0 Capacity (mmt) 5.0 10.0 10.0 10.0 15.0 18.0 Dahej Volume 6.4 7.9 8.8 11.1 10.6 11.5 Kochi Volume 0.2 1.1 Total (mmt) 6.4 7.9 8.8 11.1 10.8 12.6 Utilization rate (%) 128 79 88 111 72 70 Re-gassification Charges (INR/mmbtu) Dahej Long term 29.5 30.9 32.1 33.8 35.5 37.2 Chg (%) 4.8 4.7 4.0 5.0 5.0 5.0 Marketing margin 31.3-7.7 8.1 28.2 20.0 15.0 Short term 60.8 23.2 40.2 62.0 55.5 52.2 Kochi Long term 50.0 50.0 Chg (%) 0.0 Marketing margin 0.0 0.0 Short term 50.0 50.0 Average 32.8 23.5 30.0 34.1 34.8 36.2 EPS (INR) 6.9 5.4 8.3 14.1 13.1 15.0 Source: Company, MOSL 1 August 2012 5
Petronet LNG: an investment profile Company description Petronet LNG was formed as a joint venture by the government of India to import LNG and set up LNG terminals in India. Each promoter, GAIL, ONGC, IOCL and BPCL, holds 12.5% stake in Petronet. The company owns India's first LNG receiving and re-gasification terminal of 5mmtpa at Dahej commissioned in Feb-04 and is setting up 5mmtpa terminal at Kochi. It has a long-term contract of 7.5mmtpa with Ras Gas Qatar tied back-toback with customers in India. Key investment arguments Petronet has been increasing re-gasification charges by 5% every year leading to a stable income stream. It also earns premium margins on short term contracts enabling it to make 25% RoE. Its new terminal at Kochi is expected to get operational by FY13 and can be the next growth driver for the company. Petronet plans to add 8mmtpa capacity at Dahej and 5mmtpa capacity new terminal at Gangavaram in Andhra Pradesh. Key investments risks The long term gas sourcing is only from Ras gas Qatar, which is a notional risk. Petronet LNG's business is currently not governed by any regulation. Recently, concerns have emerged on the likely control of marketing margins. If this happens, it could pose a risk to its earnings. Recent developments Finalized the location of its 5mmtpa East Coast terminal at Gangavaram in Andhra Pradesh. In January 2012, Petronet increased its regasification charges by 5%. Valuation and view The stock trades at 9.8x FY14E EPS of INR15. Our target for Petronet is INR205/sh based on average of DCF and PE methodology. Maintain Buy. Sector view Decline in the KG-D6 gas supply and delay in the likely increase augurs well for the LNG terminals in the country. We expect gas supply in India to remain constrained in coming years, thereby benefitting the LNG importers like Petronet LNG. Target price and recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) 146 205 40.4 Buy EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY13 13.1 14.1-7.3 FY14 15.0 13.0 15.6 Stock performance (1 year) Shareholding pattern (%) Jun-12 Mar-12 Jun-11 Promoter 50.0 50.0 50.0 Domestic Inst 5.9 7.1 9.2 Foreign 25.2 24.8 22.9 Others 18.9 18.1 18.0 1 August 2012 6
Financials and Valuation 1 August 2012 7
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