Petronet LNG – entering a new Orbit

This report has been updated in June 2012 – see Petronet LNG – A Solid Gas Company

  • Date: 19 December, 2011
  • CMP: Rs 157, Large Cap with Market Cap Rs 11,883 crores
  • Advice: Invest, Target: Mar 2013 – 250 and Mar`14 – 301

Petronet LNG is doubling capacities in the next two years. It provides a clean fuel, Liquefied Natural Gas to an energy starved country. Being a PSU JV, business risks are lower. The operational performance and capacity addition projects in the last few years have been excellent. It is a gem of a stock that will continue to give equity investors safe and high returns for the next few years.

Petronet LNG – Description and Profile

  • Petronet LNG imports, processes and sells LNG in India, and is a JV of GAIL, ONGC, Indian Oil & BPCL.
  • Turnover in 2011 was Rs 13,197 crores with PAT at 620 crores. PLNG owns and operates a LNG terminal at Dahej, Gujarat that imports 10 mmtpa (Million Metric Tonne Per Annum) of LNG.
  • LNG is sourced through long term contracts (with 7.5 mmtpa from RasGas-Qatar, 1.44 mmtpa from Exxon Mobil-Australia and 2.5 mmtpa from Gazprom) and also spot cargoes (sourcing 0.6MT in ’12 from Gaz De France) that boost volumes and utilize capacity. These contracts indicate stable supplies.
  • Imported LNG is regassified and supplied to customers in pipelines – generally operated by GAIL and GSPL. The customer base includes power plants, household and commercial piped gas, fertilizer plants, Industrial boiler fuel, etc. Most sales are through GAIL, IOCL & BPCL
  • Operational performance was excellent, with the FY11 LNG volumes at 11 mmtpa, a 110% capacity utilization at Dahej.
  • The global prices of LNG have been rising. It depends on location, and today varies from  4$/mmbtu in USA to 15$/mmbtu in Japan. However, PLNG is protected from these prices, as it ensures back to back buying arrangements with customers. It earns a Rupee denominated marketing margin.

The current projects include:

  • PLNG is 26% promoter of a JV with Adani Enterprises, called Adani Petronet (Dahej) Port Pvt Ltd.  This is a bulk Solid Cargo Port of capacity 12 mmtpa that has started operations this year at Dahej.
  • Construction has started of an additional LNG jetty at Dahej which will take the terminal capacity from 10 to 15 mmtpa by Sept ’13.
  • Construction of a new LNG terminal at Kochi, Kerala of 5 mmtpa, which will start by Sept 2012.
  • Started LNG Supply in Cryogenic road Vehicles – for supply to isolated customers without pipelines
  • Direct Marketing of LNG  in coastal & industrial areas, will develop the market /boost demand

 Future Plans

  • Plan for forward integration into a power plant of 1200 MW capacity at Dahej using LNG fuel.
  • A plan for building a LNG Terminal on the east coast of India. Location to be decided.
  • Once the Kochi terminal is ready, PLNG may also invest in a power plant here, using LNG fuel.
  • By FY16, total capacity could increase to 25 mmtpa, which is 2.5 times current capacity.

Industry Note:

  • Gas is a cleaner fuel than Coal and Oil. It burns completely. Usage of Gas is better environmentally than other fuels.
  • Gas consumption in India is low compared to global patterns. PLNG is a pioneer that is creating the infrastructure that will improve gas usage and meet demand.
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Fig 1 – Energy consumption – World and India – Click to expand

  • Today India is energy hungry, and raw fuel deficit, with supply issues:
  1. Coal – while there are enough Coal reserves, Coal India has not been able to meet production targets. Their constraints are environmental clearances, logistic challenges, recent heavy rains in mining areas and labor issues. Other mine owners in India are also not producing enough; so many customers need to import coal. Also Coal is a dirty fuel.
  2. India is a crude oil importer and 70% of demand comes from this route. Oil prices are high.
  3. Nuclear energy has suffered a setback in India due to the Japan disaster. New plant construction is a political hot potato. Hydro and Renewables have a high cost of capacity setup.
  • Indian gas demand is expected to reach 381 mscmd by 2015, compared with a current supply trajectory of 202.9 mscmd. There is definitely a huge demand for gas.
  • Domestic supply of Natural gas from Reliance (Krishna Godavari), ONGC and Oil India wells has not scaled up and will not be able to meet above demand.
  • Other LNG terminals are Hazira (Shell owned, 3.5 mmtpa) and Dabhol (GAIL/NTPC, ready by 2012).
  • GAIL also procures LNG in long term contracts, and used the available terminal capacity (including PLNG) to import this.

Stock evaluation, performance and returns

  • PLNG had its IPO in March 2004 priced at Rs 15. It was oversubscribed 4.2 times.
  • The maiden dividend of Rs 1.3 on FV Rs 10 was paid in 2007. Thereafter dividend has shown a steady to increasing trend (See Figure 2)
  • At CMP of Rs 157 today, the stock has shown a 42% annualized return over the last 8 years!
  • Revenues have grown steadily at 37% CAGR, (Fig 3), along with EBITDA – 35% and Profits 29%.
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Fig 2 – Petronet LNG stock performance – Click to expand

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Fig 3 – Quarterly revenues have grown steadily

  • Cash flow and EPS are showing a robust growth rate – see Fig 4. A dip in 2010 was temporary, with a substantial recovery in 2011.
  • With the excellent capacity utilization in 2011, PLNG has partially repaid debt and D/E ratio is 1.0
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Fig 4 – Cash Flow and EPS have grown substantially

  • Price and PE chart shows that PE has fallen recently close to the 5 year mean of 14 times. (Fig 5). PE today is 13.3 and has fallen 43% from 23 levels. During this fall, the price has only fallen 14% from the recent peak of 183 in Aug 2011. The rest of the fall comes from EPS growth, see fig 6.
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Fig 5 – Price and PE Graph

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Fig 6 – Price and EPS Graph

  • Price and EPS quarterly graph shows that EPS growth has accelerated in recent quarters. This elevated EPS will stabilize in 2012, and any further gains will come from interest cost reductions. Volume growth will happen in 2013 with additional capacity coming on stream in Kochi and Dahej.
  • ROCE is between 15 – 25%
  • PEG is at 0.46 – indicates safety and undervalued status

Financial Projections, with FY14 estimates

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Exhibit 7: Financial Projections – (Click to expand)

Risks:

  • A global recession, perhaps involving a European country debt default, will depress the equity market overall, and PLNG also. But this even if it happens, will be a temporary condition.
  • There has been a recent spurt in spot LNG price. This was largely due to the March 11 Japan earthquake and nuclear disaster; Japan has started idling their nuclear plants, and turned to LNG in a big way. In India, LNG demand is high, but may drop if prices exceed 18$/ mmbtu. However, spot prices in USA are at <4 $/mmbtu, so this is unlikely. US has low prices as they have started producing LNG from non conventional sources.
  • Pipeline infrastructure from Dahej to customers is a constraint. However this is being aggressively addressed by GAIL and GSPL. Similarly pipelines to demand centers around Kochi have to be set up to evacuate gas. This being addressed by Kerala Government and GAIL
  • Currently, LNG charges regasification tariffs are not under the purview of the regulator. Any policy decision to regulate the tariff may affect the valuation of the stock.

Opinion, Outlook and Recommendation

  • PLNG has an excellent track record of investing in LNG assets and utilizing/ operating them well.
  • In the last 8 years, all performance metrics of revenues, profits and EPS have improved to a new orbit every time capacity was added. Imminent capacity addition will replay this characteristic.
  • Demand is huge in India, and as of now, all LNG import for the next 6 months are booked by customers.
  • My opinion is that Petronet will continue down the path of solid stock performance and dividends over the next decade .
  • Invest now and systematically for long term outperformance
  • The projection/ targets for PLNG are
    • March 13 target is 250 (a 60% appreciation from current levels)
    • March 14 is 301 (a 92% appreciation)
  • The projections are based on PE expectations of 18 times.

:-)

This report is an update on a Feb 2011 report I had shared, available on Link

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