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The latest report on Petronet LNG – A Recovery in Kochi, created in May 2014 is available for your reading. Petronet LNG – A Recovery in Kochi

Date: June 15, 2012        CMP: Rs 132        Large Cap with Market Cap Rs 11,883 crores Advice:  Buy now and systematically              Target:  Mar’13 – 269 and Mar’14 – 361

Executive Summary

Overview:  Petronet LNG has a unique status as a private sector player promoted by PSUs. It supplies LNG, a clean fuel, to the energy & gas deficit country. It has a great record of creation and operation of LNG import facilities. Revenues have grown at a CAGR of 33%, EBITDA 23%, Profits 28% and Cash Flow 19% over 5 years.

Why Buy Now: The key constraint is capacity, as capacity utilization has been 112%. Petronet LNG is doubling capacities in the next two years. The share price has had an unusual fall of 29% in the last 10 months due to news flow, market conditions and a flat Q4FY12. This fall is a market excess, and offers investors an attractive entry point.

This is a revision of a Dec’11 Report by JainMatrix Investments – LINK

Petronet LNG – Description and Profile

• Petronet LNG (PLNG) has a 20% market share in gas supply in India. It’s objective is to import, regassify and sell LNG in India. It is a JV of GAIL, ONGC, Indian Oil & BPCL, yet is a private sector firm.
• Turnover in ’12 was 22,695 crores (up 72%) and PAT 1058 cr. (up 71%). PLNG owns and operates a LNG terminal at Dahej, Gujarat with capacity of 10 Million Metric Tonne Per Annum (mmtpa) of LNG.
• Long-term contracts are in place for LNG supply from RasGas-Qatar (7.5 MMTPA) and Exxon Mobil-Australia (1.44 MMTPA). PLNG also takes spot cargoes to boost volumes and utilize capacity. It recently signed with Gaz De France for 0.6MT supply starting soon.
• Operational excellence with FY12 LNG volumes of 11.2 mmtpa, a 112% capacity utilization at Dahej.
• The price of LNG sourced rose recently from 3-4$/mmbtu a few years ago, to 16$/mmbtu last year in the Asian market. However, PLNG is protected from these prices due to back-to-back contracts with customers. Sales of the long-term contracted gas are through GAIL, IOCL & BPCL, where PLNG keeps a regassification margin. For spot cargoes, PLNG earns both marketing and regassification margins.
• Imported LNG is regassified and supplied in pipelines or Cryogenic road Vehicles. The customers include power plants, household & commercial piped gas, fertilizer plants, Industrial boiler fuel, etc.
• PLNG has a 26% JV called Adani Petronet Port, for bulk Solid Cargo capacity 15 mmtpa, since 2011.
• Shareholding pattern: Promoter – Govt./ PSU 50%, MFs/ DII 7.1%, FIIs 14.3%, Individuals retail / HNI 14.2% Bodies Corporate etc 14.4%. The Private company status gives PLNG operational flexibility.
• Executives: Dr. A. K. Balyan, MD & CEO and Shri C. S. Mani Director (Technical).
• The vision is to grow capacity from current 10 to 25 mmtpa by FY17.

Current projects

• A new LNG terminal at Kochi, Kerala of 5 mmtpa, which will be commissioned by Sept ‘12.
• An additional LNG jetty at Dahej will take the capacity from 10 to 15 mmtpa by Oct ’13.
• Direct Marketing of LNG in Western region, coastal & industrial areas, in a 800 km radius.

Future Plans

• Kochi terminal complex: PLNG may also invest in a power plant in Kochi that will run on LNG. It is also likely to pick up stake in a LNG shipping venture for transporting LNG to Kochi.
• The term sheet has been signed for a LNG Terminal at Gangavaram Port, Andhra Pradesh, of 5 mmtpa capacity. To be commissioned by 2016, the project involves an investment of 4,500 crores.

Industry Note:

• Gas consumption in India is low compared to global patterns, see Fig 1. PLNG is a pioneer that is creating the infrastructure for gas access and supply, to change consumption patterns and demand.

• Gas is a better fuel than Coal, Oil and Nuclear. It burns completely. Gas is the cleanest fossil fuel.
• Today India is energy and raw fuel deficit, with supply issues and growing demand.
• LNG prices: We have seen a rise in spot LNG prices, particularly in Asia after the Japanese nuclear disaster. LNG demand is high, but price has peaked around 16$/mmbtu, and may fall as spot prices in USA are 2$/mmbtu and it starts exporting. Also Japan will soon restart its nuclear plants as it has modern, safe plants and large unused capacity.
• Also PLNG is not directly affected by high prices, in fact it earns higher margins on high prices, but overall demand will be affected.

• Coal – it is a dirty fuel. There are substantial Coal reserves, but monopoly producer Coal India has not met production targets. Their constraints are environmental clearances, logistics, heavy rains, insurgency and labour issues. Other captive mine owners are not producing enough, so imports have increased.
• India is a crude oil importer and 70% of supply comes from this route. Oil prices are high.
• Nuclear energy globally has suffered a setback due to the Japan disaster. New plant construction is a political hot potato. Hydropower capacity has growth constraints. Alternative energy sources are yet to become commercially comparable to fossil fuels.
• Indian gas demand is expected to reach 434 mscmd by 2015, compared with a supply of 203 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 may not be able to meet above demand.
• Other LNG terminals present are Hazira (Shell owned, 3.6 mmtpa) and Dabhol (GAIL/NTPC, will be ready mid 2012, 5 mmtpa).  PLNG is thus a pioneer and industry leader.

Stock evaluation, Performance and Returns

• PLNG had its IPO in March 2004 priced at Rs 15, and was oversubscribed 4.2 times. The price rose to 120 in Jan’08, in the financial crisis fell to 30 in Nov’08; the all time high was 186 in Aug’11. Fig 3.

• Petronet LNG at CMP of 132, has given IPO investors a 34% return CAGR in 8 years, Fig 4. The maiden dividend of Rs 1.3 was paid in 2007. Thereafter dividend has shown a steady increase.

• The Quarterly Sales and Margins (Fig 5) show that the fall in margins from early years is compensated by volumes growth. Revenues have grown at 33% CAGR, EBITDA 23% and Profits 28%.

•  Cash flow and EPS have a robust growth rate Fig 6. After the 2010 dip, we saw substantial recovery in 2012.  The Cash flow is up 19% CAGR and annualized EPS is up 28% CAGR over last 5 years.
• With good capacity utilization in ‘11 & ‘12, PLNG has partially repaid debt and D/E has fallen to 0.86.

• Price and PE chart Fig 7, shows that PE has fallen below the historical mean of 14 times. PE today is 9.4 and clearly in the underpriced quartile.
• This price fall has happened in spite of earnings growth, Fig 8.

• Price and EPS quarterly graph, Fig 8, shows that EPS growth has flattened in 2012. This was expected as the company is running at 112% capacity utilization. The next boost to earnings is in 2^nd half FY12 when the Kochi terminal is launched, and then 2^nd half of ’13 when the additional capacity in Dahej is commissioned.
• The investments for these projects will involve a debt increase in future.
• We expect the EPS of PLNG to stay within the channel in the Fig 8 graphic.
• ROCE and RONW are between 27-30% in FY12, which is excellent.
• Beta of the stock is 1.08 (Reuters) and this indicates volatility is similar to that of the Sensex.
• PEG is at 0.34 – indicates safety and great value

 Benchmarking and Financial Projections

• In a benchmarking exercise, we compare PLNG with 3 firms in the same or related industry

• Conclusions: Compared to peers, PLNG is not overpriced. It has good Sales and Profits growth. Debt looks high but this is an investment phase for PLNG. Price appreciation is good.
• (Gujarat Gas looks good on many parameters. Perhaps we will research this stock in depth soon.)
• In a Financial projections exercise, we project PLNG financials till FY 2015.
• Readers of my Dec ’11 report on PLNG (LINK) may note that the firm exceeded my FY12 projections by 15-28%, another sign of exceptional performance.

Risks:

A spate of bad news recently has sent PLNG price down. These are:

• The Petroleum Natural Gas Regulatory Board PNGRB recently passed an order against Indraprastha Gas retrospectively cutting the network tariff and compression charges, affecting IGL & PLNG prices.
  • However the High court soon quashed this ruling as ‘illegal’ and that PNGRB was not empowered to take such calls. However until the role of PNGRB is clarified/ resolved, uncertainty will loom over the sector. PLNG management is also confident that PNGRB does not have a mandate to review margins for PLNG.
• PLNG reported excellent results in Q1, Q2 and Q3 of FY12, but flat results in Q4 (compared to Q3). The investing community was disappointed and the share price fell sharply.
  • With capacity utilization of 112%, better results cannot be expected until capacity is added.
• Current market weakness has affected the PLNG price, but expect recovery and solid performance.

Opinion, Outlook and Recommendation

• The equity base of PLNG has remained stable at 750 crores through 8 years of 12-fold revenue growth. This indicates stable and conservative capital management.
• PLNG is doubling expanding capacities in two years. It has a good track record of investing in LNG assets and utilizing/ operating them. The Cochin facility will supply the energy deficit Kerala region.
• PLNG share price has had an unusual fall of 29% due to news flow and market conditions discussed above. These are temporary, and the stock specific effects should reverse in the next 3-6 months.
• The valuation and projection/ targets for PLNG are
  • Current valuation is of 197, indicating it is available at a 49% discount
  • March 13 target is 269 (a 104% appreciation from current levels)
  • March 14 is 361 (a 173% appreciation)
• PLNG will continue on the path of solid stock performance and dividends over the next decade. Invest now and systematically to gain for the long-term.

JainMatrix Knowledge Base:

Additional Infrastructure sector reports from JainMatrix Investments:

• Adani Ports and SEZ – LINK
• IRB Infrastructure Developers – LINK
• KEC International – LINK
• Ramky Infrastructure – LINK
• BGR Energy Systems – LINK 

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

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