Petronet LNG – A Recovery in Kochi

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  • Date: May 7th, 2014
  • Large Cap with Market Cap Rs 10,920 crores
  • CMP: Rs 146
  • Advice: Buy

JainMatrix Investments has published a report on Petronet LNG for its Subscribers. A partial report is available below. Removed sections include Bench-marking, Financial Projections, Risk factors, and 2 year target prices for the share. The JainMatrix Investment service is available for a subscription fee.

This is an update of the June 2012 report called Petronet LNG – A Solid Gas Company LINK

Executive Summary

Overview: Petronet LNG dominates the import of Natural Gas in India, and has a unique private sector status. It has a great record of creation and operation of LNG import facilities. Revenues have grown at a CAGR of 34%, EBITDA 9%, Profits 7% & Cash Flow 23% over 6 years.

Why Buy Now: 1) The Kochi plant utilization will improve with the addition of linkage gas pipelines in the next 1 year. 2) The Dahej facility will add 50% capacity in the next 2 years, which is already connected to consumers. 3) We anticipate the fall of LNG prices in the spot market, which will grow gas demand. 4) The PLNG share is today at 22% below the 185 high of Aug 2011. Thus the current market price offers an attractive entry point with a low downside probability.

Petronet LNG – Description and Profile

  • Petronet LNG (PLNG) imports, regassifies & sells gas in India, and is a JV of GAIL, ONGC, Indian Oil and BPCL.
  • Turnover in FY14 was Rs.37,747 cr. and PAT 711 cr. PLNG owns and operates two LNG terminals, at Dahej, Gujarat (capacity 10 million metric ton per annum – mmtpa) and Kochi (5 mmtpa).
  • Long-term contracts are in place for LNG supply from RasGas-Qatar (7.5 mmtpa), Exxon Mobil-Australia (1.44 mmtpa) and Gaz De France (0.6 mmtpa). These are at lower prices than spot prices.
  • PLNG also takes spot cargoes to meet demand and utilize available capacity. Spot price of LNG has been rising from 3-4 $/mmbtu a few years ago to 17-18 $/mmbtu today.
  • Sales of the long-term contracted gas are through GAIL, IOCL & BPCL, where PLNG keeps a regasification margin. With 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.
  • India Ratings has upgraded PLNG long-term issuer rating to ‘IND AA+’ from ‘IND AA’ while its Short-Term Issuer rating has been affirmed at ‘IND A1+’. The Outlook on the Long-term rating is Positive.
  • Shareholdings pattern is: Promoters 50%, MFs/ DII 4.8%; FIIs 18.9%, Individuals retail /HNI 13.4%, Bodies Corporate & others 12.9%.
  • PLNG has a private company status (PSU holdings <51%) that gives it operational flexibility.
  • Key Executives: Dr. AK Balyan (MD/CEO), Rajender Singh (Dir. Technical) and R K Garg (Dir. Finance).

Current Projects

  • PLNG has signed agreements to supply LNG to bulk consumers in Power, Refineries & Fertilizers.
  • Its joint venture with Adani Port for bulk Solid Cargo, Adani Petronet Port at Dahej, has commissioned its second jetty expanding its capacity to 20 MT/ year at an investment of 750 cr.
  • PLNG also directly markets LNG through trucks to LNG hubs and Satellite Stations to customer premises in regions not serviced by pipelines under the Brand name of Tarai Gas.
  • The recently commissioned Kochi terminal is being utilized to the extent of only 8%. PLNG set up the plant successfully, but its connectivity to demand centers through pipelines has been delayed inordinately. See Fig 1.
Demand Centers for PLNG Kochi, JainMatrix Investments

Fig 1 – Demand Centers for PLNG Kochi, JainMatrix Investments

(Click on any image in this report to enlarge)

  • GAIL is tasked with the creation of the Kochi/ Mangalore/Bangalore pipeline. This ran into local and political opposition, which delayed it. It is anticipated that this crucial infrastructure will be created in the next 12 months.

Future Plans

  • PLNG is exploring supply of LNG to coastal area consumers with LNG Vessels.
  • PLNG has signed the term sheet for a LNG Terminal at Gangavaram Port, AP, of 5 mmtpa capacity. It will be commissioned by 2016, at an investment of 4,500 cr. It received the MoEF clearance for 10 mmtpa LNG facilities.
  • PLNG board has approved setting up of a wind power generation plant of 40 MW at a cost of 250 cr. Commissioning is expected in next one year.

News

  • Oman may buy stake in PLNG’s planned unit at Gangavaram Port, of about 10-15% in this project, the Gulf nation’s oil minister Mohammed bin Hamad Al Rumhy said.
  • PLNG will lease out almost half of the capacity at its Dahej liquefied natural gas (LNG) terminal from 2017 as prices for the high-cost fuel have cut demand. PLNG has signed 20-year deals to lease 6 mmtpa of the terminal’s capacity to GAIL, IOC, BPCL and the GSPC in Gujarat.
  • PLNG is bullish on the domestic demand for LNG. The company will continue importing LNG in future and expects LNG prices to drop to $15/mmbtu in near-term from $17-18/mmbtu currently.
  • PLNG wants IOC to drop Ennore LNG terminal project. With Indian Oil Corp (IOC) planning to set up two LNG terminals on the east coast, PLNG has raised the issue of duplicate infrastructure and has offered to meet all of its gas needs through the Gangavaram facility.
  • PLNG plans to lease out one of the two storage tanks at its newly commissioned Kochi terminal to make the under-utilized facility commercially viable.

Industry Notes

  • Gas is a better fuel than Coal, Oil and Nuclear. It burns almost completely, so is the cleanest fuel.
  • India is a major gas/LNG consumer (13th position globally) and importer (5th largest).
  • The Indian economy is growing at a CAGR of 6-7% with similar growth in energy consumption.
  • Oil regulator PNGRB has extended the last date of bidding for licenses to retail CNG and piped cooking gas in 14 cities, including Bengaluru and Pune, by three months to 12 May’14.
  • Following the nuclear disaster in Japan in March 2011, there has been a big spurt in demand and also spot prices of LNG in Asia. See Fig 2.
NatGas prices, JainMatrix Investments

Fig 2 – Natural Gas Spot Prices

  • The huge demand/supply gap for gas is expected to continue for years to come. The demand: supply ratio in ‘13-14 was 2.42 and is expected to reach 2.57 in 2019-20 and 3.1 in 2029-30. Se Fig 3.
  • Indian gas demand is expected to reach 713.5 mscmd by 2030, compared with a supply of 231.4 mscmd. Thus there is a pent-up demand for gas. Domestic supply of Natural gas from Reliance (Krishna Godavari), ONGC and Oil India wells has not scaled up to meet this demand.
Gas Demand Supply Gap, JainMatrix Investments

Fig 3 – Gas Demand Supply Gap

  • The share of natural gas in Indian energy basket should increase from 10% to 20% by 2050. Fig 4.
Energy Consumption, JainMatrix Investments

Fig 4 – Energy Consumption, JainMatrix Investments.                           (Click on any image to enlarge)

  • Other LNG terminals are Hazira (Shell, 3.6 mmtpa), RGPPL, Maharashtra (GAIL – NTPC JV 5 mmtpa).
  • Other proposed regasification terminals in the country are Pipavav LNG terminal, Mundra LNG terminal (JV of GSPC and Adani, 5mt/year), Ennore LNG terminal (JV of IOCL and TIDCO), Mangalore LNG terminal and Paradip LNG Terminal (GAIL, 4.8 mt/year)

Stock Evaluation, Performance and Returns

  • PLNG had its IPO in Mar’04 priced at Rs 15, and was subscribed 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.
  • PLNG at CMP of 146, has given IPO investors a 28% return CAGR in 11 years, Fig 5. The maiden dividend of Rs 1.3 was paid in 2007. Thereafter dividend has shown a steady increase.
PLNG Stock Returns, JainMatrix Investments

Fig 5 – PLNG Stock Returns, JainMatrix Investments

  • Revenues, EBITDA and Profits have grown at 34%, 9% and 7% CAGR over 6 years (Fig. 6).
  • The Quarterly Operating and Profit Margins have fallen from early years even as volumes have ramped up rapidly.  The Earnings per Share (EPS) grew till FY12 but has shown declines thereafter.
Quarterly Revenues and Profits, JainMatrix Investments

Fig 6 – Quarterly Revenues and Profits, JainMatrix Investments

  •  Cash flow and EPS have a robust growth rate Fig 7. The Cash flow from operations is up 23% CAGR, but annualized EPS is up only 7% CAGR over last 6 years.
  • With good cash flow, PLNG has repaid some debt and D/E has fallen to 0.61, quite good.
Cash Flow and EPS, JainMatrix Investments

Fig 7 – Cash Flow and EPS, JainMatrix Investments

  •  Price and PE chart (Fig 8) shows that the historical mean of PE is 14 times. PE today is 15.3 and so the stock is just above average valuations.
Price and PE Chart, JainMatrix Investments

Fig 8 – Price and PE Chart, JainMatrix Investments

  • Price and EPS quarterly graph, Fig 9, shows that EPS grew sharply in FY11-12, but recently it is in a declining trend.
  • We can see in Fig 9 that the share price anticipates EPS performance by about 1 year, in both EPS peaks and troughs. The current share recovery too appears to be factoring in a 2015 EPS gain. 
Price and EPS chart, JainMatrix Investments

Fig 9 – Price and EPS chart, JainMatrix Investments

  • The company has an interest coverage ratio of around 15.5 times which is good.
  • ROCE and RONW are over 25% in FY14, which is excellent.
  • Beta of the stock is 0.36 (Reuters) and this indicates much lower volatility to that of the Sensex.
  • PEG is at 0.32 – indicates safety and great value.

Opinion, Outlook and Recommendation

  • India continues to be fuel starved, with many projects suffering for lack of gas supply. Domestic gas findings have underperformed and there is a large demand supply gap.
  • All PLNG capacities are fully utilized except Kochi where there is a temporary delay in pipeline infra.
  • Our opinion is that Kochi capacity utilization will move to 30% (in 1 year) and 80% (2 years). The TN section pipeline – disputes should get resolved (6 months), and constructed (1 year thereafter).
  • We are confident that in 2 years not only the current capacities, but also newer additions will be well utilized. Gas volumes supplied by PLNG will double by end 2016.
  • The PLNG share is today at 22% below the 185 high of Aug 2011. The recent low was 102.5 in Jan 2014 from which it has recovered sharply. This fall is complete.
  • The worst is over for the PLNG stock and the next 2 years will see a recovery – both of the 2013 financials high, and the past peak share prices.
  • Invest now and systematically to gain from long-term out-performance.

JainMatrix Knowledge Base:

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Petronet LNG – A Solid Gas Company

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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.
Primary Energy consumption – World and India, JainMatrix Investments

Fig 1 – Primary Energy consumption – World and India, click to enlarge image

  • 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.
Natural Gas Prices, JainMatrix Investments

Fig 2 – Natural Gas Prices

  • 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 Price Chart

Fig 3 – Petronet LNG Price Chart, JainMatrix Investments

  • 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.
Petronet LNG stock performance, JainMatrix Investments

Fig 4 – Petronet LNG stock performance, JainMatrix Investments, click to enlarge

  • 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%.
Quarterly Sales and Margins, JainMatrix Investments

Fig 5 – Quarterly Sales and Margins, JainMatrix Investments

  •  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.
Cash Flow and EPS, JainMatrix Investments

Fig 6 – Cash Flow and EPS, JainMatrix Investments, , click to enlarge image

  • 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 PE Chart, JainMatrix Investments

Fig 7 – Price and PE Chart, JainMatrix Investments

Price and EPS Chart, JainMatrix Investments

Fig 8 – Price and EPS Chart, JainMatrix Investments, , click to enlarge image

  • 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 2nd half FY12 when the Kochi terminal is launched, and then 2nd 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
Benchmarking, JainMatrix Investments

Fig 9 – Benchmarking, JainMatrix Investments

  • 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.
Financial Projections, JainMatrix Investments

Fig 10 – Financial Projections, JainMatrix Investments

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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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.
JainMatrix Investments

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%.
JainMatrix Investments

Fig 2 – Petronet LNG stock performance – Click to expand

JainMatrix Investments

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
JainMatrix Investments

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.
JainMatrix Investments

Fig 5 – Price and PE Graph

JainMatrix Investments

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

JainMatrix Investments

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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Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .  Also see: https://jainmatrix.wordpress.com/disclaimer/