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Petronet LNG Limited- Fuelling India’s gas needs
Investment rationale
Natural Gas availability - The future does not look so bright
Gas demand in India is projected to grow to 305mmcmd by FY14e. However,
MoP&G's projections puts expected gas supply in most optimistic scenario at
201mmcmd by FY16e leaving a huge shortfall, further accentuated by delay
in ramp up of KG-D6 output. Petronet LNG Limited (PLL) stands to benefit from
this natural gas deficit which can be met through increased LNG import
volumes only.
PLL re-gasification capacity expansion coming at the right time
Increase in Dahej re-gasification capacity to 11.5mmtpa in FY10 and further
to 14.5mmtpa along with 2.5-5mmtpa Kochi terminal would increase PLL's
re-gasification capacity to ~20mmtpa by end of FY13E implying a CAGR of
20% over FY10-13e. Kochi expansion plans have also been brought forward
to FY13e from FY14-15e which indicates the potential of LNG demand growth
that PLL is foreseeing.
Concerns of PLL re-gasification charges being too high, are overstated
We believe concerns over PLL charging higher re-gas tariff, are not justified.
Our economic model of setting up a green field 5mmtpa LNG terminal needs
atleast INR55/mmbtu of re-gasification tariff to earn a post tax ROCE of 12%
(~regulated return). Though earning just regulated returns may not justify the
substantial risk in sourcing LNG and managing sales contract. PLL's much
lower Dahej re-gasification charges of INR32/mmbtu, reduces concerns on
the same.
Valuation and outlook
We currently value PLL based on DCF methodology assuming average regas
tariff increase of 4% till FY12e and 1% thereafter, capacity of 19mmtpa by
FY14e, long-term capacity utilisation of 88%, WACC of 11% and terminal
growth rate of 1%. We recommend a BUY with a price target of INR143/
share, providing an upside of 14% from current levels.
Investment rationale
Gas demand in India - strong demand from priority sector
There is a huge gap between demand and supply of gas in India, which has necessitated
the need for new sources of gas. Power and fertilizers are the largest consumers of
natural gas in India, together comprising around 65% of domestic demand.
Demand for natural gas by various priority sectors identified by the EGoM is expected
to grow to 266mmcmd by FY14e from present supplies of 136mmcmd. This results in
18% CAGR growth in demand growth from priority sector over FY10-14e
As opposed to the rising demand conditions, natural gas production is not expected
to rise by much over the next 5-6 years, according to estimates by the petroleum
ministry. Total availability of domestic gas during FY11e has been pegged at
143mmcmd and will go up only to 187mmcmd by FY16e, an increase of just
44mmcmd. Even the most optimistic estimates assume the availability of natural gas
at 202mmcmd by FY16e, an increase of 59mmcmd.
LNG import volumes to plug the gap
This clearly paves way for PLL to meet the deficit through imported LNG volumes. XI-XII
Plan estimated for LNG supply outlook further confirms our optimism. According to
the ministry of Petroleum, LNG supply is going to rise from 32mmcmd in FY08 to
60mmcmd in FY12e and further to 109mmcmd in FY17e implying a CAGR of 15%
for the next 5-6 years. LNG is thus expected to form almost 42% of total gas supply by
FY17e even under most conservative estimates.
PLL re-gasification capacity expansion comes at the right time
Dahej re-gasification capacity has been increased from 6.5mmtpa to 10mmtpa (effective
1.5mmtpa) in FY10. PLL is also commissioning a new 2.5mmtpa Kochi terminal which
s expected to be completed in 4QFY12e. Kochi terminal would be further expanded
to 5mmtpa back to back in FY13e, with minimal capex of INR3bn. PLL is also planning
to set up another jetty at Dahej with a capex of INR9.5bn, which would increase the
capacity of Dahej terminal by another 3-4mmtpa and is expected to be commissioned
by mid FY13e. Thus, PLL's re-gasification capacity is slated to rise from 11.5mmtpa
currently to ~20mmtpa by FY13e, implying a CAGR of 20% over FY10-13e. Another
point to note is that the Kochi expansion plan for another 2.5mmtpa capacity addition
was earlier planned for FY14-15e which has now been brought forward to FY13e.
This clearly indicates the potential of LNG demand growth that PLL is foreseeing and
is in a favourable position to capitalise on the same, in our view.
Concerns over PLL’s re-gasification charges being too high, are
overstated
We analysed the economics of setting up of a green-field 5MMtpa LNG terminal with
initial capital costs of INR44bn, similar to the capex budgeted by IOC for its Ennore
LNG terminal. Our analysis reveals that such an LNG terminal needs atleast INR55/
mmbtu of re-gas tariffs to earn post tax RoCE of 12%, i.e regulated returns. We,
however, believe that earning just regulated returns do not justify the substantial risk in
sourcing LNG and managing sales contract. Thus, concerns over higher re-gasification
tariff charged by PLNG are not justified, in our view.
Furthermore, at regulated return, the required charges are significantly higher than
PLNG's re-gas tariff of INR32/mmbtu at Dahej, and hence do not pose any risk of
regulation.
As per management guidance, we expect the gross re-gasification charges on
contracted sales for the Dahej terminal to increase by 4% in FY11e and thereafter by
1% each year. However, management maintains that this is subject to negotiations
with the contracted LNG off-takers.
For the new 2.5mmtpa Kochi terminal, we have assumed gross re-gasification margin
of INR55/mmbtu in FY13 based on management guided post tax equity IRR of 15-
16%. This is however 15-30% lower than the management guided INR80-82/mmbtu
for the initial 1.5mmt of LNG sales from Kochi terminal and INR64-65/mmbtu as
sales increase to 2.5mmt. Moreover management was confident of securing regasification
margins at INR64-65 even for additional 2.5mmt of sales after Kochi
terminal capacity is expanded to 5mmtpa. The lower re-gas charges as compared to
new project economics would help PLNG to keep competition away.
No concerns on regulating re-gasification charges
Re-gasification charges currently do not fall under any government regulations. Our
interaction with the senior MOP&G officials indicated that PNGRB would not bring
regassification charges under purview and this is not even at the thinking levels of
government think tanks. Our analysis also indicates that PLL's re-gasification tariffs will
be significantly lower than that required for green field LNG terminals, going forward
helping it to reduce regulatory concerns.
Valuation and outlook
We currently value PLL based on DCF methodology assuming average regassification
tariff increase of 4% for FY12e and 1% thereafter. Key assumptions for our DCF
valuation are: capacity of 19mmtpa by FY14e, long-term capacity utilisation of 88%,
WACC of 11% and terminal growth rate of 1%.
We reiterate a BUY with a price target of INR143/ share, providing an upside of 14%
from current market prices. We are currently not assigning any value to the company's
port and power project, given the limited visibility around the financial returns from
the same.
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