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PETRONET LNG
Robust quarter
Result beats estimates; EBITDA jumps on back of higher volumes
In Q3FY11, Petronet LNG (PLNG) reported net revenue of INR 36.3 bn, marginally
below our expectation of INR 36.8 bn. Total regasification volumes processed
during the quarter stood at 2.31 MMT (up 20% Q-o-Q and 25.7% Y-o-Y due to
higher long-term volumes as well as spot volumes). EBITDA, at INR 3.5 bn,
jumped 65.6% Y-o-Y and 27.2% Q-o-Q on the back of higher regasification
charges (Y-o-Y and Q-o-Q), profits in spot gas trading against losses (Y-o-Y), and
higher re-gas volumes (Y-o-Y and Q-o-Q). Higher operating costs (+29.7% Y-o-Y
and +37.5% Q-o-Q) and a dip in other income at INR 54 mn (INR 186 mn in
Q2FY11) partly offset the jump in EBITDA. Overall, PAT came in at INR 1.71 bn
(+105.3% Y-o-Y and +30.3% Q-o-Q) which was 6% ahead of our estimate (INR
1.62 bn). Regasification charges were steady at INR 31.76/mmbtu, with the
contribution margin being higher at USD 0.72/mmbtu out of net realisation of USD
6.76/mmbtu due to impact of higher markeitng margins.
New medium-term sourcing contracts signed; brighter outlook for spot
LNG processed from long-term contracts was higher than the contracted rate (7.5
MMTPA or 1.875 MMT/qtr). Long-term volumes during Q3FY11 were at 1.93 MMT
against 1.86 MMT in Q2FY11. In addition, PLNG processed 0.38 MMT of spot
volumes. The company has recently signed deals to source 1.1 MMTPA of LNG
annually for FY12 and FY13 and offtake agreements for the same have also been
finalised (mostly refineries). In another positive development during Q3FY11, Gail
India signed a medium-term contract to source 0.5 mmt/year (8 spot cargoes)
with Japan’s Marubeni Corp for three years starting January 2011, of which 0.25
mmtpa will be received at the Dahej LNG terminal, thus providing higher visibility
in spot volumes for PLNG from FY12.
Outlook and valuations: Triggers remain; maintain ‘BUY’
We are revising up our earnings estimates for PLNG to incorporate higher sales
volumes for FY12 (9.5 mmt from 9.0 mmt earlier) and FY13 (12.1 mmt from 11.88
mmt - inclusive of Kochi). Hence, we are also revising up PLNG’s fair value to INR
145/share (for March 2012) from INR 135 /share earlier. Upsides to our fair value
will come from contribution from the Dahej port (INR 7/share) and possiblility of
the Section 80IA tax benefit coming through (~INR 12-14/share), which we
believe will become clear by March–June 2011. Going forward, we expect higher
visibility in the company’s earnings to come from timely completion of GAIL’s
pipelines and commissioning of the Kochi LNG terminal by FY13. At INR 130, PLNG
is trading at P/E of 14.7x FY12E EPS and 11.0x FY13E EPS. We maintain
‘BUY/Sector Outperformer’ recommendation/rating on the stock.
Other key highlights
• PLNG board has approved expansion of the Kochi terminal to 5 MMTPA during Q3FY11.
The overall construction of the terminal has been slightly delayed and is now expected
to be commissioned by Q3FY13 (earlier March 2012).
• The company has awarded contracts for construction of additional jetty and associated
unloading facilities at Dahej. The same is expected to be commissioned by Q2FY14.
Spot LNG demand outlook for FY12 improves
We believe the outlook for spot volumes market in India has improved post recent fall in
Reliance Industries’ (RIL) natural gas production from its KG-D6 field to ~50 mmscmd
compared to an earlier guidance of 60 mmscmd. RIL may also seek to source LNG for
incremental gas requirement at its refineries.
The company has recently signed deals to source 1.1 MMTPA of LNG annually for FY12 and
FY13 and offtake agreements for the same have also been finalised (mostly refineries). In
another positive development during Q3FY11, Gail India signed a medium-term contract to
source 0.5 mmt/year (8 spot cargoes) with Japan’s Marubeni Corp for three years starting
January 2011, of which 0.25 mmtpa will be received at the Dahej LNG terminal, thus
providing higher visibility in spot volumes for PLNG from FY12.
Our industry sources have indicated that New Delhi state government has sought 3
mmscmd of gas from PLNG for its 1500 MW Pragati power plant. The first unit (750 MW) is
expected to become operational in September 2011, providing a possible visibility of
another 0.8 mmtpa of LNG from H2FY12.
Change in earnings estimates for FY12 to account for higher volumes
We are revising up our earnings estimates for PLNG to incorporate higher volumes for FY12
(9.5 mmt from 9.0 mmt earlier) and FY13 (12.1 mmt from 11.88 mmt - inclusive of Kochi)
on the back of improved outlook on spot LNG imports.
Outlook and valuations: Triggers remain; maintain ‘BUY’
We are revising up our earnings estimates for PLNG to incorporate higher sales volumes for
FY12 (9.5 mmt from 9.0 mmt earlier) and FY13 (12.1 mmt from 11.88 mmt - inclusive of
Kochi). Hence, we are also revising the fair value to INR 145/share (for March 2012) from
INR 135 /share earlier. Upsides to our fair value would come from contribution from the
Dahej port (INR 7/share) and possiblility of the Section 80IA tax benefit coming through
(~INR 12-14/share), which we believe will become clear by March–June 2011. Going
forward, we expect higher visibility in the company’s earnings to come from timely
completion of GAIL’s pipelines and commissioning of the Kochi LNG terminal by FY13. At
INR 130, PLNG is trading at P/E of 14.7x FY12E EPS and 11.0x FY13E EPS. We maintain
‘BUY/Sector Outperformer’ recommendation/rating on the stock.
Company Description
PLNG is the largest and sole domestic player in India importing, storing, and re-gasifying
LNG. It has a unique risk-free business model, generating revenues by charging regasification
margins on the imported LNG. Its supply and demand side risks are hedged
through a long-term sourcing contract from Ras-Gas Qatar and off take contracts from
three of its heavyweight promoters— GAIL India (GAIL), Indian Oil Corporation (IOCL),
and Bharat Petroleum Corporation (BPCL). PLNG owns and operates a LNG terminal at
Dahej, Gujarat, which had a nameplate capacity of 5.0 MMTPA till FY09 which was
expanded to 10 MMTPA in FY10 (operable at 11 mmtpa currently).
Investment Theme
With a new terminal coming up in Kochi (2.5 mmtpa by Q1CY12, expandable to 5
mmtpa) and a favorable environment for LNG in the Indian natural gas market, PLNG is
set to register a CAGR of 17.4% in gas import volumes over FY10-13E. Unit EBITDA
margins (INR/mmbtu) are likely to increase from INR 22/mmbtu in FY10 to INR
32/mmbtu in FY13E (13.8% CAGR) backed by higher re-gasification margins for the
Kochi terminal. We believe that upside triggers to the stock would come as: (i) PLNG ties
up long term/medium-term supply contracts for Dahej/Kochi terminals; (ii) completion of
GAIL’s pipelines (DVPL phase II), slated to be completed by March 2011, enabling Dahej
terminal’s volume expansion; (iii) spot volumes picking up with natural gas prices
remaining low and RIL capping its gas production from KG-D6 field; and (iv) start up of
PLNG’s Kochi terminal.
Key Risks
PLNG is planning to set up a 1,200 MW gas-based power plant at Dahej at an estimated
investment of USD 842 mn. Considering the high unit costs of generation, there is a lack
of clarity on whether the project would generate adequate returns.
Ramp up of domestic supplies from indigenous natural gas fields like RIL’s KG D6 from
FY12 can hamper the growing demand for R-LNG in the country.
Higher-than-expected dip in re-gasification charges due to relatively higher R-LNG prices.
High gas prices may lower demand for R-LNG, thus making it unviable for PLNG to
source more long term supplies.
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