Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Petronet LNG (PLNG), Indraprastha Gas (IGL), and Gujarat Gas (GGAS)
have strong defensive allure in view of their domestic-oriented growth
visibility. We believe the 15-26% stock performance over the past three
months does, however, price in the defensive attributes even as we see
challenges to the growth trajectory from infrastructure constraints and
price acceptability of LNG. We downgrade PLNG and GGAS to Neutral,
and stay UW on IGL.
We have been wrong on IGL, so far: IGL has been one of the
strongest performers in the Indian gas utility space. Pricing power and
strong volume growth in the piped gas segment has led to better-thanexpected
margins and earnings. In our view, the stock price builds in
optimism about continued volume growth, which could be challenging
in the piped gas segment, with incremental growth dependent on highcost
LNG. While we continue to expect robust growth in the PNG
segment, we believe this growth will entail margin sacrifice as spot LNG
prices are near those of their liquid fuel equivalents (fuel oil).
PLNG – margins at a high; infrastructure constraints bite: PLNG's
strong 1Q FY12 results reflect the bid on LNG capacity we had
expected. With spot volumes constrained by infrastructure over the next
1.5 years, and with little scope for margin expansion, we believe the
current stock price is building in a premium for limited regas capacity in
India. Consequently, we downgrade the stock to Neutral. Clarity on the
domestic gas ramp-up would be negative for stock performance.
GGAS – better adjusted CGD: GGAS’s business model and stock
price are better aligned to the challenges facing CGDs, in our view.
Management has a cogent strategy to meet supply and margin
challenges. While we remain positive on the LT prospects for CGD, we
believe GGAS’s performance will be constrained, especially after the
26% performance over the past four months. Downgrade to Neutral.
Risks to our view – defensive allure could be too strong to resist:
While we believe the stock prices reflect the growth opportunity for gas
utilities in India, with little allowance for operational slippage, we note
that in the current market conditions, the stocks provide good visibility
on growth given their micro, domestic biases.
Clouds on the horizon
The downstream gas utility names – IGL, PLNG and GGAS – have performed well,
delivering 15-26% gains over the past three months, as robust end consumer demand
has afforded companies pricing power even as a shortage of domestic gas supplies
has increased the demand for LNG.
While the outlook on demand remains fairly healthy, headwinds have appeared on
the horizon: (i) near-term constraints on LNG supplies could impact the ability to
grow volumes/protect margins for the CGD players, while moderating earnings
growth at PLNG; (ii) LNG prices remain elevated, and are approaching liquid fuel
levels – this could begin to impact demand, particularly from industrial users; (iii)
rupee depreciation affects domestic pricing of LNG, and could necessitate further
price rises; and (iv) valuations look stretched – the stocks are between 1 and 2
standard deviations above mean multiples. While this reflects a re-rating due to
increasing gas demand/usage in India, we believe that stocks are fairly valued at
these levels.
Infrastructure constraints
PLNG has seen a significant increase in capacity utilization, as the stagnation in
domestic gas supplies has spurred LNG demand. However a significant increase in
gas volumes from current levels will be difficult due to infrastructure constraints.
Table 1: PLNG projects
Project Timeline
Kochi Sep '12
Dahej - jetty Sep-Dec '13
Dahej - expansion End FY16
Source: Company data, J.P. Morgan estimates.
With the Kochi terminal expected to start up/stabilize by the end of CY12,
meaningful volumes will begin only in FY14, while the first stage of Dahej
expansion (2nd jetty) is expected to be completed towards the end of CY13. In
addition, the second stage of Dahej expansion (addition of vaporizers, tankages) will
take 42-48 months to complete.
As a result, volume growth will necessarily be muted over the near term, and
earnings will be dependent on margins – which could be harder to protect as spot
prices continue to rise.
LNG prices rising
Spot LNG prices have continued to rise over the past few months – these are now
close to liquid fuel levels, and could begin to have an impact on demand from
industrial users. A key issue here, if prices rise further, would be margins. IGL and
GGAS have thus far passed on input cost increases to customers – if demand falters,
margins could be affected. PLNG has been able to levy lucrative marketing margins
on its spot cargos, but these could soften if demand begins to weaken. In particular,
we expect spot LNG prices to be firm in the winter, which could affect near-term
industrial consumption growth.
Rupee depreciation
Exacerbating the rise in LNG prices has been the recent depreciation in the rupee
(8% since August). This could necessitate larger price increases, reducing the
wriggle room for CGD companies.
Valuations
The stocks are all trading at the upper end of their trading ranges (1-2SD above
mean). While this does reflect a re-rating over historical levels due to growing Indian
gas demand/usage and the defensive allure of these stocks, we believe stocks are now
fairly priced. Based on our DCF models, we see 4-6% upside potential for
GGAS/PLNG and 3% downside for IGL.
Indraprastha Gas
Stock performance has been impressive….: IGL has been a strong performer in
the gas utility space, with a combination of robust volume growth and resilient
pricing power. Domestic growth bias has added to the defensive allure of IGL,
further spurring stock performance.
….but continues to price in very high growth: The stock continues to price in
very high growth along with continued margin resilience, in our view. Given that
spot LNG prices are now in-line with liquid fuel equivalents (fuel oil), we believe
current levels of volume/margin expansion are unlikely to be sustainable.
Growth to moderate: While we continue to build in robust volume growth with
a 14% volume CAGR over FY11-16E, we expect CNG and PNG growth to
moderate after the CWG boost and as spot LNG prices impact PNG growth.
Remain UW: We retain our UW rating on IGL, with a revised Sep-12 price
target of Rs410. Our price target is based on a three-stage DCF model, which
uses explicit forecasts through to FY16, and a five-year intermediate growth stage
of 8%. Risks to our view include higher-than-expected volume growth.
Valuation, price target and assumptions
We retain our UW rating on IGL, and raise our price target to Rs410 from Rs305.
The price target increase is a result of our estimate changes and rolling forward our
timeframe from Sep-11 to Sep-12. Our price target is DCF-based (three-stage), and
uses a WACC of 11.6%, five years of explicit forecasts, and an intermediate growth
stage of 8%. Key risks to our call are higher-than-expected volume growth, and
improving margins.
Petronet LNG Ltd.
Domestic ramp-up delays has bid up LNG capacities: PLNG has performed
exceptionally well against the backdrop of unexpected stagnant domestic gas
production, as buyers bid up LNG capacities. However, hereon we expect
capacity constraints to moderate growth.
Capacity constraints to come to the fore: With the Kochi terminal expected to
be commissioned towards the end of CY12, and the second jetty at Dahej
expected to receive cargos at the end of CY13, PLNG is likely to face capacity
constraints on its growth over the near term. The recently announced ramp-up of
Dahej capacity to 17-18MMT is ~3.5-4 years away from being completed.
Kochi regas margins could face pressure: With LNG prices continuing to
climb higher, the economics of many offtakers are being affected. It is unlikely
that power plants would be able to run solely on LNG. As a result, the
remunerative margins at Kochi could be threatened. We assume a 20% cut to
contracted regas margins (which still remain attractive).
Downgrade to Neutral: We downgrade PLNG to Neutral, with a new Sep-12
price target of Rs190 (DCF based). Key downside risks to our rating and price
target include a road-map to ramp up domestic production. Key upside risks are a
lack of growth in domestic supplies and a moderation in LNG prices.
Valuations, price target and assumptions
We downgrade PLNG to Neutral, as we expect near-term capacity constraints to
moderate growth. We raise our price target to Rs190 from Rs160, as a result of our
earnings estimate revisions and rolling forward our timeframe from Sep-11 to Sep-
12. Our DCF analysis uses a WACC of 11.7%. Key upside risks to our call include a
continued lack of growth in domestic supplies and a moderation in LNG prices.
Downside risks include a roadmap for domestic gas supply ramp up.
Gujarat Gas Ltd
Well placed CGD, but fairly priced: While GGAS is well placed to meet
challenges facing CGD businesses, the recent outperformance registered by the
stock makes it fairly priced, in our view. We expect to see a 15% earnings CAGR
based on c.13% volume growth.
Challenges can be faced: While existing geographies provide visibility for 8-
10% growth, and new geographies will act as a catalyst, current headwinds in
terms of LNG prices (large industrial customer base) could impact ability to
maintain margins. However, GGAS does have a cogent strategy in place to meet
such challenges, and we are fundamentally positive on its prospects.
LNG will increase in supply mix: With limited visibility of domestic gas supply
ramp-up, Gujarat Gas is looking to secure additional LNG to meet growth
requirement in its existing geographies. Strong parent linkage (BG owns 65% of
GGAS) would be an advantage to secure additional LNG given BG's global LNG
portfolio (20mtpa by 2015). We project LNG will rise to ~50% of supply mix
over next 3 years and note this would require additional 1.6mmscmd LNG by
2013.
Downgrade to Neutral: We downgrade GGAS to Neutral and retain our Jun-12
price target of Rs460. Our fair value estimate for the company is based on a
three-stage DCF (WACC – 12.5%) with five years of explicit forecasts,
intermediate growth of 8% and 3% terminal growth. Lower volumes are a key
downside risk, while new geography wins are an upside risk.
Valuations, price target & assumptions
We downgrade GGAS to Neutral, and maintain our June-12 price target of Rs460.
Our target is three-stage DCF based, and uses a WACC of 12.5%, five years of
explicit forecasts and an intermediate growth phase of 8%. Key downside risks to our
PT and rating are a lack of customer acceptance of higher prices due to higher LNG
proportion, and a failure to secure LNG supplies. A key upside risk is new
geographic growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Petronet LNG (PLNG), Indraprastha Gas (IGL), and Gujarat Gas (GGAS)
have strong defensive allure in view of their domestic-oriented growth
visibility. We believe the 15-26% stock performance over the past three
months does, however, price in the defensive attributes even as we see
challenges to the growth trajectory from infrastructure constraints and
price acceptability of LNG. We downgrade PLNG and GGAS to Neutral,
and stay UW on IGL.
We have been wrong on IGL, so far: IGL has been one of the
strongest performers in the Indian gas utility space. Pricing power and
strong volume growth in the piped gas segment has led to better-thanexpected
margins and earnings. In our view, the stock price builds in
optimism about continued volume growth, which could be challenging
in the piped gas segment, with incremental growth dependent on highcost
LNG. While we continue to expect robust growth in the PNG
segment, we believe this growth will entail margin sacrifice as spot LNG
prices are near those of their liquid fuel equivalents (fuel oil).
PLNG – margins at a high; infrastructure constraints bite: PLNG's
strong 1Q FY12 results reflect the bid on LNG capacity we had
expected. With spot volumes constrained by infrastructure over the next
1.5 years, and with little scope for margin expansion, we believe the
current stock price is building in a premium for limited regas capacity in
India. Consequently, we downgrade the stock to Neutral. Clarity on the
domestic gas ramp-up would be negative for stock performance.
GGAS – better adjusted CGD: GGAS’s business model and stock
price are better aligned to the challenges facing CGDs, in our view.
Management has a cogent strategy to meet supply and margin
challenges. While we remain positive on the LT prospects for CGD, we
believe GGAS’s performance will be constrained, especially after the
26% performance over the past four months. Downgrade to Neutral.
Risks to our view – defensive allure could be too strong to resist:
While we believe the stock prices reflect the growth opportunity for gas
utilities in India, with little allowance for operational slippage, we note
that in the current market conditions, the stocks provide good visibility
on growth given their micro, domestic biases.
Clouds on the horizon
The downstream gas utility names – IGL, PLNG and GGAS – have performed well,
delivering 15-26% gains over the past three months, as robust end consumer demand
has afforded companies pricing power even as a shortage of domestic gas supplies
has increased the demand for LNG.
While the outlook on demand remains fairly healthy, headwinds have appeared on
the horizon: (i) near-term constraints on LNG supplies could impact the ability to
grow volumes/protect margins for the CGD players, while moderating earnings
growth at PLNG; (ii) LNG prices remain elevated, and are approaching liquid fuel
levels – this could begin to impact demand, particularly from industrial users; (iii)
rupee depreciation affects domestic pricing of LNG, and could necessitate further
price rises; and (iv) valuations look stretched – the stocks are between 1 and 2
standard deviations above mean multiples. While this reflects a re-rating due to
increasing gas demand/usage in India, we believe that stocks are fairly valued at
these levels.
Infrastructure constraints
PLNG has seen a significant increase in capacity utilization, as the stagnation in
domestic gas supplies has spurred LNG demand. However a significant increase in
gas volumes from current levels will be difficult due to infrastructure constraints.
Table 1: PLNG projects
Project Timeline
Kochi Sep '12
Dahej - jetty Sep-Dec '13
Dahej - expansion End FY16
Source: Company data, J.P. Morgan estimates.
With the Kochi terminal expected to start up/stabilize by the end of CY12,
meaningful volumes will begin only in FY14, while the first stage of Dahej
expansion (2nd jetty) is expected to be completed towards the end of CY13. In
addition, the second stage of Dahej expansion (addition of vaporizers, tankages) will
take 42-48 months to complete.
As a result, volume growth will necessarily be muted over the near term, and
earnings will be dependent on margins – which could be harder to protect as spot
prices continue to rise.
LNG prices rising
Spot LNG prices have continued to rise over the past few months – these are now
close to liquid fuel levels, and could begin to have an impact on demand from
industrial users. A key issue here, if prices rise further, would be margins. IGL and
GGAS have thus far passed on input cost increases to customers – if demand falters,
margins could be affected. PLNG has been able to levy lucrative marketing margins
on its spot cargos, but these could soften if demand begins to weaken. In particular,
we expect spot LNG prices to be firm in the winter, which could affect near-term
industrial consumption growth.
Rupee depreciation
Exacerbating the rise in LNG prices has been the recent depreciation in the rupee
(8% since August). This could necessitate larger price increases, reducing the
wriggle room for CGD companies.
Valuations
The stocks are all trading at the upper end of their trading ranges (1-2SD above
mean). While this does reflect a re-rating over historical levels due to growing Indian
gas demand/usage and the defensive allure of these stocks, we believe stocks are now
fairly priced. Based on our DCF models, we see 4-6% upside potential for
GGAS/PLNG and 3% downside for IGL.
Indraprastha Gas
Stock performance has been impressive….: IGL has been a strong performer in
the gas utility space, with a combination of robust volume growth and resilient
pricing power. Domestic growth bias has added to the defensive allure of IGL,
further spurring stock performance.
….but continues to price in very high growth: The stock continues to price in
very high growth along with continued margin resilience, in our view. Given that
spot LNG prices are now in-line with liquid fuel equivalents (fuel oil), we believe
current levels of volume/margin expansion are unlikely to be sustainable.
Growth to moderate: While we continue to build in robust volume growth with
a 14% volume CAGR over FY11-16E, we expect CNG and PNG growth to
moderate after the CWG boost and as spot LNG prices impact PNG growth.
Remain UW: We retain our UW rating on IGL, with a revised Sep-12 price
target of Rs410. Our price target is based on a three-stage DCF model, which
uses explicit forecasts through to FY16, and a five-year intermediate growth stage
of 8%. Risks to our view include higher-than-expected volume growth.
Valuation, price target and assumptions
We retain our UW rating on IGL, and raise our price target to Rs410 from Rs305.
The price target increase is a result of our estimate changes and rolling forward our
timeframe from Sep-11 to Sep-12. Our price target is DCF-based (three-stage), and
uses a WACC of 11.6%, five years of explicit forecasts, and an intermediate growth
stage of 8%. Key risks to our call are higher-than-expected volume growth, and
improving margins.
Petronet LNG Ltd.
Domestic ramp-up delays has bid up LNG capacities: PLNG has performed
exceptionally well against the backdrop of unexpected stagnant domestic gas
production, as buyers bid up LNG capacities. However, hereon we expect
capacity constraints to moderate growth.
Capacity constraints to come to the fore: With the Kochi terminal expected to
be commissioned towards the end of CY12, and the second jetty at Dahej
expected to receive cargos at the end of CY13, PLNG is likely to face capacity
constraints on its growth over the near term. The recently announced ramp-up of
Dahej capacity to 17-18MMT is ~3.5-4 years away from being completed.
Kochi regas margins could face pressure: With LNG prices continuing to
climb higher, the economics of many offtakers are being affected. It is unlikely
that power plants would be able to run solely on LNG. As a result, the
remunerative margins at Kochi could be threatened. We assume a 20% cut to
contracted regas margins (which still remain attractive).
Downgrade to Neutral: We downgrade PLNG to Neutral, with a new Sep-12
price target of Rs190 (DCF based). Key downside risks to our rating and price
target include a road-map to ramp up domestic production. Key upside risks are a
lack of growth in domestic supplies and a moderation in LNG prices.
Valuations, price target and assumptions
We downgrade PLNG to Neutral, as we expect near-term capacity constraints to
moderate growth. We raise our price target to Rs190 from Rs160, as a result of our
earnings estimate revisions and rolling forward our timeframe from Sep-11 to Sep-
12. Our DCF analysis uses a WACC of 11.7%. Key upside risks to our call include a
continued lack of growth in domestic supplies and a moderation in LNG prices.
Downside risks include a roadmap for domestic gas supply ramp up.
Gujarat Gas Ltd
Well placed CGD, but fairly priced: While GGAS is well placed to meet
challenges facing CGD businesses, the recent outperformance registered by the
stock makes it fairly priced, in our view. We expect to see a 15% earnings CAGR
based on c.13% volume growth.
Challenges can be faced: While existing geographies provide visibility for 8-
10% growth, and new geographies will act as a catalyst, current headwinds in
terms of LNG prices (large industrial customer base) could impact ability to
maintain margins. However, GGAS does have a cogent strategy in place to meet
such challenges, and we are fundamentally positive on its prospects.
LNG will increase in supply mix: With limited visibility of domestic gas supply
ramp-up, Gujarat Gas is looking to secure additional LNG to meet growth
requirement in its existing geographies. Strong parent linkage (BG owns 65% of
GGAS) would be an advantage to secure additional LNG given BG's global LNG
portfolio (20mtpa by 2015). We project LNG will rise to ~50% of supply mix
over next 3 years and note this would require additional 1.6mmscmd LNG by
2013.
Downgrade to Neutral: We downgrade GGAS to Neutral and retain our Jun-12
price target of Rs460. Our fair value estimate for the company is based on a
three-stage DCF (WACC – 12.5%) with five years of explicit forecasts,
intermediate growth of 8% and 3% terminal growth. Lower volumes are a key
downside risk, while new geography wins are an upside risk.
Valuations, price target & assumptions
We downgrade GGAS to Neutral, and maintain our June-12 price target of Rs460.
Our target is three-stage DCF based, and uses a WACC of 12.5%, five years of
explicit forecasts and an intermediate growth phase of 8%. Key downside risks to our
PT and rating are a lack of customer acceptance of higher prices due to higher LNG
proportion, and a failure to secure LNG supplies. A key upside risk is new
geographic growth.
No comments:
Post a Comment