PETRONET LNG High spot prices continue to dent demand: Edelweiss

We recently met the Petronet LNG (PLNG) management to get an update
on current LNG demand trend. As mentioned in our earlier update,
Volume outlook weak, dated September 10, 2013, high spot LNG prices
and INR depreciation continue to dent demand. While investors’ concern
so far had centered on utilisation of new capacity, we believe it is now
shifting to volume decline in existing operations. We estimate FY14 overall
volumes remaining flat despite commencement of Kochi facility, leading to
EPS decline over FY14/15. Maintain ‘HOLD’ with target price of INR131.

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Spot LNG prices to remain tight
PLNG expects the spot LNG market to remain tight till CY15 end, after which new
supplies from Australia/East Africa/US will come on stream. Spot prices are currently
around USD17-18/mmbtu and expected to remain high due to winter demand. The
company is unable to source spot LNG currently, due to high demand during sudden
sharp winter. We believe that due to (1) high prices, (2) nil power demand due to high
LNG prices, and (3) easing of power deficit; LNG demand is likely to remain tepid. Hence,
operating rates of new/planned terminals will be a serious concern.
Long term and tolling to remain core strategy
While PLNG’s current operating capacity is 11mtpa, (a) the second jetty at Dahej (up by
May 2014 – further delay of 2 months) will add ~2.0mtpa, and (b) increased re-gas
capacity will add 5mtpa (guidance of Dec 2016). This will take total capacity to 15mtpa.
Of this, while 7.5mtpa will be under long-term contracts, PLNG has already sold 2.25mtpa
to GSPC and 2.5mtpa to GAIL. Strategically, PLNG plans to de-risk itself by focusing on
collecting guaranteed tolling margins instead of relying on spot markets. Hence,
investors may expect further such tolling deals. Phase-2 pipeline from Kochi-Mangalore
will take at least a year, post which it will add 1.2mtpa demand (MCF, MRPL). Kochi
terminal reported a loss of INR350mn in Q2FY14 and PLNG expects a minor loss at the
EBITDA level going forward. We estimate FY14 and FY15 Kochi EBIT loss at INR0.9bn and
INR1.4bn, respectively.
Outlook and valuations: Earnings decline likely; maintain ‘HOLD’
Key headwinds: (1) lower spot demand at Dahej; (2) losses at Kochi terminal; and (3)
pipeline RoW issues in Tamil Nadu, leading to EPS fall over FY14/15. Maintain ‘HOLD/Sector
Performer’ with a TP of INR131, noting that valuations are attractive at 7.6x FY15E CEPS.

Company Description
PLNG is the largest domestic player in India importing, storing and regasifying LNG. It has a
unique risk-free business model, generating revenues by charging re-gasification 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 promoters —
GAIL India, Indian Oil Corporation (IOCL), and Bharat Petroleum Corporation (BPCL). PLNG
owns and operates a LNG terminal at Dahej, Gujarat with a nameplate capacity of 10 mmtpa
in FY13. It has recently commissioned a 5 mmtpa terminal at Kochi.
Investment Theme
The key to PLNG will be volume growth, driven by commissioning of the 5 mmtpa LNG
terminal at Kochi and expansion of the Dahej LNG terminal to 15 mmtpa. In the near term,
while the Kochi terminal has been commissioned in August 2013, LNG offtake will be an
issue due to pipeline issues. Also, weak industrial demand could lead to lower marketing
margin on spot cargoes. Key upside triggers are: (i) improvement in spot demand; (ii) clarity
on utilisation rate post expansion at Dahej and new terminal at Kochi.
Key Risks
Current annual escalation of 5% in re-gasification charges may not persist after a while if it
begins to impact the demand.
High gas prices may lower demand for R-LNG, thus making it unviable for PLNG to source
more long term supplies.
Increase in domestic gas production and start of other LNG terminals in the country could
lead to lower utilisation for PLNG.