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Petronet LNG (PLNG)
Energy
Concerns on high-priced imported LNG emerge. We believe the delay in signing
power purchase agreements (PPAs) for NTPC’s Kayamkulam power plant in Kochi
reflects unacceptability of high-priced LNG by the power sector. We have long
highlighted our concerns on acceptability of high-priced LNG by price-sensitive sectors
like power and fertilizers. We would advise investors to exercise caution in estimating
the potential demand for imported LNG in India in light of its high price in comparison
to alternate fuels. We retain our SELL rating on Petronet LNG with a target price of
`100.
NTPC expresses inability to find buyers of power generated from high-priced LNG
As per media reports, NTPC has asked Petronet LNG to cut the price of LNG given its inability to
sign power purchase agreements (PPAs) with state governments. Tamil Nadu, Andhra Pradesh,
Kerala and Karnataka have expressed their unwillingness to buy power based on imported LNG
given its high cost. NTPC has consequently expressed its inability to sign a gas sales purchase
agreement (GSPA) with Petronet LNG. We would be cautious about the economics of PLNG’s
Kochi project if volumes do not ramp up due to a lack of demand for high-priced LNG.
Lower domestic gas supply need not result in higher demand for imported LNG—price of gas is
the critical factor
We believe lower domestic supply of gas need not necessarily translate into higher off-take of
imported LNG. We have long highlighted our concerns about the acceptance of high-priced LNG
in India by price-sensitive sectors like power (see our note ‘Stronger-than-expected 3QFY11 results’
dated January 19, 2011). Exhibit 1 gives the comparative cost of power using different fuels. We
note that the power cost using imported LNG is significantly higher versus other fuels such as
imported coal and is closer to the cost using naphtha as feedstock. This would entail a primary use
by industrial units and preclude use by bulk users such as power plants and fertilizer units.
Retain SELL with target price of `100
We have revised our EPS estimates for FY2011-13E to `8.1 (+0.3%), `8.9 (-2.3%) and `8.6 (-
4.1%) to reflect a higher cost of fuel for internal consumption on higher long-term crude price
assumptions. We model PLNG’s re-gasification tariff to increase by 5% in each year in FY2011-14E
and remain flat thereafter. We maintain our SELL rating on the stock with a revised 12-month
DCF-based target price of `100 (`105 previously), noting that the stock offers 12% downside
from current levels.
Volumes. We model contract LNG volumes at 7.5 mn tons, 7.5 mn tons and 8.4 mn tons
in FY2011E, FY2012E and FY2013E. We model spot LNG imports of 1 mn tons in
FY2011E, 2.5 mn tons in FY2012E and 2.5 mn tons in FY2013E.
We assume the Kochi project to be commissioned by FY2013E. We highlight that the
Kochi terminal will have to rely on spot LNG cargos until it starts receiving contracted LNG
from the Gorgon project (likely to be commissioned in CY2015/16E). We see downside
risks to our volume assumptions for Kochi terminal from (1) delay in Gorgon project and
(2) lower demand for high-priced LNG in Kochi.
Re-gasification tariffs. We model PLNG’s re-gasification tariff to increase by 5% in each
year in FY2012-14E and remain flat thereafter until FY2020E, the terminal year of our
DCF model (see Exhibit 3). We highlight that we assume re-gasification tariffs at
US$0.88/mn BTU from FY2014E until FY2020E. We see significant downside risk to this
assumption.
Exchange rate. We maintain our exchange rate assumptions for FY2012E and FY2013E
at `45.5/US$ and `44/US$.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Petronet LNG (PLNG)
Energy
Concerns on high-priced imported LNG emerge. We believe the delay in signing
power purchase agreements (PPAs) for NTPC’s Kayamkulam power plant in Kochi
reflects unacceptability of high-priced LNG by the power sector. We have long
highlighted our concerns on acceptability of high-priced LNG by price-sensitive sectors
like power and fertilizers. We would advise investors to exercise caution in estimating
the potential demand for imported LNG in India in light of its high price in comparison
to alternate fuels. We retain our SELL rating on Petronet LNG with a target price of
`100.
NTPC expresses inability to find buyers of power generated from high-priced LNG
As per media reports, NTPC has asked Petronet LNG to cut the price of LNG given its inability to
sign power purchase agreements (PPAs) with state governments. Tamil Nadu, Andhra Pradesh,
Kerala and Karnataka have expressed their unwillingness to buy power based on imported LNG
given its high cost. NTPC has consequently expressed its inability to sign a gas sales purchase
agreement (GSPA) with Petronet LNG. We would be cautious about the economics of PLNG’s
Kochi project if volumes do not ramp up due to a lack of demand for high-priced LNG.
Lower domestic gas supply need not result in higher demand for imported LNG—price of gas is
the critical factor
We believe lower domestic supply of gas need not necessarily translate into higher off-take of
imported LNG. We have long highlighted our concerns about the acceptance of high-priced LNG
in India by price-sensitive sectors like power (see our note ‘Stronger-than-expected 3QFY11 results’
dated January 19, 2011). Exhibit 1 gives the comparative cost of power using different fuels. We
note that the power cost using imported LNG is significantly higher versus other fuels such as
imported coal and is closer to the cost using naphtha as feedstock. This would entail a primary use
by industrial units and preclude use by bulk users such as power plants and fertilizer units.
Retain SELL with target price of `100
We have revised our EPS estimates for FY2011-13E to `8.1 (+0.3%), `8.9 (-2.3%) and `8.6 (-
4.1%) to reflect a higher cost of fuel for internal consumption on higher long-term crude price
assumptions. We model PLNG’s re-gasification tariff to increase by 5% in each year in FY2011-14E
and remain flat thereafter. We maintain our SELL rating on the stock with a revised 12-month
DCF-based target price of `100 (`105 previously), noting that the stock offers 12% downside
from current levels.
Volumes. We model contract LNG volumes at 7.5 mn tons, 7.5 mn tons and 8.4 mn tons
in FY2011E, FY2012E and FY2013E. We model spot LNG imports of 1 mn tons in
FY2011E, 2.5 mn tons in FY2012E and 2.5 mn tons in FY2013E.
We assume the Kochi project to be commissioned by FY2013E. We highlight that the
Kochi terminal will have to rely on spot LNG cargos until it starts receiving contracted LNG
from the Gorgon project (likely to be commissioned in CY2015/16E). We see downside
risks to our volume assumptions for Kochi terminal from (1) delay in Gorgon project and
(2) lower demand for high-priced LNG in Kochi.
Re-gasification tariffs. We model PLNG’s re-gasification tariff to increase by 5% in each
year in FY2012-14E and remain flat thereafter until FY2020E, the terminal year of our
DCF model (see Exhibit 3). We highlight that we assume re-gasification tariffs at
US$0.88/mn BTU from FY2014E until FY2020E. We see significant downside risk to this
assumption.
Exchange rate. We maintain our exchange rate assumptions for FY2012E and FY2013E
at `45.5/US$ and `44/US$.
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