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EQUITY RESEARCH REPORT PETRONET LNG LTD BSE CODE: 532522 NSE CODE: PETRONET Sector/Industry: UTILITIES CMP: Rs. 132.10 (30/04/2011) Market Cap: 99075 (Million) Target Price: Rs. 185 Date: April 30, 2011 Time Period: 12 – 18 months Saral Gyan Capital Services www.saralgyan.in An Independent Equity Research Firm
VALUE PICKS – APR 2011 TABLE OF CONTENT S.No Content Page No. 1. Company Background 03 2. Financial Performance 06 3. Investment Rationale 09 4. Risk & Concerns 09 5. Future Outlook 10 6. Saral Gyan Recommendation 11 7. Disclaimer 12 -2- SARAL GYAN CAPITAL SERVICES
VALUE PICKS – APR 20111. Company Background Petronet LNG is at the forefront of Indias all‐out national drive to ensure the countrys energy security in the years to come. Formed as a Joint Venture by the Government of India to import LNG and set up LNG terminals in the country, it involves Indias leading oil and natural gas industry players. Our promoters are GAIL (India) Limited (GAIL), Oil & Natural Gas Corporation Limited (ONGC), Indian Oil Corporation Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL). The authorized capital is Rs. 1,200 crore ($240 million). Vision: "To be a key energy provider to the nation by leveraging company’s unique position in the LNG value chain alongwith an international presence." Mission • Create and manage world class LNG infrastructure • Pursue synergetic business growth opportunities • Continue excellence in LNG business • Maximize value creation for the stakeholders • Maintain highest standards of business ethics and values LNG The very concept of Liquefied Natural Gas (LNG) is a response to the inefficiency of natural gas pipelines and the technical and economic problems of running pipelines over long distances. If natural gas is cooled at minus 160.5° C, it becomes liquid and more compact, occupying just 1/600th of the gaseous volume. This is because most of the heavier hydrocarbons are removed during liquefaction. The cargo that is transported in bulk by sea is predominantly methane (over 80%) — a colourless, odourless, transparent liquid which is non‐toxic, non‐corrosive and less dense than water. As LNG is highly volatile, specialist operators are involved in its transportation. -3- SARAL GYAN CAPITAL SERVICES
VALUE PICKS – APR 2011Primary LNG Project / Chain Components are: i. Upstream development of long‐term natural gas supply for feed gas to an LNG plant ii. Downstream development of liquefaction , storage and loading facilities iii. Marine transportation iv. Downstream development of receiving terminals for regasification and pipeline transportation to market Applications of LNG Natural Gas is not only efficient, clean, eco‐friendly and flexible in control, it meets many of the fuel requirements of modern industrial society. LNGs main applications are: Electricity generation : Fuel for base load and combined cycle/ co‐generation power plants. Public and commercial : This clean fuel, which is cheaper than LPG, can be used as piped gas for households. In the West, most household consumption is accounted for by piped gas, whose use is increasing rapidly Industrial : Industrial : Under boiler fuel for steam raising and heating applications. Alternative motor fuel to diesel : The use of natural gas as fuel for automobiles is increasing rapidly as it is 30 to 40% more efficient and much cleaner than traditional fossil fuels. With only one carbon and four hydrogen atoms per molecule, it is the most eco‐friendly option and is gaining increasing relevance in the age of Global Warming and Climate Change. Petrochemicals : Several vital chemical products, e.g. methanol, can be derived from natural gas. -4- SARAL GYAN CAPITAL SERVICES
VALUE PICKS – APR 2011LNG Sourcing • 7.5 MMTPA sourced through Long Term Contract with RasGas, Qatar with back to back sales arrangement with GAIL, IOCL & BPCL. • 1.44 MMTPA LNG tied up from Exxon Mobil’s Gorgon Venture in Australia. • Additional LNG being sourced through Spot /Short Term Contracts & sold to Offtakers/ Bulk Buyers. LNG Supply: Truck Loading • Truck Loading facility at Dahej terminal was commissioned in August 09, 2007 as a Pilot Project. • Currently about 4‐5 trucks are loaded on daily basis & total of around 2000 trucks have been loaded till date. • Facility can handle 2500 loadings / Yr. • Presently LNG (by road tanker) is being sold to limited consumers in Western region. • Fast developing market with several new consumers (up to 800 KMS) are being lined up for off‐take of LNG for industrial and city gas use. Direct Marketing: Petronet plans to foray into Direct Marketing by focusing on the following areas: • Entered into direct RLNG marketing by signing HOA with bulk end consumer in Power producers, Industrial consumers , Fertilizers Producers etc • LNG/LCNG i.e. LNG through Trucks and supplies at LNG hubs, customer’s premises in regions not serviced by pipelines. • LNG/RLNG trading on International and domestic platform -5- SARAL GYAN CAPITAL SERVICES
VALUE PICKS – APR 20112. Financial Performance Petronet LNG net profit rises 112.03% in the March 2011 quarter Net profit of Petronet LNG rose 112.03% to Rs. 206.28 crore in the quarter ended March 2011 as against Rs. 97.29 crore during the previous quarter ended March 2010. Sales rose 67.10% to Rs. 3985.97 crore in the quarter ended March 2011 as against Rs. 2385.45 crore during the previous quarter ended March 2010. FY 2009‐2010 Result Updates: For the audited full year, net profit rose 53.18% to Rs. 619.62 crore in the year ended March 2011 as against Rs. 404.50 crore during the previous year ended March 2010. Sales rose 23.93% to Rs. 13197.29 crore in the year ended March 2011 as against Rs. 10649.09 crore during the previous year ended March 2010 Last 6 Quarters Net Sales & Profit 4,500.00 3,985.97 4,000.00 3,627.64 3,500.00 3,057.72 3,000.00 Rs in Crores 2,525.96 2,500.00 2,244.59 2,385.46 2,000.00 1,500.00 1,000.00 500.00 206.28 83.21 97.29 111.37 131.12 170.84 0.00 1 2 3 4 5 6 Net Sales 2,244.59 2,385.46 2,525.96 3,057.72 3,627.64 3,985.97 Net Profit 83.21 97.29 111.37 131.12 170.84 206.28 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 -6- SARAL GYAN CAPITAL SERVICES
VALUE PICKS – APR 2011Quarterly Financials (Rs million) Year End March Q1FY11 Q2FY11 Q3FY11 Q4FY11Net Revenue 25,260 30,577 36,276 39,860EBITDA 2,477 2,716 3,456 3,513% of revenue 9.8 8.9 9.5 8.8Depr. & Amortization 461 466 465 455Net Interest 498 495 507 431Other Income 126 186 54 314Profit before Tax 1,644 1,941 2,538 2,941Total Tax 530 630 830 878Profit after Tax 1,114 1,311 1,708 2,063Adj. PAT 1,114 1,311 1,708 2,063Key Operating Metrics Year End March 2010 2011 2012E 2013EContracted Sales (TBTUs) 280.5 378.6 374.7 374.7Spot LNG (TBTUs) 103.9 36.2 81.6 126.4EBITDA/MMBTU 21.2 27.7 28.0 31.2Source: Saral Gyan Research. -8- SARAL GYAN CAPITAL SERVICES
VALUE PICKS – APR 20113. Investment Rationale i) Petronet LNG has signed deals to source 1.1mt of LNG annually for the next two financial years. These volumes are on top of 7.5 million tonne per year LNG that the company will get from RasGas. ii) While the Kochi terminal is on course to commence operation towards the end of FY13, Petronet is also evaluating viability for setting up of a regasification terminal on the east coast. iii) The company has already spent Rs 900 crores for its capex plan while it further plans Rs 1000‐1200 crore in FY 12. iv) The company has registered excellent numbers for the quarter ending March 2011. Revenues surged 112% from a year ago quarter to stay at Rs 39859.7 as against 23854.5 million during the previous quarter ended March 2010. Rise in volumes coupled with higher realizations brought back the company on a growth trajectory. Net profit of the company skyrocketed from Rs 972.9 million clocked in Q4FY10 to Rs 2062.8 million in Q4FY11. EPS stood at Rs 2.75 climbing sharply from Rs 1.3 in Q4FY10. v) Petronet LNG has reported robust volumes and earnings growth as it benefited from the reduced domestic natural gas production during last two quarters. Latent demand and pipeline expansions has helped rise in volume along with some reduction in domestic gas production. It has sold the entire volume tied up through new deals to end consumers. 4. Risk & Concerns Decrease in volumes can put pressure on the margins. Any significant downturn in the LNG demand will impact Petronet LNG earnings negatively. -9- SARAL GYAN CAPITAL SERVICES
VALUE PICKS – APR 20115. Future Outlook Sector wise projected Gas demand in India: India’s Current Demand (Optimistic) – Domestic Supply Scenario: - 10 - SARAL GYAN CAPITAL SERVICES
VALUE PICKS – APR 20116. Saral Gyan Recommendation As per our estimates, Petronet LNG can deliver a turnover of Rs 183,608 million and PAT of Rs 7,253 million, resulting in EPS of Rs 9.7 in FY 2011‐12. This translates in a expected PE multiple of 13.6 times based on FY 2011‐12 earnings. Superior operational performance led by higher volumes and better utilization rates translated into more than doubling of PAT on YoY basis. Petronet LNG has recently declared dividend of 20% for financial year 2011. Dividend yield of Petronet LNG at CMP is 1.32%. On equity of Rs. 7500 million the estimated annualized EPS works out to Rs. 9.7 and the Book Value per share is Rs. 38.06. At a CMP of Rs. 132.10, stock price to book value is 3.5. EBITDA during the quarter stood at Rs3,513 million. However, adjusted for higher other expenditure during the quarter on account of building a road at Kochi and painting work at the jetty, EBITDA would have been at Rs3,592 million. We believe the demand for spot LNG will remain strong in the near term as KG‐D6 gas production remains below 60mmscmd for the next few quarters, directly benefiting Petronet LNG in terms of better volumes. Saral Gyan Team recommends “BUY” for Petronet LNG at current market price of 132.10 for a target of Rs. 185 over a period of 12‐18 months. - 11 - SARAL GYAN CAPITAL SERVICES