Multi Baggers

COMPANY PROFILE

New Delhi based Petronet LNG Ltd, one of the fastest growing companies in the Indian energy sector, was incorporated in April 1998 as a joint venture with equity participation from GAIL, IOC, ONGC and BPCL to cater to the natural gas demand supply deficit through imported LNG. Gujarat Maritime Board (GMB) granted PLL the right to develop a port for commercial use on BOOT basis and also build a solid cargo terminal alongside the LNG import terminal at Dahej. PLL successfully commissioned India’s first LNG receiving and regasification terminal in Feb’04 and commercial operations commenced in Apr’04.

PLNG is in the process of setting up another terminal at Kochi, Kerala. Petronet LNG is also drawing keen interest from global energy industry stars. While French national gas company GAZ de France (GDF) is a strategic partner, Ras Laffan Liquefied Natural Gas Company Ltd, Qatar, has signed an LNG sale and purchase agreement (SPA) with Petronet for the supply of LNG to India.

PLNG’s strength is its “assured-quantity supply” contract with Qatar’s RasGas and its back-to-back sales agreements with key customers, Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Gas Authority of India Ltd. (GAIL), for its existing operations. The LNG prices are “pass-through”, and PLL is protected from commodity price fluctuations, thus stabilizing earnings.

PLNG’s well-structured sales and purchase agreements (SPAs) with its LNG suppliers and NG customers ensure stable cash flows over the contractual period. PLNG has several capex plans, including in power generation, exploration and production business, shipping Special purpose vehicle and new LNG tanks in Gujarat.

INDUSTRY STATUS

The oil and gas industry has been instrumental in fuelling the rapid growth of the Indian economy. The petroleum and natural gas sector, which includes transportation, refining and marketing of petroleum products and gas constitutes over 15 per cent of the GDP.

India is the world’s sixth largest consumer of oil. There is a huge demand-supply gap in oil and gas in India. The country imports more than 70% of its crude oil requirement.  Stagnating crude-oil production and the rapid economic growth have served to increase the demand-supply mismatch for crude oil and gas in India. This growth in demand is likely to sustain over time, creating an ever-increasing need for imports.

Similarly, natural gas demand in the country has far outstripped its supply, in the past, with shortfalls before RIL's production estimated at close to 100 million metric standard cubic metres per day (mmscmd). The natural gas market in India currently stands at 95-100 mmscmd, which is catered to by a combination of domestic supplies (~70 mmscmd) and imports as LNG (~30 mmscmd). That situation looks to change soon with the additional ~80 mmscmd of KG gas slated to almost double the domestic supply over the next five years. The demand for natural gas is actually much higher, at ~170 mmscmd, and is constrained only by supply shortage. However, with KG gas leading to surplus capacity for LNG, the supply might be adequate in the short term. Nevertheless, India would still face a natural gas shortage in the longer term, which would necessitate higher LNG imports.

The scenario is changing soon with too many players in the industry have indulged in capacity expansions. This might lead to an oversupply of NG in near future. Despite this one cannot deny the fact that it contributes 24% of the energy requirements of USA. USA alone constitutes 21% of world energy consumption and would run out of presently proven NG reserves within a decade. Hence this market would continue to be a seller’s market in the long term as present long term tie ups of US account for a small portion of its overall needs.

FINANCIAL POSITION
PNLG reported a Sales of RS 8505 crs for FY 2008-09 which was an incrwase of 28% over the perevipus year. Net Profit rose to Rs 518 crs on the back of strong inventory gains made in the last quarter. It reported an EPS of 6.9. PLNG’s net profit for the quarter ending June 2009, stood at Rs.103.31 Crs down 49% QoQ and flay YoY. Its total income stood at Rs.2,612.38 Crs down 2% QoQ and up 58% YoY. Its EPS for the quarter was Rs.1.38 and EBIDTA margin at 7% down 469bps YoY for Q1FY10.

PROJECTS
Petronet LNG Ltd is expected to invest Rs.14,500 crore in various allied projects related to its proposed LNG terminal scheduled to be commissioned in Puthuvypeen near Kochi by 2011. Besides the terminal, the other projects included a 1,068-MW plant at an investment of Rs 3,250 crore, GAIL’s pipeline linking Bangalore and Mangalore via Coimbatore, Erode and Salem for city gas supply (Rs 5,000 crore) and for procuring LNG vessels (Rs 2,500crore). 30 per cent of the capital for the projects would be raised from internal accruals and the remaining would be raised by revisiting the capital markets much before 2011.

INVESTMENT POSITIVES

•Net sales rose 51%YoY as total volume of gas sold in the quarter was up 25%.
•The 20-year gas supply pact of PLNG with Exxon Mobil Corporation from the proposed Gorgon LNG project in Western Australia has fetched PLNG 1.5mtpa LNG supplies starting from 2014.
•PLNG has completed the expansion of the Dahej facility to nameplate capacity of 10mtpa.
•Even with improving supply scenario, the concern for offtake from PLL is allayed because PLNG has already tied up 9.2 mn mt of Dahej capacity through long term contracts.
•PLNG does not need working capital to carry out its business and thus the growth is unaffected by the unavailability of the same.

KEY CONCERNS

•As RIL ramps up its production, India’s gas availability at a low cost is likely to double by the end of FY10 thereby adversely affecting PLNG’s high margins on spot LNG.
•Competition from domestic gas supply and new LNG capacities might limit capacity utilization of PLNG and put pressure on its marketing margins.
•Capacity utilization may be be under pressure and long-term business viability concerns remain as India moves from a deficit of gas to surplus.

TRIGGER FOR THE STOCK

Petronet LNG, has recently inked a deal with Exxon to buy the fuel from its facilities in Australia. The agreement is to buy 1.5 million metric tonnes (mmt) a year of liquefied natural gas (LNG) for 20 years for delivery at the Kochi terminal. Thus, the signing of the agreement is a positive development as it assures the supply of LNG for higher capacity utilization of its terminal facility at Kochi.

VALUATION

At Rs 64, Petronet LNG trades  at a P/E of 9.4 with an EPS of Rs 6.9 for FY09. We estimate FY10 EPS to be at Rs.7.8 and P/E to be 9.8. Considering the projects it has at hand and the signing of the crucial Exxon supply deal, we give a BUY recommendation to the stock, with a target price of Rs.80.

Disclosure:

The share finds a place in the proprietary portfolios of the author as also some of the portfolios of P.N.Vijay Financial Services P Ltd of which he is the Managing Director..