>PETRONET LNG (KR CHOKSEY)

Petronet LNG (PLNG) is one of the largest LNG players in India and is set to play a significant role in country’s full scale drive to ensure its energy security in the years to come. The company has set up its first LNG Terminal at Dahej, Gujarat, with a capacity of 5 MMTPA, and is in the process of setting up another terminal at Kochi, Kerala, with a capacity of 2.5 MMTPA. The company was co-promoted by India’s largest oil majors GAIL, ONGC, IOCL and BPCL.

During Q1FY10, it reported revenue of Rs 2,604 crore which was in line with our expectation, down 2% q-o-q and up 58% y-o-y. Volume was in-line with our expectation at 95.8TBTUs, up 16% q-o-q. The volumes included 61TBTU from RasGas, 15TBTU for Dabhol and 6TBTU on a spot basis. Profit was below our expectation due to lower regasification charges. We believe that regasification charges on the spot volumes were under pressure due to commencement of supply
from KG D6 gas basin. Expanded capacity at Dabhol has been commenced on 15th July’09.

Higher Regassification Charges– RasGas volume remains steady at 62.7TBTU whereas spot volume has jumped by 65% q-o-q to 33TBTUs. Increase in spot volume is attributed to globally lower LNG prices. In Q1FY10 Henry Hub spot prices were down 19% q-o-q to $3.7/mmbtu. Regassification charges declined 56.7% q-o-q and 26.2% y-o-y to Rs 21.1/mmbtu. In Q4FY09, company earned marketing margin on some of the cargo which was absent in Q1FY10. In current quarter company had provided the regassification service to the cargo bought by GSPC and earned Rs 8.4crore; backward calculation give us Rs 28.5/mmbtu regasification service charge which are in-line with the RasGas margin. However with increase in domestic supply, we expect spot margin will be under pressure. EBITDA margin dropped by 469bps y-o-y to 7.0%; lowest in last 4 years. Other income increased 44% to Rs 28.8crore. On account of lower operating profit, PAT declined by 49.4% q-o-q and 2.2% y-o-y to Rs 103.3crore.

Other Developments – PLNG will start sourcing additional 2.5mtpa from RasGas for the expanded Dahej capacity from September’09. Expanded Dahej capacity is handed over to the PLNG in May’09 and operation has been commenced on 15th July’09. In Jan’09, Petronet had received a 5% escalation in its long term Rasgas to Rs 30/mmbtu. FOB price for 2009 increased from $2.54/mmbtu to $3.1/mmbtu and would rise further in 2010 and 2011.

Our View
Current low spot LNG prices ($3.4/mmbtu) may continue for few more months as the Asian markets have seen demand destruction in spot cargo. Falling global LNG prices will neutralize the price concern against KG D6 gas and keep volume intact. RasGas base contract will reach full capacity in Q4FY10 of 7.5mtpa. However, going forward capacity utilization will be under pressure and long term business viability concerns remain as India moves from a deficit of gas to surplus. We are expecting a 3-6 months delay and cost escalation in Kochi terminal. From Q2FY10, interest and depreciation costs to increase with commencement of extended Dahej capacity.

We have maintained our estimates for FY10 and FY11 volumes to 8.0mtpa and 8.7mtpa due to weakening in LNG spot prices. We have reduced out regassification charges due to lower expected spot margin going forward. Our EPS for FY10 is Rs 7.4 against our previous expectation of Rs 7.8. We are upgrading the stock from REDUCE to HOLD rating on the stock back of multiple expansion taken place in the Indian equity market and increased revenue visibility. Key Risk for the stock can be 1) Declining spot margin & underutilization 2) recent out-performance of the stock 3) unexpected and prolong delays in sourcing long-term gas 4) execution risk associated with the Kochi terminal. Our new revised price target is Rs 80 is 10x FY10E EPS of Rs 7.4 reflects multiple expansions taken place in Indian equity market giving a upside of potential of 10% from the CMP.

To see full report: PETRONET LNG