Petronet LNG + GAIL India – Bright Fortunes
July 19, 2010
Petronet LNG (PLNG) is the largest LNG re-gasifier in India. The company has a unique risk-free business model, generating revenues by charging re-gasification margins. 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 heavyweight promoters – GAIL, IOCL, and BPCL.
A massive impetus in US shale gas production recently has plugged the country’s demand-supply gap. With US LNG imports dipping drastically against earlier estimates, spot prices of natural gas are likely to remain subdued. This could have positive repercussions for potential LNG off takers like PLNG in tying up long-term supply contracts and also boost their spot cargo orders in near term.
PLNG’s operable capacity is likely to catapult from the current 11.0 mmtpa to 17.5 mmtpa at a total capital cost of ~INR 50 bn with: (a) completion of 2.5 mmtpa capex at Kochi LNG in Q1CY12; (b) 2.5 mmtpa expansion at Kochi in FY14; and (c) rise in Dahej LNG capacity by 1.5 mmtpa in CY14. LNG import volumes will grow faster; volumes are set to grow 1.6x to 12.1 mmtpa by FY13E as GAIL completes new pipelines under construction and PLNG inks long-term sourcing contract for its Kochi LNG facility
Petronet is expected to report an EPS of Rs 6 and 7.5 for FY 11 & FY 12 respectively.
Gail India Gas volumes transported by GAIL (4.7% CAGR for the past three years) are expected to jump due to the inherent advantages of gas as a fuel over other fossil fuels and infrastructural bottlenecks being eased due to large investments being made in the sector. Energy-intensive sectors like fertilizers, power-generation, and refining have been restricted /forced to use liquid fuels (fuel oil and naphtha) due to paucity of gas (due to insufficient supplies and poor connectivity). But, with the setting up of the national gas grid and finds like the KG basin, more industries will be able to use gas as fuel.
GAIL has value embedded in its pre-approved pipelines (12% assured ROCE); venture into the CGD business the proposed national gas highway project and its Myanmar E&P assets. On FY11E and FY12E EPS estimate of Rs. 26.2 and Rs. 32.5, the stock is currently trading at a P/E of 16.8 x and EV/EBITDA of 12.6x on FY11E basis and at a P/E of 13.5x.