28 dec 2017 gas sector - hdfc securities sector - dec17...sector update 28 dec 2017 gas sector hdfc...

SECTOR UPDATE 28 DEC 2017

Gas sector

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters

Hitting the right chordA confluence of policy reforms, benign gas prices and accelerated execution of infrastructure is expected to drive gas demand in India. Ministry of Petroleum and Natural Gas (MoPNG) is not only set to more than triple the share of gas in the energy mix to 20% by 2025, but is also empowering its ambition with structural reforms to help achieve their goals. The global LNG supply glut and weak LNG demand in key import markets will keep LNG prices under pressure. Owing to an increase in domestic production, doubling of domestic LNG import capacities and creation of national gas grid will ease gas supply constraints and unlock latent demand. The restoration of Petroleum and Natural Gas

Regulatory Board (PNGRB) quorum will expedite the long-pending City Gas Distribution (CGD) bid announcement, and new guidelines for bidding. New cities will come up for city gas distribution, as PNGRB will open bidding rights for 200 cities for promoting consumption of clean fuel to control pollution. This will open a plethora of opportunities for CGD entities.

The likelihood of including natural gas under the GST gamut augurs well for CGD companies. We believe the GST rate is unlikely to be above 18%, as other alternative fuels currently under the GST regime, such as petcoke and fuel oil, attract 18% GST. Currently, effective tax rate on CNG varies from 20-30% of pre-tax price. With 18% GST rate, the selling price is expected to dip by 2-9%. This will widen the gap between CNG and Diesel/Petrol, and make it more economical as compared to these alternate fuels. The absence of input tax credit to industrial and commercial customers has hurt sales volumes of CGD companies. Inclusion of gas under GST would attract these additional volumes from customers.

We believe that market concern over low utilisation of PLNG’s terminal owing to a ramp up in domestic gas production and commissioning of new LNG terminals is overdone.

Relatively low re-gasification tariff compared to competitors, well-connected terminals and tied-up capacity with off-takers will ensure healthy utilisation of PLNG’s terminals.

Top pick: IGL and Petronet LNG Key Financials

Company Mcap (Rs bn)

CMP (Rs/sh) Reco TP

(Rs/sh) EBITDA (Rs bn) APAT (Rs bn) RoIC (%)

FY17 FY18E FY19E FY17 FY18E FY19E FY17 FY18E FY19E IGL 230.0 329 BUY 421 9.47 11.26 13.14 5.55 6.93 8.17 21.8 25.1 27.1 MGL 108.4 1097 NEU 1,211 6.44 7.23 7.20 3.93 4.40 4.30 24.2 24.3 21.6 PLNG 376.5 251 BUY 304 25.92 29.70 32.39 17.06 18.41 20.73 22.64 19.97 22.56 Source: Company, HDFC sec Inst Research

Company Mcap (Rs bn)

CMP (Rs/sh) Rating TP

(Rs/sh) IGL 230.0 329 BUY 421

MGL 108.4 1,097 NEU 1,211

PLNG 376.5 251 BUY 304 Nilesh Ghuge [email protected] +91-22-6171-7342

GAS : SECTOR UPDATE

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Contents Favourable policies to improve gas usage .................................................................................................... 3

Vision to transfer the Indian economy to a gas-based economy ..................................................................... 3 Viability gap funding ......................................................................................................................................... 3 Gas price reform leading to increased production ........................................................................................... 4 New urea policy................................................................................................................................................. 4 Encouraging new ways to use natural gas ........................................................................................................ 5 Increase penetration of CGD Network .............................................................................................................. 5 Lowering LNG duty ............................................................................................................................................ 5 LNG trading hub to discover market-driven pricing ......................................................................................... 5 Regulations for the sale of petcoke ................................................................................................................. 5

Infrastructure development ......................................................................................................................... 6 Carrier first, commodity later ........................................................................................................................... 6 LNG terminal capacity to double by FY21 ......................................................................................................... 7

Global LNG prices to remain benign ............................................................................................................. 8 Robust RLNG supply .......................................................................................................................................... 8 Weak demand in key import markets ............................................................................................................. 11

Companies Indraprastha Gas ............................................................................................................................................. 15 Mahanagar Gas ............................................................................................................................................... 20 Petronet LNG ................................................................................................................................................... 25

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Favourable policies to improve gas usage Vision to transfer the Indian economy to a gas-based economy Globally, the share of natural gas in the energy mix

is ~24%, as compared to 6.2% for India in 2016. In order to reduce emissions and address the problem of air pollution in major cities, MoPNG has set a target of increasing the share of gas in the energy mix to 20% by 2025, at the cost of both oil and coal.

Natural Gas Share In India’s Energy Mix

Source: BP statistics, HDFC sec Inst Research

Gas Contribution To Increase At The Cost Of Oil And Coal

Source: BP statistics, GoI, HDFC sec Inst Research

Viability gap funding The Government of India (GoI) has taken a decision

to provide a capital grant of Rs 51.76bn. This is 40% of the estimated capital cost of Rs 129.4bn to GAIL for development of the Jagdishpur-Haldia/Bokaro-Dhamra Gas Pipeline (JHBDPL), known as the “Pradhan Mantri Urja Ganga” project. Its progress is being closely monitored by the Prime Minister’s Office. We believe the government grant will improve the commercial viability of this project. GAIL has already awarded contracts for laying the pipeline for Phase I & II, which will be completed by Dec-2018.

Pradhan Mantri Urja Ganga Project Details

Length (kms)

Schedule completion Pipelines Current Status

Section I 759 Dec-18 Pipelines: Phulpur-Gaya-Baruni-Gorkhpur-Patna Contracts for laying pipeline awarded

Section II 341 Dec-18 Pipeline: 1.Gaya-Haldia-Durgapur-Sindri-Jamshedpur,2.Dhamra-Angul Contracts for laying pipeline awarded

Section III 1,520 Dec-20 Pipeline: Bokaro-Angul Total 2,620 Source: GoI, HDFC sec Inst Research

56.9 50.0

29.4 25.0

6.2 20.0 4.1 2.0 3.5 3.0

-

20.0

40.0

60.0

80.0

100.0

2016 2025

Coal Oil Gas Hydel Renewable

%

Share of Natural Gas in the energy mix to increase from 6.2% in 2016 to 20% in 2025 Combined contribution from Oil and Coal together in India’s energy mix will drop from 86% in 2016 to 75% in 2025 GoI to provide Rs51.76bn, 40% of the capital cost to develop JHBDPL, which will improve the commercial viability of this pipeline project

10.7

10.3

8.7

7.8

7.1

6.0

6.2

20.0

-

5.0

10.0

15.0

20.0

25.0

2011

2012

2013

2014

2015

2016

2017

2025

%

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Gas price reforms leading to increased production

In order to incentivise gas production in difficult areas like High Pressure High Temperature (HPHT) reservoirs, deepwater and ultra deepwater areas, GoI has approved the new Gas Pricing Formula. Gas produced in such a difficult terrain has given the freedom of marketing and pricing to producers. Marketing freedom is capped by a ceiling price, which is based on the landed price of alternative fuels. The ceiling price in USD/mmbtu (GCV) will be lower than (1) Landed price of imported fuel oil (2) Landed weighted average price of substitute fuels (0.3 x price of coal + 0.4 x price of fuel oil + 0.3 x price of naphtha), and (3) Landed price of imported LNG.

This decision resulted in investments in deep water fields. RIL and ONGC have firmed up their investment plans totalling ~USD 11bn to increase gas production from KG basin. The companies expect new production to commence in 2020, with a ramp-up starting in 2022. ONGC and RIL’s investments will increase domestic production by ~16bcm to 48bcm.

New urea policy

The government is implementing a two-pronged strategy to address the issue of rising fertiliser imports. These are (1) To support volume growth of existing plants through gas price pooling, and (2) Revival of closed units.

Gas pool pricing: Under the new urea policy, domestic gas will be pooled with RLNG to provide natural gas at a uniform delivered price to all urea-manufacturing plants. These are connected to the natural gas grid. All urea units getgas at a uniform price, irrespective of the gas allocated to the unit. This ensures that gas will be supplied to the urea units at a competitive price. Further, these units are incentivised to maximise their production beyond the re-assessed capacity by allowing them to withdraw gas beyond their allocated quantity.

Revival of closed fertiliser units: At present, eight fertiliser public sector plants have been closed. Of these, five plants, namely Ramagundam, Gorakhpur, Sindri, Barauni and Talcher are being revived. A JV company, Hindustan Urvarak & Rasayan Limited (HURL) was incorporated by Coal India Ltd (CIL), National Tharmal Power Corporation (NTPC), Indian Oil Corporation (IOC), Fertiliser Corporation of India Ltd (FCIL), and Hindustan Fertiliser Corporation Limited (HFCL). HURL will invest Rs 200bn to establish and operate new natural gas-based fertiliser plants Gorakhpur, Sindri and Barauni, and simultaneously market their products. A JV of Rashtriya Chemicals & Fertilisers (RCF), GAIL, CIL and FCIL will invest Rs 80bn to revive the Talcher plant. The Ramagundam plant of FCIL will be revived with an investment of Rs 60bn. Revival of these plants will create 10.8mmscmd of natural gas demand.

RIL and ONGC have firmed up their investment plans totalling ~USD11bn to increase gas production by 16bcm Revival of shut fertiliser plants to create demand for 10.8mmscmd of natural gas

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Five Fertiliser Plants To Be Revamp By Dec-2020

Plant Expected production Urea capacity (mmtpa) Gas requirement (mmscmd)

Ramagundam November, 2018 1.27 2.16 Gorakhpur August, 2020 1.27 2.16 Sindri September, 2020 1.27 2.16 Barauni October, 2020 1.27 2.16 Talcher December, 2020 1.27 2.16 Total 6.35 10.80 Source: GoI, HDFC sec Inst Research

Encouraging new usage of natural gas

The government and industry players have found new ways to promote gas usage in new areas. For example, the government started LNG buses in Kerala, which is now being planned on a broader scale. Petronet LNG has been looking for innovative ways of supplying LNG to smaller customers. This has been done by supplying using trucks to small customers, with plans to directly market to customers in coastal areas using small ships.

Increase penetration of CGD network

The government is pushing CGD companies to increase gas penetration in cities. Currently, there are 81 geographical areas (GAs) authorised by PNGRB for development of CGD networks in the country. MoPNG plans to connect 10 million households to the PNG network in the next three years. Restoration of Petroleum and Natural Gas Regulatory Board (PNGRB) quorum will expedite the long-pending CGD bid announcement and new guidelines for bidding. Government is planning to increase the number of cities to 200 for promoting the consumption of clean fuel in order to control pollution.

Lowering LNG duty

In a bid to promote gas consumption in India, customs duty on imported RLNG has been reduced from 5% to 2.5% by the Finance Minister in FY2017-18 Budget. However, it was maintained at 5% on alternate fuels like Furnace Oil and Low Sulphur Heavy Stock (LSHS).

LNG trading hub to discover market-driven pricing

Government is planning to develop a LNG trading hub in India, to discover prices for domestic production as well as for imported gas. Currently, domestic natural gas is sold based on a government-determined formula that links the local price to international price, while most of the long-term import contracts are linked to JCC/Brent. We highlighted that low domestic gas production and very few LNG terminals may not result in many trading opportunities, but the move is a positive step to shift from administered prices.

Regulation for the sale of petcoke

The Supreme Court asked the government to come out with emission standards of the use of petcoke in lime industries, and power plants were asked to switch to alternate fuels within one year.

New ways to promote gas usage like LNG buses and PLNG’s initiative to supply LNG through direct marketing will increase gas penetration Restoration of PNGRB quorum will expedite the long-pending CGD bid announcement and new guidelines for bidding Government is planning to develop LNG trading hub to discover market-driven prices

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Infrastructure development Carrier first, Commodity later India currently has 16,470kms of gas pipeline

predominately in Western and Northern India. The government has announced a national gas grid network project, in which ~ 13,500kms of gas pipelines will connect Eastern and Southern India to domestic gas sources, and also to new LNG terminals. GAIL has been actively engaged in developing this network, and working towards development of a National Gas Grid structure as a backbone for expanding the infrastructure reach across the country. Over 60% of the network addition is expected to be achieved from the Jagadishpur-Haldia/Bokaro-Dhamra Pipeline (JHBDPL), at an estimated project cost of Rs 129.4bn. GoI has already approved of a 40% (Rs 51.76bn) capital grant for this project, and the first installment of the grant of Rs 4.5bn was disbursed in FY17. GAIL is also working to execute the Vijaipur–Auraiya–Phulpur pipeline (VAPPL) of

672km to ensure the feed of gas supply to JHBDPL. Further, the Kochi-Kottanad-Mangalore pipeline (KKMPL) project of 873km is also under execution by GAIL. IOCL is executing the Ennore-Bengaluru-Nagapattinam-Tuticorin gas pipeline, which is connecting its upcoming LNG terminal at Ennore to industrial hubs in Southern India.

Revamp of defunct fertiliser plants like Gorakhpur, Sindri, Talcher and Ramagundam of FCIL and Barauni plant of HFCL, and issuing authorisation to GAIL for laying a CGD network in Varanasi, Patna, Ranchi, Jamshedpur, Cuttack and Bhubaneshwar will ensure healthy utilisation of the pipeline.

Currently, the transmission infrastructure dominates the western and northern parts of the country, but the eastern and southern parts are significantly underserved. In our view, development of these pipeline projects will not only cater to existing demand, but also spur strong multi-year demand from industries as well as city gas segment.

Doubling Of Pipeline Network Pipeline Entity Length in kms Expected completion Kochi-Koottanad-Mangalore GAIL(India) Ltd. 1056 Feb-2019 Dabhol-Bengaluru GAIL(India) Ltd. 302 Under construction Surat-Paradip GAIL(India) Ltd. 2112 NA Jagdishpur-Haldia-Bokaro-Dhamra GAIL(India) Ltd. 2539 Dec-2018 to Dec-2020 Vijaipur-Auraiya-Phulpur GAIL(India) Ltd. 672 CY 2018 Mallavaram-Bhopla-Bhilwada GSPC India Transco Ltd. 2042 NA Mehsana-Bhatinda GSPC India Gasnet Ltd. 2052 NA Bhatinda-Jammu-Srinagar GSPC India Gasnet Ltd. 725 NA Kakinada -Vizag- Srikakulam A P Gas Distribution Corporation 391 NA Ennore- Nellore Gas Transmission India Pvt. Ltd. 250 Dec-2017 Ennore- Thiruvallur-Bengaluru-Puducherry-Nagapattinam-Madurai-Tuticorin Indian Oil Corporation Ltd. 1385 Dec-2018

Jaigarh-Manglore H-Energy Pvt. Ltd. 635 Mar-2019 Total 13,489 Source: PPAC, HDFC sec Inst Research

~13,500kms of new gas pipeline’s capacity will be added, which will connect eastern and southern India to gas sources and LNG terminals In our view, development of these pipeline projects will not only cater to existing demand, but also spur strong multi-year demand from industries as well as the city gas segment from eastern and southern parts of the country

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LNG terminal capacity to double by FY21

The Dahej LNG terminal’s re-gasification capacity has been augmented from 15mmtpa to 17.5mmtpa. The expansion will be completed in FY19. The work to develop two new LNG terminals of 5mmtpa capacity each at Mundra (Gujarat) and Ennore (Tamil Nadu) is at an advanced stage. The terminals would be operational in FY19. H-Energy appears to have made steady progress in its Jaigarh project, chartering a 4mmtpa FSRU from Engie and targeting commissioning by end-FY19. In addition to this, there are plans to develop two new RLNG terminals of 5mmtpa capacity each (i.e. Dharmra and Chhara). Completions of these projects will double the RLNG capacity from 26.6mmtpa to 53.1mmtpa. These new terminals not only ease import constrains in the existing western and northern market, but also make gas available in the southern and eastern parts of the country.

RLNG Capacity To Double In Four Years LNG terminal Entity Capacity

(mmtpa) Expected commissioning

Dahej Petronet LNG 2.5 FY19 Ennore IOCL 5 FY19 Mundra Adani 5 FY19 Jaigarh H-Energy 4 FY19

Dhamra Adani, IOCL, Gail 5 FY21

Chhara HPCL 5 FY21 Total 26.5 Source: Companies, HDFC sec Inst Research

RLNG’s terminal capacity will increase from 26.6mmtpa in FY17 to 53.1mmtpa in FY21 New terminals ease import constrains in the existing western and northern market… …. and also make gas available in the southern and eastern parts of the country

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Global LNG prices to remain benignRobust RLNG supply

In 2017, 39.2mmtpa (11% of 2016-end capacity) of liquefaction capacity has been added globally. Further, 76.8mmtpa of LNG capacity will start commercial operations during 2018-2020. Australia and USA together will add 55.75mmtpa during this

period. Thus, liquefaction capacity will increase by 7.57% CAGR from 339.7mmtpa in 2016 to 454.8mmtpa in 2020. In comparison to liquefaction capacity addition, the global LNG trade grew merely by 1.3% CAGR from 241mmtpa in 2011 to 258mmtpa in 2016.

Liquefaction Plants Commissioned In 2017

No Country Project Name Nameplate

Capacity (MTPA)

Promoters

1 Australia APLNG T2 4.50 ConocoPhillips, Origin Energy, Sinopec 2 Australia Wheatstone LNG T1 4.45 Chevron, Apache, Pan Pacific Energy, KUFPEC, Shell, Kyushu Electric 3 Australia Gorgon LNG T3 5.20 Chevron, ExxonMobil, Shell, Osaka Gas, Tokyo Gas, Chubu Electric 4 Malaysia PFLNG 1 1.20 PETRONAS 5 Malaysia MLNG 9 3.60 PETRONAS 6 Indonesia Senkang LNG T1 0.50 EWC 7 Russia Yamal LNG T1 5.50 Novatek, TOTAL, CNPC 8 US Cove Point LNG 5.25 Dominion 9 US Sabine Pass T3-4 9.00 Cheniere

Total 39.2 Source: Companies, International Gas Union (IGU) 2017, HDFC sec Inst Research

Global RLNG trade grew by 1.3% CAGR over 2011-2016… …liquefaction capacity to increase by 7.58% CAGR over 2017-2020

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Liquefaction Plants Expected To Start Commercial Operation During 2018-20

No Country Project Name Nameplate Capacity (MTPA)

Owners* Status

2018 1 Australia Ichthys LNG T1 4.45 INPEX, TOTAL, Tokyo Gas, CPC, Osaka Gas,

Chubu Electric, Toho Gas Production expected in 1QCY18

2 Australia Ichthys LNG T2 4.45 INPEX, TOTAL, Tokyo Gas, CPC, Osaka Gas, Chubu Electric, Toho Gas Construction is on

3 Australia Wheatstone LNG T2 4.45 Chevron, Apache, Pan Pacific Energy,

KUFPEC, Shell, Kyushu Electric 2nd Train construction on expect production in 2017

4 Australia Prelude FLNG 3.60 Shell, INPEX, KOGAS, CPC Regular operation of FLNG wil start in 2018

5 USA Cameron LNG T1-2 8.00 Sempra, Mitsubishi/NYK JV, Mitsui, ENGIE Construction commenced in Oct-2014expected to commissioned by 2018

6 USA Freeport LNG T1 5.10 Freeport LNG, Osaka Gas, Chubu Electric Under construction

7 USA Elba Island LNG T1-6 1.50 Kinder Morgan Liquefaction terminal by Mid-

2018 8 Russia Yamal LNG T2 5.50 Novatek, TOTAL, CNPC Project under construction

9 Cameroon Cameroon FLNG 2.40 Golar, Keppel Commercial production in 1QCY18

Sub Total 39.45 2019

10 Russia Yamal LNG T3 5.50 Novatek, TOTAL, CNPC Construction is on 11 USA Freeport LNG T2 5.10 Freeport LNG, IFM Investors Under construction 12 USA Sabine Pass T5 4.50 Cheniere Production by 2HCY2019 13 USA Freeport LNG T3 5.10 Freeport LNG Under construction

14 USA Cameron LNG T3 4.00 Sempra, Mitsubishi/NYK JV, Mitsui, ENGIE

15 USA Corpus Christi LNG T1 4.50 Cheniere Commenced construction on

Trains 1 and 2

16 USA Elba Island LNG T7-10 1.00 Kinder Morgan Under construction

Sub Total 29.70

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No Country Project Name Nameplate Capacity (MTPA)

Owners* Status

2020

17 Indonesia Tangguh LNG T3 3.80 BP, CNOOC, JX Nippon Oil & Energy, Mitsubishi, INPEX, KG Berau, Sojitz, Sumitomo, Mitsui

Expected to be commissioned in 2020

18 Malaysia PFLNG 2 1.50 PETRONAS Expected to be commissioned in 2020

19 Malaysia PFLNG 3 1.50 PETRONAS Expected to be commissioned in 2020

Sub Total 6.80 Total 75.95 Source: Companies, IGU 2017, HDFC sec Inst Research Growth In Liquefaction Capacity Addition To Outpace Traded LNG Volumes

Source: IGU, HDFC sec Inst Research

Global RLNG trade will increase by 14mmtpa, while liquefaction capacity will increase by 115mmtpa over 2017-2020

241 240 237 241 245258 261 265 269 272

277 281 291 301 304

339

378

418448 454

200

250

300

350

400

450

500

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

mmtpa Global trade (mmtpa) Liquefaction capacity (mmtpa)

Projected volumes

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Weak demand in key import markets

Japan is the biggest importer of LNG. The power sector is the largest consumer of natural gas, with 63% of the mix, while the industrial (21%), residential (9%), commercial (4%) and other sectors (3%) comprise the rest. Japan’s government intends to resume using nuclear energy as a power source. The government believes the use of nuclear energy is necessary to reduce current energy supply strains and high energy prices faced by the country’s industries and household users.

Japanese government approved ‘2030 Policy for Electricity Generation’. This policy emphasises energy security, economic efficiency, emissions’ reduction, and safe use of nuclear power. This policy set the electric power source target of 27% by LNG, 26% by Coal, 21-22% by Nuclear, 3% by Oil and 22-23% by Hydro and renewables (solar, wind, geothermal and waste), compared to 42% by LNG, 31% by Coal, 3.8% by Nuclear, 4% by Oil, 18.5% by Hydro and renewables (solar, wind, geothermal and waste) in July-2017.

In line with this policy, until October 2017, five nuclear plants with a combined capacity of 4,410MW are operational and connected to the grid. Another 21 units of 27,856MW generation capacities have applied to the Nuclear Regulatory Authority (NRA), an administrative body of the Cabinet of Japan established to ensure nuclear safety in Japan, and to local authorities for restarting. Looking at the government’s emphasis on reliable, economical and clean sources for power

generation, we believe nuclear power has been expected to a play bigger role in the country’s energy mix in 2030, at the cost of LNG, Coal and Crude Oil.

RLNG Share In Composition Of Electric Power Sources By 2030 In Japan

Source: METI (The Ministry of Economy, Trade and Industry of Japan), HDFC sec Inst Research

Out of the total power generation of 84.9TWh in July 2017, 35.9TWh was generated by consuming 4.93mmt of LNG. At the current run rate, LNG import volumes would be ~58mmt in 2017. By 2030, Japan’s total power requirement would be 1,150TWh, of which 311TWh (~27%) will be fulfilled by using imported LNG. This implies that the requirement of LNG will drop from 58mmtpa in 2017 to 43mmtpa in 2030.

RLNG share in electric power source to reduce from 42% in July-2017 to 27% in 2030

39.3 42.327.0

32.9 31.4

26.0

9.9 4.0

3.0

8.79.6

8.8

4.11.3

8.7

4.17.6

6.0

0.93.8

20.5

0.0

20.0

40.0

60.0

80.0

100.0

2015 Jul-17 2030

% LNG

Coal

Oil

Hydro

Solar and Wind

Biofuels, Waste, Geothermal and others

Nuclear

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15mmtpa Of LNG Volume Reduction In Japan By 2030 Particulars Units Remarks Power generated from LNG TWh 35.9 Volume of LNG use for Power in July mmt 4.9 Volume of LNG use mmscmd 221.8 Volume require in 2017*(A) mmt 58.0 Energy demand in 2030 TWh 1,150.0 Expected power demand by METI^

Energy generation by using LNG TWh 310.5 LNG’s share will be 27% in composition of electric power sources

Volume of LNG require for power in 2030 (B) mmt 43.0 Reduction in LNG demand (A)- (B) mmt 15 Source: METI (The Ministry of Economy, Trade and Industry of Japan), HDFC sec Inst Research

4,410 MW Of Nuclear Capacity Restarted No Type Plant Reactors Remarks Capacity (MW) 1 PWR Kyushu Sendai 1&2 Unit 1 in August-2014 and Unit 2 in October-2015 1,780 2 PWR Kansai Takahama 3&4 Unit 4 in May-2017 and Unit 3 in June-2017 1,740 3 PWR Shikoku Ikata 3 September-2016 890

Total operating units 5 4,410 Source: Companies, HDFC sec Inst Research

Five nuclear plants of 4,410MW capacity are operational

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27,856MW Of Capacity Awaits Approval No Type Plant Reactors Remarks Capacity (MW)

1 PWR Kansai Ohi 3&4 Expected to restart in by 2017 end 2,360

2 PWR Kyushu Genkai 3&4 Unit 3 would be started by end 2017. Unit 4 construction is in progress 2,360

3 PWR Hokkaido Tomari 1,2,3 Seismic approval finalised 8,050 4 PWR Kansai Mihama 3 Work program filed with NRA 826 5 PWR Kansai Takahama 1&2 Expected to start in 2019 1,652

6 PWR JAPC Tsuruga 2 NRA has expert report suggesting seismic problem 1,160

7 ABWR Tepco Kashiwazaki Kariwa 6&7 Revised application filed with NRA in August-2017. Expected to start in April-2020 2,630

8 ABWR EPDC/ J-Power Ohma 1 NRA reviewing 1,383 9 BWR Chugoku Shimane 2 NRA reviewing 820

10 BWR Tohoku Onagawa 2 Construction work will be completed by March-2019 820

11 BWR Chubu Hamaoka 4 NRA reviewing, local govt opposed to restart. 1,137

12 BWR Chubu Hamaoka 3 NRA reviewing 1,100 13 BWR JAPC Tokai 2 NRA approved. Local govt opposed 1,100 14 BWR Tohoku Higashidori 1 construction work by March 2020 1,100 15 BWR Hokuriku Shika 2 Construction work by March-2018 1,358

Total applied units 21 27,856 Source: Companies, HDFC sec Inst Research

21 units of 27,856MW capacity plants have applied to NRA and local authorities for restarting

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Demand from South Korea to rise by merely ~6mmt over the next 13 years

Most of South Korea’s installed power generation capacity is fossil fuel-based, although nuclear power plays a significant role in the power sector. Baseload generation is primarily made up of coal and nuclear power, while peak demand is generally met by LNG imports. Power generation accounts for ~50% of the natural gas sales, while the city’s gas network, commercial and industrial consumers, accounted for the remaining half of the natural gas sales.

South Korea intends to reduce its greenhouse gas emission levels by 37% by 2030. As part of this effort, the government is promoting more nuclear power plants’ development, cleaner burning coal-fired plants compared to the older and less efficient units, and greater development of renewable energy. Government is trying to reduce its dependency on LNG to generate electricity and intend to reduce LNG use in energy mix from 26% in 2016 to 24.8% in 2030. In its power supply plan, the government expects its electricity demand to be 656TWh by 2029, of which 24.8% i.e. 163TWh would be generated from LNG. This would increase LNG demand merely by ~6mmt from South Korea.

Merely 6mmtpa Of Incremental Demand By 2029 In South Korea Particulars Units Gas use for power generation in 2016 mmt 15.3 Total power requirement in 2029 TWh 656.9 Power generation from LNG TWh 162.9 Gas requirement in 2029 mmt 21.4 Increase in LNG demand mmt 6.1 Source: South Korea Energy Economics Institute, HDFC sec Inst Research

RLNG prices to remain benign

Spot LNG prices depend on demand-supply dynamics. while demand is linked to economic conditions in the customers’ countries and their propensity to consume, supply depends on LNG production outlook and suppliers’ propensity to sell. Though most of the new liquefaction projects are supported by long-term contracts, several of these are destination-flexible, with LNG aggregators. This destination flexibility is encouraging trading opportunities, and led to the decoupling of LNG from crude prices.

Dissociation from oil prices will ensure that LNG prices will not move in the direction of the former, which are expected to remain elevated after extension of a supply cut by OPEC till December 2018. Dissociation from crude is apparent, as the average long-term slope to Brent has corrected from ~13-14% to as low as 11% in trail capacity growth. We expect this phenomenon to continue, and LNG prices are expected to remain under pressure.

Demand from Korea to rise by 6mmt over the next 13 years

COMPANY UPDATE 28 DEC 2017

Indraprastha Gas BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

Best in classA favourable regulatory environment, entry into new markets and the availability of a discount to alternate fuels should allow IGL volume to grow by 9% CAGR and provide pricing power to maintain margins. Based on our estimates, IGL trades at an FY19E and FY20E P/E of 27.7x and 24.8x- 41% and 26% premium to 1- standard deviation of 1-yr forward PE multiple. The favourable regulatory environment remains a significant tailwind for the company, which will support premium valuations. 9% CAGR volume growth and pricing power will ensure a RoE greater than 21% and over 25% RoIC for IGL. Our SOTP target is Rs 421/sh (30x FY20E standalone core EPS + 25x CUGL/MNGL EPS share to IGL). Maintain BUY.

Volume CAGR of ~9% over FY18E-FY20E: Regulatory announcements to address the pollution problems in the area of operations augur well for the company’s volume growth in FY17. It has witnessed overall volume growth of 14% YoY. The OLA and Uber and private car conversions have resulted in 13% YoY growth in CNG. An addition of more than 1lakh domestic PNG connections and 290 Industrial and Commercial establishments has resulted in 20% YoY growth in the PNG segment. This growth momentum will continue as (1) State government has accepted the proposal to procure 2,000 buses, of which 1,000 cluster buses will be added in 2HFY18, and the remaining 1,000 DTC buses will be added in 1HFY19, and (2) PNGRB has awarded new areas to IGL, namely Karnal, Rewari and part of Gurugram. Each of these new areas has a potential of ~0.4-0.5mmscmd.

EBITDA margin to remain above Rs 6/scm: The company has only passed on part of the benefit of the APM gas price reduction to the end consumer, resulting in EBITDA margin expansion from Rs 5.9/scm in FY17 to Rs 6.2/scm in 1HFY18. Guaranteed supply of domestic gas for CNG and Domestic PNG, which accounts for 81% of total sales volumes and low indirect taxes as compared to Diesel and Petrol, will allow CNG to enjoy 32-42% discounts to alternate fuels. We believe this should provide an adequate cushion and pricing power for IGL to maintain its margins above Rs6/scm.

Subsidiaries witnessing strong growth: MNGL and CUGL are growing by 15% and 10% YoY respectively. These companies are self sufficient, and IGL is not expecting any cash outflow to support these entities.

Well positioned to capture long-term growth: Restoration of the PNGRB quorum will expedite the long-pending CGD bid announcement, and new guidelines for bidding. The government plans to roll out new CGDs. This will open opportunities for IGL, which has over 25 years of experience and a strong balance sheet to bid aggressively.

Near-term outlook: Volume growth will continue, owing to the addition of new buses.

Financial Summary (Standalone) (Rs bn) FY16 FY17

FY18E FY19E

FY20E

Net Sales 36.7 38.0 44.0 49.1 53.9 EBITDA 7.6 9.5 11.3 13.1 14.6 APAT 4.2 5.6 6.9 8.2 9.1 Diluted EPS (Rs) 6.0 8.2 9.9 11.7 13.0 P/E (x) 55.0 40.3 33.2 28.2 25.2 EV / EBITDA (x) 29.6 23.2 19.4 16.3 14.4 RoE (%) 17.7 20.4 22.0 22.4 21.7 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS

CMP (as on 28 Dec 2017) Rs 329

Target Price Rs 421 Nifty 10,478

Sensex 33,848

KEY STOCK DATA

Bloomberg IGL IN

No. of Shares (mn) 700

MCap (Rs bn) / ($ mn) 230/3,587

6m avg traded value (Rs mn) 701

STOCK PERFORMANCE (%)

52 Week high / low Rs 339/170

3M 6M 12M

Absolute (%) 12.5 58.4 85.0

Relative (%) 4.3 48.7 55.8

SHAREHOLDING PATTERN (%)

Promoters 45.00

FIs & Local MFs 13.46

FPIs 25.26

Public & Others 16.28 Source : BSE

Nilesh Ghuge [email protected] +91-22-6171-7342

IGL : COMPANY UPDATE

Page | 16

CNG Volumes Growth PNG Volumes Growth

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Volume CAGR Of 9% Over FY18E-FY20E EBITDA Margin To Remain Above Rs6/scm

Source: Company, HDFC sec Inst Research

CNG volumes to grow by ~8% CAGR over FY18E-20E PNG volumes to grow by ~13% CAGR over FY18E-20E as new areas have high PNG potential Overall volumes to grow by ~9% CAGR over FY18E-20E Pricing power to keep EBITDA margin above Rs 6/scm

3.1 3.5 3.8 4.2 4.5

4.5

13.5

10.1 9.4

6.5

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

-0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

FY16

FY17

FY18

E

FY19

E

FY20

E

%mmscmd CNG CNG YoY Gr (%) - RHS

0.9

1.1 1.2 1.4 1.6 1.7

20.0

10.3

12.4 12.9

-

5.0

10.0

15.0

20.0

25.0

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

FY16

FY17

FY18

E

FY19

E

FY20

E

%mmscmd PNG PNG YoY Gr (%) - RHS

3.1 3.5 3.8 4.2 4.5

0.9 1.1

1.2 1.4 1.6

3.8

15.0

10.2 10.1

8.1

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY16

FY17

FY18

E

FY19

E

FY20

E

%mmscmdCNG PNG Overall YoY Gr (%) - RHS

5.3 5.9 6.1 6.5 6.6

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY16

FY17

FY18

E

FY19

E

FY20

E

Rs/scm


Page | 17

RoE And RoIC Operating Cash Flow Of Rs 27.8bn Over FY18E-FY20E

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

RoE to remain above 21% and RoIC above 25% IGL to generate OCF of Rs 27.8bn over FY18-20E

6.71

10.22 8.15

9.34 10.35

-

2.00

4.00

6.00

8.00

10.00

12.00

FY16

FY17

FY18

E

FY19

E

FY20

E

Rs bn

17.7 20.4 22.0 22.4 21.7

17.0

21.8

25.1 27.1

28.0

10.0 12.0 14.0 16.0 18.0 20.0 22.0 24.0 26.0 28.0 30.0

FY16

FY17

FY18

E

FY19

E

FY20

E

% RoE RoIC


Page | 18

Income Statement (Standalone) (Rs bn) FY16 FY17 FY18E FY19E FY20E Revenues 36.74 37.98 44.00 49.14 53.91 Growth % 0.1 3.4 15.8 11.7 9.7 Raw Material 22.76 20.84 24.38 26.99 29.58 Employee Cost 0.78 0.92 0.99 1.07 1.16 Other Expenses 5.57 6.76 7.36 7.95 8.59 EBITDA 7.63 9.47 11.26 13.14 14.58 EBIDTA Margin (%) 20.8 24.9 25.6 26.7 27.1 EBITDA Growth % (2.6) 20.1 2.6 4.5 1.2 Depreciation 1.56 1.67 1.53 1.61 1.69 EBIT 6.06 7.80 9.72 11.53 12.90 Other Income (Including EO Items) 0.30 0.65 0.72 0.79 0.87

Interest 0.10 0.01 - - - PBT 6.36 8.45 10.44 12.32 13.76 Tax 2.19 2.90 3.51 4.14 4.63 RPAT 4.17 5.55 6.93 8.17 9.13 EO (Loss) / Profit (Net Of Tax) - - - - - APAT 4.17 5.55 6.93 8.17 9.13 APAT Growth (%) (8.6) 33.2 24.8 17.9 11.8 AEPS 6.0 8.2 9.9 11.7 13.0 AEPS Growth % (4.2) 36.3 24.8 17.9 11.8


Balance Sheet (Standalone) (Rs bn) FY16 FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share Capital 1.40 1.40 1.40 1.40 1.40 Reserves And Surplus 23.76 27.87 32.37 37.68 43.62 Total Equity 25.16 29.27 33.77 39.08 45.02 Long-term Debt - - - - - Short-term Debt - - - - - Total Debt - - - - - Deferred Tax Liability 1.65 1.81 1.81 1.81 1.81 Long-term Provision 0.15 0.20 0.24 0.26 0.29 TOTAL SOURCES OF FUNDS 26.96 31.28 35.81 41.15 47.11 APPLICATION OF FUNDS Net Block 20.19 21.17 23.14 25.28 27.11 Capital WIP 2.67 3.52 4.32 4.32 4.32 LT Loans And Advances 0.06 0.08 0.08 0.08 0.08 Total Non-current Investments 2.59 2.59 2.59 2.59 2.59 Inventories 0.58 0.52 0.60 0.67 0.73 Debtors 2.51 2.01 2.33 2.61 2.86 Cash and Cash Equivalent 4.54 10.27 12.40 15.92 20.42 Other Current Assets 0.67 0.70 0.78 0.84 0.91 Total Current Assets 8.30 13.50 16.11 20.04 24.92 Creditors 1.61 2.74 3.21 3.55 3.89 Other Current Liabilities & Provns 5.24 6.85 7.23 7.61 8.02 Total Current Liabilities 6.85 9.59 10.43 11.16 11.91 Net Current Assets 1.44 3.91 5.68 8.88 13.01 TOTAL APPLICATION OF FUNDS 26.96 31.28 35.81 41.15 47.11



Page | 19

Cash Flow Statement (Standalone) (Rs bn) FY16 FY17 FY18E FY19E FY20E Reported PBT 6.38 8.61 10.44 12.32 13.76 Non-operating & EO Items (0.30) (0.65) (0.72) (0.79) (0.87) Interest Expenses 0.10 0.01 - - - Depreciation 1.56 1.67 1.53 1.61 1.69 Working Capital Change 0.78 3.32 0.40 0.35 0.39 Tax Paid (1.81) (2.74) (3.51) (4.14) (4.63) OPERATING CASH FLOW ( a ) 6.71 10.22 8.15 9.34 10.35 Capex (2.54) (3.50) (4.30) (3.75) (3.52) Free Cash Flow (FCF) 4.17 6.72 3.85 5.59 6.83 Investments 0.32 - - - - Non-operating Income 0.30 0.65 0.72 0.79 0.87 Others - - - - - INVESTING CASH FLOW ( b ) (1.92) (2.85) (3.58) (2.97) (2.65) Debt Issuance/(Repaid) (1.45) - - - - Interest Expenses (0.10) (0.01) - - - FCFE 2.62 6.71 3.85 5.59 6.83 Share Capital Issuance - - - - - Dividend (4.91) (6.96) (2.43) (2.86) (3.20) FINANCING CASH FLOW ( c ) (6.47) (6.97) (2.43) (2.86) (3.20) NET CASH FLOW (a+b+c) (1.68) 0.40 2.14 3.52 4.50 EO Items, Others 3.90 5.35 - - 0.00 Closing Cash & Equivalents 4.53 10.29 12.40 15.92 20.42


Key Ratios FY16 FY17 FY18E FY19E FY20E PROFITABILITY % EBITDA Margin 20.8 24.9 25.6 26.7 27.1 EBIT Margin 16.5 20.5 22.1 23.5 23.9 APAT Margin 11.3 14.6 15.7 16.6 16.9 RoE 17.7 20.4 22.0 22.4 21.7 Core RoCE 17.0 21.8 25.1 27.1 28.0 RoCE 16.4 19.6 20.7 21.2 20.7 EFFICIENCY Tax Rate % 34.4 33.6 33.6 33.6 33.6 Fixed Asset Turnover (x) 1.1 1.0 1.0 1.0 1.0 Inventory (days) 6 5 5 5 5 Debtor (days) 25 19 19 19 19 Other Current Assets (days) 7 7 6 6 6 Payables (days) 16 26 27 26 26 Other Current Liab & Provns (days) 52 66 60 57 54 Cash Conversion Cycle (days) (31) (61) (56) (52) (50) Net Debt/EBITDA (x) (0.6) (1.1) (1.1) (1.2) (1.4) Net D/E (0.2) (0.4) (0.4) (0.4) (0.5) Interest Coverage 0.0 0.0 - - - PER SHARE DATA (Rs) EPS 6.0 8.2 9.9 11.7 13.0 CEPS 8.2 10.5 12.1 14.0 15.5 Dividend 6.0 8.5 3.0 3.5 3.9 Book Value 35.9 41.8 48.2 55.8 64.3 VALUATION P/E (x) 55.0 40.3 33.2 28.2 25.2 P/Cash EPS (x) 40.0 31.2 27.2 23.5 21.3 P/BV (x) 9.2 7.9 6.8 5.9 5.1 EV/EBITDA (x) 29.6 23.2 19.4 16.3 14.4 EV/Revenue (x) 6.1 5.8 5.0 4.4 3.9 Dividend Yield (%) 1.8 2.6 0.9 1.1 1.2 CFO/EV (%) 3.0 4.6 3.7 4.4 4.9 FCFF/EV (%) 1.8 3.1 1.8 2.6 3.3 FCFE/M Cap (%) 1.1 2.9 1.7 2.4 3.0


INITIATING COVERAGE 28 DEC 2017

Mahanagar Gas NEUTRAL


Tepid volume growthLack of regulatory compulsion and a gradual penetration to new areas is expected to result in 4-5% volume growth for the company. Low indirect taxes compared to those of alternate fuels provide pricing power to the company. Thus, we believe the company will be able to maintain margins. We believe that given state support of conversions, volume potential in existing area of operation, new geographical areas, and stakes in high growth CGD companies IGL should command a valuation premium over MGL. Therefore, we use a 10% discount to IGL’s 30x FY20E EPS to adjust for lower volume growth of MGL. Using 27x FY20E EPS, our TP is Rs1,211. We initiate with NEUTRAL.

EBITDA margin to remain above Rs 6.8/scm: The company has adopted margin accretive pricing policy, which resulted in EBITDA margin expansion in FY17. While the overall cut in the APM gas cost for MGL was in FY17, the company only passed on part of the benefit to the end consumers, resulting in EBITDA margin expansion from Rs 5.5/scm in FY16 to Rs 6.7/scm in FY17. Guaranteed supply of domestic gas for CNG and Domestic PNG, which accounts for 86% of total sales volumes and low indirect taxes compared to Diesel and Petrol, will allow CNG to enjoy a 32-42% discount to alternate fuels. We believe this should provide enough cushion and pricing power for MGL to maintain margins.

Tepid volume growth: At 74%, CNG remains MGL’s dominant volume contributor. Domestic PNG stands at 12% of total volumes, followed by 14% for industrial, commercial and others. We believe that the lack of regulatory compulsions in Mumbai to shift

to PNG/CNG, unlike Delhi, will limit volume growth for MGL. The company has started work on building an infrastructure in Raigad district, and is expanding in the authorised areas close to Thane city. However, expansion in these geographies is very slow, and owing to a lack of regulatory compulsion, the shift to gas is very sluggish in this area. In the near term, there are no plans to add CNG-driven buses by State Transport Undertakings (STUs) operating in the area of operation of MGL. Instead of that, these entities are experimenting with electric vehicles. We expect an overall volume growth of 4-5% over FY18E-20E.

Inclusion of natural gas under GST could drive volumes: Currently, the effective tax rate on CNG is 23% of the retail selling price in Mumbai. We believe the GST rate is unlikely to be above 18%. With 18% GST rate, the selling price is expected to reduce by 9%. This will result in widening of the gap between CNG and Diesel/Petrol, making it more economical as compared to these alternate fuels that may drive volumes for MGL.

Near-term outlook: We do not see a significant jump in volume growth owing to lack of regulatory compulsions.

Financial Summary (Standalone) (Rs bn) FY16 FY17 FY18E FY19E FY20E Net Sales 20.8 20.3 21.4 22.4 24.4 EBITDA 5.1 6.4 7.2 7.2 7.5 APAT 3.1 3.9 4.4 4.3 4.4 Diluted EPS (Rs) 31.2 39.8 44.6 43.6 44.8 P/E (x) 35.4 27.7 24.8 25.2 24.5 EV / EBITDA (x) 20.2 16.0 14.2 14.0 13.2 RoE (%) 18.5 22.1 22.8 20.3 19.2 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS

CMP (as on 28 Dec 2017) Rs 1,097

Target Price Rs 1,211 Nifty 10,478

Sensex 33,848

KEY STOCK DATA Bloomberg MAHGL IN

No. of Shares (mn) 99

MCap (Rs bn) / ($ mn) 107/1,676

6m avg traded value (Rs mn) 272


52 Week high / low Rs 1,378/768

3M 6M 12M

Absolute (%) 0.3 12.7 40.2

Relative (%) (7.9) 3.0 11.0


Promoters 65.00


FPIs 9.98



MAHANAGAR GAS : INITIATING COVERAGE

Page | 21

CNG Volumes Growth PNG Volumes Growth

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Overall Volume Growth EBITDA Margin Trend


CNG volumes to grow by ~4.1% CAGR over FY18E-20E New areas have a large potential of PNG customers, resulting in ~7.1% CAGR over FY18E-20E in PNG volumes Overall volumes to grow by ~4.9% CAGR over FY18E-20E EBITDA margin to remain at ~ Rs6.8/scm

1.84 1.90 1.99 2.07 2.16

2.3 3.2

4.8

3.9

4.3

-

1.0

2.0

3.0

4.0

5.0

6.0

-

0.50

1.00

1.50

2.00

2.50

FY16

FY17

FY18

E

FY19

E

FY20

E

%mmscmd CNG CNG YoY Gr (%) - RHS

0.63 0.67 0.70 0.76 0.80

46.5

6.3 4.4

8.3 5.9

-5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0

-0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90

FY16

FY17

FY18

E

FY19

E

FY20

E

%mmscmd PNG PNG YoY Gr (%) - RHS

2.5 2.6 2.7 2.8 3.0

10.8

4.0 4.7 5.1 4.7

-

2.0

4.0

6.0

8.0

10.0

12.0

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

FY16

FY17

FY18

E

FY19

E

FY20

E

%mmscmd Total Overall YoY Gr (%) - RHS

5.5

6.7 7.4

6.8 6.8

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FY16

FY17

FY18

E

FY19

E

FY20

E

Rs/scm


Page | 22

RoE And RoIC Operating Cash Flow

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Impact Of GST On CNG Prices Price build up of CNG Unit Delhi Mumbai Delhi Mumbai VAT % 5.0 13.5 Excise duty/GST % 14.4 14.4 18.0 18.0 Price before duties Rs/kg 33.1 32.8 33.1 32.8 Excise duty + VAT Rs/kg 6.6 9.8 5.9 5.9 Selling Price Rs/kg 39.7 42.6 39.0 38.7 Effective tax incidence % 16.7 23.0 15.3 15.3 Est. reduction in price Rs/kg (0.7) (3.9) Est. reduction in price % (1.8) (9.1) Source: Company, HDFC sec Inst Research

MGL to generate OCF of Rs16.4bn over FY18-20E With 18% GST rate, the selling price is expected to reduce by 9% in Mumbai

18.5

22.1 22.8

20.3 19.2

21.3

24.2 24.3

21.6 20.4

10.0

12.0

14.0

16.0

18.0

20.0

22.0

24.0

26.0

FY16

FY17

FY18

E

FY19

E

FY20

E

% RoE RoIC

4.3

5.3 4.9

5.7 5.8

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY16

FY17

FY18

E

FY19

E

FY20

E

Rs bn


Page | 23

Income Statement (Standalone) (Rs bn) FY16 FY17 FY18E FY19E FY20E Revenues 20.79 20.34 21.35 22.83 24.44 Growth % (0.8) (2.2) 5.0 6.9 7.1 Raw Material 12.30 10.18 10.16 11.50 12.58 Employee Cost 0.54 0.60 0.67 0.71 0.74 Other Expenses 2.83 3.11 3.29 3.42 3.56 EBITDA 5.13 6.44 7.23 7.20 7.56 EBIDTA Margin (%) 24.7 31.7 33.9 31.5 30.9 EBITDA Growth % 4.7 25.6 12.2 (0.4) 5.0 Depreciation 0.84 0.95 1.07 1.25 1.45 EBIT 4.29 5.49 6.16 5.95 6.11 Other Income (Including EO Items) 0.43 0.53 0.52 0.55 0.57

Interest 0.03 0.01 0.00 0.01 0.01 PBT 4.69 6.01 6.68 6.49 6.68 Tax 1.60 2.07 2.28 2.18 2.25 RPAT 3.09 3.93 4.40 4.30 4.43 EO (Loss) / Profit (Net Of Tax) - - - - - APAT 3.09 3.93 4.40 4.30 4.43 APAT Growth (%) 2.6 27.5 11.9 (2.3) 2.9 AEPS 31.2 39.8 44.6 43.6 44.8 AEPS Growth % 2.5 27.5 11.9 (2.3) 2.9


Balance Sheet (Standalone) (Rs bn) FY16 FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share Capital 0.89 0.99 0.99 0.99 0.99 Reserves And Surplus 16.39 17.41 19.29 21.13 23.01 Total Equity 17.28 18.40 20.28 22.11 24.00 Long-term Debt 0.04 0.03 0.03 0.03 0.03 Short-term Debt - - - - - Total Debt 0.04 0.03 0.03 0.03 0.03 Deferred Tax Liability 1.20 1.38 1.38 1.38 1.38 Long-term Provision 0.12 0.14 0.14 0.14 0.14 TOTAL SOURCES OF FUNDS 18.64 19.95 21.83 23.66 25.54 APPLICATION OF FUNDS Net Block 11.29 13.05 14.45 15.91 17.43 Capital WIP 4.29 4.12 4.12 4.12 4.12 LT Loans And Advances 0.73 1.12 1.12 1.12 1.12 Total Non-current Investments - - - - - Inventories 0.18 0.24 0.24 0.27 0.29 Debtors 0.93 0.95 1.00 1.07 1.14 Cash and Cash Equivalent 5.68 6.15 6.54 7.57 8.43 Other Current Assets 0.60 0.63 0.66 0.71 0.76 Total Current Assets 7.40 7.96 8.43 9.60 10.62 Creditors 1.12 1.49 1.49 1.68 1.84 Other Current Liabilities & Provns 3.94 4.81 4.80 5.41 5.90 Total Current Liabilities 5.06 6.30 6.28 7.09 7.74 Net Current Assets 2.34 1.67 2.15 2.51 2.88 TOTAL APPLICATION OF FUNDS 18.64 19.95 21.83 23.66 25.54



Page | 24

Cash Flow Statement (Standalone) (Rs bn) FY16 FY17 FY18E FY19E FY20E Reported PBT 4.69 6.01 6.68 6.49 6.68 Non-operating & EO Items (0.43) (0.53) (0.52) (0.55) (0.57) Interest Expenses 0.03 0.01 0.00 0.01 0.01 Depreciation 0.84 0.95 1.07 1.25 1.45 Working Capital Change 0.65 0.80 (0.09) 0.66 0.50 Tax Paid (1.43) (1.90) (2.28) (2.18) (2.25) OPERATING CASH FLOW ( a ) 4.35 5.34 4.86 5.68 5.81 Capex (2.28) (2.54) (2.47) (2.72) (2.97) Free Cash Flow (FCF) 2.07 2.81 2.39 2.96 2.84 Investments 0.01 (0.02) - - - Non-operating Income 0.43 0.53 0.52 0.55 0.57 Others - - - - - INVESTING CASH FLOW ( b ) (1.84) (2.03) (1.95) (2.17) (2.39) Debt Issuance/(Repaid) 0.01 (0.67) 0.01 - - Interest Expenses (0.03) (0.01) (0.00) (0.01) (0.01) FCFE 2.05 2.12 2.40 2.95 2.84 Share Capital Issuance - 0.09 (0.00) - - Dividend (1.88) (2.26) (2.54) (2.47) (2.54) FINANCING CASH FLOW ( c ) (1.90) (2.85) (2.53) (2.48) (2.55) NET CASH FLOW (a+b+c) 0.61 0.46 0.39 1.03 0.87 EO Items, Others - - Closing Cash & Equivalents 5.68 6.15 6.54 7.57 8.43


Key Ratios FY16 FY17 FY18E FY19E FY20E PROFITABILITY % EBITDA Margin 24.7 31.7 33.9 31.5 30.9 EBIT Margin 20.6 27.0 28.9 26.1 25.0 APAT Margin 14.8 19.3 20.6 18.8 18.1 RoE 18.5 22.1 22.8 20.3 19.2 Core RoCE 21.3 24.2 24.3 21.6 20.4 RoCE 17.3 20.4 21.1 18.9 18.0 EFFICIENCY Tax Rate % 34.1 34.5 34.1 33.7 33.7 Fixed Asset Turnover (x) 0.9 0.8 0.8 0.8 0.8 Inventory (days) 3 4 4 4 4 Debtor (days) 16 17 17 17 17 Other Current Assets (days) 11 11 11 11 11 Payables (days) 20 27 25 27 27 Other Current Liab & Provns (days) 69 86 82 86 88 Cash Conversion Cycle (days) (59) (80) (75) (81) (83) Net Debt/EBITDA (x) (1.1) (1.0) (0.9) (1.0) (1.1) Net D/E (0.3) (0.3) (0.3) (0.3) (0.4) Interest Coverage 0.0 0.0 0.0 0.0 0.0 PER SHARE DATA (Rs) EPS 31.2 39.8 44.6 43.6 44.8 CEPS 39.8 49.5 55.4 56.2 59.5 Dividend 15.8 19.0 21.3 20.8 21.4 Book Value 175.0 186.3 205.3 223.9 243.0 VALUATION P/E (x) 35.1 27.5 24.6 25.2 24.5 P/Cash EPS (x) 27.6 22.2 19.8 19.5 18.4 P/BV (x) 6.3 5.9 5.3 4.9 4.5 EV/EBITDA (x) 20.0 15.9 14.1 14.0 13.2 EV/Revenue (x) 4.9 5.0 4.8 4.4 4.1 Dividend Yield (%) 1.4 1.7 1.9 1.9 1.9 CFO/EV (%) 4.2 5.2 4.8 5.6 5.8 FCFF/EV (%) 2.0 2.7 2.4 2.9 2.8 FCFE/M Cap (%) 1.9 2.0 2.2 2.7 2.6


COMPANY UPDATE 28 DEC 2017

Petronet LNG BUY


Volumes, the key driver Softer LNG price will make it competitive on energy terms with alternate fuels. A relatively low re-gasification tariff compare to competitors, well-connected terminals and tied up capacity with off-takers ensure healthy utilisation of Petronet’s LNG terminals, despite competition from new terminals. Our TP is Rs 304/sh (17x of FY20E EPS). Maintain BUY.

Kochi terminal to break even: The Kochi terminal, which was commissioned in 2014 and accounts 35% of the balance sheet , has not broken-even owing to lack of pipeline capacity. GAIL is targetting Dec-2018 as the commissioning date for the Kochi-Mangalore pipeline. This should help to increase terminal utilisation from 15.7% in 2QFY18 to 34% in FY20. This in turn will help the terminal’s turnaround and contribute positively. We estimate that the contribution of EPS from the Kochi terminal will increase to Rs1.7/sh from loss of Rs1.3/sh in FY17.

Dahej expansion: Currently, the company is expanding the Dahej terminal capacity from 15mmtpa to 17.5mmtpa. This expansion will be completed by end-FY19. This should drive volumes’ expansion beyond FY19. EPC contracts for this expansion are already awarded, and the company is confident of completing this project on time. We expect the Dahej terminal volumes to increase from 14mmtpa in FY17 to 15.6mmtpa in FY20, and to 17.2mmtpa in FY21.

Move from marketing to tolling business model: PLNG has a unique business model, where it has moved away from the marketing model to pure tolling, resulting in the quality of earnings being much better. Further,

customers have funded its capex resulting in stickiness of customer. Marketing margin’s contribution reduced from 30% of total gross margins in FY13 to 4% in FY17. We expect it to further reduce to 1.2% by FY20.

Healthy cash generation over FY18E-20E: Over the next three years (FY18-20), PLNG would generate Operating Cash Flow (OCF) of Rs 76.9bn. However, its capex requirement is limited at Rs 21.3bn, including capex required for expansion at the Dahej terminal by 2.5mmtpa. The company will generate FCF of Rs 55.6bn. In our FY20 estimates, the stock is trading at FCF yield of 6.2%. We have not factored in increase in the dividend payment. However, company may increase its dividend payout.

Strong balance sheet to help in pursuing growth opportunities: PLNG is at the forefront of actively exploring and promoting the direct use of LNG, especially in heavy vehicles and inland waterways. On a pilot basis, PLNG plans to set up two pumps each at Dahej and Kochi to supply LNG.

Near-term outlook: Incremental volumes are expected after the completion of the Kochi-Mangalore pipeline, and expansion of the Dahej terminal.

Financial Summary (Standalone) (Rs bn) FY16 FY17 FY18E FY19E FY20E Net Sales 271.3 246.2 293.2 296.2 350.9 EBITDA 15.9 25.9 29.7 32.4 39.4 APAT 9.1 17.1 18.4 20.7 25.4 Diluted EPS (Rs) 6.1 11.4 12.3 13.8 16.9 P/E (x) 41.3 22.1 20.5 18.2 14.8 EV / EBITDA (x) 23.8 13.9 11.9 10.6 8.1 RoE (%) 14.6 23.2 20.9 20.1 20.9 Source: Company, HDFC sec Inst Research

INDUSTRY OIL & GAS

CMP (as on 28 Dec 2017) Rs 251

Target Price Rs 304 Nifty 10,478

Sensex 33,848

KEY STOCK DATA Bloomberg PLNG IN

No. of Shares (mn) 1,500

MCap (Rs bn) / ($ mn) 376/5,866

6m avg traded value (Rs mn) 1,231


52 Week high / low Rs 276/176

3M 6M 12M

Absolute (%) 12.0 16.0 37.0

Relative (%) 3.8 6.3 7.9


Promoters 50.00


FPIs 21.83



PETRONET LNG : COMPANY UPDATE

Page | 26

Dahej Volume Break Up Dahej Regasification Charges

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Kochi Volume Trend Kochi Regasification Charges


277 423 434 434 434

75

37 10 10 20 213

256 332 342 342

-

100

200

300

400

500

600

700

800

900

FY16

FY17

FY18

E

FY19

E

FY20

E

tbtu Long Term Spot/St Services

40.9 43.1 45.3 47.6 49.9

-

20.0

40.0

60.0

FY16

FY17

FY18

E

FY19

E

FY20

E

Rs/mmbtu

18 14 31 38

87

-

20

40

60

80

100

FY16

FY17

FY18

E

FY19

E

FY20

E

tbtu

66.0 72.5 76.2 80.0 84.0

-

20.0

40.0

60.0

80.0

100.0

FY16

FY17

FY18

E

FY19

E

FY20

E

Rs/mmbtu

Dahej volumes will increase from 14mmtpa in FY17 to 15.6mmtpa in FY20 We have assumed 5% escalation in Regasification tariff for Dahej Terminal Kochi volumes will increase from 0.28mmtpa in FY17 to 1.7mmtpa in FY20 We have assumed 5% escalation in Regasification tariff for Kochi Terminal


Page | 27

Operating Cash Flow Free Cash Flow

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Marketing Margin And Its Contribution To Total Margins


26.3

18.722.8 25.2

29.0

-

5.00

10.00

15.00

20.00

25.00

30.00

35.00

FY16

FY17

FY18

E

FY19

E

FY20

E

Rs bn

16.4 13.9 15.6 14.4

25.6

-

5.00

10.00

15.00

20.00

25.00

30.00

FY16

FY17

FY18

E

FY19

E

FY20

E

Rs bn

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

%Rs bnMarketing Margin As a % of gross margin - RHS

PLNG to generate OCF of Rs 77bn and FCF of Rs 55.6bn Marketing margin’s contribution reduced from 30% of total gross margins in FY13 to <4% in FY17. We expect it to further reduce to 1.2% by FY20


Page | 28

Income Statement (Standalone) (Rs bn) FY16 FY17 FY18E FY19E FY20E Revenues 271.33 246.16 293.16 296.19 350.93 Growth % (31.3) (9.3) 19.1 1.0 18.5 Raw Material 250.76 214.17 257.16 257.05 304.10 Employee Cost 0.72 0.74 0.86 1.04 1.24 Other Expenses 4.00 5.33 5.44 5.72 6.16 EBITDA 15.86 25.92 29.70 32.39 39.42 EBIDTA Margin (%) 5.8 10.5 10.1 10.9 11.2 EBITDA Growth % 10.2 63.5 14.6 9.0 21.7 Depreciation 3.22 3.69 3.51 3.62 3.90 EBIT 12.64 22.23 26.19 28.77 35.52 Other Income (Including EO Items) 1.73 3.47 2.40 3.20 3.36

Interest 2.39 2.10 1.12 1.04 1.04 PBT 11.99 23.60 27.48 30.93 37.84 Tax 2.86 6.55 9.07 10.21 12.49 RPAT 9.12 17.06 18.41 20.73 25.36 EO (Loss) / Profit (Net Of Tax) - - - - - APAT 9.12 17.06 18.41 20.73 25.36 APAT Growth (%) 3.4 87.0 7.9 12.6 22.3 AEPS 6.1 11.4 12.3 13.8 16.9 AEPS Growth % 3.4 87.0 7.9 12.6 22.3


Balance Sheet (Rs bn) FY16 FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share Capital 7.50 7.50 15.00 15.00 15.00 Reserves And Surplus 58.64 73.44 79.83 96.05 116.89 Total Equity 66.14 80.94 94.83 111.05 131.89 Long-term Debt 22.33 14.50 9.87 9.87 9.87 Short-term Debt - - - - - Total Debt 22.33 14.50 9.87 9.87 9.87 Deferred Tax Liability 5.89 7.30 10.05 13.14 16.92 Long-term Provision 14.06 13.92 13.37 12.84 12.33 TOTAL SOURCES OF FUNDS 108.41 116.66 128.12 146.89 171.01 APPLICATION OF FUNDS Net Block 68.04 84.19 83.41 82.60 91.05 Capital WIP 15.57 0.53 5.00 13.00 4.00 LT Loans And Advances 0.98 0.95 0.95 0.95 0.95 Total Non-current Investments 3.81 3.60 3.60 3.60 3.60 Inventories 2.46 5.41 6.44 6.50 7.71 Debtors 11.21 12.11 13.72 13.81 16.46 Cash and Cash Equivalent 21.83 30.98 34.34 43.95 65.90 Other Current Assets 0.36 0.53 0.26 0.26 0.26 Total Current Assets 35.86 49.03 54.75 64.53 90.33 Creditors 7.72 9.45 11.24 11.36 13.46 Other Current Liabilities & Provns 8.13 12.18 8.34 6.42 5.46 Total Current Liabilities 15.85 21.63 19.59 17.78 18.92 Net Current Assets 20.01 27.40 35.17 46.74 71.41 TOTAL APPLICATION OF FUNDS 108.41 116.66 128.12 146.89 171.01



Page | 29

Cash Flow Statement (Standalone) (Rs bn) FY16 FY17 FY18E FY19E FY20E Reported PBT 11.99 23.60 27.48 30.93 37.84 Non-operating & EO Items (1.73) (3.47) (2.40) (3.20) (3.36) Interest Expenses 2.39 2.10 1.12 1.04 1.04 Depreciation 3.22 3.69 3.51 3.62 3.90 Working Capital Change 12.36 (2.09) (0.57) (0.04) (1.76) Tax Paid (1.91) (5.13) (6.32) (7.12) (8.71) OPERATING CASH FLOW ( a ) 26.30 18.70 22.81 25.23 28.96 Capex (9.93) (4.80) (7.20) (10.81) (3.35) Free Cash Flow (FCF) 16.37 13.91 15.61 14.42 25.61 Investments 2.12 0.24 - - - Non-operating Income 1.73 3.47 2.40 3.20 3.36 Others - - - - - INVESTING CASH FLOW ( b ) (6.08) (1.09) (4.80) (7.61) 0.01 Debt Issuance/(Repaid) 2.17 (1.85) (9.02) (2.45) (1.47) Interest Expenses (2.39) (2.10) (1.12) (1.04) (1.04) FCFE 16.15 9.96 5.47 10.93 23.10 Share Capital Issuance - - 7.50 - - Dividend (2.26) (4.51) (4.51) (4.51) (4.51) FINANCING CASH FLOW ( c ) (2.48) (8.46) (7.15) (8.00) (7.02) NET CASH FLOW (a+b+c) 17.75 9.15 10.86 9.61 21.95 EO Items, Others 0.46 - (7.50) (0.00) (0.00) Closing Cash & Equivalents 21.83 30.74 34.34 43.95 65.90


Key Ratios FY16 FY17 FY18E FY19E FY20E PROFITABILITY % EBITDA Margin 5.8 10.5 10.1 10.9 11.2 EBIT Margin 4.7 9.0 8.9 9.7 10.1 APAT Margin 3.4 6.9 6.3 7.0 7.2 RoE 14.6 23.2 20.9 20.1 20.9 Core RoCE 13.7 22.6 20.0 22.6 25.7 RoCE 10.6 16.5 15.7 15.6 16.4 EFFICIENCY Tax Rate % 23.9 27.7 33.0 33.0 33.0 Fixed Asset Turnover (x) 2.3 1.9 2.1 1.9 2.0 Inventory (days) 3 8 8 8 8 Debtor (days) 15 18 17 17 17 Other Current Assets (days) 0.5 0.8 0.3 0.3 0.3 Payables (days) 10 14 14 14 14 Other Current Liab & Provns (days) 11 18 10 8 6 Cash Conversion Cycle (days) (2) (5) 1 3 6 Net Debt/EBITDA (x) 0.0 (0.6) (0.8) (1.1) (1.4) Net D/E 0.0 (0.2) (0.3) (0.3) (0.4) Interest Coverage 0.2 0.1 0.0 0.0 0.0 PER SHARE DATA (Rs) EPS 6.1 11.4 12.3 13.8 16.9 CEPS 8.2 13.8 14.6 16.2 19.5 Dividend 1.3 2.5 2.5 2.5 2.5 Book Value 44.1 54.0 63.2 74.0 87.9 VALUATION P/E (x) 41.3 22.1 20.5 18.2 14.8 P/Cash EPS (x) 30.5 18.1 17.2 15.5 12.9 P/BV (x) 5.7 4.7 4.0 3.4 2.9 EV/EBITDA (x) 23.8 13.9 11.9 10.6 8.1 EV/Revenue (x) 1.4 1.5 1.2 1.2 0.9 Dividend Yield (%) 0.5 1.0 1.0 1.0 1.0 CFO/EV (%) 7.0 5.2 6.5 7.4 9.0 FCFF/EV (%) 4.3 3.9 4.4 4.2 8.0 FCFE/M Cap (%) 4.3 2.6 1.5 2.9 6.1


GAS : SECTOR UPDATE

Page | 30

1yr Price Movement

Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

100

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400

Dec-

16

Jan-

17

Feb-

17M

ar-1

7

Apr-

17

May

-17

Jun-

17

Jul-1

7

Aug-

17

Sep-

17

Oct

-17

Nov

-17

Dec-

17

IGL

600

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800

900

1,000

1,100

1,200

1,300

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16

Jan-

17

Feb-

17M

ar-1

7

Apr-

17M

ay-1

7

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17Ju

l-17

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17O

ct-1

7

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-17

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17

Mahanagar Gas

120

170

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320

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16Ja

n-17

Feb-

17M

ar-1

7Ap

r-17

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-17

Jun-

17Ju

l-17

Aug-

17Se

p-17

Oct

-17

Nov-

17De

c-17

Petronet

GAS : SECTOR UPDATE

Page | 31

Disclosure: I, Nilesh Ghuge, MMS, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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mailto:[email protected]

GAS : SECTOR UPDATE

Page | 32

HDFC securities Institutional Equities Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel, Mumbai - 400 013 Board : +91-22-6171 7330 www.hdfcsec.com

28 dec 2017 gas sector - hdfc securities sector - dec17...sector update 28 dec 2017 gas sector hdfc...

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