saral gyan value picks april 2011

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

http://www.saralgyan.in/

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


1. Company Background Petronet LNG is at the forefront of India's all‐out national drive to ensure the country's 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 India's 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.



Primary 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. LNG's 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.



LNG 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



2. 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

2,244.592,385.46

2,525.96

3,057.72

3,627.64

3,985.97

170.84 206.28131.1297.2983.21 111.370.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

4,000.00

4,500.00

Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11

Rs

in C

rore

s

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

1 2 3 4 5 6



Current & Expected Earnings: Income Statement (Rs m) Year End March 2010 2011 2012E 2013ENet Revenue 106,491 131,973 183,608 286,337Raw Material Expenses 96,648 118,012 167,855 264,470Gross Profit 9,843 13,961 15,753 21,866Employee Cost 204 306 266 412Other Expenses 1,174 1,493 1,567 1,645EBITDA 8,465 12,163 13,920 19,809Depr. & Amortization 1,609 1,847 1,879 3,932Net Interest 1,839 1,931 2,030 3,515Other Income 978 680 850 1,000Profit before Tax 5,995 9,064 10,860 13,362Total Tax 1,950 2,868 3,608 4,438Profit after Tax 4,045 6,196 7,253 8,923Ex‐Od items / Min. Int. — — — —Adj. PAT 4,045 6,196 7,253 8,923Avg. Shares O/S (m) 750.0 750.0 750.0 750.0EPS (Rs.) 5.4 8.3 9.7 11.9

Key Financial Metrics Year End March 2010 2011 2012E 2013EGrowth Revenue (%) 26.3 23.9 39.1 56.0EBITDA (%) (6.1) 43.7 14.4 42.3PAT (%) (22.0) 53.2 17.1 23.0EPS (%) (22.0) 53.2 17.1 23.0Profitability EBITDA Margin (%) 7.9 9.2 7.6 6.9PAT Margin (%) 3.8 4.7 4.0 3.1RoCE (%) 11.7 14.5 13.5 14.9RoE (%) 19.2 25.2 24.6 25.1Balance Sheet Net Debt : Equity 1.0 1.0 1.1 0.7Net Working Cap. (days) (2) 1 2 2Valuation PER (x) 25.3 16.5 14.1 11.5P / B (x) 4.6 3.8 3.2 2.6EV / EBITDA (x) 14.6 10.6 9.9 6.5EV / Sales (x) 1.2 1.0 0.7 0.4Earnings Quality Eff. Tax Rate 32.5 31.6 33.2 33.2Other Inc / PBT 16.3 7.5 7.8 7.5Eff. Depr. Rate (%) 4.5 5.1 5.2 5.2FCFE / PAT (126.6) 168.9 256.2 (299.4)Source: Saral Gyan Research.



Quarterly 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 2,063

Key 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.



3. 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.



5. Future Outlook Sector wise projected Gas demand in India:

India’s Current Demand (Optimistic) – Domestic Supply Scenario:



6. 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.



7. Disclaimer

portant Notice: Saral Gyan Capital Services is an Independent Equity Research Company.

GYAN CAPITAL SERVICES

his document prepared by our research analysts does not constitute an offer or solicitation for the

Im

isclosure: The author of this article does not hold shares in the recommended company. D © SARAL Tpurchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Saral Gyan Capital Services (www.saralgyan.in) or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.


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