spark capital- natural gas utilities- in-depth report - alarms on lng are scare mongering

Natural Gas Utilities Sector

In–depth report

Oct 2011

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Sector Outlook Positive

Natural Gas Utilities

1

Executive Summary

Market data

BSE SENSEX 16536

Nifty 4974

BSEO&G 8632

Date Oct 12, 2011

Mayur Patel, CFA

[email protected]

+91 44 4344 0037

Vishnu Kumar A S

[email protected]

+91 44 4344 0069

Alarms on LNG are scaremongering; despite rising LNG prices, replacement economics

remain attractive in core segments; Upgrade PLNG to Buy and Reiterate Buy on GAIL

There has been lot of noise in relation to rising LNG prices denting gas demand in the country. Based on our

thorough channel checks with refineries and CGDs (key users of spot RLNG), we observed that substitution

economics of RLNG even at $18-$20 (delivered price) remain attractive in the core segments – CNG and LFR in

CGD and Naphtha/Diesel replacement in refineries. The low cost fuels (FO/LSHS) replacement which is a small

segment has seen some pounding due to high spot prices. Spot LNG prices are likely to remain stubborn over

next couple of months due to chaotic buying by Japan. However, the current levels which are threatening to

breach oil parity are not sustainable as demand would shift back to oil – already China and UK are reducing

spot LNG offtake. We do not see any risks to LNG spot volumes (just 0.5-0.7mmtpa for PLNG and 1.8mmtpa for

Shell Hazira) which are quite nominal given the rock solid demand in the country. Nevertheless, lofty

marketing margins on spot LNG booked by PLNG and GAIL in 1Q would taper down over the next two

quarters. We believe the recent correction of 10-12% in PLNG is unwarranted and gives an opportunity to buy

into the Indian LNG story. Upgrade PLNG from ADD to Buy and Reiterate Buy on GAIL

Inter-ministerial committee dropped Gas Pooling but recommends pref allocation to priority sectors and LNG usage to

meet 22-27% of the requirement in Fertiliser/Power projects. It also recommends capping of allocation to CGDs at

current levels and Industrials at 5mmscmd (current cons. is 18mmscmd). Further, it is proposed to do away with the 5%

custom duty on LNG and accord “declared goods” status to N.Gas. This is a strong positive for PLNG, GAIL and GSPL

from a long term perspective as it would increase appetite for costly LNG in the Fertiliser and Power sectors.

Declining KGD6 supplies continues to restrain throughput levels in GAIL and GSPL pipelines and there is no major

incremental domestic supply over the next 2 years. Benign petchem prices, gas marketing margins and sequentially

lower subsidy would cushion GAIL’s profitability in the near term. On the CGD side, rising LNG prices and

strengthening dollar have started putting pressure on margins but IGL would be better off given its recent merger of

allocation and consistent price hikes. GGAS’ spreads have peaked out in 2QCY11 and likely to taper down over

subsequent quarters as it is not planning any further price hike till December. GSPL is likely to record weak

performance in the near term with flat volumes due to decline in KGD6 supplies and lower LNG offtake in Gujarat

power utilities. Further delay in tariff approval and postponement of listing of GSPC gas would impede any re-rating in

the near term. Prefer GAIL over GSPL in midstream and IGL over GGAS in CGDs

Valuation and view: After a 10-12% correction over last month, PLNG is trading at attractive valuation of 12x EPS and

2.8x book of FY13E. GAIL is a compelling defensive play available at attractive valuations of 1.9x FY13E book (ex-

invest.) which is at the lower end of its trading band. GSPL is trading at par with GAIL at ~2.0x FY13E book (ex-invest.)

but we do not see any near term positive triggers; IGL and GGAS are trading at rich valuations of 15x FY13E EPS but

IGL would continue to outperform driven by strong volume growth and consistent price hikes.

Risks: Prolonged tightening of global R-LNG markets; Delay in execution of ongoing pipelines / terminals

TP (Rs) Abs. Rel.

GAIL 541 BUY OPF

GGAS 402 REDUCE UPF

GSPL 96 REDUCE UPF

IGL 451 ADD OPF

PLNG 190 BUY OPF

mailto:[email protected]




2

Current Developments

Rising LNG Prices and

strengthening USD are pushing

input cost higher while Brent

remains flat

LNG prices likely to remain

stubborn during winters

KG D6 continues to fall

Final Report suggest no

pooling but recommends tax

sops and ~25% LNG usage in

priority sectors

Surging imported Urea prices

pushing GOI to fasttrack

fertilizer projects despite high

LNG prices

Recent MoUs/HOA and

investments in shale gas assets

to provide supply visibility for

upcoming LNG terminals

Our views – Impact on the sector

Weakening crude and rising Spot LNG prices (10-15% over last 6months to

Delivered price of ~$18-20/mmbtu) have narrowed savings against low cost fuels

like FO/LSHS (20-25% of replacement demand in refineries). However, LNG

remains attractive in refineries (Naptha replacement and gas turbines

forming 70-75% of req in refineries) and CGDs. E.g. GSPC Gas runs entirely

on LNG (~3.8mmscmd)

Spot LNG prices are likely to remain stubbornly high ($15-$17) over next 3-4

months owing to Japan crisis. However, prices above oil parity are not sustainable

and we may see offtake from China and Europe coming down

KG D6 supplies have dipped to 44.5mmscmd levels as compared to 60mmscmd a

year ago. RIL’s new partner BP has guided to ramp up supplies by FY14, supplies

till then may remain tepid

Inter-ministerial committee drops Pooling, but strongly recommends RLNG usage

(22-25% of requirement) in on-going/future projects in Fertiliser and Power. This

would surely enhance RLNG appetite in the priority sectors. It also recommends

exemption of 5% custom duty on LNG and to accord declared goods status to

N.Gas for VAT purpose

Imported urea prices have surged by ~50% in the last six months to ~$550/MT. The

conversion and new/debottlenecking projects (Gas req. of 28mmscmd) are now

placed on the top of the GOI’s agenda. The 22-25% LNG usage recommended can

bring down the blended cost to $9-10 levels even if RLNG costs $18. At this

blended rate the cost of prodn would be in the range of $400-$420 vs. imported

price of $550.

Recently various Indian companies (GAIL, GSPC, PLNG & IOC) signed an MOU

with Gazprom for supply of LNG by FY15/16(10mmtpa); GSPC signed a 2.5mmtpa

deal for supplies starting FY14, such large deals provide strong volume cushion for

R-LNG terminals under constrn. (60% of FY16 capacity is tied with long term

supplies)

Stock specific impact

PLNG – Despite rising prices, spot

volumes of 0.5-0.7mmtpa can easily be

placed as demand remains buoyant.

Market margins may normalise to $0.20-

$0.25 levels.

GAIL – Adverse impact on QoQ drop in

brent is greatly offset by higher USD in

Petchem and LPG biz; Gas marketing

margins may come down from previous

quarter’s highs though.

Negative for Transmission biz of GAIL and

GSPL. Positive for PLNG as more RLNG

would be required to meet the deficit.

Positive for the RLNG story. Positive for

PLNG, GAIL and GSPL.





LNG even at $18-$20 generates attractive savings in core segments; Committee

recommends 22-27% LNG usage in Fert/power; PLNG & GAIL in sweet spot



3

PLNG

Temporary tightening of LNG markets would not affect PLNG’s performance as substantial part of its capacity is tied-up and

marketing margins are also locked in short term contracts. Out of our estimated 10.5mmtpa FY12E dahej volumes (7.5mmtpa Long

term; 1.5mmtpa short term with built in margins; 1mmtpa 3rd party Regas - 0.5 GAIL Marubeni and 0.5-1 GSPC contracts) spot

volumes would be hardly 0.5-0.7mmtpa. Further, substantial part of spot/short term volumes are placed in refineries and CGDs where

LNG remains attractive vs. Naptha (@ $27/mmbtu), Petrol, Diesel etc,. Sustained spot volumes and margins ($0.2-$0.25) and timely

execution of Kochi terminal would drive momentum in the stock going forward. Current underperformance gives a good opportunity to

buy into the stock– Upgrade to Buy-OPF

GAIL

The strengthening USD would mostly offset the negative impact of weakening crude on Petchem and LPG realisations in the near

term. Falling KGD6 volumes would put pressures on transmission throughput, hence we have reduced our volume estimates.

However, gas marketing margins would continue to cushion profitability and subsidy reforms may emerge as a near term trigger.

Current valuations are attractive to enter a solid defensive story which can yield attractive returns in the medium term. Reiterate Buy-

OPF

GSPL

Tumbling KGD6 volumes have already started putting pressure on GSPL pipelines. Further, Tariff overhang is likely to persist for 6-12

months as the new chairman and members of PNGRB would take some time to settle down. New pipelines are won at aggressive

capex and acquiring RoU outside Gujarat would be a difficult game – too early to assign any value to these. Lack of any near term

triggers (Listing of GSPC Gas postponed) would also entail underperformance. Reiterate Reduce-UPF

IGL

In a scenario of rising LNG prices and strengthening dollar, IGL would outperform given its strong pricing power esp. in the CNG

market. Recent merger of APM allocation and consistent price hikes has fortified it to fight against rising gas costs. Heightened

spreads would normalise over ensuing quarters though. Robust volume growth, strong pricing power and quality balance sheet would

continue to drive outperformance in near term. Reiterate Add-OPF

GGAS

GGAS has also showcased pricing power by sharply increasing prices over last 6-8 months to pass on rising gas costs. However,

industrial customers (>80% of volumes) especially textile processors are posing resistance. After the recent price hike in August,

mgmt has no plans for further hikes till December. This would imply that rising LNG prices and USD would pull down spreads from

Rs. 5.9 in 2QCY11 to Rs. 4.9 by 4QCY11E. In the absence of any strong visibility for volume growth, stock would underperform due to

current rich valuations. Reiterate Reduce-UPF

Snapshot of Views on Stocks



4

Valuation Matrix

* For Gujarat Gas FY11/12/13 represents CY10/11/12 financial year end

Company

Sales (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) CAGR FY11-FY13E

FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E Sales EBITDA PAT

GAIL 324,586 370,884 417,844 54,546 62,114 70,908 35,611 39,570 41,733 28.1 31.2 32.9 13.5% 14.0% 8.3%

Gujarat Gas * 18,493 25,280 29,697 4,156 5,249 5,566 2,565 3,448 3,608 20.0 26.9 28.1 26.7% 15.7% 18.6%

Gujarat State Petronet 10,465 10,892 11,132 9,694 10,094 10,263 5,064 4,794 4,614 9.0 8.5 8.2 3.1% 2.9% -4.5%

Indraprastha Gas 17,441 25,019 33,768 4,923 6,949 8,100 2,598 3,472 3,938 18.6 24.8 28.1 39.1% 28.3% 23.1%

Petronet LNG Ltd 131,973 216,743 312,051 12,163 16,813 20,326 6,196 9,075 9,716 8.3 12.1 13.0 53.8% 29.3% 25.2%

Company

P/E P/B EV/EBITDA

CMP

(Rs)

Mkt Cap Target Rating

FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E (Rs. mn) Basis Price Absolute Relative

GAIL 14.9x 13.4x 12.7x 2.7x 2.4x 2.1x 9.3x 8.2x 7.7x 417 528,955 DCF 541 BUY O-PF

Gujarat Gas * 21.0x 15.6x 14.9x 6.4x 5.3x 4.6x 11.6x 8.9x 8.3x 420 53,865 DCF 402 REDUCE U-PF

Gujarat State Petronet 11.6x 12.2x 12.7x 2.9x 2.5x 2.2x 7.3x 7.4x 7.7x 104 58,512 DCF 96 REDUCE U-PF

Indraprastha Gas 23.0x 17.2x 15.1x 5.9x 4.7x 3.8x 12.7x 9.0x 7.8x 426 59,640 DCF 451 ADD O-PF

Petronet LNG Ltd 19.1x 13.1x 12.2x 4.4x 3.5x 2.9x 12.3x 9.6x 7.9x 158 118,500 DCF 190 BUY O-PF


Natural Gas Utilities LNG prices on the rise – Core segments (Naphtha, Petrol, Diesel etc) continue to be

attractive; savings diminish on low cost fuel replacement (FO/LSHS)

5

Core segments remain attractive

Source: BPCL, Bloomberg, Spark Capital Research. Petrol, Diesel prices at Delhi

• Spot R-LNG prices have reached $15-$16/mmbtu from $12-$13/mmbtu in the

previous quarter. At these levels, the delivered prices work out to $19/mmbtu

in Gujarat and ~$20/mmbtu in the Northern part of the country. While this rally

has diminished savings on FO/LSHS (small demand segment), the

replacement of other fuels like Naphtha, Petrol, Diesel etc remains attractive

• While the LNG prices are likely to remain strong during winters (Oct-Mar) due

to Japan crisis, it should taper down subsequently as some off takers would

refrain from prices higher than the oil-parity. Although the timeline of restart of

nuclear reactors is uncertain, the new PM has clearly shown strong inclination

to quickly resume unaffected units

• The spot rates of $15-$16 are threatening to breach the oil-parity (16.67% of

JCC) levels. We believe the prices cannot sustain above oil-parity level for

long as demand would shift out of gas to oil

Spot R-LNG delivered price at $19-$20/mmbtu

Source: News reports, Company data, Spark Capital Research.

* Guj. - GSPL tariff of Rs. 800/mscm; Outside Guj. highest tariff of DVPL upg Rs. 1900/mscm

$/mmbtu Gujarat North India

FOB 14.0 14.0

Shipping cost 0.5 0.5

CIF Price 14.5 14.5

Import duty @ 5.15% 0.7 0.7

CIF Price (incl. tax) at Terminal 15.2 15.2

Re-gas tariff (Rs. 34/mmbtu) 0.74 0.74

Ex Terminal 16.0 16.0

VAT @15% 2.4 2.4

Marketing margins of PLNG 0.3 0.3

Pipeline tariff (max) including service tax of

10%* 0.5 1.3

Delivered Price 19.2 19.9

Fuel Fuel Oil LSHS Naphtha Deisel Petrol

Price $/MT 767 799 1,086 1,054 1,706

Kcal / Kg 10,500 10,000 10,500 9,500 11,250

Equiv.Cost

($/mbbtu) 18 20 26 28 38

Spot price

($/mmbtu) 20.0 20.0 20.0 20.0 20.0

Savings -8% 1% 30% 40% 91%

Spot R-LNG prices likely to inch higher over next few quarters

Source: Bloomberg, Spark Capital Research.

$10.9 $11.2 $11.0 $12.0

$13.8

$16.0 $16.5 $16.5

$15.0

$6

$10

$14

$18

1QFY11 3QFY11 1QFY12 3QFY12E 1QFY13E

Japan LNG price ($/mmbtu)

Spot R-LNG to remain high

as Japan & Korea would

draw more N.gas during

winter (Oct’11-Mar’12)

5


Natural Gas Utilities Japan’s Nuclear Shutdown may continue to push LNG prices upward during the

winter season

Japanese LNG Cons. in the Power Sector to shoot by 8-10 MMTPA

Source: FEPC, Spark Capital Research

2.5

2.9

3.3

3.7

4.1

4.5

4.9

5.3

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

2009 2010 2011

LN

G c

on

s.

in

po

wer

(MM

T)

• The Japanese Earthquake has knocked off

a good part of the country’s nuclear based

capacity, as a result LNG imports have

increased by ~20% for firing gas based

power plants

• Currently only 11 out of the 54 nuclear

reactors are operational and even those

operating are due for maintenance

shutdown by April’12

• The Japanese Govt. has set up an elaborate

procedure for restarting nuclear units after

approving satisfactory stress test results.

But, no deadline for restart has been set yet

The Institute of Energy Economics forecasts incremental LNG consumption under 2 scenarios:

Restart of Nuclear plants by Sep – CY11 +8 MMTPA; CY12 -3MMTPA

No restart of Nuclear plants – CY11 +14MMTPA; CY12 +19.5MMTPA

Although, recent commentary by Japanese Prime minister – Mr. Yoshihiko Noda was much in favour of reviving nuclear reactors, the timing

and extent of revival is still uncertain

Recently, Japanese Prime Minister Yoshihiko Noda, said he is determined to restart idle reactors by next summer after conforming to the

safety standards. He further added that it was "impossible" for the country to get by without them or to consider a quick phase out of nuclear

energy. He plans to bring online the unaffected units (shutdown for maintenance) as early as possible. Noda is more seriously worried about

the risk of power shortages on the manufacturing sector. Further, a total nuclear shutdown would add nearly $40 billion a year in additional

fuel costs. Source: WSJ, BBC

6



Japan LNG prices threatening to breach Oil Parity – Unlikely to hold !

Source: Bloomberg, Spark Capital Research.

$0

$5

$10

$15

$20

$25

Japan LNG price CIF ($/mmbtu) JCC N.gas-Oil parity price ($/mmbtu)

Japanese LNG prices are correlated to JCC with a lag of 2-3 months

Oil parity: It is the LNG price that would be equal to that of crude

oil on a barrel of oil equivalent basis. Energy equivalent price is

calculated by dividing oil prices (in $/bbl) by a factor of 6 to give

equivalent prices in $/mmbtu.

The current Japanese LNG price (CIF) of ~$16/mmbtu is close to

the oil parity of $17.2/mmbtu. Even if it breaches the oil parity, it

is unlikely to sustain as it will make customers shift back to

crude related products.

The Japanese LNG price has remained below the Oil parity for

~80% of its 10year history. Hence we don’t see LNG prices

sustaining at such elevated levels in the long run.

News flow from China and Britain seems to suggest that their spot requirements during the winter are likely to remain muted…

Sep 2011(China): China's CNOOC, the country's largest LNG player, has little appetite for spot imports of LNGfor this winter as a jump in Japanese

demand has tightened near-term supply and led to a surge in freight costs. Also China's role in the spot LNG market in the short to medium term is

expected to be minimal due to a government policy that requires all LNG terminals to lock in the bulk of their requirement. CNOOC’s official also quoted

that they don't really see a shortage from the CNOOC side as they are well-covered by term supplies. Source: Reuters, Ibtimes

Sep’11 (UK): National Grid, the British network operator has forecasted gas demand to fall by 2 percent this winter as power plants choose cheaper coal

to generate power instead of gas. Also, increasing supplies from North sea, milder weather than the prev. two years and full gas storage capacity are

likely to result in lower LNG offtake. Source: Reuters, Platts, Catalyst- Commercial

LNG prices: Near term LNG prices likely to breach oil parity, unlikely to sustain in the

long run; China & Britain unlikely to pursue aggressive buying in winter..

7


Natural Gas Utilities Refinery: Status Check – Despite rising LNG prices key demand segments remain

unaffected – No major risk to PLNG’s spot volumes

~70-75% of N.gas replace Naphtha/Diesel – hence not much risk..

Source: Industry, Spark Capital Research

Refinery Status Check – N.gas replacing Naphtha intact, shift back to FO/LSHS seen in RIL & Essar Oil

Key Refineries MTPA Cur. usage

(mmscmd)

Potential

(mmscmd) Channel checks

Reliance 60,000 7.0 10.0 N.Gas consumption dropped from ~9mmscmd in 1QFY12 to ~7mmscmd due to shift

back to FO/ LSHS. RIL can draw upto 12mmscmd

Essar Oil 10,500 0.4 1.8 Essar has dropped its gas consumption from ~0.7mmscmd to ~0.4mmscmd, due to

shift to FO/LSHS for process users

HPCL, Mumbai 6,500 0.8 1.1

The Refinery is using N. gas to replace Naptha and as fuel in its CPP. It is also

undertaking feasibility studies for shifting from FO and LSHS. Gas req.could go upto

1.5mmsmcd

BPC, Mumbai 12,000 1.2 2.0 The Mumbai refinery is consuming ~1.2mmscmd of N.gas and there are no

indications of shifting to FO/LSHS for process firing

IOC, Mathura,

Panipat, Koyali 42,700 5.0 7.5

IOC Mathura (1.5mmscmd) has an environmental mandate to use gas irrespective of

the prices – Panipat and Gujarat refineries are also consuming gas without any

decline in offtake

Total 131,700 14.4 22.4

Source: Spark Capital Research

RIL & Essar Oil have dropped

their gas usage to the extent of

FO/LSHS replacement as

internally generated fuels

(FO/LSHS) are cheaper than

N.gas at current prices.

Not much savings on FO/LSHS; ~30% savings on Naphtha

Source: BPCL, Bloomberg, Spark Capital Research. Petrol & Diesel prices at Delhi

Fuel Fuel Oil LSHS Naphtha Diesel Petrol

Price $/MT 767 799 1,086 1,054 1,706

Kcal / Kg 10,500 10,000 10,500 9,500 11,250

Equiv.Cost

($/mbbtu) 18 20 26 28 38

Spot price

($/mmbtu) 20.0 20.0 20.0 20.0 20.0

Savings -8% 1% 30% 40% 91%

N. Gas required for Naphtha/Diesel replacement forms 70-75% of the gas requirement of Refinery – economics are attractive. N. gas req. for FO/LSHS

replacement forms 20-25% of refinery requirement – economics are dull.

Present

configuration

Present

configuration Present input

Natural Gas

Requirement

(% of total)

Present

configuration

Present

configuration

Natural gas

req. for a

15mmtpa

Power

plant (CPP)

Process

users Hydrogen generation

Naphtha / Diesel Fuel Oil / LSHS Naphtha

~40%-45% ~20%-25% ~35%-40%

1.2-1.6mmscmd 0.6-0.8mmscmd 1.0-1.2mmscmd

8


Natural Gas Utilities Refinery: Strong potential – Key determinants would be Pipeline connectivity and

gas supply

Refineries MTPA Potential

(mmscmd) Remarks

Tota Gas based capacity 131,700 8.0

IOCL Haldia 7,500 1.3

HPCL, Visakh 8,300 1.4 The Vizag refinery is currently undertaking studies to shift to N.gas and final investment

decision is likely to be taken in line with pipeline connectivity and gas availability

BPCL, Kochi 9,500 1.6 Feasibility studies for switching to N. gas is currently being undertaken; PLNG Kochi

terminal likely to supply N. gas

CPCL, Chennai 11,500 1.9 Feasibility studies for switching to N. gas is currently being undertaken; PLNG's Kochi

terminal or IOCL's proposed Ennore terminal likely to supply N.gas

MRPL, M'lore 11,820 2.0 Undertaking feasibility studies; likely supply from PLNG’s Kochi terminal through GAIL’s

PL

Bina 6,000 1.0 Refinery capable of using N.gas; no PL connectivity yet

Bhatinda 9,000 1.5 Capable of using N.gas.; refinery in commissioning/stabilisation stage; N.gas req. is

likely to be assessed once plant is fully operational.

Others 7,078 1.2

Total Conversion Opportunity 70,698 19.7

IOC Paradip (New) 15,000 2.5 Completion by FY13/14

Nagarjuna (New) 6,000 1.0 Completion by FY13

MRPL (Expansion) 3,180 0.5 Completion by FY12/FY13

Essar (Expansion) 7,500 1.3 Completion by FY13

BPCL (Expansion) 2,500 0.4 Completion by FY14

HPCL (Expansion) 5,200 0.9 Completion by FY13/14

Bina (Expansion) 3,000 0.5 Completion by FY15

BPCL Kochi (Expansion) 6,000 1.0 Completion by FY15

CPCL (Expansion) 5,500 0.9 Completion by FY16

Total Addnl. Capacity (FY12-16) 53,880 9.0

Total Refinery Capacity (FY16) 256,278 28.7

We have conservatively

est. the incremental

demand at 2.5 mmscmd

for a 15MMTPA plant vs

an ideal req. of 3.5-

4mmscmd, thus giving

considerable upside to

our est. of 29mmscmd of

incremental N.gas req. by

FY16E

Most of these plants

are undertaking

studies for conversion

to N.gas and are likely

to be completed only

when the refineries

are connected with

gas pipelines

9



CGD: Yes there is an appetite for expensive R-LNG (Even at $20/mmbtu)

Commercial PNG - Attractive - Domestic PNG will make sense if noises on Policy decisions happen (Rs.700/ cylinder)

Domestic Commercial

Weight (Kgs) 14.2 14.2 14.2 19.0 19.0 19.0

Price Rs. / Cylinder 395 700 700 1,300 1,300 1,300

Price (Rs. /Kg) 28 49 49 68 68 68

Calorific value (kcal/kg) 11,900 11,900 11,900 11,900 11,900 11,900

Rs./1000 kcal 2 4 4 6 6 6

Gas Cost $/mmbtu $7 $7 $20 $7 $15 $20

PNG Price Rs/ scm 22 22 42 30 43 51

Calorific value 8,700 8,700 8,700 8,700 8,700 8,700

Rs. / 1000 kcal 3 3 5 3 5 6

Savings % -8% 39% -15% 40% 15% -2%

Source: IGL, Industry, Spark Capital Research

*The PNG price is arrived at after factoring in CGD operators gross margins of Rs. 8/scm or Domestic and Rs. 17.5/scm

for commercial. CNG / PNG prices at Delhi

Govt in May’11 had proposed to deregulate LPG

prices and make direct cash transfer to bank

accounts of BPL families. Based on news reports

this move would increase the cylinder prices to Rs.

700 and save the exchequer about Rs. 110bn.

While it is at a very nascent stage , PNG will make

good economics if this policy move happens

CNG economics are extremely attractive even at R-LNG prices of $20/mmbtu 4 wheelers Bus

Fuel Petrol Petrol Petrol Deisel Deisel Diesel

Price (Rs. / Ltr) 66.8 66.8 66.8 41.3 41.3 41.3

Mileage (Km /Ltr) 12.0 12.0 12.0 4.0 4.0 4.0

Running Cost (Rs. /Km) 5.6 5.6 5.6 10.3 10.3 10.3

Gas Cost $/mmbtu 7.0 15.0 20.0 7.0 15.0 20.0

CNG (Rs. / Kg)* 32.0 49.1 61.7 30.2 49.1 61.7

Mileage (Km / Kg) 18.0 18.0 18.0 4.5 4.5 4.5

Running Cost (Rs. /Km) 1.8 2.7 3.4 6.7 10.9 13.7

% Saving 68% 51% 38% 35% -6% -33%

Daily Average Kms 50.0 50.0 50.0 150.0 150.0 150.0

Kit Cost (Rs. per kit) 35,000 35,000 35,000 300,000 300,000 300,000

Saving /Yr (300 days

assumed) 56,833 42,563 32,092 162,884 NA NA

Payback Period (Yrs) 0.6 0.8 1.1 1.8 NA NA

Source: IGL, Industry, Spark Capital Research

*The CNG price is arrived at after factoring in CGD operators gross margins of Rs. 10/Kg and excise duty of 12.5%

CNG/Petrol/Diesel prices at Delhi

CNG generates attractive savings vs. alt.

fuels even at gas cost (RLNG) of

$20/mmbtu

Commercial PNG is attractive at $15/mmbtu levels

and breaks even at $20/mmbtu levels

Industrial: Savings on Naphtha/Diesel;

Breaks even with FO/LSHS

Fuel Fuel Oil LSHS Naphtha Diesel

Price $/MT 767 799 1,086 1,054

Kcal / Kg 10,500 10,000 10,500 9,500

Equiv.Cost per

mmbtu ($/mbbtu) 18 20 26 28

Spot price

($/mmbtu) 20.0 20.0 20.0 20.0

Savings -8% 1% 30% 40%

Source: BPCL, Spark Capital Research

10


Natural Gas Utilities Inter – ministerial committee drops pooling; Recommends pref. domestic gas

allocation and 22-27% LNG usage for Fertiliser/Power projects

All power plants which apply for linkage to have a PPA of 85% of

their generation. – Risks to gas allocation for merchant units like

Torrent, GMR and Lanco.

Fertilizer and Power on priority for allocation of domestic natural gas 2

Recommendation to use 22-27% R-LNG in fertilizer and power for incremental gas

requirements

Long term positive for PLNG and GAIL as it increases R-LNG

demand in Fertilizer and Power sectors. However, the report

remains silent on the acceptable R-LNG price levels at which the

75:25 mix is feasible in the new fertilizer/power units.

3

No addnl. allocation to CGD apart from the existing allocation of 6mmscmd and 1mmscmd

be reserved for court mandated customers

Neutral for IGL and Guj Gas. They are not factoring in any

additional allocation. 4

Non-priority sectors’ allocation would be capped at 5mmscmd vs. current offtake of

~18mmscmd. They need to rely more on RLNG so that cheap domestic gas is diverted

towards regulated sectors

Negative for Refineries, Steel, Sponge iron etc. Positive for

PLNG and GAIL, as they would be selling more R-LNG to these

non-priority sectors to offset the decline in domestic allocation. 5

The Committee does not recommend pooling mechanism for natural gas at the overall

level, nor does it recommend a price pooling on sectoral basis, except where that may be

found to be the best workable option

Though the committee has rejected the idea of pooling, it still

suggests pooling where it could be a workable option, inferring

a potential in fertiliser and power sectors.

1

Pipeline tariff which is presently being set on a cost/bid-based Zonal tariff basis should be

modified to the extent that the outlier tariffs (for small offtakes) should not be more than 50

per cent of the average tariffs

Based on our channel checks GAIL’s pipeline tariff do not vary

significantly across zones. However, GSPL’s tariff for long

distance zones are higher than zones nearer to the source –

this clause may cause some changes to the tariff set up of

GSPL.

6

Committee recommends to align the import duty on LNG (~5%) with that of crude

petroleum (Nil duty) and to accord declared good status to natural gas/LNG 7 Positive for Gas Utilities and end consumers.

It has recommended a more fair mechanism for fixing prices of domestic gas - Inferred

price based on average of Henry Hub and netback price of Japan Korea Marker or Asian

LNG 8

This should definitely push domestic prices upwards and

therefore it is positive for gas producers like ONGC, OIL,

and RIL.

We believe PLNG and GAIL to be the key beneficiaries of these recommendations. PLNG would benefit from higher volumes due to increased R-LNG demand in

priority sectors. GAIL would gain from higher transmission volumes and better marketing volumes/margins. GSPL may also benefit from increased R-LNG

flows.

11



FY11 FY12 FY13 FY14 FY15 FY16 FY17

Net domestic gas available 119 110

Less: Fert & Power offtake 89 88

Net Gas available 30 22

(-) CGD, CNG, Court mandated Cons. 8 7

(-) Fixed for Industries 5

Net addnl available for priority 22 10

Additional Availability (assumed ) - - - 8 8 8 8

Total Dom. Gas availability 22 10 - 8 8 8 8

Consumption of Fertiliser Sector

(a) Switching LSHS/FO & Naphtha 3.8 4.0 2.2

(b) Debottlenecking 1.0 2.0 1.0

(c) New plants 4.0 7.0 3.0

Total Addnl Req. 4.8 6.0 7.2 7.0 3.0

Domestic Gas 33 32 36 40 46 51 53

Imported R-LNG 7 8 9.2 10.7 12.5 14.2 15.0

Total 40 40 44.8 50.8 58.0 65.0 68.0

Proportion of R-LNG 17% 20% 21% 21% 22% 22% 22%

Net Dom. Gas available after Fert. 10.0 -3.6 3.5 2.6 2.7 5.8

Consumption of Power Sector

Total Addnl. Req. (New Plants) - 16 26 16 3 - -

Proportion of R-LNG 9% 15% 26% 26% 24% 25% 27%

Source: Inter-ministerial committee‘s final report on gas pooling

Under a reasonable scenario it assumes an

incremental natural gas prodn. of 8mmscmd p.a

The committee recommends usage of R-LNG to the

extent of ~20% - 22% of the overall demand

Fertiliser/Power projects cannot progress without LNG; Gas potential of 28mmscmd in Fertiliser ~22% to be met from RLNG – Positive for PLNG and GAIL

Incremental gas demand from ~12GW of power

capacity due for completion over FY12 – FY15

The final report’s workings shows preferential allocation of dom. gas to Fertiliser followed by Power sector and recommends usage of R-LNG to the tune of

~21%-22% in the fertiliser sector. The workings (below) gives the actual requirement of Fertiliser and Power sector and how it could be met.

Current gas availability after meeting the req. of the

priority sectors is 22 mmscmd, which is being used

for CNG and other Industries/Refineries. The

committee recommends to restrict the allocation

for CNG to 7mmsmcd and Industries to 5mmsmcd.

The balance 10mmsmcd to be used in the Fertiliser

sector

Overall gas potential of 28mmscmd over FY12-16

The committee recommends a R-LNG mix of 25%-27% in the power sector.

12



At $9/mmbtu Urea prodn. ($420/tonne) is much cheaper than imports

Source: BPCL, FAI, Spark Capital Research

• Gas cons. in fertiliser sector is set to increase from 40mmscmd to 68mmscmd

(FY17) backed by conversion/debottlenecking/new projects

• The final Inter-minist. Committee report on gas pooling has suggested that

22% of gas requirements in the on-going projects to be met by R-LNG

• Imported urea prices have rallied by ~50% over the last 6 months. Based on

our workings at a pooled price of $9/mmbtu the cost of prodn. works out to

$400-$420/tonne vs imported price of $560/tonne – makes a strong case for

RLNG usage

• Govt. is proposing to decontrol urea and to bring it inline with NBS, once

approved by CCEA this would increase the appetite for R-LNG in this sector

• The conversion process in north India based FO units are progressing on

track. South based units like Madras fertilizer are almost done with conversion

and can switch to gas as and when supply and infra emerge

Fertilizer: Surging imported urea prices; recommendations for 22% LNG usage; and

decontrol of urea pricing to push implementation of projects

0

100

200

300

400

500

600

700

800

900

$6 $7 $8 $9 $767 $1,085

N.Gas $/mmbtu Fuel Oil $/MT

Naphtha $/MT

$ /t

on

ne (fo

r various

inputs

)

100% savingsImported Cost of Urea $570 (FOB+Ship.+Others)

List of Fertiliser plants

Urea Plants Fuel Capacity

('000 MT) Status

Gas Req.

(mmscmd)

Existing Gas based Plants N. Gas 17,130 40

NFL, Panipat (Haryana) Fuel Oil 512 COD Jan'13

NFL, Nangal (Punjab) Fuel Oil 479 COD Jan'13

NFL, Bhatinda (Punjab) Fuel Oil 512 COD Jan'13

GNVFC, Bharuch (Guj.) Fuel Oil 636 COD 4QFY12

SPIC (Tuticorin) Naphtha 620

Madras Fertilisers, Manali Naphtha 486 COD Dec'12

MCFL, Mangalore Naphtha 380

Zuari Nagar (Goa) Naphtha 399

FACT – Udyogamandal Naphtha 330

Total Naphtha & FO plants 4,354 10

Total Operating Capacity 21,483 50

Debottlenecking/ Revamp Fuel Capacity

('000 MT) Status

Gas Req.

(mmscmd)

CFCL, Gadepan I (Raj.) N. Gas 158

CFCL, Gadepan II (Raj.) N. Gas 125

IGFL, Jagdishpur (U.P.) N. Gas 244

KRIBHCO, Hazira, (Guj.) N. Gas 466

RCF, Thal (Mah.) N. Gas 450

NFL, Vijaipur I (M.P.) N. Gas 135

NFL, Vijaipur II (M.P.) N. Gas 224

1,802 4

New Plants (COD FY15-17) 14

Total Addl. Gas Requirement 28

Total Gas Requirement (FY17) 68

Source: Inter. Min committee report on gas pooling, FAI, Spark Capital Research

13



PLF’s to tread lower given challenges on supply/pricing

Year

Gas based -

Installed Capacity

(GW)

Gas req. @90% PLF

(mmscmd)

Gas Supply

(mmscmd) PLF%

FY 10 15,769 78 55 64%

FY 11 17,652 86 62 65%

FY 12 21,055 103 62 54%

FY 13 24,323 119 66 50%

FY 14 25,505 125 72 52%

FY 15 27,005 132 80 54%

FY 16 28,505 140 80 52%

Source: CEA, Industry Statistics, Company data, Spark Capital Research

Large additions on yesteryear gas promises; Fuel a challenge now !

State Plant

Capacity

(MW) COD

Gas Req.

(mmscmd) Fuel Source

Delhi Pragati III Power 1,500 2012 7.4 GAIL, IOCL &

BPCL - 2 each

Delhi Rithala CCPP 108 2012 0.5 0.6 from KG - D6

Gujarat Hazira/Pipavav 1,053 2012 5.2 FSA – GSPC

AP Lanco - Kondapalli 742 2012 3.6 KG - D6 ?

AP GMR - Rajahmundry 768 2012 3.8 KG - D6 ?

Assam Assam Power 100 2013 0.5 0.6 from Oil India

AP Reliance - Samalkot 2,400 2013 11.8 KG - D6 ?

Gujarat Torrent - SUGEN 382 2014 1.9 KG - D6 ?

Gujarat Torrent - Dahej 800 2014 3.9 KG - D6 ?

7,853 38.5

Source: Company data, CEA, Spark Capital Research

• Gas offtake in the power sector will remain muted given the declining

KGD6 supplies, lack of other sizeable additional supplies and unviable

R-LNG economics as compared to coal. (See table below)

• The final report on gas pooling highlights that new gas based plants are

required to have atleast 85% PPA for dom. gas allocation. This in our view

raises questions for the allocation of gas to existing merchant units like

Lanco, GMR and Torrent

• The inter-mini. Committee’s final report on gas pooling recommends usage of

R-LNG to the extent of 25%-27% for the new plants. Based on our workings

at 25% ($15/mmbtu) R-LNG mix the cost of power would be Rs. 4/kwh, which

we believe would be a challenge to sell. Hence, we have conservatively

taken a much lower demand from the power sector than assumed in the final

report and expect to operate at ~50% PLFs.

Power: Committee strongly recommends 25-27% R-LNG – Even this may not solve

the problem

Cost of Power Generation Coal Gas

Fuel Source Domestic Imported Domestic Imported Imported

Landed cost

($/tonne $ /mmbtu) $33 $72 $7 $10 $18

UHV-Coal/LNG (Kcal per

Kg/mmbtu) 2,800 4,000 8,500 9,000 9,000

Heat Rate (Kcal / Kwh) 2,250 2,250 1,900 1,900 1,900

Energy Charge (Rs. Per Kwh) 1.2 1.8 2.4 3.4 6.1

PLF 85% 85% 85% 85% 85%

Fixed Cost (Rs. /Kwh) 1.2 1.2 1.0 1.0 1.0

Cost of Power (Rs. / Kwh) 2.4 3.0 3.4 4.4 7.1

Merchant Rate Rs. 3.5/kwh

Merchant Rate Rs. 4/kwh

Merchant Rate Rs. 4.5/kwh


14



Supply (MMSCMD) FY10 FY11 FY12E FY13E FY14E FY15E FY16E

Total Onshore 23 23 23 23 23 23 23

Mumbai High 48 48 48 48 48 48 48

KG - D6 42 56 46 45 50 65 75

Panna Mukta Tapti 14 12 14 13 12 12 11

ONGC - 1 2 6 7 7 7

Deen Dayal GSPC - - - - 3 6 8

NEC-25 - - - - - 2 3

Others 2 2 2 2 2 2 2

Total Offshore 107 119 112 114 122 142 154

CBM 0 1 2 4 6 7 8

Total Production 130 143 137 141 151 172 185

Less: Int. Cons, Flaring 17 15 13 14 15 16 16

Less: LPG/C2/C3 extr. 8 8 11 11 11 11 11

Net Supply 105 120 113 116 125 145 158

LNG Imports 33 37 45 59 72 81 108

Total Supply 137 157 158 175 197 226 265

Demand (MMSCMD) FY10 FY11 FY12E FY13E FY14E FY15E FY16E

Power 57 62 62 66 72 80 80

Fertilizers 38 40 42 45 51 58 65

Refinery & Petchem 23 24 26 42 58 71 76

CGD 12 14 19 22 27 30 33

Others 8 17 20 20 20 20 20

Total Demand 137 157 169 195 228 259 274

Deficit - - 9 20 30 33 9

Source: FAI, CEA, PNGRB, MoPNG, Spark Capital Research

KGD6 continues to fall – likely ramp up by 2014; LNG projects continue to march

ahead despite rising R-LNG prices

• We have made changes to our N. gas supply estimates to factor in declining KG-D6 supplies. We expect gas production to remain flattish

(addition of only 8mmscmd) over FY11-14E largely driven by dwindling KG D6 volumes. Supply is likely to pick up again over FY14-16E with

ramp up in KG-D6 and surge in volumes from CBM fields, GSPC KG-basin and ONGC’s marginal fields. Further there can be upsides from

Shale gas and early start of ONGC’s KG-DWN which we are not factoring in our estimates

• Refineries and CGDs continue to lead consumption in a scenario of rising LNG supplies. We expect the Fertiliser sector to join the momentum

if the recommendations of recently placed report are accepted.

• We expect domestic production to grow by only 8mmscmd to

151mmscmd over FY11-14E. (CBM – 5, ONGC/GSPC – 9,

KG D6 – (6))

• KG-D6 production is currently below 45mmscmd as against an

expected output of 60mmscmd by FY11/12. We are factoring a

flattish volume output ~45-50mmscmd over FY11-14 and

expect it to ramp up only by FY15E

• CBM ramp up by players like Essar and Reliance in MP and W.

Bengal would provide addnl. volumes of 5mmscmd by FY14E

• ONGC is likely to add volumes of 6mmscmd by FY14E.

G1/GS15, North Tapti, C Series and arginal fields would be the

likely contributors

• GSPC’s Deen Dayal block is set to come live by mid FY14E,

the volumes are likely to be 3mmscmd and ramp up to

6mmscmd by FY15E

• Oilex’s cambay tight gas fields are under assessment and could

yield 5-6mmscmd of addnl. gas supplies. We have not factored

in any est. yet.

• LNG supply is likely to increase by ~71mmscmd over FY11-

16E, on the back of additional capacities coming on stream.

There could be an upside of 5mmtpa if PLNG’s plan to set up a

terminal on east coast fructifies.

15



R-LNG Terminals in India (Existing/Under Construction)

Terminals FY 11 FY12E FY13E FY14E FY15E FY16E Remarks

Dahej 10.0 10.0 11.0 13.5 13.5 18.5 Includes 5MMTPA Brownfield expansion

Hazira 3.5 5.0 5.0 5.0 5.0 5.0 Operates on Merchant Basis

Dabhol - - 2.5 2.5 5.0 5.0 Breakwater debottlenecking in FY15

Kochi - - 5.0 5.0 5.0 5.0 2.5MMTPA (Jul’12); 2.5MMTPA (Oct’12)

Mundra - - - - - 5.0 Currently undergoing pre-constrn. activities

Total capacity (MMTPA) 13.5 15.0 23.5 26.0 28.5 38.5

Long Term Supplies (MMTPA) 7.5 7.5 7.5 11.4 11.4 22.5 Qatar -7.5; Australia-1.44 ;Russia -10, BG

Group - 2.5, US - 1.1

Short term Supplies (MMTPA) 2.1 2.7 2.7 - - - GAIL - 0.5 (Marubeni), PLNG - 1.5 (various),

GSPC - 0.7 (Russia,etc.,)

Spot Requirement - 2.3 6.1 8.6 11.1 7.5

Total Est. Throughput (MMTPA) 9.6 12.5 16.3 20.0 22.5 30.0

Source: Company data, News reports, Spark Capital Research

Note: PLNG is at an advanced stage for setting up an LNG terminal in the east coast, which is not considered in the list (COD: FY15/16)

Long term supplies provide support for R-LNG terminal capacity build up..

Suppliers MMTPA Contract Status Contract Start Importer

Rasgas - Qatar 7.5 Contracted On going PLNG

Australia 1.4 Contracted 2014 PLNG

Gazprom - Russia 10.0 HOA 2016 PLNG, GSPC, GAIL & IOC

BG Group - Global Portfolio 2.5 HOA 2014 GSPC

Cheniere - US 1.1 HOA 2016 GAIL

Long term Contracts

(MMTPA) 22.5

Source: Company data, News reports, Spark Capital Research

Recently entered long term

contracts, MoUs and HOA provides a

sturdy ~60% supply visibility to our

estimated LNG capacity of ~38mmtpa

in FY16E. Also GAIL is scouting for

more contracts in Brunei, Russia,

etc., This will further provide cushion

for the on-going projects

The general market perception is

that the winter season (Oct’11 –

Mar’12) will see tightening of

supplies. But given our modest req.

of 2.3/6.1 (FY12E/13E) compared to

an overall spot market of 60-

70MMTPA, India will not find it

challenging to source the same

LNG Supply: Modest spot req. helps in a tight market condition (next 2yrs); Pipeline

of MoUs and HOAs provide long term visibility to upcoming facilities

16



Global LNG Liquefaction facilities (MMTPA)

Geography CY08 CY09 CY10 CY11E CY12E CY13E CY14E CY15E CY16E

Atlantic Basin 78 78 78 78 92 92 99 115 138

Middle East 47 74 92 100 100 100 100 100 100

Pacific Basin 77 94 100 104 104 104 122 140 158

Total 202 246 270 282 296 296 321 354 396

New Additions 44 24 12 14 - 25 33 41

Global LNG throughput (MMTPA)

Contracted 142 152 179 193 200 207 235 262 280

Spot 30 30 42 61 73 72 70 75 96

Total 172 182 220 254 272 278 305 337 376

% of Spot 18% 16% 19% 24% 27% 26% 23% 22% 26%

Utilisation 85% 74% 82% 90% 92% 94% 95% 95% 95%

Source: GIIGNL, Bloomberg, News reports, Company data, Spark Capital Research

Spot volumes would remain in the

range of 20-25% of the total

volumes, as ~70% -80% of the

volumes are tied up.

Given India’s spot req. over (CY11-

CY16) is just ~15% of the global

spot availability, we don’t see any

challenge to source these.

Global LNG: Large Capacity additions starting CY14; Sourcing modest spot

requirements (15% of global spot market) would not be a challenge

Very little LNG terminals coming

online in the next two years, but

starting CY14/15, a host of

Australian LNG facilities will come

online.

GAIL is actively scouting for

tying up medium/long term

contracts with more than 5

countries. Recently there were

news reports that GAIL is

looking to invest in LNG

facilities in Algeria. If such an

event happens it will boost the

supply visibility for the country

Upcoming Liquefaction terminals (CY11-14)

Country Project Year

Capacity

(MMTPA) Companies

Qatar Qatargas 2011 7.8 7.0 CNOOC, Petrochina, Centrica

Australia Pluto 2011 4.3 3.8 Tokyo Gas, Kansai Electric

Angola Soya LNG 2012 5.2 -

Algeria Azrew / Skikda 2012 9.2 7.5 GDF SUEZ - France

PN Guinea PNG LNG 2014 6.6 6.6 Sinopec, TEPCO, Osaka, CPC

Australia QGC Curtis 1 2014 4.3 4.0 Pow er Gas - S'pore

Australia Gladstone 1 2014 3.9 3.9 Kogas, Petronas

Australia Gorgon T1 / T2 2014 10.0 10.0 Petrochina, PLNG, Japan Utils.

Contracted (MMTPA



Pipelines under construction

Company Project

Approved Cost

(Rs. bn)

Capex upto

July’11 COD

Scheduled

progress %

Actual

Progress %

GAIL Vijaipur – Dadri 38

68

Commissioned

GAIL Dahej - Vijaipur 44 Dec’11 94 95

GAIL Compressor Stn at Jhabua & Vijaipur 14 Commissioned

GAIL Compressor Stn at Kailaras & Chainsa 12 Dec’11 85 84

GAIL Dadri - Bawana 6 14

Commissioned 91 89

GAIL Bawana Nangal 18 Jan’12/Jul’12

GAIL Dhabol Bangalore - Phase I 45 9

Aug'12 54 70

GAIL Dhabol Bangalore - Phase II 5 Dec'12

GAIL Chainsa – Jhajjar – Hissar (Jhajjar – Hissar

on hold) 13 6.4 Dec’11 NA NA

GAIL Kochi - Kootanad - M'lore - B'lore: Phase I 4 1.5

Aug'12 60 70

GAIL Kochi - Kootanad - M'lore - B'lore: Phase II 29 Mar'13

GAIL Haldia Jagdsihpur: Phase I 67 NA

Dec'13 Detailed Survey Completed

GAIL Haldia Jagdsihpur: Phase II 10 Dec'14

GSPL Mallawaram – Bhilwara 65 2015

Detailed Design and pre-constrn.

activities being undertaken GSPL Mehsana – Bhatinda 45 2015

GSPL Bhatinda - Jammu Srinagar 12 2015

Source: GAIL’s performance report to MoPNG –Sep’11, Company data, Spark Capital Research

R-LNG terminals under construction

Company Terminal

Capacity

(mmtpa) COD Remarks

PLNG Kochi 5.0 Oct'12 Physical progress – 89%; on track

GAIL Dabhol - Phase I 2.5 Mar'12 Storage Tanks completed ; currently under

testing

GAIL Dabhol - Phase II 2.5 Sep'14 Breakwater tender awarded, dredging work to

start in Jan'12

Source: Company data, Spark Capital Research

Pipeline / R-LNG terminals projects mostly on track

18


Natural Gas Utilities Recent meeting with officials in PNGRB: Team reshuffle to linger rollouts of

authorisation over near term

Currently the PNGRB board consists of: Mr. Man Singh (Chairman), Mr. YPC Dangay (Member-Legal) and Ms. Sudha

Mahalingam (Member-Distribution). Member-Technical and Member-Commercial positions are vacant.

The retiring chairman is likely to be replaced by Mr. Krishnan (Ex Fertilizer Secy.), additionally Mr. K.K.Jha (IOCL Director-

Pipelines) has been selected as Member-Technical, but would be joining only in Jan’12. Mr. Bishnoi (the Chairman and MD

of Rashtriya Ispat Nigam Ltd) has been selected as Member-Commercial, but his application has been stuck in CVC

clearance.

New team

PNGRB recently extended the closing date of 4th round bid to November. Further, PNGRB is introducing some norms to

increase hygiene in the bidding process and avoid zero/irrational bidding – this may further extend the bid closure date.

We believe that the evaluation and award of 4th round bids may take more than 6 months after the closure of bid given the

new composition of the board.

Delay in 4th Round

bidding

PNGRB is currently working on to finalise GSPL’s capacity in its Gujarat network, post which the process of network

authorisation and tariff approval would begin. Given the current reshuffle in the board, we believe the authorisation could

take atleast a year.

Negative for GSPL stock; Tariff overhang may persist in near term.

GSPL’s Gujarat network

authorisation

Authorisation for Gujarat Gas existing network is likely to be approved in another 15-20 days.

Positive trigger for Gujarat Gas Stock as the application includes new areas surrounding its core operational regions (Surat,

Bharuch and Ankleshwar) which could provide growth opportunities

Gujarat Gas network

authorization

IGL’s contention is that Delhi region was authorised by PNGRB in Jan 2009 when the later was not empowered to do so.

Since PNGRB got empowered only in July 2010 when section 16 was notified, the three year marketing exclusivity for Delhi

should be considered starting July 2010. However, PNGRB declined to comment anything on this matter for the moment. If

PNGRB accepts IGL’s submission, it would be a positive trigger for the stock.

IGL’s submission for

extension of marketing

exclusivity

19



20

Natural Gas Utilities Sector – All numbers in Rs mn except per share data

Quarter Change

Comments / Watch out for

Recommendation

Sep-11 Jun-11 Sep-10 yoy qoq Absolute Relative

GAIL

Net Sales 97,095 88,674 81,041 20% 9% We expect gas transm. volumes of 118mmscmd flat qoq as declining KG-D6

is partly offset by R-LNG; We expect tariff of Rs. 890/mscm vs Rs. 881/mscm

in 1Q. Expect subsidy of Rs. 5.6bn for 2Q vs Rs. 6.8bn in 1Q BUY O-PF EBITDA 15,825 15,556 14,329 10% 2%

PAT 9,906 9,847 9,235 7% 1%

EPS 7.8 7.8 7.3 7% 1%

GGAS

Volumes (mmscm) 327 302 315 4% 8% After three qtrs of Nil growth we expect qoq volumes to grow by 8% driven

primarily by some LFR customers which were deferring decisions uptill now.

Gross spreads for 3QCY11 at Rs. 5.4/scm vs Rs. 5.9/scm in 2QCY11. It

would further come down owing to higher R-LNG prices, declining cheap

domestic gas and strengthening dollar

REDUCE U-PF Net Sales 6,610 5,766 4,985 33% 15%

EBITDA 1,402 1,403 903 55% 0%

PAT 910 960 561 62% -5%

EPS 7.1 7.5 4.4 62% -5%

GSPL

Volumes (mmscm) 3,215 3,345 3,250 -1% -4% We expect lower qoq volumes (4%) due to declining KG-D6 supplies, rising R-

LNG forcing power plants to operate at lower PLFs and lower offtake from

RIL, marginally offset by growth in other segments

Estimate tariff of Rs. 800/mscm for 2Q vs Rs. 813/mscm in 1Q; Items below

EBITDA are not comparable due to change in depreciation policy

REDUCE U-PF Net Sales 2,686 2,876 2,545 6% -7%

EBITDA 2,485 2,652 2,336 6% -6%

PAT 1,171 1,374 915 28% -15%

EPS 2.1 2.4 1.6 28% -15%

IGL

Volumes (mmscm) 294 282 246 20% 4% We expect 4% qoq volume growth due to opening of new CNG stations and

higher growth in the industrial segment. Est. gross spreads for 2Q at Rs.

8.5/scm vs 8.4/scm in 1Q, higher driven by addnl. allocation of 0.3mmscmd

from GOI, offset by decline in KG D6 supplies, rising R-LNG prices and

strengthening dollar.

ADD O-PF Net Sales 5,856 5,364 4,451 32% 9%

EBITDA 1,638 1,573 1,230 33% 4%

PAT 812 801 663 22% 1%

EPS 5.8 5.7 4.7 22% 1%

PLNG

Volumes (TBTU) 131 133 100 31% -2% Expect marginally lower volumes due to maintenance shutdown (2-3 days)

and monsoons; Mktg. margins on spot volumes (5% of total volumes) is likely

to be lower ($0.2/mmbu) than the prev qtr ($0.5/mmbtu). Overall, we expect

blended tariffs at 35.3/mmbtu for 2Q vs Rs. 36.8/mmbtu in the previous qtr. BUY O-PF

Net Sales 52,426 46,233 30,577 71% 13%

EBITDA 4,085 4,381 2,716 50% -7%

PAT 2,291 2,567 1,311 75% -11%

EPS 3.1 3.4 1.8 75% -11%

Preview – 2QFY12

Petronet LNG Relative

Absolute Buy

Outperform Target

CMP Rs. 158

Rs. 190

21

Rating: ▲ Target price: ▲ EPS: ▲


Date Oct 12, 2011

Market Data

SENSEX 16536

Nifty 4974

Bloomberg PLNG IN

Shares o/s 750mn

Market Cap Rs. 118bn

52-wk High-Low Rs. 186-105

3m Avg. Daily Vol Rs. 586mn

Index member BSE OIL & GAS

Latest shareholding (%)

Promoters 50.0

Institutions 21.6

Public 28.4

Financial summary

Year Revenue (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA (x)

FY11 131,973 12,163 6,196 8.3 19.1x 12.3x

FY12E 216,743 16,813 9,075 12.1 13.1x 9.6x

FY13E 312,051 20,326 9,716 13.0 12.2x 7.9x

Mayur Patel, CFA

[email protected]

+91 44 4344 0037

Vishnu Kumar A S

[email protected]

+91 44 4344 0069

Stock performance (%)

1m 3m 12m

PLNG -10% 10% 40%

Sensex -2% -12% -18%

BSEO&G 0% -4% -20%

LNG – Against all odds; 10% correction gives an opportunity; Upgrade to Buy – OPF The stock recently corrected by around 10%, owing to concerns on rising R-LNG prices impacting PLNG’s spot

volumes and risks to high marketing margins. Based on our recent interaction with the Mgmt. and our channel

checks, we believe R-LNG continues to find favour with Refineries/Industries/CGDs even at $19-$20/mmbtu

(especially Naptha/Petrol/Diesel replacement) and there are no material risks on short term/spot volumes of

2mmtpa in the near term. PLNG earned high marketing margins (~$0.5) on spot volumes (~0.5mmtpa) in 1Q

driven by one-off events. This is likely to normalise over the ensuing quarters to $0.20 levels; and fixed

marketing margins ($0.20-$0.25) on short term contracts of 1.5mmtpa (1.5 years) would continue to cushion near

term profitability. Upgrade to Buy - OPF

Investment Rationale:

• Strong Volumes: Volumes are likely to remain above 10mmtpa over the ensuing quarters. 2Q volumes may be

slightly lower than 1Q (104% throughput) due to maintenance shutdown (2-3 days) and monsoons

• Substitution economics vs alt fuels: R-LNG prices at $19-20/mmbtu (delivered prices) are almost at par with

FO/LSHS ($18-$20), but still much cheaper than Naphtha ($26-$28/mmbtu). Our interactions with Refineries suggests

that some refineries (Essar and RIL) are using internally generated FO/LSHS instead of gas, but continue to use gas

to replace Naphtha

• Mktg. margins: Margins on short term contracts (1.5mmtpa) are fixed ($0.20-$0.25/mmbtu) for the next 1.5 years.

Marketing margins ($0.5) on spot volumes of 0.5mmtpa to normalise to ~$0.20 levels over ensuing quarters

• Projects: Second Jetty (COD–2QFY14) and Kochi project (3QFY12) are on track. The company is seriously

evaluating the option to set up a 5mmtpa terminal on the East Coast and is yet to zero in on a location (AP/Orissa)

We have slightly increased our earlier (conservative) margin est. to factor in continuity of marketing margins

($0.25/mmbtu) on short term (1.5mmtpa for 1.5years). PLNG has a slew of expansion in its pipeline, growing its capacity

from 10mmtpa to 18mmtpa by FY14E. The Dahej brownfield expansion will further raise the capacity to 23mmtpa by

FY15/16. Despite the huge capex requirement, OCF from existing business (>Rs. 12bn p.a) and likely funding from

advances will restrict leverage to around 1x levels. PLNG is an excellent growth story and we like the stock given the long

term R-LNG outlook; no regulatory interventions; first mover advantage; inspiring fundamentals and on-track progress in

various projects. We upgrade PLNG to Buy-OPF with a DCF based TP of Rs. 190.




Absolute Buy

Outperform Target

CMP Rs. 158

Rs. 190

22

Mgmt. meeting and channel checks - Key takeaways

Marketing Margins: locked in margins on short term contracts to alleviate concerns on sustainability of marketing margins

• Marketing margins (over and above regas charges of Rs. 33.3/mmbtu which are earned on long term contracts) on short term/spot volumes are likely to

remain for a while and boost profitability. We expect blended tariffs (incl. mktg. margins) of Rs.35.3/mmbtu in 2Q vs. Rs.36.5 in 1Q.

• PLNG’s short term contracts have two components – Short term (~15% of capacity) and Spot (~5% of capacity). The marketing margins (~$0.20-

$25/mmbtu) on the short term contracts are fixed for the next 1.5years. On spot volumes the company makes margins which vary with every cargo. In

1QFY12 margins on spot cargoes were phenomenally high at $0.50/mmbtu due to availability of cargoes at distressed valuation and resilient markets – We

expect this to come down to sub $0.20 in this quarter owing to stubbornly rising LNG prices

Particulars FY11 FY12E FY13E Q1 12 Q2 12E Q3 12E Q4 12E

Volumes

Dahej - Long term 7.5 7.5 7.5 1.7 1.9 2.0 2.0

Dahej - Short Term - 1.3 1.5 0.4 0.3 0.3 0.3

Dahej - Spot 0.6 0.6 1.0 0.2 0.1 0.1 0.2

Dahej - Third party regas (GSPC,GAIL) 0.6 1.2 0.5 0.4 0.3 0.3 0.3

Kochi - - 1.0 - - - -

Total (mmtpa) 8.6 10.5 11.5 2.6 2.6 2.7 2.7

Tariff including marketing margins (Rs. /mmbtu)

Dahej - Long term 32.2 33.8 35.5 33.3 33.3 33.3 35.0

Dahej - Short Term - 45.9 45.9 45.9 45.9 45.9 45.9

Dahej - Spot 24.7 46.4 40.0 56.0 42.0 42.0 42.0

Dahej - Third party regas (GSPC,GAIL) 32.2 33.8 35.5 33.4 33.3 33.3 35.0

Kochi - - 65.0 - - - -

Blended Tariff (Rs. /mmbtu) 31.68 35.94 39.78 36.76 35.29 35.14 36.62

Marketing Margins charged over and above regas charges of Rs. 33 ($0.74/mmbtu)

Short term ($/mmbtu) $0.27 $0.23 $0.28 $0.28 $0.28 $0.24

Spot ($/mmbtu) $0.28 $0.10 $0.50 $0.19 $0.19 $0.16

Total $0.27 $0.18 $0.35 $0.25 $0.25 $0.21

Refinery Status Check: FO/LSHS replacement (~25%-30%) tepid, while Naphtha/Diesel replacement (~70%-75%) continues to remain strong

• Essar Oil – Cons. of N. gas has dropped from ~0.7mmscmd to ~0.4mmscmd due to a shift to FO/LSHS. The company does not have an active market for

FO/LSHS and hence prefers to use these whenever cost savings emerge.

• Reliance – N. gas cons. has dropped from 9mmscmd to ~7mmscmd due to shift to FO/LSHS. However, gas continues to replace Naphtha/Diesel

• HPCL (Mumbai) – Refinery is currently using N.gas for Naphtha and in CPP(Power plant); studies are being undertaken for replacign FO/LSHS to N.gas.

• BPCL (Mumbai) – Refinery is consuming 1.2mmscmd of N.gas and there is no signs to shift back to FO/LSHS

• IOCL – Mathura, Panipat, Koyali together consume about 5mmscmd and there are no signs to shift back to FO/LSHS. Mathura has environ. mandate to use

R-LNG irrespective of prices.


Absolute Buy

Outperform Target

CMP Rs. 158

Rs. 190

Japanese LNG prices hit record highs; $16/mmbtu (CIF)

Source: Bloomberg, Spark Capital Research

Rising R-LNG prices: Loosing sheen with FO/LSHS; Attractive with

Naphtha

• With spot LNG prices of $14-$15/mmbtu, the delivered prices reach

$19/mmbtu in Gujarat and $20/mmbtu in North India (UP, Punjab, etc)

• At such prices there is very little saving on FO/ LSHS (highlighted in

yellow). The savings on Naphtha continue to remain attractive (~35%)

• Our channel checks with various refineries suggest that economics of

Naphtha replacement remains strong, while FO/LSHS replacement

(20%-25% of req.) is under stress

• Overall despite the recent surge in prices, we do not see major risks

to PLNG’s volumes given: (1) 75% of their capacities are long term

volumes (2) 15% are locked for 1.5 years and (3) the rest spot and

regas volumes are not sizeable

Not much savings on FO/LSHS; ~30% savings on Naphtha

Source: BPCL, Bloomberg, Spark Capital Research. Petrol & Diesel prices at Delhi

Spot R-LNG delivered price at $19-$20/mmbtu

Source: News reports, Company data, Spark Capital Research.

* Guj. - GSPL tariff of Rs. 800/mscm; Outside Guj. highest tariff of DVPL upg Rs. 1900/mscm

$/mmbtu Gujarat North India

FOB 14.0 14.0

Shipping cost 0.5 0.5

CIF Price 14.5 14.5

Import duty @ 5.15% 0.7 0.7

CIF Price (incl. tax) at Terminal 15.2 15.2

Re-gas tariff (Rs. 34/mmbtu) 0.74 0.74

Ex Terminal 16.0 16.0

VAT @15% 2.4 2.4

Marketing margins of PLNG 0.3 0.3

Pipeline tariff (max) including service tax of

10%* 0.5 1.3

Delivered Price 19.2 19.9

Fuel Fuel Oil LSHS Naphtha Deisel Petrol

Price $/MT 767 799 1,086 1,054 1,706

Kcal / Kg 10,500 10,000 10,500 9,500 11,250

Equiv.Cost

($/mbbtu) 18 20 26 28 38

Spot price

($/mmbtu) 20.0 20.0 20.0 20.0 20.0

Savings -8% 1% 30% 40% 91%

$10.9 $11.2 $11.0 $12.0

$13.8

$16.0 $16.5 $16.5

$15.0

$6

$10

$14

$18

1QFY11 3QFY11 1QFY12 3QFY12E 1QFY13E

Japan LNG price ($/mmbtu)

Spot R-LNG to remain high

as Japan & Korea would

draw more N.gas during

winter (Oct’11-Mar’12)


Absolute Buy

Outperform Target

CMP Rs. 158

Rs. 190

31 32 34 35 37

6 25

46 43

40

65 65 65

25

32 36

40 42

0

10

20

30

40

50

60

70

FY10 FY11 FY12E FY13E FY14E

Long term (Rs./mmbtu) Spot/Short term (Rs./mmbtu)

Kochi (Rs./mmbtu) Blended (Rs./mmbtu)

Strong Regas margins on Spot/Short to boost FY12 blended tariff

Source: Company, Spark Capital Research

5.7 7.5 7.5 7.5 7.5

1.9

0.6 0.6 1.0

3.5

0.3 0.6 1.2 0.5

0.5

1.0

2.0

-

2

4

6

8

10

12

14


Kochi (mmtpa) Regas (mmtpa) Short/Spot term (mmtpa) Long term (mmtpa)

CAGR Vol. growth 16% (FY11-14E): Kochi to reach 40% util. by FY14E


CAGR Growth (FY11-14E): EBITDA =28%; PAT = 23%



24

Key estimate revision

FY12E FY13E

Old New Change Old New Change

Volumes

(mmtpa) 10.4 10.5 1% 11.5 11.5 0%

Blended Tariff

(Rs. /mmbtu) 35.3 36.0 2% 38.6 39.8 3%

EBITDA (Rs. mn) 16,372 16,813 3% 19,711 20,326 3%

PAT (Rs. mn) 8,524 9,075 6% 9,233 9,716 5%

EPS (Rs.) 11.4 12.1 6% 12.3 13.0 5%

Business Overview

Jump in Mktg.

margins on

Short/spot term.

4 6

9 10 12

8

12

17

20

25

0

5

10

15

20

25

30

FY 10 FY 11 FY 12E FY 13E FY 14E

PAT (Rs. Bn) EBITDA (Rs. Bn)


Absolute Buy

Outperform Target

CMP Rs. 158

Rs. 190 Valuation

25

Key DCF estimates

Rs. mn Mar-12

WACC 12%

Terminal Growth Rate 0%

Total firm Value (Rs. Mn) 174,044

Net debt / (cash) (Rs. Mn) 31,445

Equity Value (Rs. Mn) 142,599

Shares O/s (Nos. Mn) 750

Target Price (Rs. /Share) 190

Current trading Multiples

FY11 FY12E FY13E

EPS (Rs.) 8.3 12.1 13.0

P/E (x) 18.8x 12.8x 12.0x

P/B (x) 4.3x 3.5x 2.8x

EV/EBITDA (x) 11.1x 8.0x 6.7x

Implied Target Multiples

FY11 FY12E FY13E

8.3 12.1 13.0

23.0x 15.7x 14.7x

5.3x 4.2x 3.5x

13.3x 9.6x 7.9x

WACC

Term

ina

l Gro

wth

10% 11% 12% 13% 14%

0.0% 244 214 190 170 152

0.5% 251 220 194 173 155

1.0% 259 226 199 177 158

1.5% 268 233 204 181 161

2.0% 279 241 210 185 164

Key estimates

Particulars FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E

Dahej 9.2 9.0 11.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5 12.5

Kochi - 1.0 2.0 3.0 4.0 4.5 4.5 4.5 4.5 4.5 4.5

Volume (MMTPA) 9.2 10.0 13.5 15.5 16.5 17.0 17.0 17.0 17.0 17.0 17.0

Revenue ($/mmbtu) $8.75 $11.57 $13.03 $13.41 $13.48 $13.48 $13.44 $13.44 $13.44 $13.44 $13.44

Dahej - Regas Tariff (Rs./mmbtu) 35.9 39.8 42.1 43.4 44.7 45.3 45.3 45.3 45.3 45.3 45.3

Kochi - Regas tariff (Rs./mmbtu) - - 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0 65.0

Blended Regas (Rs./mmbtu) 35.9 35.8 45.5 47.6 49.6 50.5 50.5 50.5 50.5 50.5 50.5

NOPAT (Rs. Mn) 9,985 11,384 13,842 16,671 18,574 19,509 19,533 19,501 19,469 19,437 19,437

Depreciation (Rs. Mn) 1,910 3,336 4,569 4,893 4,940 4,988 5,036 5,084 5,131 5,179 5,179

Capex +WC Chgs (Rs. Mn) 22,097 10,476 1,803 1,268 1,070 979 900 900 900 900 900

FCFF (Rs. Mn) (10,202) 4,243 16,608 20,296 22,444 23,519 23,668 23,684 23,700 23,716 23,716

PV of FCFF as on March 2012 (Rs. Mn) - 3,795 13,285 14,517 14,356 13,452 12,106 10,833 9,693 8,674 7,756


Absolute Buy

Outperform Target

CMP Rs. 158

Rs. 190

26

Financial Summary

Rs. mn FY 10 FY 11 FY 12E FY13E FY 10 FY 11 FY 12E FY13E

Revenues 106,491 131,973 216,743 312,051 Sales 26.3% 23.9% 64.2% 44.0%

EBITDA 8,465 12,163 16,813 20,326 EBITDA -6.1% 43.7% 38.2% 20.9%

Depreciation 1,609 1,847 1,910 3,336 Adj. Net Profit -22.0% 53.2% 46.5% 7.1%

EBIT 6,856 10,316 14,903 16,991 Margin ratios (%)

Other Income/Exp 978 680 700 500 EBITDA 7.9% 9.2% 7.8% 6.5%

Interest 1,839 1,931 2,154 3,091 EBIT 6.4% 7.8% 6.9% 5.4%

PBT 5,995 9,064 13,449 14,399 Adj. Net Profit 3.8% 4.7% 4.2% 3.1%

Net Profit 4,045 6,196 9,075 9,716 Performance ratios

Adjusted Net Profit 4,045 6,196 9,075 9,716 RoIC (%) 12% 15% 17% 16%

RoE (%) 19% 25% 30% 26%

Shareholders Equity 22,349 26,802 33,690 41,219 RoCE (%) 12% 14% 15% 14%

Total debt 24,998 32,161 46,161 44,161 Sales / Total Assets (x) 2.2 2.3 3.0 3.6

Total Netw orth & Liabilities 50,609 62,443 83,331 88,860 Fixed Assets Turnover (x) 2.8 2.9 3.6 4.2

Net f ixed assets 28,829 27,024 26,114 66,779 Financial stability ratios

CWIP 13,184 22,029 44,029 10,029 Total Debt to Equity (x) 1.12 1.20 1.37 1.1

Investments 5,386 11,649 11,649 11,649 Inventory & Debtor days 17.4 23.6 20.1 20.1

Current assets 12,216 13,875 21,577 28,275 Creditor days 25.5 28.6 30.0 30.0

Current liabilities 9,006 12,134 20,037 27,871 Valuation metrics

Net current assets 3,211 1,741 1,539 404 Current Share Price (Rs.)

Total Assets 50,609 62,443 83,331 88,860 Market Cap (Rs.mn) 118,500 118,500 118,500 118,500

Fully Diluted Shares (mn) 750 750 750 750

Cash flow s from Operations 10,279 9,075 11,887 12,575 Adjusted EPS (Rs.) 5.4 8.3 12.1 13.0

Cash flow s from Investing (12,358) (14,766) (23,000) (10,000) P/E (x) 29.3 19.1 13.1 12.2

Cash flow s from Financing (1,094) 3,826 12,251 (4,186) P/B (x) 5.3 4.4 3.5 2.9

Cash Generated (3,173) (1,865) 1,138 (1,612) EV (Rs.mn) 140,093 149,121 161,983 161,594

Opening Cash 6,578 3,405 1,540 2,679 EV/ EBITDA (x) 16.6 12.3 9.6 7.9

Closing Cash 3,405 1,540 2,679 1,067 Dividend Yield (%) 1.1% 1.3% 1.6% 1.58%

Cash Flows

Growth ratios (%)

Abridged Financial Statements Key metrics

158

Profit & Loss

Balance Sheet

GAIL Relative

Absolute Buy

Outperform Target

CMP Rs. 417

Rs. 541

27

Rating: ◄► Target price: ▼ EPS: ▼


Date Oct 12, 2011

Market Data

SENSEX 16536

Nifty 4974

Bloomberg GAIL IN

Shares o/s 1,268mn

Market Cap Rs. 529bn



Index member NIFTY


Promoters 57.3

Institutions 38.7

Public 4.0

Financial summary

Year Revenue (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) P/B(x)

FY11 324,586 54,546 35,611 28.1 14.9x 2.7x

FY12E 370,884 62,114 39,570 31.2 13.4x 2.4x

FY13E 417,844 70,908 41,733 32.9 12.7x 2.1x

Mayur Patel, CFA

[email protected]

+91 44 4344 0037

Vishnu Kumar A S

[email protected]

+91 44 4344 0069


1m 3m 12m

GAIL 1% -10% -17%

Sensex -2% -12% -18%

BSEO&G 0% -4% -20%

Long term defensive play at cheap valuation We have reduced our transmission volume estimates to incorporate declining KGD6 supplies and slightly

reduced gas mktg. margin estimates to factor in rising LNG prices. Despite, rising LNG prices, we remain positive

on the LNG prospects given its impressive economics vs. alt fuels. Our recent meeting with management

suggests that GAIL is very aggressive about LNG marketing in India. Although, tepid transmission volume may

impede stock momentum in the near term, it would generate good returns over medium term as more LNG

capacity come on stream and KGD6 ramps up. We believe that market is more than pricing in the near term

concerns of low RoCEs on new pipelines and undermining the intrinsic value of these upcoming pipelines.

Further, implementation of proposed subsidy reforms may emerge as near term triggers. Reiterate Buy-OPF

Investment rationale

• Massive capex plan of Rs. 300bn to set a platform for long term growth; Pick up in R-LNG supplies to support

utilisations of new pipelines & drive 8% CAGR growth in Gas Transmission volumes

• Although, highs of gas marketing margins booked in 1QFY12 is not sustainable in current rising lng price scenario, it

would continue to make good margins on LNG cargoes

• PL Projects are mostly on track; Savings in capex related to Vijaipur-Dadri PL is likely to be used for adding more

spurlines. Hence, we see no risk of tariff cut. Dabhol terminal to get delayed by 2-3months (Rev. COD Mar’12 – fully

operational by July-Aug’12) – no changes to estimates as we originally considered 1mmtpa volumes only from FY13

• GAIL has submitted workings to PNGRB for final approval of tariffs of HVJ-GREP-DVPL (prov. approved at ~Rs.

25/mmbtu) and its upgradation (prov. approved tariff ~Rs. 54/mmbtu) as single integrated tariff. If this is approved, it

would boost near term earnings. However, given the current reshuffle in PNGRB these approvals may take some time

• Mgmt. expects fertiliser as the next LNG demand driver. Fertiliser Ministry is in talks with GAIL to secure LNG supply

for its upcoming requirement; Inter-minist committee recommendations of LNG usage are also positive for GAIL

• Steady petchem prices to cushion near term profitability; Doubling of capacity to fuel growth from FY15 onwards

Valuations and View: We expect GAIL to record a PAT growth of 8% CAGR over FY11-14E. It trades at 11.7x FY13E

earnings and 1.9x FY13E book (ex-investments). Our SOTP valuation gives a TP of Rs. 541 implying an upside of 30%.

Risks: Higher than expected subsidy share; Delay in new pipelines/Dabhol terminal; sudden decline in LPG/PE prices;



GAIL Relative

Absolute Buy

Outperform Target

CMP Rs. 417

Rs. 541

Stable earnings - Lower volumes offset by higher realizations and

lower subsidy


28

Business Overview

Gas Transmission: Volumes flat, tariff continues to rise..


Gas trading: Mktg. margins to taper down a bit


Segment wise EBIT: Gas Transmission continues to lead the pack


6 6 5 6 7 7 5 7 7

1 1 1 1

1 1 1

1 1 1 1 0

2 2 2

3 3 3 3 3

4 3

3 2 4 2 3

(1)

1 4 2 2

2

(1)

2 2

-5

0

5

10

15

20

2QFY10 4QFY10 2QFY11 4QFY11 2QFY12E

Gas Transmission (Rs. bn) LPG Transmission (Rs.bn)

Gas Trading (Rs. bn) Petrochemical Business (Rs. bn)

LPG & Liq. Hydro. (Subsidy) (Rs. bn) Others

81 81

84 85

79

83 86

83 82

148 158

51

204 220

268

351

416

348

-

50

100

150

200

250

300

350

400

450

74

76

78

80

82

84

86

88


Volumes (mmscmd) EBIT (Rs. /mscm) (RHS)

106109

115 116 115120 120

117 118

864 850

716

848 927 907

842 881 890

-

200

400

600

800

1,000

95

100

105

110

115

120

125


Volumes (mmscmd) Tariff (Rs. /mscm) (RHS)

7 9 9 9 9 10

8 10 10 10

13 13 13 14 14 12

15 15

0

2

4

6

8

10

12

14

16


PAT (Rs. bn) EBIT (Rs. bn)

GAIL Relative

Absolute Buy

Outperform Target

CMP Rs. 417

Rs. 541

29

Business Overview (Cont’d)

LPG & OHC: Realisations to inch down as Brent weakens


LPG & OHC segment: Subsidy to come down


Petchem: Volumes to rise qoq, realisation to remain stable


LPG Transmission: Stable performance


88

120109

88107

81

144

88106

$1,491 $1,461

$1,640

$1,585

$1,443

$1,574 $1,573

$1,612 $1,592

$1,300

$1,400

$1,500

$1,600

$1,700

0

40

80

120

160


Petrochemical Volumes ('000MT) Realisation (US$./MT) (RHS)

728 820 871

788 799 893 857 817 820

1,414 1,415 1,406 1,441 1,428 1,447 1,373 1,398 1,400

500

700

900

1,100

1,300

1,500

0

200

400

600

800

1,000


Volumes ('000MT) Tariff (Rs. /MT) RHS

379 375

356 356347

331339

349 350

530

669 768 754

668

773

934 955 875

0

200

400

600

800

1000

1200

300

320

340

360

380

400


LPG Volumes ('000MT) Realisation (US$./MT) (RHS)

-1

1

4

22 2

-1

2 2

4

6

77

56

89

8

-2

0

2

4

6

8

10


EBIT (Rs. bn) EBIT (Rs. bn) (pre subsidy)

GAIL Relative

Absolute Buy

Outperform Target

CMP Rs. 417

Rs. 541

30

Current Trading Multiples

FY11 FY12E FY13E

EPS - ex cash 25.33 28.46 29.99

PE ex investments 13.8x 12.3x 11.7x

P/B ex investment 2.7x 2.2x 1.9x

EV/EBITDA 9.3x 8.2x 7.7x

Implied Target Multiples

FY11 FY12E FY13E

EPS - ex cash 25.33 28.46 29.99

PE ex investments 18.7x 16.7x 15.8x

P/B ex investment 3.1x 2.7x 2.3x

EV/EBITDA 11.4x 10.0x 8.8x

SOTP Valuation - GAIL Target

Mcap (Rs. bn) Per Share (Rs.) Remarks Implied EV/EBITDA (FY13E)

Natural gas transmission 341 269 DCF - WACC 11.6%; terminal gr 2% 10.08

Natural gas trading 99 78 DCF - WACC 11.6%; terminal gr 2% 9.53

Petrochemical 102 80 7x FY13E EBITDA 7.00

LPG 59 47 6x FY13E EBITDA 6.00

LPG Transmission 22 17 6x FY13E EBITDA 6.00

E&P Investments 20 16 Valued at 0.85x BV

Investments 85 67 Quoted Investments at CMP, rest at BV (less 20%

cons. Discount)

Total - EV 728 574 9.53

Less: Net debt/(cash) 42 33 FY13E debt

Equity Value - target 686 541

CMP 529 417

Upside 30%


Key estimate revisions

FY12E FY13E


Natural Gas

- Transm. Volumes (mmscmd) 123 120 -2% 140 130 -7%

- Avg. Tariff (Rs. /mscm) 914 889 -3% 972 951 -2%

- marketing volumes (mmscmd) 84 84 0% 88 86 -2%

- marketing margins (Rs. /mscm) 335 314 -6% 359 333 -7%

Petrochemical

- PE sales volumes (000 MT) 440 440 0% 450 450 0%

- Avg. realisation (Rs. /Kg) 71 72 1% 71 72 1%

LPG & OHC

- sales volumes (000 MT) 1,400 1,400 0% 1,420 1,420 0%

- Avg. realisation (Rs./ MT) 40,698 39,842 -2% 40,727 40,306 -1%

LPG Transmission

- Transm. Volumes (000 MT) 3,400 3,400 0% 3,400 3,400 0%

- Avg. Tariff (Rs. /MT) 1,422 1,422 0% 1,422 1,422 0%

Financials

Subsidy (Rs. mn) 23,595 22,770 -3% 20,000 19,500 -3%

Revenue (Rs.mn) 370,814 370,884 0% 423,479 417,844 -1%

EBITDA (Rs.mn) 64,585 62,114 -4% 75,285 70,908 -6%

EBIT (Rs. Mn) 56,900 54,429 -4% 65,270 60,893 -7%

PAT (Rs. Mn) 41,250 39,570 -4% 44,707 41,733 -7%

EPS (Rs.) 32.5 31.2 -4% 35.2 32.9 -7%


Valuation

GAIL Relative

Absolute Buy

Outperform Target

CMP Rs. 417

Rs. 541

31

Financial Summary

Rs. mn FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E

Profit & Loss Growth ratios (%)

Revenues 249,964 324,586 370,884 417,844 Sales 4.6% 29.9% 14.3% 12.7%

EBITDA 46,692 54,546 62,114 70,908 EBITDA 15.2% 16.8% 13.9% 14.2%

Depreciation 5,618 6,503 7,685 10,015 Adj. Net Profit 12.0% 13.4% 11.1% 5.5%


Other Income/Exp 5,411 5,186 5,186 5,500 EBITDA 18.7% 16.8% 16.7% 17.0%

Interest 700 829 1,390 4,986 EBIT 16.4% 14.8% 14.7% 14.6%



Adjusted Net Profit 31,398 35,611 39,570 41,733 RoIC (%) 22.1% 20.5% 18.0% 15.9%

Balance Sheet RoE (%) 19.9% 19.8% 19.0% 17.4%

Shareholders Equity 167,990 192,533 223,969 256,796 RoCE (%) 18.6% 18.2% 16.7% 14.5%








Net current assets 33,343 23,313 37,613 54,220 Current Share Price (Rs.)


Cash Flows Fully Diluted Shares (mn) 1,268 1,268 1,268 1,268



Cash flow s from Financing (5,459) (668) 13,750 35,810 P/B (x) 3.1 2.7 2.4 2.1

Cash Generated 7,154 (20,402) 16,100 16,587 EV (Rs.mn) 484,414 504,916 512,091 545,205

Opening Cash 34,562 41,715 21,314 37,414 EV/ EBITDA (x) 10.4 9.3 8.2 7.7



417

Indraprastha Gas Relative

Absolute Add

Outperform Target

CMP Rs. 426

Rs. 451

32

Rating: ◄► Target price: ▲ EPS: ▲


Date Oct 12, 2011

Market Data

SENSEX 16536

Nifty 4974

Bloomberg IGL IN

Shares o/s 140mn

Market Cap Rs. 60bn



Index member BSE 200


Promoters 45.0

Institutions 40.4

Public 14.6

Financial summary

Year Revenue (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA (x)

FY11 17,441 4,923 2,598 18.6 23.0x 12.7x

FY12E 25,019 6,949 3,472 24.8 17.2x 9.0x

FY13E 33,768 8,100 3,938 28.1 15.1x 7.8x

Mayur Patel, CFA

[email protected]

+91 44 4344 0037

Vishnu Kumar A S

[email protected]

+91 44 4344 0069


1m 3m 12m

IGL -4% 11% 36%

Sensex -2% -10% -18%

BSEO&G 0% -4% -20%

Timely price hikes to arrest margin pressures; Pricing power to support Pricey valuations Our recent interaction with the management suggests that IGL is on track to deliver around 20% CAGR volume growth

(FY11-14E), with a good boost from industrial volumes. IGL recently hiked CNG prices by Rs. 2.0/scm, showcasing

strong pricing power, yet again. Gross spreads are likely remain elevated (>Rs. 8.5/scm) in FY12E as price hikes and

merger of cheap APM gas (0.3mmscmd) would more than offset the negatives of lower KG D6 supplies, rising R-LNG

prices and strengthening dollar. Despite the strong market outperformance (+10%) over the last 3 months, the stock

would continue to outperform on strong volume growth and tested pricing power especially in the CNG segment (~80% of

volumes). Reiterate Add – OPF

Investment rationale:

• Volume Growth: Mgmt. expects volume growth of 12%-15% for CNG and 50-60% growth in PNG segment over near

term. The growth in PNG segment will be fuelled predominantly by Industrial volumes. We expect overall volumes to

grow by 22% CAGR over FY11-14E - CNG 12% and PNG growth of 52%

• CNG Stations: The issues related to 60 stations pending approval have been resolved and 10 stations have already

started operations. Remaining are likely to start soon. This would underpin near term volume growth.

• Spreads: Recently, IGL hiked CNG prices by Rs. 2.0/scm on Sep 30th to counter the rising R-LNG prices. Unlike

GGAS, which faces resistance from Indl. customers, the CNG market of IGL is relatively resilient. Gross spreads are

likely to remain at elevated levels (>Rs. 8.5/scm) over subsequent quarters due to recent price hikes and merger of

cheap APM gas (0.3mmscmd) more than offsetting the negatives of rising R-LNG prices and strengthening dollar.

• Exclusivity extension: IGL has asked PNGRB to extend the marketing exclusivity period from Jan’12 to Jul’13 on the

ground that three year exclusivity period should be construed only from the date on which PNGRB was authorised. If

PNGRB accepts IGL’s submission, it would be a positive trigger

• R-LNG Framework agreements: The company has entered into framework agreement with Shell and BP for tying up

long term R-LNG supplies. The details of the agreement are yet to be finalised.

We have increased our material costs estimates to factor in the rising LNG prices and USD and on the other hand

increased our realisation estimates to factor in the recent price hikes. This has resulted in slight expansion in spreads. We

maintain our positive stance on the company with a DCF based TP of Rs. 451 (Rs. 435)




Absolute Add

Outperform Target

CMP Rs. 426

Rs. 451

CAGR Growth (FY11-14E): EBITDA = 22%; PAT = 18%


Gross spread to remain above Rs. 8.5/scm levels


33

Business Overview

33

Volume Growth CAGR (FY11-FY14E) – CNG =12%; PNG = 50%



FY12E FY13E


Volumes (mmscm) 1,219 1,219 0.0% 1,433 1,442 0.6%

Gross spread (Rs. /scm) 8.4 8.6 2.1% 8.6 8.6 0.5%

EBITDA (Rs. mn) 23,839 25,019 4.9% 30,694 33,768 10.0%

PAT (Rs. mn)

6,879 6,949 1.0%

7,954 8,100 1.8%

EPS (Rs.) 3,425 3,472 1.4% 3,839 3,938 2.6%


605 695 811

931 1,024 54

87

180

288

417

0

200

400

600

800

1,000

1,200

1,400

1,600


PNG (mmscm) CNG (mmscm)

1,725 2,155

2,598

3,472 3,938

3,001

3,808

4,923

6,949

8,100

0

1,500

3,000

4,500

6,000

7,500

9,000


PAT (Rs. mn) EBITDA (Rs. mn)

5.8 6.0

9.5 11.2

13.9 6.7 7.5

7.7

8.6

8.7 4.5 4.9 5.0

5.7 5.6

2.0

3.0

4.0

5.0

6.0

4.0

8.0

12.0

16.0

20.0

24.0


Gross spread (Rs. /scm) Gas Cost (Rs/ scm) EBITDA (Rs. /scm) (RHS)


Absolute Add

Outperform Target

CMP Rs. 426

Rs. 451 Valuation

34

DCF Valuation Estimates FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E

CNG (mmscm) 931 1,024 1,154 1,286 1,433 1,547 1,671 1,805 1,949 2,105 2,105

PNG (mmscm) 288 417 626 764 932 1,034 1,148 1,274 1,415 1,570 1,570

Volume (mmscm) 1,219 1,442 1,780 2,050 2,365 2,582 2,819 3,079 3,364 3,675 3,675

Avg. realisation (Rs. /scm) 17.6 20.5 23.4 25.5 26.5 27.6 28.0 28.0 28.3 28.6 29.0

Gross Spread (Rs. / scm) 8.6 8.7 8.6 8.3 8.4 8.2 7.7 7.6 7.5 7.5 7.5

EBITDA (Rs. / scm) 5.7 5.6 5.1 4.7 4.6 4.5 4.0 3.8 3.7 3.7 3.7

NOPAT (Rs. Mn) 3,667 4,193 4,546 4,676 5,399 5,770 5,536 5,884 6,364 7,000 7,000


Capex + WC chgs (Rs. Mn) 4,631 5,577 5,597 5,598 618 621 639 (169) 532 453 500

FCFF (Rs. Mn) 512 457 1,213 1,766 7,700 8,106 7,892 9,088 8,905 9,658 9,611

PV of CF Mar’ 2012 (Rs. Mn) 410 977 1,276 4,993 4,717 4,121 4,258 3,743 3,643 3,253

DCF Key estimates

Mar-12

WACC 11.4%

Terminal Growth Rate 2.0%

PV of terminal Value (Rs. Mn) 33,251


Net debt / (cash) (Rs. Mn) 3,324


Shares O/s (Nos. Mn) 140

Target Price (Rs. / Share) 451


FY11 FY12E FY13E

EPS (Rs.) 18.6 24.8 28.1

P/E (x) 23.0 17.2 15.1

P/B (x) 5.9x 4.7x 3.8x


Implied target Multiples

FY11 FY12E FY13E

P/E (x) 24.3 18.2 16.0

P/B (x) 6.3x 5.0x 4.0x


WACC

Term

ina

l G

row

th

9% 10% 11% 12% 13%

1.0%

561

486

425

376

335

1.5%

584

502

438

385

342

2.0%

610

521

451

396

350

2.5%

639

542

467

407

359

3.0%

673

566

484

420

368


Absolute Add

Outperform Target

CMP Rs. 426

Rs. 451

35

Financial Summary

Key metrics

Rs. mn FY10 FY11 FY12E FY13E FY10 FY11 FY12E FY13E


Revenues 10,781 17,441 25,019 33,768 Sales 26.4% 61.8% 43.4% 35.0%

EBITDA 3,808 4,923 6,949 8,100 EBITDA 26.9% 29.3% 41.2% 16.6%

Depreciation 775 1,029 1,475 1,841 Adj. Net Profit 24.9% 20.5% 33.7% 13.4%



Interest - 132 424 519 EBIT 28.1% 22.3% 21.9% 18.5%




Balance Sheet RoE (%) 29% 28% 31% 28%


Total debt - 3,465 4,465 5,465 Sales / Total Assets (x) 1.3 1.4 1.5 1.6




Investments 170 416 416 416 Inventory & Debtor days 20.8 23.1 20.8 20.8



Net current assets 534 (355) 510 1,253 Current Share Price (Rs.)


Cash Flows Fully Diluted Shares (mn) 140 140 140 140



Cash flow s from Financing (655) 2,620 184 184 P/B (x) 7.2 5.9 4.7 3.8

Cash Generated (1,121) (793) 968 713 EV (Rs.mn) 58,257 62,515 62,548 62,835

Opening Cash 2,503 1,383 589 1,557 EV/ EBITDA (x) 15.3 12.7 9.0 7.8

Closing Cash 1,383 589 1,557 2,270 Dividend Yield (%) 1.1% 1.2% 1.2% 1.17%

Abridged Financial Statements

426

GSPL Relative

Absolute Reduce

Underperform Target

CMP Rs. 104

Rs. 96

36

Rating: ◄► Target price: ▼ EPS: ▼


Date Oct 12, 2011

Market Data

SENSEX 16536

Nifty 4974

Bloomberg GUJS IN

Shares o/s 563mn

Market Cap Rs. 59bn





Promoters 37.7

Institutions 40.4

Public 21.9

Financial summary

Year Revenue (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) P/B(x)

FY11 10,465 9,694 5,064 9.0 11.6x 2.9x

FY12E 10,892 10,094 4,794 8.5 12.2x 2.5x

FY13E 11,132 10,263 4,614 8.2 12.7x 2.2x

Mayur Patel, CFA

[email protected]

+91 44 4344 0037

Vishnu Kumar A S

[email protected]

+91 44 4344 0069


1m 3m 12m

GSPL -5% 6% -12%

Sensex -2% -12% -18%

BSEO&G 0% -4% -20%

Weakening volumes and lack of near term triggers; Downgrade to Reduce-UPF Transmission volumes for the company are likely to remain weak as declining KGD6 volumes mount pressure on

utilisation levels. Restrained volumes growth; likely delay in tariff approval (6-12 months); postponement of

listing of GSPC Gas (near term triggers assumed earlier) and aggressive capex for new pipelines are the key

reasons behind our negative stance on the stock. Reiterate Reduce-UPF

Investment rationale:

• Weakening volumes: Rising R-LNG prices and declining KG-D6 supplies have been forcing Gujarat Power Utilities

(Torrent, GIPCL, Guj Paguthan etc.) to operate at lower PLFs and therefore consume lesser gas. Although, other

segments are growing at a healthy rate, decline in power offtake is likely to constrain gas transmission volumes in near

term. Overall, volumes are likely to be flattish in FY12E (vs.orig. est. of 7% yoy growth) and pick up only by year end

• Tariff overhang to remain: Based on our interactions with management and PNGRB, we believe the Gujarat network

authorisation and final tariff approval may take longer than expected (10-12mnths vs. our expectations of 3-4months)

owing to the re-shuffle of members in PNGRB. While, we maintain our stance that final tariff should not come below

Rs. 750/mscm (noise of sharp tariff cuts are untenable), delay in the approval process would restrict rerating in

the stock

• Listing of GSPC Gas postponed: Based on GSPL’s management commentary and industry sources, the listing of

GSPC Gas is not likely to happen in the immediate term owing to volatile market conditions. It may take more than a

year for any progress in this regard against our original expectations of few months. Although, we see good value in

GSPL’s equity stake (~36%) in GSPC gas, value discovery would happen closer to any listing related announcements

We expect volumes of 35.5/39.0mmscmd in FY12E/FY13E with tariff estimates of Rs. 800/750 per mscm for

FY12E/FY13E. While volumes should pick-up by the end of FY12E on the back of GNFC, Essar oil etc., Stock would

underperform in the near term due to lack of triggers amidst weak performance expected in the core business. However,

increased contribution from wind power would slightly cushion profitability. We believe the positives of robust business

model are very much factored in and further rerating in the stock from hereon is difficult due to lack of near term catalysts.

We ascribe a DCF value of Rs. 95/share (Rs. 100) to the core business and value investments at a BV of Rs.

1.4/share. Reiterate Reduce-UPF



GSPL Relative

Absolute Reduce

Underperform Target

CMP Rs. 104

Rs. 96

37

Key takeaways of recent Mgmt. meet

• Near term volume visibility:

o GNFC (Fertiliser): Additional volumes of 0.5mmscmd by 4QFY12E. The company is currently drawing 0.4mmscmd taking the total to

0.8/0.9mmscmd by Mar’12

o Essar Oil (Refinery): Additional volumes of 1mmsmcd by 4QFY12E. The company is also undergoing capacity expansion, which could further add

2mmscmd post completion in Dec’12. Currently they are consuming 0.8mmscmd of natural gas

o KRIBHCO (Fertiliser): Additional volumes of 1.6/1.8mmscmd post their capacity expansion (likely COD Dec’12). KRIBHCO is currently drawing

1.8mmscmd of natural gas. The environmental clearance for this expansion has already been received and gas allocation is yet to happen

o Power Plants: Power capacities of around 1050MW are being added in Gujarat (Pipavav-700MW;Hazira-350MW) by the end of FY12. Demand from

these units will depend on the PLFs, these units opt to operate. Overall gas potential is from this pocket is 5-6mmscmd

• Incremental supply visibility:

o Deen Dayal: Likely volumes of 5-6mmscmd in CY13E. It is pertinent to note that the aforesaid power plants have signed fuel supply agreement with

GSPC for 5.2mmscmd. Hence, substantial part of these supplies would flow through GSPL pipelines

o Hazira / Dahej: Hazira LNG terminal (Shell) has a capacity of ~3.5mmtpa with potential to go upto 4.5mmtpa. Currently, it is operating at ~2mmtpa

and therefore there is scope of additional volumes of ~2mmtpa (i.e 7.2mmscmd). Dahej LNG terminal’s second jetty expansion in FY14 would

increase its capacity by 2.5mmtpa (9mmscmd). Overall, 4.5mmtpa (16mmscmd) of additional R-LNG capacity would come over next 2-3yrs

o Oilex: The shale drilling program in Cambay basin is currently under appraisal and drilling results will be submitted to DGH soon. There is a potential

of 5-6mmscmd. Currently, it is difficult to gauge the timeline for commercial production given it is at a testing stage

o We believe the expansion in LNG terminals and potential of DD block may easily support 8-10% CAGR volume growth for GSPL over FY12-14E

• Capacity booking in PLNG’s brownfield (5 MMTPA ) expansion under consideration

o GSPL and GSPC (Parent company) are in talks with Petronet LNG to book 1.25mmtpa (4.5mmscmd) capacity in PLNG’s 5mmtpa brown field

expansion. This capacity may come on board by FY15-16 and the structure of the deal is yet to be finalised. Based on our discussion with the

management we understand that, either GSPL or GSPC or a combination of both is likely to make an advance payment of Rs. 2bn-2.5bn to PLNG,

which is likely to be adjusted once the facility starts operations. This is positive for GSPL as it would enable its customers especially on the

upcoming cross country pipelines, to buy LNG in the global markets and get it regassified without any intermediaries (charging markt margins)

• Wind Power:

o Revenues from wind power segment are likely to be in the range of Rs.400-450mn p.a; most of which would directly flow into cash profits given

minimal operational costs

o The company is applying for Carbon Emission Receipts (CER) from the Clean Development Mechanism Board. The process which is likely to be

complete in a year’s time will enable GSPL to get ~1,00,000 CERs. The CERs are likely to be shared with the Gujarat State Electricity Board. If

GSPL gets the approval, this could contribute additional cash flows of Rs. 50-70mn per annum

GSPL Relative

Absolute Reduce

Underperform Target

CMP Rs. 104

Rs. 96

1,234

4,138 5,064 4,794 4,614 4,280

9,404 9,694 10,094 10,263

70%

75%

80%

85%

90%

95%

100%

-

2,000

4,000

6,000

8,000

10,000

12,000

FY 09 FY 10 FY 11 FY 12E FY 13E

PAT (Rs. Mn) EBITDA (Rs. Mn) EBITDA margin % (RHS)

CAGR growth FY11-14E: EBITDA +4%, PAT (-3%)


898 857 794 800 750

-

200

400

600

800

1,000

FY 09 FY 10 FY 11 FY 12E FY 13E

Tariff (Rs. /mscm)

Tariff to stabilise at Rs.750/mscm post PNGRB approval


15

32 36 36

39

10

15

20

25

30

35

40

FY 09 FY 10 FY 11 FY 12E FY 13E

Volumes (mmscmd)

Flattish volumes for FY12

Source: Company, Spark Capital Research Source: Company, Spark Capital Research

38


FY12E FY13E


Volumes

(mmscmd) 35.5 35.5 0% 40 39 -1%

Tariff (Rs. /mscm) 800 800 0% 765 750 -2%

EBITDA (Rs. mn) 10,094 10,094 0% 10,611 10,263 -3%

PAT (Rs. mn) 4,794 4,794 0% 4,846 4,614 -5%

EPS (Rs.) 8.5 8.5 0% 8.6 8.2 -5%

Business Overview

GSPL Relative

Absolute Reduce

Underperform Target

CMP Rs. 104

Rs. 96

39

Valuation

DCF Valuation Estimates FY12E FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E

Volume (mmscmd) 36 39 42 45 50 51 51 51 51 51 51

Tariff (Rs. / mscm) 800 750 750 750 750 750 750 750 750 750 750

NOPAT (Rs. Mn) 5,577 5,620 5,995 6,400 7,227 7,219 7,235 7,146 7,092 7,010 7,010


Capex + Change in WC (Rs. Mn) 3,919 3,748 5,261 1,933 1,447 704 716 1,000 684 (12) 0

FCFF (Rs. Mn) 3,428 3,747 2,802 6,680 8,071 8,864 8,925 8,628 8,948 9,581 9,569

PV of CF as on March 2012 (Rs. Mn) 3,367 2,263 4,847 5,261 5,191 4,696 4,079 3,801 3,657 3,281

Key DCF Estimates

Mar-12

WACC 11%

Terminal Growth Rate -

Total firm Value (Rs. mn) 69,482

Net debt / (cash) (Rs. mn) 16,162

Equity Value (Rs. mn) 53,320

Shares O/s (mn) 562

DCF derived Price (Rs. /share) 95

Investment at Book Value 1

Target Price (Rs./Share) 96


FY11 FY12E FY13E

EPS (Rs.) 9.0 8.5 8.2

P/E (x) 11.6x 12.2x 12.7x

P/B (x) 2.9x 2.5x 2.2x


Implied target Multiples

FY11 FY12E FY13E

P/E (x) 10.7x 11.3x 11.7x

P/B (x) 2.7x 2.3x 2.0x


WACC

Le

veli

zed

Tari

ff 9% 10% 11% 12% 13%

650 105 91 78 68 60

700 116 100 87 76 67

765 127 110 96 84 75

800 138 120 105 93 82

850 149 130 114 101 89

GSPL Relative

Absolute Reduce

Underperform Target

CMP Rs. 104

Rs. 96

40

Financial Summary

Rs. mn FY 10 FY 11 FY 12E FY 13E FY 10 FY 11 FY 12E FY 13E


Revenues 10,009 10,465 10,892 11,132 Sales 105.3% 4.6% 4.1% 2.2%

EBITDA 9,404 9,694 10,094 10,263 EBITDA 119.7% 3.1% 4.1% 1.7%

Depreciation 2,365 1,299 1,770 1,874 Adj. Net Profit 235.3% 22.4% -5.3% -3.8%



Interest 929 961 1,363 1,699 EBIT 70.3% 80.2% 76.4% 75.4%










Investments 666 766 6,766 12,766 Inventory & Debtor days 32.1 30.1 30.1 30.1



Net current assets (1,889) 1,410 (488) 189 Current Share Price (Rs.)


Cash Flows Fully Diluted Shares (mn) 563 563 563 563



Cash flow s from Financing (478) 349 381 2,817 P/B (x) 3.7 2.9 2.5 2.2

Cash Generated 767 648 (1,317) 929 EV (Rs.mn) 69,348 70,939 74,674 79,245

Opening Cash 975 1,742 2,390 1,073 EV/ EBITDA (x) 7.4 7.3 7.4 7.7



104

Gujarat Gas Relative

Absolute Reduce

Underperform Target

CMP Rs. 420

Rs. 402

41

Rating: ◄► Target price: ◄► EPS: ▼


Date Oct 12, 2011

Market Data

SENSEX 16536

Nifty 4974

Bloomberg GGAS IN

Shares o/s 128mn

Market Cap Rs. 54bn





Promoters 65.1

Institutions 23.5

Public 11.4

Financial summary

Year Revenue (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x)

FY11 18,493 4,156 2,565 20.0 22.4 12.5

FY12E 25,280 5,249 3,448 26.9 16.6 9.6

FY13E 29,697 5,566 3,608 28.1 15.9 8.9

Mayur Patel, CFA

[email protected]

+91 44 4344 0037

Vishnu Kumar A S

[email protected]

+91 44 4344 0069


1m 3m 12m

GGAS -6% 4% 7%

Sensex -2% -12% -18%

BSEO&G 0% -4% -20%

Rising gas cost to normalise margins; Maintain Reduce-UPF

Gujarat gas has showcased strong pricing power by sharply increasing prices over last 6-8 months to pass on rising gas costs, this

has led to a euphoria on gross spread expansion. But based on our recent discussion with the mgmt, we have learnt that the

heightened gross spreads of 2QCY11 (Rs. 5.9/scm) is unlikely to sustain despite recent price increases owing to rising R-LNG

supplies at higher prices; declining cheap dom. supplies; strengthening dollar and no near term price hikes. Volume growth in CY11 is

likely to remain modest (5%-6%) with no immediate growth boosters. The current valuations are more than pricing in the current

margin expansion but is not factoring in bleak volume growth visibility; rising gas cost; and high sensitivity of operational performance

to future price increases. Reiterate Reduce - Underperform

Investment rationale: Volume growth: Likely to remain modest over CY10-13E (CAGR growth of 7%). 3QCY11 volumes are likely to be in the range

of 3.5-3.6mmscmd (+7% qoq) and exit the year at around 3.8mmscmd.

Price Hikes: No agitation faced from Textile customers for raising prices by 10%-15% in the industrial segment. Although the

price hikes looks steep, the increase in RSL would partly offset the impact and result in only a 5%-6% positive impact on

blended realisations wef Sep’11. Also, GGAS is likely to follow IGL’s strategy of differential pricing in domestic PNG.

Gross Spreads: The spread in 2QCY11 (Rs. 5.9/scm) is likely to sober down owing to rising R-LNG supplies at higher prices;

declining supplies of cheap domestic gas; and strengthening dollar. We expect gross spreads to decline to Rs. 4.9/scm by

4QCY11E. GGAS does not hedge dollar payments and expected changes in the USD are only considered during price hikes.

Network authorisation / New bids: Authorisation of its Gujarat network is likely to be received within a month. This would be a

positive trigger for the stock as it would enable GGAS to plan its capex in virgin areas which are clubbed with the existing

operating regions in the applied Geog Areas (GAs). On the Bhavnagar bid, company is hopeful of winning the same. This

region has a potential to scale up to 1mmscmd over 5 years from the date of authorisation.

Cash Build up: As of Jun’11 the company has ~Rs. 5.3bn in liquid investments and is likely to generate around Rs. 2.50bn of

free cash flows in CY11E. GGAS would take a call on usage (special dividend, buyback etc.) of surplus cash after the outcome

of the Bhavnagar bid, which might require some part of the cash.

We believe the gross spread outperformance was one off and likely to normalise over the ensuing quarters. We do see a possibility of

some small pop in the stock price on the receipt of network authorisation, which would be an another opportunity to book profits. The

current valuations are more than pricing in the current margin expansion but is not factoring in bleak volume growth visibili ty; rising gas

cost; and high sensitivity of operational performance to future price increases. Maintain REDUCE-UPF with a TP of Rs. 402.




Absolute Reduce

Underperform Target

CMP Rs. 420

Rs. 402

1,729

2,565

3,448 3,608 4,088

2,795

4,156

5,249 5,566

6,191

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

CY09 CY10 CY11E CY12E CY13E

PAT (Rs. mn) EBITDA (Rs. mn)

CAGR Growth (CY10-13E): EBITDA = 14%; PAT = 17%


10351212 1281

13901501

0

200

400

600

800

1000

1200

1400

1600


Sales volumes (mmscm)

Modest CAGR Volume growth of 7% (CY10-13E)


13.415.0

19.521.1

22.2

9.710.6

14.315.9 16.7

3.7 4.35.2 5.2 5.4

0.0

5.0

10.0

15.0

20.0

25.0


Realisation (Rs./scm) Cost of Gas (Rs./scm) Gross Spread (Rs./scm)

Gross spread likely to flatten over the next few years (CY12/13)


42

Business Overview

42


CY11E CY12E


Volumes (mmscm) 1,286 1,281 0% 1,389 1,390 0%

Realisation (Rs. /scm) 19.0 19.5 2% 20.4 21.1 4%

Gross spread (Rs. /scm) 5.4 5.2 -3% 5.3 5.2 -1%

Revenues (Rs. mn) 24,767 25,280 2% 28,618 29,697 4%

EBITDA (Rs. mn) 5,500 5,249 -5% 5,651 5,566 -2%

PAT (Rs. mn) 3,620 3,448 -5% 3,666 3,608 -2%

EPS (Rs.) 28.23 26.88 -5% 28.6 28.1 -2%

All figures in Rs. mn, except EPS, which is in Rs.


Absolute Reduce

Underperform Target

CMP Rs. 420

Rs. 402 Valuation

43

DCF Valuation Estimates CY11E CY12E CY13E CY14E CY15E CY16E CY17E CY18E CY19E CY20E CY21E

Volume (mmscmd) 3.5 3.8 4.1 4.4 4.6 4.9 5.2 5.5 5.9 6.2 6.6

Avg realisation (Rs. / scm) 19.5 21.1 22.2 22.6 22.6 22.6 22.6 22.6 22.6 22.6 22.6

Gross Spread (Rs. /scm) 5.2 5.2 5.4 5.1 4.7 4.7 4.7 4.7 4.7 4.7 4.7

EBITDA (Rs. /scm) 4.1 4.0 4.1 3.6 3.1 3.4 3.4 3.4 3.4 3.4 3.4

NOPAT (Rs. mn) 3,105 3,262 3,624 3,300 2,847 3,456 3,664 3,886 4,124 4,378 4,650

Depreciation (Rs. mn) 614 698 782 866 936 992 1,048 1,104 1,160 1,216 1,273

Capex +WC Chgs (Rs. mn) 1,897 1,933 1,940 1,458 965 965 963 961 958 956 953

FCFF (Rs. mn) 1,822 2,026 2,466 2,708 2,818 3,483 3,749 4,029 4,326 4,639 4,969

PV of CF as on Mar’ 12 (Rs. mn) 0 1,883 2,078 2,070 1,954 2,191 2,139 2,085 2,030 1,975 1,919

Key DCF Estimates

Mar-12

WACC (%) 10.25%

Terminal Growth Rate (%) 3%

PV of Terminal Value (Rs. Mn) 27,262


Net debt / (cash) (Rs. Mn) (7,029)

Pref. Sh. +Minority (Rs. Mn) 220

Other liabilities (Rs. Mn) 2,835


Shares O/s (Nos. mn) 128

Target Price (Rs. /Share) 402

WACC

Term

ina

l G

row

th 8% 9% 10% 11% 12%

2.0% 498 427 374 333 300

2.5% 525 446 387 343 307

3.0% 557 467 402 353 315

3.5% 595 492 419 365 324

4.0% 643 521 438 379 334

Current Trading Multiples Implied target multiple

CY10 CY11E CY12E CY10 CY11E CY12E

EPS (Rs.) 20.0 26.9 28.1 20.0 26.9 28.1

P/E (x) 21.0x 15.6x 14.9x 20.1x 15.0x 14.3x

P/B (x) 6.4x 5.3x 4.6x 6.1x 5.1x 4.4x

EV/EBITDA (x) 11.6x 9.2x 8.7x 11.1x 8.8x 8.3x


Absolute Reduce

Underperform Target

CMP Rs. 420

Rs. 402

44

Financial Summary

Rs. mn CY09 CY10 CY11E CY12E CY09 CY10 CY11E CY12E


Revenues 14,197 18,493 25,280 29,697 Sales 9.1% 30.3% 36.7% 17.5%

EBITDA 2,795 4,156 5,249 5,566 EBITDA 18.8% 48.7% 26.3% 6.0%

Depreciation 474 542 614 698 Adj. Net Profit 8.5% 48.3% 34.4% 4.6%



Interest 1 5 5 5 EBIT 16.4% 19.5% 18.3% 16.4%






Total debt - - - - Sales / Total Assets (x) 1.5 1.7 2.0 2.0

Total Networth & Liabilities 9,963 11,397 13,824 15,846 Fixed Assets Turnover (x) 2.1 2.5 3.0 3.1

Net fixed assets 5,809 6,359 7,246 8,048 Financial stability ratios

CWIP 1,356 1,298 1,798 2,298 Total Debt to Equity (x) - - - -




Net current assets (1,683) (2,091) (1,050) (331) Current Share Price (Rs.)


Cash Flows Fully Diluted Shares (mn) 128.3 128.3 128.3 128.3

Cash flows from Operations 1,782 2,874 4,058 3,962 Adjusted EPS (Rs.) 13.5 20.0 26.9 28.1

Cash flows from Investing (1,966) (2,164) (1,560) (1,560) P/E (x) 31.2 21.0 15.6 14.9

Cash flows from Financing 39 (695) (1,051) (1,616) P/B (x) 7.0 6.4 5.3 4.6

Cash Generated (146) 14 1,448 786 EV (Rs.mn) 49,548 48,284 46,836 46,050

Opening Cash 225 79 94 1,541 EV/ EBITDA (x) 17.7 11.6 8.9 8.3

Closing Cash 79 94 1,541 2,328 Dividend Yield (%) 1.9% 2.9% 3.3% 3.3%

420

spark capital- natural gas utilities- in-depth report - alarms on lng are scare mongering

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