Long term story intact Petronet LNG reported its Q4FY14 results with revenues at | 10,427 crore (up 23.2%) and PAT at | 169.3 crore (down 30.9%) in Q4FY14 The topline was in line with our estimates despite lower than estimated sales volumes (117.2 tbtu against our estimate of 122.8 tbtu) as the blended margin of | 42.1/mmbtu is higher than our estimate of | 37.8/mmbtu. The EBITDA margin at 3.7% came above our estimate of 3.3% for Q4FY14 mainly on account of higher than estimated spot/short-term volumes and margins. PAT was higher than our estimates on account of higher other income Disappointing performance last year; scenario likely to improve The total sales volume (long-term + spot/short-term + tolling) has declined from 548.4 tbtu in FY12 to 525.2 tbtu in FY13 and further to 493 tbtu in FY14. In Q4FY14, volumes declined 5.2% QoQ to 117.2 TBTU. However, the EBITDA margin sustained at 3.7% (above our estimate of 3.3%) due to almost doubling of spot volumes (20.5 tbtu in Q4FY14) QoQ. For FY14, reasons like high LNG prices, rupee depreciation and a challenging demand environment led to lower capacity utilisation (96% for FY14) of Dahej terminal. Although the Kochi terminal became operational on September 10, 2013, volumes at the Kochi terminal continue to remain subdued due to delay in commissioning of Phase II of the Kochi Mangalore Bangalore pipeline. During Q4FY14, volumes at the Kochi terminal stood at a meagre 1 TBTU (79% QoQ reduction), as FACT had stopped its gas offtake on January 10, 2014 due to higher LNG prices. The Tamil Nadu section (connecting to Bangalore) will get commissioned in July 2015 only if Gail receives a favourable verdict from the Supreme Court, where the hearing is in July 2014. Therefore, we expect substantial volume ramp up at Kochi only in H2FY16. However, we find comfort in the fact that the second jetty got commissioned in April 2014 at Dahej. The jetty will enable the terminal to handle 1.25 MMTPA of the volume booked by GSPC on a take or pay basis. The company has also signed a short-term supply back to back contract for 0.8 MMTPA in FY15E. Regas volume of 1 MMTPA is expected to come from GAIL. We have estimated LNG volumes of 556 tbtu and 599 tbtu for FY15E and FY16E, respectively. Focus on contracted & tolling volumes will reduce volatility The Dahej expansion to 15 mmtpa is expected to happen by November 2016. Of this 15 mmtpa, 7.5 mmtpa will be under long-term contracts while 7.25 mmtpa of the incremental capacity has been already booked (GAIL-2.5, GSPC- 2.25, IOCL-1.5 & BPCL-1) under take-or-pay contract. Of the 2.5 MMTPA booked by GSPC, 1.25 MMTPA has already started in Q1FY15 after the commissioning of the second jetty. This focus on tolling volumes will reduce the sourcing & earning volatility risk. Primary LNG play in India With India continuing to be significantly short of natural gas supply, Petronet LNG will benefit being the primary play on increasing usage of LNG. While the next few quarters could be challenging (economic slowdown, low Kochi utilisation), the stock price does reflect these concerns. We have valued the stock based on DCF methodology (WACC 12%, terminal growth -2%) to arrive at a HOLD recommendation with a target price of | 157. Petronet LNG (PETLNG) | 145 Rating matrix Rating : Hold Target : | 157 Target Period : 12 months Potential Upside : 8%
Whats changed? Target Changed from | 132 to | 157 EPS FY15E Changed from | 9.5 to | 10.5 EPS FY16E Introduced at | 12.8 Rating Changed from Buy to Hold
ICICI Securities Ltd | Retail Equity Research Page 2 Variance analysis Q4FY14 Q4FY14E Q4FY13 YoY (%) Q3FY14 QoQ (%) Comments Total Revenues 10,427.8 10,454.3 8,465.6 23.2 9,382.1 11.1 Inline with estimates; lower volumes offset by higher than estimated realisation Raw materials costs 9,934.4 9,990.1 7,998.6 24.2 8,917.1 11.4 Employees Cost 19.5 12.5 13.7 42.5 10.6 84.6 Higher in fourth quarter due to variable pay component Other Expenses 87.07 104.5 19.0 358.3 104.5 -16.7 lower than estimates as low capacity utilisation at Kochi led to lower power/fuel cost Total Expenditure 10,041.0 10,107.2 8,031.2 25.0 9,032.2 11.2 EBITDA 386.8 347.1 434.4 -11.0 349.9 10.5 EBITDA margins (%) 3.7 3.3 5.1 -142 bps 3.7 -2 bps higer than estimates on account of higher than estimated spot/short term volumes & margiins Depreciation 100.0 102.4 46.8 113.7 101.7 -1.7 EBIT 286.8 244.7 387.6 -26.0 248.2 15.5 Interest 78.6 77.8 24.7 218.3 78.3 0.4 Other Income 30.8 14.7 20.3 51.9 21.6 42.3 Higher than estimates due to maturity of short term investments Extra Ordinary Item 0.0 0.0 0.0 NA 0.0 NA PBT 238.9 181.6 383.1 -37.6 191.6 24.7 Total Tax 69.6 49.2 138.0 -49.6 56.0 24.3 PAT 169.3 132.3 245.1 -30.9 135.6 24.9 Key Metrics Sales volume (tbtu) 112.7 106.5 118.3 -4.7 104.8 7.6 Regasification vol (tbtu) 4.5 16.3 3.7 21.9 18.8 -76.1 Total Volumes (tbtu) 117.2 122.8 122.0 -3.9 123.6 -5.2 Lower than estimates on account of lower capacity utilisation at Dahej (96%) & lower volumes at Kochi Blended margin (|/mmbtu) 42.1 37.8 43.0 -2.2 37.6 11.9 Higher on account of doubling of short term / spot volumes QoQ which commands higher margins
Source: Company, ICICIdirect.com Research
Change in estimates (| Crore) Old New % Change Old New % Change Comments Revenue 44,472.7 40,279.1 -9.4 NA 42,913.1 NA Reduced FY15E estimates, since Kochi volumes are not expected to gorw.In FY16, we'l witness a rebound in revenues due to expected ramp up at Kochi EBITDA 1,806.2 1,791.4 -0.8 NA 2,123.7 NA EBITDA Margin (%) 4.1 4.4 39 bps NA 4.9 NA PAT 712.9 789.1 10.7 NA 957.0 NA Estimates increased due to lower tax rate assumption & higher estimated other income EPS (|) 9.5 10.5 10.7 NA 12.8 NA FY15E FY16E
Source: Company, ICICIdirect.com Research
Assumptions FY13 FY14 FY15E FY16E FY15E FY16E Sales volume (tbtu) 479.4 439.6 448.6 472.1 463.2 500.4 Regasification vol (tbtu) 45.7 53.7 107.0 126.5 88.3 88.3 Total Volumes (tbtu) 525.2 493.3 555.6 598.6 551.5 588.7 No major change in FY15E estimates as Kochi is not expected to ramp up Blended Margin(|/bbl) 41.2 38.6 39.7 43.0 41.1 44.7 Comments Current Earlier
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 3 Company Analysis
Disappointing performance last year; scenario likely to improve Total sales volume (long-term + spot/short-term + tolling) has declined from 548.4 tbtu in FY12 to 525.2 tbtu in FY13 and further to 493 tbtu in FY14. In Q4FY14, volumes declined 5.2% QoQ to 117.2 TBTU. However, the EBITDA margin sustained at 3.7% (above our estimate of 3.3%) due to almost doubling of spot volumes (20.5 tbtu in Q4FY14) QoQ. For FY14, reasons like high LNG prices, rupee depreciation and a challenging demand environment led to lower capacity utilisation (96% for FY14) of Dahej terminal. Although the Kochi terminal became operational on September 10, 2013, volumes at the Kochi terminal continue to remain subdued due to delay in commissioning of Phase II of the Kochi Mangalore Bangalore pipeline. During Q4FY14, volumes at Kochi terminal stood at meagre 1 TBTU (79% QoQ reduction), as FACT had stopped its gas offtake on January 10, 2014 due to higher LNG prices.
Exhibit 1: Volume trend 525.2 598.6 555.6 493.3 117.2 123.6 123.0 129.5 122.0 141.0 135.0 127.2 0.0 100.0 200.0 300.0 400.0 500.0 600.0 Q 1 F Y 1 3 Q 2 F Y 1 3 Q 3 F Y 1 3 Q 4 F Y 1 3 F Y 1 3 Q 1 F Y 1 4 Q 2 F Y 1 4 Q 3 F Y 1 4 Q 4 F Y 1 4 F Y 1 4 F Y 1 5 E F Y 1 6 E t b t u Sales volume Regasification volume
Source: Company, ICICIdirect.com Research
A marginal increase in volumes will happen in H1FY16, if the Kerala section (connecting to Mangalore) issue gets resolved. The Tamil Nadu section (connecting to Bangalore) will get commissioned in July 2015 only if Gail receives a favourable verdict from Supreme Court, where the next hearing is scheduled in July 2014. Therefore, we expect a substantial volume ramp up at Kochi only in H2FY16. However, we find comfort in the fact that the second jetty got commissioned in April 2014 at Dahej. The jetty will enable the terminal to handle 1.25 MMTPA of the volume booked by GSPC on a take or pay basis. The company has also signed a short term supply back to back contract for 0.8 MMTPA in FY15E. A regas volume of 1 MMTPA is expected to come from Gail. We have estimated LNG volumes of 556 tbtu and 599 tbtu for FY15E and FY16E, respectively.
ICICI Securities Ltd | Retail Equity Research Page 4 We expect blended margins to increase from | 38.6 per mmbtu in FY14 to | 43 per mmbtu in FY16E on account of an increase in Dahej contract & regasification margins by 5% per annum.
Exhibit 2: Margin trend 41.5 43.0 41.2 37.6 42.1 43.0 39.7 38.6 37.6 37.4 43.0 44.3 32 34 36 38 40 42 44 46 Q 1 F Y 1 3 Q 2 F Y 1 3 Q 3 F Y 1 3 Q 4 F Y 1 3 F Y 1 3 Q 1 F Y 1 4 Q 2 F Y 1 4 Q 3 F Y 1 4 Q 4 F Y 1 4 F Y 1 4 F Y 1 5 E F Y 1 6 E | / m m b t u
Source: Company, ICICIdirect.com Research
Focus on contracted & tolling volumes to reduce volatility The Dahej expansion to 15 mmtpa is expected to happen by November 2016. Of this 15 mmtpa, 7.5 mmtpa will be under long-term contracts, while 7.25 mmtpa of the incremental capacity has been already booked (GAIL-2.5, GSPC- 2.25, IOCL-1.5 & BPCL-1) under take-or-pay contract. Of the 2.5 MMTPA booked by GSPC, 1.25 MMTPA has already started in Q1FY15 after the commissioning of the second jetty. This focus on tolling volumes will reduce the sourcing and earning volatility risk.
ICICI Securities Ltd | Retail Equity Research Page 5 Global demand supply scenario - determinant for spot LNG prices Price of spot LNG, which had reached a peak of~$17-18/mmbtu post a severe winter, have cooled off to levels of ~US$14/mmbtu. Prices will not increase in the near term, considering that the demand for LNG will remain low in summer. In FY15, incremental LNG supply is expected from commissioning of 6 MMTPA terminal in Papua New Guinea and flow of volumes from Angola and Algeria. In FY16, incremental supply will come from projects in Australia. However, there is enough global demand to match the incremental global supply. Hence, spot LNG prices are not expected to correct much from current levels from a medium-term perspective.
Conference call highlights Qatar FOB price for Q4FY14 stood at $ 12.5/mmbtu while the average price for FY14 stood at $11.9/mmbtu. The FY15 Qatar FOB price is expected to be at $13/mmbtu Regas tariffs at Dahej terminal have been raised from | 36.7/mmbtu to | 38.6/mmbtu based on the annual 5% hike The PBT loss for Kochi terminal for FY14 stood at | 250 crore, which was mainly due to | 108 crore interest cost and | 121 crore depreciation One key approval has been pending for the Gangavaram project as there has not been any government in Andhra Pradesh for the past three months Capex for FY15E stands | 1200 crore Lower tax rate is attributable to the losses from the Kochi terminal Employee cost was higher in Q4FY14 due to the variable pay component
ICICI Securities Ltd | Retail Equity Research Page 6 Outlook & Valuation India continues to be significantly short of natural gas supply, with the shortfall likely to increase. This will necessitate an increase in LNG imports. Petronet LNG will benefit being the primary play on increasing usage of LNG. While the next few quarters could be challenging (economic slowdown, low Kochi utilisation), the stock price does reflect these concerns. We have valued the stock based on DCF methodology (WACC 12%, terminal growth -2%) to arrive at a HOLD recommendation with a price target of | 157.
Exhibit 4: Valuation Particulars Amount WACC 11.0% Present Value of Cash Flows till FY20E 3004.1 Terminal Growth Rate 2% Terminal Value 24093.1 Present Value of Terminal Cash Flows 12881.2 Total Present Value of the Firm 15885.2 Less: Net Debt (FY14E) 4198.2 Total Present Value of Equity 11687.0 Number of Outstanding shares (In Crore) 75.0 DCF (| per share) 179
ICICI Securities Ltd | Retail Equity Research Page 7 Company snapshot Target Price: 157 0 20 40 60 80 100 120 140 160 180 200 J a n - 0 8 A p r - 0 8 J u l - 0 8 O c t - 0 8 J a n - 0 9 A p r - 0 9 J u l - 0 9 O c t - 0 9 J a n - 1 0 A p r - 1 0 J u l - 1 0 O c t - 1 0 J a n - 1 1 A p r - 1 1 J u l - 1 1 O c t - 1 1 J a n - 1 2 A p r - 1 2 J u l - 1 2 O c t - 1 2 J a n - 1 3 A p r - 1 3 J u l - 1 3 O c t - 1 3 J a n - 1 4 A p r - 1 4 J u l - 1 4 O c t - 1 4 J a n - 1 5 A p r - 1 5
Source: Bloomberg, Company, ICICIdirect.com Research
Key events Date Event Jan-08 Fears of decline in LNG demand due to weaker global and domestic economy Oct-08 Sub-prime crisis impacting the global and domestic growth impacted the sentiment for future LNG demand, Also, fears that Reliance KG basin gas production from next year would lead to the decline in LNG demand May-09 LNG demand stable inspite of start of production from Reliance KG basin Aug-10 Production from Reliance KG D6 basin declines, pushing up demand for spot LNG Jul-11 Reliance production from KG basin declines significantly which increased demand for short term and spot LNG. Improved results also due to higher margins on short term and spot LNG Apr-12 Results of Petronet LNG were below market expectations on account of lower margins on short term and spot volumes. Company felt the impact of high LNG prices on its bottomline May-13 Kochi terminal gets ready but delay in construction of Phase-II of Kochi-Mangalore-Bangalore pipeline would lead to lower capacity utilization for the terminal Dec-13 Fears of further delay in construction of Phase-II of Kochi-Mangalore-Bangalore pipeline Apr-14 Company reports better than expected blended margins due to higher than expected short term / spot volumes
Source: Company, ICICIdirect.com Research
Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Bharat Petroleum Corporation Ltd 31-Mar-14 12.50 93.8 0.0 2 GAIL (India) Ltd 31-Mar-14 12.50 93.8 0.0 3 Indian Oil Corpn Ltd 31-Mar-14 12.50 93.8 0.0 4 Oil and Natural Gas Corporation Ltd 31-Mar-14 12.50 93.8 0.0 5 Gaz de France 31-Mar-14 10.00 75.0 0.0 6 Asian Development Bank 31-Mar-14 5.20 39.0 0.0 7 T. Rowe Price International (UK) Ltd. 31-Mar-14 2.55 19.1 0.1 8 Fidelity Management & Research Company 31-Mar-14 2.04 15.3 3.1 9 Norges Bank Investment Management (NBIM) 31-Mar-14 1.71 12.8 2.5 10 ICICI Prudential Asset Management Co. Ltd. 31-Mar-14 1.05 7.9 0.0 (in %) Jun-13 Jun-13 Sep-13 Dec-13 Mar-14 Promoter 50.0 50.0 50.0 50.0 50.0 FII 13.7 14.4 16.4 18.9 19.9 DII 9.0 8.1 6.5 4.8 4.4 Others 27.3 27.6 27.0 26.3 25.7
Source: Reuters, ICICIdirect.com Research
Recent Activity Investor name Value Shares Investor name Value Shares Sundaram Asset Management Company Limited 8.73m 3.83m HSBC Global Asset Management (Hong Kong) Limited -11.37m -5.99m Fidelity Management & Research Company 7.01m 3.07m DNB Asset Management (Asia) Limited -5.92m -3.00m Norges Bank Investment Management (NBIM) 5.68m 2.49m Russell Investments Limited -3.25m -1.66m DSP BlackRock Investment Managers Pvt. Ltd. 2.52m 1.10m HDFC Asset Management Co., Ltd. -3.15m -1.61m Sydinvest 1.78m 0.78m SBI Funds Management Pvt. Ltd. -2.97m -1.30m Buys Sells
Source: Reuters, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 8
ICICI Securities Ltd | Retail Equity Research Page 10
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Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093
research@icicidirect.com
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List of Key Financial Ratios: Formulas and Calculation Examples Defined for Different Types of Profitability Ratios and the Other Most Important Financial Ratios