Spark Capital - Natural Gas Utilities - In-Depth Report - Alarms On LNG Are Scare Mongering

Natural Gas Utilities Sector Indepth report
Oct 2011
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Natural Gas Utilities

Executive Summary
Sector Outlook
Date Market data BSE SENSEX Nifty BSEO&G 16536 4974 8632
Positive
Oct 12, 2011
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
TP (Rs) Abs.
Rel.
GAIL
541
BUY
OPF
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 GAILs 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 (exinvest.) 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
GGAS
402
REDUCE
UPF
GSPL
96
REDUCE
UPF
IGL
451
ADD
OPF
PLNG
190
BUY
OPF
Mayur Patel, CFA mayur@sparkcapital.in +91 44 4344 0037 Vishnu Kumar A S vishnu@sparkcapital.in +91 44 4344 0069

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
Current Developments 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
Sector Outlook
Positive
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 quarters highs though. Negative for Transmission biz of GAIL and GSPL. Positive for PLNG as more RLNG would be required to meet the deficit.
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
KG D6 supplies have dipped to 44.5mmscmd levels as compared to 60mmscmd a year ago. RILs 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 GOIs 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)
Final Report suggest no pooling but recommends tax sops and ~25% LNG usage in priority sectors
Positive for the RLNG story. Positive for PLNG, GAIL and GSPL.
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

Snapshot of Views on Stocks
Sector Outlook Positive
PLNG
Temporary tightening of LNG markets would not affect PLNGs 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 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 BuyOPF 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
GAIL
IGL
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
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

Valuation Matrix
Sector Outlook Positive
Sales (Rs. mn) Company GAIL Gujarat Gas * Gujarat State Petronet Indraprastha Gas Petronet LNG Ltd FY11 324,586 18,493 10,465 17,441 FY12E 370,884 25,280 10,892 25,019 FY13E 417,844 29,697 11,132 33,768
EBITDA (Rs. mn) FY11 54,546 4,156 9,694 4,923 FY12E 62,114 5,249 10,094 6,949 FY13E 70,908 5,566 10,263 8,100 FY11 35,611 2,565 5,064 2,598
PAT (Rs. mn) FY12E 39,570 3,448 4,794 3,472 FY13E 41,733 3,608 4,614 3,938 FY11 28.1 20.0 9.0 18.6
EPS (Rs.) FY12E 31.2 26.9 8.5 24.8 FY13E 32.9 28.1 8.2 28.1
CAGR FY11-FY13E Sales 13.5% 26.7% 3.1% 39.1% EBITDA 14.0% 15.7% 2.9% 28.3% PAT 8.3% 18.6% -4.5% 23.1%
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%
P/E Company GAIL Gujarat Gas * Gujarat State Petronet Indraprastha Gas Petronet LNG Ltd FY11 14.9x 21.0x 11.6x 23.0x 19.1x FY12E 13.4x 15.6x 12.2x 17.2x 13.1x FY13E 12.7x 14.9x 12.7x 15.1x 12.2x FY11 2.7x 6.4x 2.9x 5.9x 4.4x
P/B FY12E 2.4x 5.3x 2.5x 4.7x 3.5x FY13E 2.1x 4.6x 2.2x 3.8x 2.9x FY11 9.3x 11.6x 7.3x 12.7x 12.3x
EV/EBITDA FY12E 8.2x 8.9x 7.4x 9.0x 9.6x FY13E 7.7x 8.3x 7.7x 7.8x 7.9x CMP (Rs) 417 420 104 426 158
Mkt Cap (Rs. mn) 528,955 53,865 58,512 59,640 118,500
Target Basis DCF DCF DCF DCF DCF Price 541 402 96 451 190
Rating Absolute BUY REDUCE REDUCE ADD BUY Relative O-PF U-PF U-PF O-PF O-PF
* For Gujarat Gas FY11/12/13 represents CY10/11/12 financial year end

LNG prices on the rise Core segments (Naphtha, Petrol, Diesel etc) continue to be attractive; savings diminish on low cost fuel replacement (FO/LSHS) Sector Outlook Positive
Spot R-LNG prices likely to inch higher over next few quarters
$18 $13.8 $14 $10.9 $10 $11.2 $11.0 $12.0 Spot R-LNG to remain high as Japan & Korea would draw more N.gas during winter (Oct11-Mar12) $16.0 $16.5 $16.5 $15.0
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
$6 1QFY11 3QFY11 1QFY12 3QFY12E 1QFY13E Japan LNG price ($/mmbtu) Source: Bloomberg, Spark Capital Research.
Spot R-LNG delivered price at $19-$20/mmbtu

$/mmbtu FOB Shipping cost CIF Price Import duty @ 5.15% CIF Price (incl. tax) at Terminal Gujarat 14.0 0.5 14.5 0.7 15.2 North India 14.0 0.5 14.5 0.7 15.2
Core segments remain attractive

Fuel Price $/MT Kcal / Kg Equiv.Cost ($/mbbtu) Spot price ($/mmbtu) Savings Fuel Oil 767 10,500 18 20.0 -8% LSHS 799 10,000 20 20.0 1% Naphtha 1,086 10,500 26 20.0 30% Deisel 1,054 9,500 28 20.0 40% Petrol 1,706 11,250 38 20.0 91%
Re-gas tariff (Rs. 34/mmbtu)

Ex Terminal VAT @15% Marketing margins of PLNG Pipeline tariff (max) including service tax of 10%* Delivered Price
0.74
16.0 2.4 0.3 0.5 19.2
0.74
16.0 2.4 0.3 1.3 19.9
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
Source: BPCL, Bloomberg, Spark Capital Research. Petrol, Diesel prices at Delhi
5 5

Japans 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
LNG cons. in power (MMT) 5.3 4.9 4.5 4.1 3.7 3.3 2.9 2.5 Apr May Jun Jul Aug
2009
Sector Outlook
Positive
The Japanese Earthquake has knocked off a good part of the countrys 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 April12 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
Sep
2010
Oct
Nov
2011
Dec
Jan
Feb
Mar
Source: FEPC, Spark Capital Research
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

LNG prices: Near term LNG prices likely to breach oil parity, unlikely to sustain in the Sector Outlook long run; China & Britain unlikely to pursue aggressive buying in winter..
Japan LNG prices threatening to breach Oil Parity Unlikely to hold !
$25 Japanese LNG prices are correlated to JCC with a lag of 2-3 months $20 $15 $10 $5 $0
Positive
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 $17.2/mmbtu. Even if it breaches the oil parity, it is unlikely to sustain as it will make customers shift back to crude related products. The Japanese LNG price has remained below the Oil parity for
Japan LNG price CIF ($/mmbtu) Source: Bloomberg, Spark Capital Research.
JCC N.gas-Oil parity price ($/mmbtu)
~80% of its 10year history. Hence we dont 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. CNOOCs 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
Sep11 (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

Refinery: Status Check Despite rising LNG prices key demand segments remain unaffected No major risk to PLNGs spot volumes
~70-75% of N.gas replace Naphtha/Diesel hence not much risk..
Hydrogen generation Power plant (CPP) Naphtha / Diesel Process users Fuel Oil / LSHS
Sector Outlook
Positive
Not much savings on FO/LSHS; ~30% savings on Naphtha

Fuel Price $/MT Kcal / Kg Fuel Oil 767 10,500 18 LSHS 799 10,000 20 Naphtha 1,086 10,500 26 Diesel 1,054 9,500 28 Petrol 1,706 11,250 38
Present Present input configuration
Naphtha
Natural gas Present req. for a configuration 15mmtpa Natural Gas Requirement (% of total)
1.0-1.2mmscmd
1.2-1.6mmscmd
0.6-0.8mmscmd
Equiv.Cost ($/mbbtu) Spot price ($/mmbtu)
20.0
-8%
20.0
1%
20.0
30%
20.0
40%
20.0
91%
~35%-40%
~40%-45%
~20%-25%
Savings
Source: Industry, Spark Capital Research
Source: BPCL, Bloomberg, Spark Capital Research. Petrol & Diesel prices at Delhi
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.
Refinery Status Check N.gas replacing Naphtha intact, shift back to FO/LSHS seen in RIL & Essar Oil
Key Refineries Reliance Essar Oil HPCL, Mumbai BPC, Mumbai IOC, Mathura, Panipat, Koyali MTPA 60,000 10,500 6,500 12,000 42,700 Cur. usage Potential (mmscmd) (mmscmd) 7.0 0.4 0.8 1.2 5.0 14.4 10.0 1.8 1.1 2.0 7.5 22.4 Channel checks N.Gas consumption dropped from ~9mmscmd in 1QFY12 to ~7mmscmd due to shift back to FO/ LSHS. RIL can draw upto 12mmscmd Essar has dropped its gas consumption from ~0.7mmscmd to ~0.4mmscmd, due to shift to FO/LSHS for process users 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 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 (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
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.
Total 131,700 Source: Spark Capital Research

Refinery: Strong potential Key determinants would be Pipeline connectivity and gas supply
Refineries Tota Gas based capacity IOCL Haldia HPCL, Visakh BPCL, Kochi CPCL, Chennai MRPL, M'lore Bina Bhatinda Others Total Conversion Opportunity IOC Paradip (New) Nagarjuna (New) MRPL (Expansion) Essar (Expansion) BPCL (Expansion) HPCL (Expansion) MTPA 131,700 7,500 8,300 9,500 11,500 11,820 6,000 9,000 7,078 70,698 15,000 6,000 3,180 7,500 2,500 5,200 Potential (mmscmd) 8.0 1.3 1.4 1.6 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 Remarks
Sector Outlook
Positive
Feasibility studies for switching to N. gas is currently being undertaken; PLNG Kochi terminal likely to supply N. gas Feasibility studies for switching to N. gas is currently being undertaken; PLNG's Kochi 1.9 terminal or IOCL's proposed Ennore terminal likely to supply N.gas Undertaking feasibility studies; likely supply from PLNGs Kochi terminal through GAILs 2.0 PL 1.0 Refinery capable of using N.gas; no PL connectivity yet 1.5 1.2 19.7 2.5 Completion by FY13/14 1.0 Completion by FY13 0.5 Completion by FY12/FY13 1.3 Completion by FY13 0.4 Completion by FY14 0.9 Completion by FY13/14 Capable of using N.gas.; refinery in commissioning/stabilisation stage; N.gas req. is likely to be assessed once plant is fully operational.
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
Bina (Expansion)
BPCL Kochi (Expansion) CPCL (Expansion) Total Addnl. Capacity (FY12-16) Total Refinery Capacity (FY16)
3,000
6,000 5,500 53,880 256,278
0.5 Completion by FY15

1.0 Completion by FY15 0.9 Completion by FY16 9.0 28.7
We have conservatively est. the incremental demand at 2.5 mmscmd for a 15MMTPA plant vs an ideal req. of 3.54mmscmd, thus giving considerable upside to our est. of 29mmscmd of incremental N.gas req. by FY16E

CGD: Yes there is an appetite for expensive R-LNG (Even at $20/mmbtu)
CNG economics are extremely attractive even at R-LNG prices of $20/mmbtu
Fuel Petrol Deisel Price (Rs. / Ltr) 66.8 41.3 Mileage (Km /Ltr) 12.0 4.0 Running Cost (Rs. /Km) 5.6 10.3 Gas Cost $/mmbtu 20.0 7.0 CNG (Rs. / Kg)* 61.7 30.2 Mileage (Km / Kg) 18.0 4.5 Running Cost (Rs. /Km) 3.4 6.7 % Saving 38% 35% Daily Average Kms 50.0 150.0 Kit Cost (Rs. per kit) 35,000 300,000 Saving /Yr (300 days 56,833 42,563 32,092 162,884 NA assumed) Payback Period (Yrs) 0.6 0.8 1.1 1.8 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 4 wheelers Petrol Petrol 66.8 66.8 12.0 12.0 5.6 5.6 7.0 15.0 32.0 49.1 18.0 18.0 1.8 2.7 68% 51% 50.0 50.0 35,000 35,000 Bus Deisel 41.3 4.0 10.3 15.0 49.1 4.5 10.9 -6% 150.0 300,000 Diesel 41.3 4.0 10.3 20.0 61.7 4.5 13.7 -33% 150.0 300,000 NA NA
Sector Outlook
Positive
Industrial: Savings on Naphtha/Diesel; Breaks even with FO/LSHS

Fuel Fuel Oil Price $/MT 767 Kcal / Kg 10,500 Equiv.Cost per 18 mmbtu ($/mbbtu) Spot price 20.0 ($/mmbtu) Savings -8% LSHS Naphtha Diesel 799 1,086 1,054 10,000 10,500 9,500 20 20.0 1% 26 20.0 30% 28 20.0 40%
Source: BPCL, Spark Capital Research
CNG generates attractive savings vs. alt. fuels even at gas cost (RLNG) of $20/mmbtu
Commercial PNG - Attractive - Domestic PNG will make sense if noises on Policy decisions happen (Rs.700/ cylinder) Domestic Weight (Kgs) Price Rs. / Cylinder Price (Rs. /Kg) Calorific value (kcal/kg) Rs./1000 kcal Gas Cost $/mmbtu 14.2 395 28 11,900 2 $7 14.2 700 49 11,900 4 $7 14.2 700 49 11,900 4 $20 19.0 1,300 68 11,900 6 $7 Commercial 19.0 1,300 68 11,900 6 $15 19.0 1,300 68 11,900 6 $20 Govt in May11 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
PNG Price Rs/ scm

Calorific value Rs. / 1000 kcal
22
8,700 3
22
8,700 3 39%
42
8,700 5 -15%
30
8,700 3 40%
43
8,700 5 15%
51
8,700 6 -2%
Savings % -8% 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
Commercial PNG is attractive at $15/mmbtu levels and breaks even at $20/mmbtu levels
10

Inter ministerial committee drops pooling; Recommends pref. domestic gas allocation and 22-27% LNG usage for Fertiliser/Power projects
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
Sector Outlook
Positive
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. 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. 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. Neutral for IGL and Guj Gas. They are not factoring in any additional allocation.
Fertilizer and Power on priority for allocation of domestic natural gas
Recommendation to use 22-27% R-LNG in fertilizer and power for incremental gas requirements
No addnl. allocation to CGD apart from the existing allocation of 6mmscmd and 1mmscmd be reserved for court mandated customers
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
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 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 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
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. Based on our channel checks GAILs pipeline tariff do not vary significantly across zones. However, GSPLs 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.
Positive for Gas Utilities and end consumers.
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

Fertiliser/Power projects cannot progress without LNG; Gas potential of 28mmscmd Sector Outlook in Fertiliser ~22% to be met from RLNG Positive for PLNG and GAIL
Positive
The final reports 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 FY11
Net domestic gas available Less: Fert & Power offtake Net Gas available (-) CGD, CNG, Court mandated Cons. (-) Fixed for Industries Net addnl available for priority Additional Availability (assumed ) Total Dom. Gas availability 119 89 30 8 22 22
FY12
110 88 22 7 5 10 10
FY13
FY14
FY15
FY16
FY17
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
3.8 1.0 4.8
8 8 4.0 2.0 6.0 40 10.7 50.8 21% 3.5
8 8 2.2 1.0 4.0 7.2 46 12.5 58.0 22% 2.6
8 8
8 8
Under a reasonable scenario it assumes an incremental natural gas prodn. of 8mmscmd p.a
Consumption of Fertiliser Sector

(a) Switching LSHS/FO & Naphtha (b) Debottlenecking (c) New plants Total Addnl Req. Domestic Gas Imported R-LNG Total Proportion of R-LNG Net Dom. Gas available after Fert. 33 7 40 17% 32 8 40 20% 10.0
7.0 7.0 51 14.2 65.0 22% 2.7
3.0 3.0 53 15.0 68.0 22% 5.8
Overall gas potential of 28mmscmd over FY12-16
36 9.2 44.8 21% -3.6
The committee recommends usage of R-LNG to the extent of ~20% - 22% of the overall demand
Consumption of Power Sector

Total Addnl. Req. (New Plants) 16 Proportion of R-LNG 9% 15% Source: Inter-ministerial committees final report on gas pooling 26 26% 16 26% 3 24% 25% 27%
Incremental gas demand from ~12GW of power capacity due for completion over FY12 FY15
The committee recommends a R-LNG mix of 25%-27% in the power sector.
12

Fertilizer: Surging imported urea prices; recommendations for 22% LNG usage; and decontrol of urea pricing to push implementation of projects
List of Fertiliser plants Urea Plants Existing Gas based Plants NFL, Panipat (Haryana) NFL, Nangal (Punjab) NFL, Bhatinda (Punjab) Fuel N. Gas Fuel Oil Fuel Oil Fuel Oil Capacity ('000 MT) 17,130 512 479 512 COD Jan'13 COD Jan'13 COD Jan'13 Status Gas Req. (mmscmd) 40
Sector Outlook
Positive
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
GNVFC, Bharuch (Guj.)

SPIC (Tuticorin)
Fuel Oil
Naphtha
636
620
COD 4QFY12
COD Dec'12
Madras Fertilisers, Manali

MCFL, Mangalore Zuari Nagar (Goa) FACT Udyogamandal Total Naphtha & FO plants Total Operating Capacity
Naphtha
Naphtha Naphtha Naphtha
486
380 399 330 4,354 21,483 Capacity ('000 MT) 158 125
10 50
At $9/mmbtu Urea prodn. ($420/tonne) is much cheaper than imports

900
$ /tonne (for various inputs)
Debottlenecking/ Revamp
CFCL, Gadepan I (Raj.) CFCL, Gadepan II (Raj.)
Fuel
N. Gas N. Gas
Status
Gas Req. (mmscmd)
800 700
600
500 400 300
Imported Cost of Urea $570 (FOB+Ship.+Others)
100% savings
IGFL, Jagdishpur (U.P.)

KRIBHCO, Hazira, (Guj.) RCF, Thal (Mah.) NFL, Vijaipur I (M.P.) NFL, Vijaipur II (M.P.) New Plants (COD FY15-17) Total Addl. Gas Requirement Total Gas Requirement (FY17)
N. Gas
N. Gas N. Gas N. Gas N. Gas
244
466 450 135 224 1,802 4 14 28 68
200
100 0 $6 $7 $8 $9 $767 $1,085
N.Gas $/mmbtu
Fuel Oil $/MT
Naphtha $/MT
Source: Inter. Min committee report on gas pooling, FAI, Spark Capital Research
Source: BPCL, FAI, Spark Capital Research
13

Power: Committee strongly recommends 25-27% R-LNG Even this may not solve the problem
PLFs to tread lower given challenges on supply/pricing
Year FY 10 FY 11 FY 12 Gas based Gas req. @90% PLF Installed Capacity (mmscmd) (GW) 15,769 17,652 21,055 78 86 103 Gas Supply (mmscmd) 55 62 62
Sector Outlook
Positive
PLF% 64% 65% 54%
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. Committees 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.
FY 13
FY 14 FY 15 FY 16
24,323
25,505 27,005 28,505
119
125 132 140
66
72 80 80
50%
52% 54% 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
Cost of Power Generation

Fuel Source
Landed cost ($/tonne $ /mmbtu) UHV-Coal/LNG (Kcal per Kg/mmbtu) Heat Rate (Kcal / Kwh) Energy Charge (Rs. Per Kwh) PLF Fixed Cost (Rs. /Kwh) Cost of Power (Rs. / Kwh) Merchant Rate Rs. 3.5/kwh Merchant Rate Rs. 4/kwh Merchant Rate Rs. 4.5/kwh Source: Spark Capital Research
Coal
Gas
Domestic Imported Domestic Imported Imported

$33 2,800 2,250 1.2 85% 1.2 2.4 $72 4,000 2,250 1.8 85% 1.2 3.0 $7 8,500 1,900 2.4 85% 1.0 3.4 $10 9,000 1,900 3.4 85% 1.0 4.4 $18 9,000 1,900 6.1 85% 1.0 7.1
Delhi
Delhi Gujarat AP AP Assam AP Gujarat Gujarat
Pragati III Power

Rithala CCPP Hazira/Pipavav Lanco - Kondapalli GMR - Rajahmundry Assam Power Reliance - Samalkot Torrent - SUGEN Torrent - Dahej
1,500
108 1,053 742 768 100 2,400 382 800 7,853
2012
2012 2012 2012 2012 2013 2013 2014 2014
7.4
0.5 5.2 3.6 3.8 0.5 11.8 1.9 3.9 38.5
GAIL, IOCL & BPCL - 2 each

0.6 from KG - D6 FSA GSPC KG - D6 ? KG - D6 ? 0.6 from Oil India KG - D6 ? KG - D6 ? KG - D6 ?
Source: Company data, CEA, Spark Capital Research
14

KGD6 continues to fall likely ramp up by 2014; LNG projects continue to march ahead despite rising R-LNG prices
Sector Outlook
Positive
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 ONGCs marginal fields. Further there can be upsides from Shale gas and early start of ONGCs 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.
FY10 23 48 42 14 2 107 0 130 17 8 105 33 137 FY10 57 38 23 12 8 137 FY11 23 48 56 12 1 2 119 1 143 15 8 120 37 157 FY11 62 40 24 14 17 157 FY12E FY13E FY14E FY15E FY16E 23 23 23 23 23 48 48 48 48 48 46 45 50 65 75 14 13 12 12 11 2 2 112 2 137 13 11 113 45 158 FY12E 62 42 26 19 20 169 6 2 114 4 141 14 11 116 59 175 FY13E 66 45 42 22 20 195 20 7 3 2 122 6 151 15 11 125 72 197 FY14E 72 51 58 27 20 228 30 7 6 2 2 142 7 172 16 11 145 81 226 FY15E 80 58 71 30 20 259 33 7 8 3 2 154 8 185 16 11 158 108 265 FY16E 80 65 76 33 20 274 9
Supply (MMSCMD) Total Onshore Mumbai High KG - D6 Panna Mukta Tapti ONGC Deen Dayal GSPC NEC-25 Others Total Offshore CBM Total Production Less: Int. Cons, Flaring Less: LPG/C2/C3 extr. Net Supply LNG Imports Total Supply Demand (MMSCMD) Power Fertilizers Refinery & Petchem CGD Others Total Demand
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 GSPCs 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 Oilexs 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 FY1116E, on the back of additional capacities coming on stream. There could be an upside of 5mmtpa if PLNGs plan to set up a terminal on east coast fructifies.
9 Deficit Source: FAI, CEA, PNGRB, MoPNG, Spark Capital Research
15

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

Terminals FY 11 FY12E FY13E FY14E FY15E FY16E Remarks
Dahej
Hazira Dabhol Kochi Mundra Total capacity (MMTPA) Long Term Supplies (MMTPA) Short term Supplies (MMTPA) Spot Requirement Total Est. Throughput (MMTPA)
10.0
3.5 13.5 7.5 2.1 9.6
10.0
5.0 15.0 7.5 2.7 2.3 12.5
11.0
5.0 2.5 5.0 23.5 7.5 2.7 6.1 16.3
13.5
5.0 2.5 5.0 26.0 11.4 8.6 20.0
13.5
5.0 5.0 5.0 28.5 11.4 11.1 22.5
18.5 Includes 5MMTPA Brownfield expansion

5.0 Operates on Merchant Basis 5.0 Breakwater debottlenecking in FY15 5.0 2.5MMTPA (Jul12); 2.5MMTPA (Oct12) 5.0 Currently undergoing pre-constrn. activities 38.5 22.5 7.5 30.0 Qatar -7.5; Australia-1.44 ;Russia -10, BG Group - 2.5, US - 1.1 GAIL - 0.5 (Marubeni), PLNG - 1.5 (various), GSPC - 0.7 (Russia,etc.,) The general market perception is that the winter season (Oct11 Mar12) will see tightening of supplies. But given our modest req. of 2.3/6.1 (FY12E/13E) compared to an overall spot market of 6070MMTPA, India will not find it challenging to source the same
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
Australia
7.5
1.4
Contracted
Contracted
On going
2014
PLNG
PLNG
Gazprom - Russia
BG Group - Global Portfolio
10.0
2.5
HOA
HOA
2016
2014 2016
PLNG, GSPC, GAIL & IOC

GSPC GAIL
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
Cheniere - US 1.1 HOA Long term Contracts 22.5 (MMTPA) Source: Company data, News reports, Spark Capital Research
16

Global LNG: Large Capacity additions starting CY14; Sourcing modest spot requirements (15% of global spot market) would not be a challenge
Global LNG Liquefaction facilities (MMTPA)
Geography Atlantic Basin CY08 78 CY09 78 CY10 78 CY11E 78 CY12E 92 CY13E 92 CY14E 99 CY15E 115 CY16E 138
Sector Outlook
Positive
Middle East
Pacific Basin Total New Additions
47
77 202
74
94 246 44
92
100 270 24
100
104 282 12
100
104 296 14
100
104 296 -
100
122 321 25
100
140 354 33
100
158 396 41
Very little LNG terminals coming online in the next two years, but starting CY14/15, a host of Australian LNG facilities will come online.
Global LNG throughput (MMTPA)

Contracted Spot Total % of Spot Utilisation 142 30 172 18% 85% 152 30 182 16% 74% 179 42 220 19% 82% 193 61 254 24% 90% 200 73 272 27% 92% 207 72 278 26% 94% 235 70 305 23% 95% 262 75 337 22% 95% 280 96 376 26% 95%
Spot volumes would remain in the range of 20-25% of the total volumes, as ~70% -80% of the volumes are tied up.
Source: GIIGNL, Bloomberg, News reports, Company data, Spark Capital Research
Given Indias spot req. over (CY11CY16) is just ~15% of the global spot availability, we dont see any challenge to source these.
Upcom ing Liquefaction term inals (CY11-14) Capacity Country Project Year (MMTPA) Qatar Australia Angola Algeria PN Guinea Australia Australia Australia Qatargas Pluto Soya LNG Azrew / Skikda PNG LNG QGC Curtis 1 Gladstone 1 Gorgon T1 / T2 2011 2011 2012 2012 2014 2014 2014 2014 7.8 4.3 5.2 9.2 6.6 4.3 3.9 10.0
Contracted (MMTPA Com panies 7.0 3.8 7.5 6.6 4.0 3.9 10.0 GDF SUEZ - France Sinopec, TEPCO, Osaka, CPC Pow er Gas - S'pore Kogas, Petronas Petrochina, PLNG, Japan Utils. CNOOC, Petrochina, Centrica Tokyo Gas, Kansai Electric
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

Pipeline / R-LNG terminals projects mostly on track
Pipelines under construction
Company GAIL GAIL GAIL GAIL GAIL GAIL GAIL Project Vijaipur Dadri Dahej - Vijaipur Compressor Stn at Jhabua & Vijaipur Compressor Stn at Kailaras & Chainsa Dadri - Bawana Bawana Nangal Dhabol Bangalore - Phase I Approved Cost (Rs. bn) 38 44 14 12 6 18 45 14 Capex upto July11 COD Commissioned Dec11 Commissioned Dec11 Commissioned Jan12/Jul12 Aug'12 85 91 84 89 Scheduled progress % 94 Actual Progress % 95
Sector Outlook
Positive
68
GAIL
GAIL GAIL GAIL GAIL GAIL GSPL GSPL GSPL
Dhabol Bangalore - Phase II

Chainsa Jhajjar Hissar (Jhajjar Hissar on hold) Kochi - Kootanad - M'lore - B'lore: Phase I Kochi - Kootanad - M'lore - B'lore: Phase II Haldia Jagdsihpur: Phase I Haldia Jagdsihpur: Phase II Mallawaram Bhilwara Mehsana Bhatinda Bhatinda - Jammu Srinagar
5
13 4 29 67 10 65 45 12
Dec'12
Dec11 Aug'12 Mar'13 Dec'13 Dec'14 2015 2015 2015
54
70
6.4
NA
NA
1.5
60
70
NA
Detailed Survey Completed
Detailed Design and pre-constrn. activities being undertaken
Source: GAILs performance report to MoPNG Sep11, Company data, Spark Capital Research
R-LNG terminals under construction

Company PLNG GAIL GAIL Terminal Kochi Dabhol - Phase I Dabhol - Phase II Capacity (mmtpa) 5.0 2.5 2.5 COD Oct'12 Mar'12 Sep'14 Remarks Physical progress 89%; on track Storage Tanks completed ; currently under testing Breakwater tender awarded, dredging work to start in Jan'12
Source: Company data, Spark Capital Research
18

Recent meeting with officials in PNGRB: Team reshuffle to linger rollouts of authorisation over near term Sector Outlook Positive
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. New team The retiring chairman is likely to be replaced by Mr. Krishnan (Ex Fertilizer Secy.), additionally Mr. K.K.Jha (IOCL DirectorPipelines) has been selected as Member-Technical, but would be joining only in Jan12. 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. 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
Gujarat Gas network authorization
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
GSPLs Gujarat network authorisation
PNGRB is currently working on to finalise GSPLs 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.
IGLs submission for extension of marketing exclusivity
IGLs 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 IGLs submission, it would be a positive trigger for the stock.
19

Preview 2QFY12
Natural Gas Utilities Sector All numbers in Rs mn except per share data Quarter Sep-11 GAIL Net Sales EBITDA PAT EPS GGAS Volumes (mmscm) Net Sales EBITDA PAT EPS GSPL Volumes (mmscm) Net Sales EBITDA PAT EPS IGL Volumes (mmscm) Net Sales EBITDA PAT EPS PLNG Volumes (TBTU) Net Sales EBITDA PAT EPS 294 5,856 1,638 812 5.8 131 52,426 4,085 2,291 3.1 282 5,364 1,573 801 5.7 133 46,233 4,381 2,567 3.4 246 4,451 1,230 663 4.7 100 30,577 2,716 1,311 1.8 20% 32% 33% 22% 22% 31% 71% 50% 75% 75% 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. 9% 8.5/scm vs 8.4/scm in 1Q, higher driven by addnl. allocation of 0.3mmscmd 4% from GOI, offset by decline in KG D6 supplies, rising R-LNG prices and 1% strengthening dollar. 1% -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 13% to be lower ($0.2/mmbu) than the prev qtr ($0.5/mmbtu). Overall, we expect -7% blended tariffs at 35.3/mmbtu for 2Q vs Rs. 36.8/mmbtu in the previous qtr. -11% -11% 97,095 15,825 9,906 7.8 327 6,610 1,402 910 7.1 3,215 2,686 2,485 1,171 2.1 Jun-11 88,674 15,556 9,847 7.8 302 5,766 1,403 960 7.5 3,345 2,876 2,652 1,374 2.4 Sep-10 81,041 14,329 9,235 7.3 315 4,985 903 561 4.4 3,250 2,545 2,336 915 1.6 Change yoy 20% 10% 7% 7% 4% 33% 55% 62% 62% -1% 6% 6% 28% 28% qoq Comments / Watch out for Recommendation Absolute Relative
Sector Outlook
Positive
9% We expect gas transm. volumes of 118mmscmd flat qoq as declining KG-D6 2% is partly offset by R-LNG; We expect tariff of Rs. 890/mscm vs Rs. 881/mscm 1% in 1Q. Expect subsidy of Rs. 5.6bn for 2Q vs Rs. 6.8bn in 1Q 1% 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. 15% Gross spreads for 3QCY11 at Rs. 5.4/scm vs Rs. 5.9/scm in 2QCY11. It 0% would further come down owing to higher R-LNG prices, declining cheap -5% domestic gas and strengthening dollar -5%
BUY
O-PF
REDUCE
U-PF
-4% We expect lower qoq volumes (4%) due to declining KG-D6 supplies, rising RLNG forcing power plants to operate at lower PLFs and lower offtake from -7% RIL, marginally offset by growth in other segments REDUCE -6% Estimate tariff of Rs. 800/mscm for 2Q vs Rs. 813/mscm in 1Q; Items below -15% EBITDA are not comparable due to change in depreciation policy -15%
U-PF
ADD
O-PF
BUY
O-PF
20
Petronet LNG
Rating: Target price: EPS:
CMP Target
Rs. 158 Rs. 190
Absolute Relative
Buy Outperform
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 PLNGs 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 (COD2QFY14) 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)
Date Market Data SENSEX Nifty Bloomberg Shares o/s Market Cap 16536 4974 PLNG IN 750mn Rs. 118bn Oct 12, 2011
52-wk High-Low
3m Avg. Daily Vol Index member
Rs. 186-105
Rs. 586mn BSE OIL & GAS
Latest shareholding (%) Promoters Institutions Public 50.0 21.6 28.4
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.
Financial summary Year FY11 Revenue (Rs. mn) 131,973 216,743 EBITDA (Rs. mn) 12,163 16,813 PAT (Rs. mn) 6,196 9,075 EPS (Rs.) 8.3 12.1 P/E(x) 19.1x 13.1x EV/EBITDA (x) 12.3x 9.6x
Stock performance (%) 1m PLNG Sensex BSEO&G -10% -2% 0% 3m 10% -12% -4% 12m 40% -18% -20%
FY12E
FY13E
312,051
20,326
9,716
13.0
12.2x
7.9x
21
Petronet LNG
Mgmt. meeting and channel checks - Key takeaways
CMP Target
Rs. 158 Rs. 190
Absolute Relative
Buy Outperform
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. PLNGs 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 7.5 0.6 0.6 8.6 FY12E 7.5 1.3 0.6 1.2 10.5 FY13E 7.5 1.5 1.0 0.5 1.0 11.5 Q1 12 1.7 0.4 0.2 0.4 2.6 33.3 45.9 56.0 33.4 36.76 $0.28 $0.50 $0.35 Q2 12E 1.9 0.3 0.1 0.3 2.6 33.3 45.9 42.0 33.3 35.29 $0.28 $0.19 $0.25 Q3 12E 2.0 0.3 0.1 0.3 2.7 33.3 45.9 42.0 33.3 35.14 $0.28 $0.19 $0.25 Q4 12E 2.0 0.3 0.2 0.3 2.7 35.0 45.9 42.0 35.0 36.62 $0.24 $0.16 $0.21
Volumes
Dahej - Long term Dahej - Short Term Dahej - Spot Dahej - Third party regas (GSPC,GAIL) Kochi Total (mmtpa)
Tariff including marketing margins (Rs. /mmbtu)

Dahej - Long term 32.2 33.8 35.5 Dahej - Short Term 45.9 45.9 Dahej - Spot 24.7 46.4 40.0 Dahej - Third party regas (GSPC,GAIL) 32.2 33.8 35.5 Kochi 65.0 Blended Tariff (Rs. /mmbtu) 31.68 35.94 39.78 Marketing Margins charged over and above regas charges of Rs. 33 ($0.74/mmbtu) Short term ($/mmbtu) $0.27 $0.23 Spot ($/mmbtu) $0.28 $0.10 Total $0.27 $0.18
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.
22
Petronet LNG
CMP Target
Rs. 158 Rs. 190
Absolute Relative
Buy Outperform
Rising R-LNG prices: Loosing sheen with FO/LSHS; Attractive with Naphtha
Japanese LNG prices hit record highs; $16/mmbtu (CIF)
$18 $13.8 $14 $10.9 $10 $11.2 $11.0 $12.0 Spot R-LNG to remain high as Japan & Korea would draw more N.gas during winter (Oct11-Mar12) $16.0 $16.5 $16.5 $15.0
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 PLNGs 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
$6 1QFY11 3QFY11 1QFY12 3QFY12E 1QFY13E Japan LNG price ($/mmbtu)
Source: Bloomberg, Spark Capital Research
Spot R-LNG delivered price at $19-$20/mmbtu

$/mmbtu FOB Shipping cost CIF Price Import duty @ 5.15% CIF Price (incl. tax) at Terminal Gujarat 14.0 0.5 14.5 0.7 15.2 North India 14.0 0.5 14.5 0.7 15.2
Not much savings on FO/LSHS; ~30% savings on Naphtha

Fuel Price $/MT Kcal / Kg Equiv.Cost ($/mbbtu) Spot price ($/mmbtu) Savings Fuel Oil 767 10,500 18 20.0 -8% LSHS 799 10,000 20 20.0 1% Naphtha 1,086 10,500 26 20.0 30% Deisel 1,054 9,500 28 20.0 40% Petrol 1,706 11,250 38 20.0 91%
Re-gas tariff (Rs. 34/mmbtu)

Ex Terminal VAT @15% Marketing margins of PLNG Pipeline tariff (max) including service tax of 10%* Delivered Price
0.74
16.0 2.4 0.3 0.5 19.2
0.74
16.0 2.4 0.3 1.3 19.9
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
Source: BPCL, Bloomberg, Spark Capital Research. Petrol & Diesel prices at Delhi
Petronet LNG
Business Overview
Key estimate revision FY12E Old Volumes (mmtpa) Blended Tariff (Rs. /mmbtu) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.)
10.4 35.3 16,372 8,524 11.4
CMP Target
Rs. 158 Rs. 190
Absolute Relative
Buy Outperform
CAGR Vol. growth 16% (FY11-14E): Kochi to reach 40% util. by FY14E
FY13E Change
1% 2% 3% 6% 6%
14 12
New
10.5 36.0 16,813 9,075 12.1
Old
11.5 38.6 19,711 9,233 12.3
New
11.5 39.8 20,326 9,716 13.0
Change
10
0% 3% 3% 5%
2.0 0.5 0.6 0.6

1.2 0.6
8 6
0.3 1.9
1.0 0.5 1.0
3.5
4
2 5.7
7.5
7.5
7.5
7.5
5%
FY10 Kochi (mmtpa)
FY11 Regas (mmtpa)
FY12E FY13E FY14E Short/Spot term (mmtpa) Long term (mmtpa)
Source: Company, Spark Capital Research
Strong Regas margins on Spot/Short to boost FY12 blended tariff

70
CAGR Growth (FY11-14E): EBITDA =28%; PAT = 23%

30 25 20
17
60 50 40 30
25
Jump in Mktg. margins on Short/spot term.
65 46 40
65
65
25
43
42 35
40 37
20
15
31
32
32
25
36
34
12
8 4 6
20 10
0 FY10 6
10
5
10
12
0
FY11 FY12E FY13E FY14E
FY 10
FY 11
PAT (Rs. Bn)
FY 12E
FY 13E
EBITDA (Rs. Bn)
FY 14E
Long term (Rs./mmbtu) Kochi (Rs./mmbtu)

Spot/Short term (Rs./mmbtu) Blended (Rs./mmbtu)
24
Petronet LNG
Valuation
Key estimates
Particulars Dahej Kochi Volume (MMTPA) Revenue ($/mmbtu) Dahej - Regas Tariff (Rs./mmbtu) Kochi - Regas tariff (Rs./mmbtu) Blended Regas (Rs./mmbtu) NOPAT (Rs. Mn) Depreciation (Rs. Mn) Capex +WC Chgs (Rs. Mn) FCFF (Rs. Mn) PV of FCFF as on March 2012 (Rs. Mn) Key DCF estimates Rs. mn WACC Terminal Growth Rate Total firm Value (Rs. Mn) Net debt / (cash) (Rs. Mn) Equity Value (Rs. Mn) Shares O/s (Nos. Mn) Mar-12 12% 0% 174,044 31,445 142,599 750 190 Current trading Multiples FY11 EPS (Rs.) P/E (x) P/B (x) EV/EBITDA (x) 8.3 18.8x 4.3x 11.1x FY12E 12.1 12.8x 3.5x 8.0x FY13E 13.0 12.0x 2.8x 6.7x Terminal Growth 0.0% 0.5% 10% 244 251 FY12E 9.2 9.2 $8.75 35.9 35.9 9,985 1,910 22,097 (10,202) FY13E 9.0 1.0 10.0 $11.57 39.8 35.8 11,384 3,336 10,476 4,243 3,795 FY14E 11.5 2.0 13.5 $13.03 42.1 65.0 45.5 13,842 4,569 1,803 16,608 13,285 FY15E 12.5 3.0 15.5 $13.41 43.4 65.0 47.6 16,671 4,893 1,268 20,296 14,517 FY16E 12.5 4.0 16.5 $13.48 44.7 65.0 49.6 18,574 4,940 1,070 22,444 14,356
CMP Target
Rs. 158 Rs. 190
Absolute Relative
Buy Outperform
FY17E 12.5 4.5 17.0 $13.48 45.3 65.0 50.5 19,509 4,988 979 23,519 13,452
FY18E 12.5 4.5 17.0 $13.44 45.3 65.0 50.5 19,533 5,036 900 23,668 12,106
FY19E 12.5 4.5 17.0 $13.44 45.3 65.0 50.5 19,501 5,084 900 23,684 10,833 WACC
FY20E 12.5 4.5 17.0 $13.44 45.3 65.0 50.5 19,469 5,131 900 23,700 9,693
FY21E 12.5 4.5 17.0 $13.44 45.3 65.0 50.5 19,437 5,179 900 23,716 8,674
FY22E 12.5 4.5 17.0 $13.44 45.3 65.0 50.5 19,437 5,179 900 23,716 7,756
11% 214 220
12% 190 194
13% 170 173
14% 152 155
1.0%
1.5% 2.0%
259
268 279
226
233 241
199
204 210
177
181 185
158
161 164
Target Price (Rs. /Share)
Implied Target Multiples

FY11 8.3 23.0x FY12E 12.1 15.7x FY13E 13.0 14.7x
5.3x
13.3x
4.2x
9.6x
3.5x
7.9x
25
Petronet LNG
Financial Summary
Abridged Financial Statem ents Rs. m n Profit & Loss Revenues EBITDA Depreciation EBIT Other Income/Exp Interest PBT Net Profit Adjusted Net Profit Balance Sheet Shareholders Equity Total debt Total Netw orth & Liabilities Net fixed assets CWIP Investments Current assets Current liabilities Net current assets Total Assets Cash Flow s Cash flow s from Operations Cash flow s from Investing Cash flow s from Financing Cash Generated Opening Cash Closing Cash 10,279 (12,358) (1,094) (3,173) 6,578 3,405 9,075 (14,766) 3,826 (1,865) 3,405 1,540 11,887 (23,000) 12,251 1,138 1,540 2,679 12,575 (10,000) (4,186) (1,612) 2,679 1,067 22,349 24,998 50,609 28,829 13,184 5,386 12,216 9,006 3,211 50,609 26,802 32,161 62,443 27,024 22,029 11,649 13,875 12,134 1,741 62,443 33,690 46,161 83,331 26,114 44,029 11,649 21,577 20,037 1,539 83,331 41,219 44,161 88,860 66,779 10,029 11,649 28,275 27,871 404 88,860 106,491 8,465 1,609 6,856 978 1,839 5,995 4,045 4,045 131,973 12,163 1,847 10,316 680 1,931 9,064 6,196 6,196 216,743 16,813 1,910 14,903 700 2,154 13,449 9,075 9,075 312,051 20,326 3,336 16,991 500 3,091 14,399 9,716 9,716 FY 10 FY 11 FY 12E FY13E Grow th ratios (%) Sales EBITDA Adj. Net Profit Margin ratios (%) EBITDA EBIT Adj. Net Profit Perform ance ratios RoIC (%) RoE (%) RoCE (%) Key m etrics
CMP Target
Rs. 158 Rs. 190
Absolute Relative
Buy Outperform
FY 10 26.3% -6.1% -22.0% 7.9% 6.4% 3.8% 12% 19% 12% 2.2 2.8 1.12 17.4 25.5
FY 11 23.9% 43.7% 53.2% 9.2% 7.8% 4.7% 15% 25% 14% 2.3 2.9 1.20 23.6 28.6 158
FY 12E 64.2% 38.2% 46.5% 7.8% 6.9% 4.2% 17% 30% 15% 3.0 3.6 1.37 20.1 30.0
FY13E 44.0% 20.9% 7.1% 6.5% 5.4% 3.1% 16% 26% 14% 3.6 4.2 1.1 20.1 30.0
Sales / Total Assets (x) Fixed Assets Turnover (x) Financial stability ratios Total Debt to Equity (x) Inventory & Debtor days Creditor days Valuation m etrics Current Share Price (Rs.) Market Cap (Rs.mn) Fully Diluted Shares (mn) Adjusted EPS (Rs.) P/E (x) P/B (x) EV (Rs.mn) EV/ EBITDA (x) Dividend Yield (%)
118,500 750 5.4 29.3 5.3 140,093 16.6 1.1%
118,500 750 8.3 19.1 4.4 149,121 12.3 1.3%
118,500 750 12.1 13.1 3.5 161,983 9.6 1.6%
118,500 750 13.0 12.2 2.9 161,594 7.9 1.58%
26
GAIL
Long term defensive play at cheap valuation
CMP Target
Rs. 417 Rs. 541
Absolute Relative
Buy Outperform
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 Date 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 Market Data impede stock momentum in the near term, it would generate good returns over medium term as more LNG SENSEX capacity come on stream and KGD6 ramps up. We believe that market is more than pricing in the near term Nifty concerns of low RoCEs on new pipelines and undermining the intrinsic value of these upcoming pipelines. Bloomberg Further, implementation of proposed subsidy reforms may emerge as near term triggers. Reiterate Buy-OPF Investment rationale
Shares o/s Market Cap
Oct 12, 2011
16536 4974 GAIL IN 1,268mn Rs. 529bn
Massive capex plan of Rs. 300bn to set a platform for long term growth; Pick up in R-LNG supplies to support 52-wk High-Low Rs. 538-400 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 3m Avg. Daily Vol Rs. 475mn would continue to make good margins on LNG cargoes Index member NIFTY PL Projects are mostly on track; Savings in capex related to Vijaipur-Dadri PL is likely to be used for adding more Latest shareholding (%) spurlines. Hence, we see no risk of tariff cut. Dabhol terminal to get delayed by 2-3months (Rev. COD Mar12 fully Promoters 57.3 operational by July-Aug12) 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. Institutions 38.7 25/mmbtu) and its upgradation (prov. approved tariff ~Rs. 54/mmbtu) as single integrated tariff. If this is approved, it Public 4.0 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 Stock performance (%) 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 1m 3m 12m
GAIL Sensex BSEO&G 1% -2% 0% -10% -12% -4% -17% -18% -20%
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;
Financial summary Year FY11 Revenue (Rs. mn) 324,586 370,884 EBITDA (Rs. mn) 54,546 62,114 PAT (Rs. mn) 35,611 39,570 EPS (Rs.) 28.1 31.2 P/E(x) 14.9x 13.4x P/B(x) 2.7x 2.4x
FY12E
FY13E
417,844
70,908
41,733
32.9
12.7x
2.1x
27
GAIL
Business Overview
Segment wise EBIT: Gas Transmission continues to lead the pack
20
16
CMP Target
Rs. 417 Rs. 541
Absolute Relative
Buy Outperform
Stable earnings - Lower volumes offset by higher realizations and lower subsidy
14
12 10
15 10 5 0 -5 3 1 1
6
1 3 1 1 6
4 4 0 1 5
4QFY10
2 3 2 1 6
2 3 2 1 7 2QFY11
2 2 2 1 7
4 3 1
5 (1) 4QFY11
2 2 3 1
7
2 3
3 1 7
2QFY12E
8
6 4 7
13
10 9
13
13 9 9
14 10
14
15
12
15
10
10
(1) 2QFY10
2 0
2QFY10 4QFY10
PAT (Rs. bn)
Gas Transmission (Rs. bn) Gas Trading (Rs. bn) LPG & Liq. Hydro. (Subsidy) (Rs. bn)
LPG Transmission (Rs.bn) Petrochemical Business (Rs. bn) Others
2QFY11
4QFY11
EBIT (Rs. bn)
2QFY12E
Gas Transmission: Volumes flat, tariff continues to rise..

125 120 115
110 105 100 95 120
Gas trading: Mktg. margins to taper down a bit

890 1,000 800
84 88 86 351 416 348 450 400 350
864
850
848 716
927
907
842
881
268 204
148 81 158 84 81 85 79 220
300
250
600 120
116
82
115 106
109
115
117
118
400 200
-
80 78
76 74
86
83
200
83
82
150
51
100 50
-
2QFY10
4QFY10
2QFY11
4QFY11
Tariff (Rs. /mscm) (RHS)
2QFY12E
2QFY10
4QFY10
2QFY11
4QFY11
EBIT (Rs. /mscm) (RHS)
2QFY12E
Volumes (mmscmd)
Volumes (mmscmd)
28
GAIL
Business Overview (Contd)
Petchem: Volumes to rise qoq, realisation to remain stable
160
CMP Target
Rs. 417 Rs. 541
Absolute Relative
Buy Outperform
LPG Transmission: Stable performance

$1,700
1,000
1,414
1,415
1,406
1,441
1,428
1,447
$1,640 $1,585
$1,491 $1,612 $1,574 $1,573
1,373
1,398
1,400
1,500
$1,592
$1,600
800
600
1,300
1,100 728 820
120
80
$1,461
120
$1,443 109
144 81
$1,500
400
871
788
799
893
857
817
820
900
40
88
88
107
88
106 $1,400
200
0 2QFY10 4QFY10 2QFY11 4QFY11 2QFY12E
700
500
0
2QFY10 4QFY10 2QFY11 4QFY11 2QFY12E
$1,300
Petrochemical Volumes ('000MT)
Realisation (US$./MT) (RHS)
Volumes ('000MT)
Tariff (Rs. /MT) RHS
LPG & OHC: Realisations to inch down as Brent weakens

400
934 380 360 669 530 768 955 875
LPG & OHC segment: Subsidy to come down

1200 1000 800
6 10 8
9
7 8
754
668
773 600
8 6
4 1
7
5 6
4
2
340 320
300
379
375
356 356 347
400
331
2QFY10 4QFY10
LPG Volumes ('000MT)
339
349
350 200 0
2 2
0
-2 -1
2QFY11
4QFY11
2QFY12E
-1 4QFY10
EBIT (Rs. bn)
2QFY10
Realisation (US$./MT) (RHS)
2QFY11
4QFY11
2QFY12E
EBIT (Rs. bn) (pre subsidy)
29
GAIL
Valuation
SOTP Valuation - GAIL Mcap (Rs. bn) Natural gas transmission Natural gas trading Petrochemical LPG LPG Transmission E&P Investments Investments Total - EV Less: Net debt/(cash) Equity Value - target CMP Upside Source: Spark Capital Research Key estimate revisions Old Natural Gas - Transm. Volumes (mmscmd) - Avg. Tariff (Rs. /mscm) - marketing volumes (mmscmd) - marketing margins (Rs. /mscm) Petrochemical - PE sales volumes (000 MT) - Avg. realisation (Rs. /Kg) LPG & OHC - sales volumes (000 MT) - Avg. realisation (Rs./ MT) LPG Transmission - Transm. Volumes (000 MT) - Avg. Tariff (Rs. /MT) Financials Subsidy (Rs. mn) Revenue (Rs.mn) EBITDA (Rs.mn) EBIT (Rs. Mn) PAT (Rs. Mn) EPS (Rs.) Source: Spark Capital Research 123 914 84 335 440 71 1,400 40,698 3,400 1,422 23,595 370,814 64,585 56,900 41,250 32.5 341 99 102 59 22 20 85 728 42 686 529 Target Per Share (Rs.) 269 78 80 47 17 16 67 574 33 541 417 30% Remarks
CMP Target
Rs. 417 Rs. 541
Absolute Relative
Buy Outperform
DCF - WACC 11.6%; terminal gr 2% DCF - WACC 11.6%; terminal gr 2% 7x FY13E EBITDA 6x FY13E EBITDA 6x FY13E EBITDA Valued at 0.85x BV Quoted Investments at CMP, rest at BV (less 20% cons. Discount) FY13E debt
Implied EV/EBITDA (FY13E) 10.08 9.53 7.00 6.00 6.00
9.53
Current Trading Multiples FY12E New 120 889 84 314 440 72 1,400 39,842 3,400 1,422 22,770 370,884 62,114 54,429 39,570 31.2 Change -2% -3% 0% -6% 0% 1% 0% -2% 0% 0% -3% 0% -4% -4% -4% -4% Old 140 972 88 359 450 71 1,420 40,727 3,400 1,422 20,000 423,479 75,285 65,270 44,707 35.2 FY13E New 130 951 86 333 450 72 1,420 40,306 3,400 1,422 19,500 417,844 70,908 60,893 41,733 32.9 Change -7% -2% -2% -7% 0% 1% 0% -1% 0% 0% -3% -1% -6% -7% -7% -7% Implied Target Multiples FY11 EPS - ex cash PE ex investments P/B ex investment EV/EBITDA 25.33 18.7x 3.1x 11.4x FY12E 28.46 16.7x 2.7x 10.0x FY13E 29.99 15.8x 2.3x 8.8x EPS - ex cash PE ex investments P/B ex investment EV/EBITDA FY11 25.33 13.8x 2.7x 9.3x FY12E 28.46 12.3x 2.2x 8.2x FY13E 29.99 11.7x 1.9x 7.7x
30
GAIL
Financial Summary
Abridged Financial Statem ents Rs. m n Profit & Loss Revenues EBITDA Depreciation EBIT Other Income/Exp Interest PBT Net Profit Adjusted Net Profit Balance Sheet Shareholders Equity Total debt Total Netw orth & Liabilities Net fixed assets CWIP Investments Current assets Current liabilities Net current assets Total Assets Cash Flow s Cash flow s from Operations Cash flow s from Investing Cash flow s from Financing Cash Generated Opening Cash Closing Cash 46,774 (34,162) (5,459) 7,154 34,562 41,715 21,436 (41,170) (668) (20,402) 41,715 21,314 48,194 (45,844) 13,750 16,100 21,314 37,414 54,307 (73,530) 35,810 16,587 37,414 54,000 167,990 14,804 196,689 119,311 23,305 20,730 137,127 103,784 33,343 196,689 192,533 23,100 231,966 134,591 48,236 25,825 111,462 88,149 23,313 231,966 223,969 46,375 289,610 207,936 18,236 25,825 138,334 100,722 37,613 289,610 256,796 96,075 375,233 258,952 36,236 25,825 167,695 113,475 54,220 375,233 249,964 46,692 5,618 41,074 5,411 700 45,785 31,398 31,398 324,586 54,546 6,503 48,043 5,186 829 52,400 35,611 35,611 370,884 62,114 7,685 54,429 5,186 1,390 58,226 39,570 39,570 417,844 70,908 10,015 60,893 5,500 4,986 61,407 41,733 41,733 FY10 FY11 FY12E FY13E Grow th ratios (%) Sales EBITDA Adj. Net Profit Margin ratios (%) EBITDA EBIT Adj. Net Profit Perform ance ratios RoIC (%) RoE (%) RoCE (%) Sales / Total Assets (x) Key m etrics
CMP Target
Rs. 417 Rs. 541
Absolute Relative
Buy Outperform
FY10 4.6% 15.2% 12.0% 18.7% 16.4% 12.6% 22.1% 19.9% 18.6% 1.4 1.9 0.1 28.1 151.5
FY11 29.9% 16.8% 13.4% 16.8% 14.8% 11.0% 20.5% 19.8% 18.2% 1.5 2.0 0.1 31.0 99.1 417
FY12E 14.3% 13.9% 11.1% 16.7% 14.7% 10.7% 18.0% 19.0% 16.7% 1.4 1.8 0.2 29.0 99.1
FY13E 12.7% 14.2% 5.5% 17.0% 14.6% 10.0% 15.9% 17.4% 14.5% 1.3 1.6 0.4 29.0 99.1
Fixed Assets Turnover (x) Financial stability ratios Total Debt to Equity (x) Inventory & Debtor days Creditor days Valuation m etrics Current Share Price (Rs.) Market Cap (Rs.mn) Fully Diluted Shares (mn) Adjusted EPS (Rs.) P/E (x) P/B (x) EV (Rs.mn) EV/ EBITDA (x) Dividend Yield (%)
528,955 1,268 24.8 16.8 3.1 484,414 10.4 1.80%
528,955 1,268 28.1 14.9 2.7 504,916 9.3 1.80%
528,955 1,268 31.2 13.4 2.4 512,091 8.2 2.16%
528,955 1,268 32.9 12.7 2.1 545,205 7.7 2.40%
31
Indraprastha Gas
CMP Target
Rs. 426 Rs. 451
Absolute Relative
Add Outperform
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 Jan12 to Jul13 on the ground that three year exclusivity period should be construed only from the date on which PNGRB was authorised. If PNGRB accepts IGLs 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)
Financial summary Year FY11 Revenue (Rs. mn) 17,441 25,019 EBITDA (Rs. mn) 4,923 6,949 PAT (Rs. mn) 2,598 3,472 EPS (Rs.) 18.6 24.8 P/E(x) 23.0x 17.2x EV/EBITDA (x) 12.7x 9.0x Vishnu Kumar A S vishnu@sparkcapital.in +91 44 4344 0069 Date Market Data SENSEX Nifty Bloomberg Shares o/s Market Cap 16536 4974 IGL IN 140mn Rs. 60bn Oct 12, 2011
52-wk High-Low
Rs. 454-285
Rs. 175mn BSE 200
Stock performance (%) 1m IGL Sensex BSEO&G -4% -2% 0% 3m 11% -10% -4% 12m 36% -18% -20%
Mayur Patel, CFA mayur@sparkcapital.in +91 44 4344 0037
FY12E
FY13E
33,768
8,100
3,938
28.1
15.1x
7.8x
32
Indraprastha Gas
Business Overview
Key estimate revision
FY12E Old Volumes (mmscm) Gross spread (Rs. /scm) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) 1,219 8.4 23,839 New 1,219 8.6 25,019 6,949 3,472 Change 0.0% 2.1% 4.9% 1.0% 1.4% Old 1,433 8.6 30,694 FY13E New 1,442 8.6 33,768 8,100 3,938 Change 0.6% 0.5% 10.0% 1.8% 2.6%
CMP Target
Rs. 426 Rs. 451
Absolute Relative
Add Outperform
Volume Growth CAGR (FY11-FY14E) CNG =12%; PNG = 50%

1,600 1,400 417 288 180 87 54 605 695
1,200 1,000
800 600
400 200
0
811
931
1,024
6,879 3,425
7,954 3,839
FY09
FY10 PNG (mmscm)
FY11E
FY12E CNG (mmscm)
FY13E
Gross spread to remain above Rs. 8.5/scm levels

24.0
20.0 4.9 4.5 5.0
CAGR Growth (FY11-14E): EBITDA = 22%; PAT = 18%

5.6 6.0
5.7
9,000
7,500 6,949 4,923
8,100
8.7 8.6 7.7
5.0
16.0 12.0
8.0 6.7 5.8 FY09 7.5 9.5
6,000
4.0
4,500 3,001
3,808
1,725
3,472
3,938
13.9 11.2
3.0
3,000
1,500
2,155
2,598
4.0
6.0
FY10 FY11E FY12E FY13E
2.0 Gas Cost (Rs/ scm) EBITDA (Rs. /scm) (RHS)
0
FY09 FY10 FY11E FY12E FY13E
Gross spread (Rs. /scm)
PAT (Rs. mn)

EBITDA (Rs. mn)
33
Indraprastha Gas
Valuation
DCF Valuation Estimates CNG (mmscm) PNG (mmscm) Volume (mmscm) Avg. realisation (Rs. /scm) Gross Spread (Rs. / scm) EBITDA (Rs. / scm) NOPAT (Rs. Mn) Depreciation (Rs. Mn) FY12E 931 288 1,219 17.6 8.6 5.7 3,667 1,475 4,631 512 FY13E 1,024 417 1,442 20.5 8.7 5.6 4,193 1,841 5,577 457 410 FY14E 1,154 626 1,780 23.4 8.6 5.1 4,546 2,265 5,597 1,213 977 FY15E 1,286 764 2,050 25.5 8.3 4.7 4,676 2,688 5,598 1,766 1,276 FY16E 1,433 932 2,365 26.5 8.4 4.6 5,399 2,919 618 7,700 4,993 FY17E 1,547 1,034 2,582 27.6 8.2 4.5 5,770 2,958 621 8,106 4,717
CMP Target
Rs. 426 Rs. 451
Absolute Relative
Add Outperform
FY18E 1,671 1,148 2,819 28.0 7.7 4.0 5,536 2,996 639 7,892 4,121
FY19E 1,805 1,274 3,079 28.0 7.6 3.8 5,884 3,035 (169) 9,088 4,258
FY20E 1,949 1,415 3,364 28.3 7.5 3.7 6,364 3,073 532 8,905 3,743
FY21E 2,105 1,570 3,675 28.6 7.5 3.7 7,000 3,112 453 9,658 3,643
FY22E 2,105 1,570 3,675 29.0 7.5 3.7 7,000 3,112 500 9,611 3,253
Capex + WC chgs (Rs. Mn)

FCFF (Rs. Mn) PV of CF Mar 2012 (Rs. Mn)
DCF Key estimates WACC Terminal Growth Rate PV of terminal Value (Rs. Mn) Total firm Value (Rs. Mn) Net debt / (cash) (Rs. Mn) Mar-12 11.4% 2.0% 33,251 66,524 3,324 63,199 140 451
Current trading Multiples FY11 EPS (Rs.) P/E (x) 18.6 23.0 FY12E 24.8 17.2 FY13E 28.1 9% Terminal Growth 1.0% 1.5% 2.0% 561 584 610 639 673 10% 486 502 521 542 566
WACC 11% 425 438 451 467 484 12% 376 385 396 407 420 13% 335 342 350 359 368
15.1
P/B (x)
EV/EBITDA (x)
5.9x
16.4x FY12E
4.7x
12.7x
3.8x
9.0x FY13E
Equity Value (Rs. Mn)

Shares O/s (Nos. Mn) Target Price (Rs. / Share)
Implied target Multiples FY11 P/E (x) 24.3 P/B (x) 6.3x EV/EBITDA (x) 13.4x
18.2 5.0x 9.5x
16.0 4.0x 8.2x
2.5%
3.0%
34
Indraprastha Gas
Financial Summary
Abridged Financial Statem ents Rs. m n Profit & Loss Revenues EBITDA Depreciation EBIT Other Income/Exp Interest PBT Net Profit Adjusted Net Profit Balance Sheet Shareholders Equity Total debt Total Netw orth & Liabilities Net fixed assets CWIP Investments Current assets Current liabilities Net current assets Total Assets Cash Flow s Cash flow s from Operations Cash flow s from Investing Cash flow s from Financing Cash Generated Opening Cash Closing Cash 3,273 (3,739) (655) (1,121) 2,503 1,383 4,213 (7,626) 2,620 (793) 1,383 589 5,189 (4,405) 184 968 589 1,557 5,934 (5,405) 184 713 1,557 2,270 8,254 9,045 6,514 1,826 170 2,572 2,038 534 9,045 10,039 3,465 15,079 11,594 3,423 416 2,233 2,587 (355) 15,079 12,695 4,465 18,969 14,119 3,923 416 4,297 3,787 510 18,969 15,816 5,465 23,371 17,778 3,923 416 6,064 4,811 1,253 23,371 10,781 3,808 775 3,033 211 3,244 2,155 2,155 17,441 4,923 1,029 3,894 95 132 3,857 2,598 2,598 25,019 6,949 1,475 5,473 95 424 5,144 3,472 3,472 33,768 8,100 1,841 6,259 95 519 5,834 3,938 3,938 FY10 FY11 FY12E FY13E Grow th ratios (%) Sales EBITDA Adj. Net Profit Margin ratios (%) EBITDA EBIT Adj. Net Profit Perform ance ratios RoIC (%) RoE (%) RoCE (%) Key m etrics
CMP Target
Rs. 426 Rs. 451
Absolute Relative
Add Outperform
FY10 26.4% 26.9% 24.9% 35.3% 28.1% 20.0% 32% 29% 27% 1.3 1.6 0.00 20.8 42.7
FY11 61.8% 29.3% 20.5% 28.2% 22.3% 14.9% 24% 28% 23% 1.4 1.5 0.35 23.1 36.2 426
FY12E 43.4% 41.2% 33.7% 27.8% 21.9% 13.9% 23% 31% 23% 1.5 1.5 0.35 20.8 42.7
FY13E 35.0% 16.6% 13.4% 24.0% 18.5% 11.7% 22% 28% 21% 1.6 1.7 0.35 20.8 42.7
Sales / Total Assets (x) Fixed Assets Turnover (x) Financial stability ratios Total Debt to Equity (x) Inventory & Debtor days Creditor days Valuation m etrics Current Share Price (Rs.) Market Cap (Rs.mn) Fully Diluted Shares (mn) Adjusted EPS (Rs.) P/E (x) P/B (x) EV (Rs.mn) EV/ EBITDA (x) Dividend Yield (%)
59,640 140 15.4 27.7 7.2 58,257 15.3 1.1%
59,640 140 18.6 23.0 5.9 62,515 12.7 1.2%
59,640 140 24.8 17.2 4.7 62,548 9.0 1.2%
59,640 140 28.1 15.1 3.8 62,835 7.8 1.17%
35
GSPL
CMP Target
Rs. 104 Rs. 96
Absolute Relative
Reduce Underperform
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 GSPLs 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 GSPLs 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
Financial summary Year FY11 Revenue (Rs. mn) 10,465 10,892 EBITDA (Rs. mn) 9,694 10,094 PAT (Rs. mn) 5,064 4,794 EPS (Rs.) 9.0 8.5 P/E(x) 11.6x 12.2x P/B(x) 2.9x 2.5x Vishnu Kumar A S vishnu@sparkcapital.in +91 44 4344 0069 Date Market Data SENSEX Nifty Bloomberg Shares o/s Market Cap 16536 4974 GUJS IN 563mn Rs. 59bn Oct 12, 2011
52-wk High-Low
Rs. 128-77
Rs. 254mn BSE 200
Stock performance (%) 1m GSPL Sensex BSEO&G -5% -2% 0% 3m 6% -12% -4% 12m -12% -18% -20%
Mayur Patel, CFA mayur@sparkcapital.in +91 44 4344 0037
FY12E
FY13E
11,132
10,263
4,614
8.2
12.7x
2.2x
36
GSPL
Key takeaways of recent Mgmt. meet
CMP Target
Rs. 104 Rs. 96
Absolute Relative
Reduce Underperform
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 Mar12 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 Dec12. 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 Dec12). 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 terminals 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 PLNGs 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 PLNGs 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 years 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
37
GSPL
Business Overview
Key estimate revision FY12E Old
Volumes (mmscmd) Tariff (Rs. /mscm) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) 35.5 800 10,094 4,794 8.5
CMP Target
Rs. 104 Rs. 96
Absolute Relative
Reduce Underperform
Flattish volumes for FY12

FY13E Change
0% 0% 0% 0% 0%
40
New
35.5 800 10,094 4,794 8.5
Old
40 765 10,611 4,846 8.6
New
39 750 10,263 4,614 8.2
Change
-1% -2%
35
30
25 20 32 36
36
39
-3%
15
-5% -5%
15 10
FY 09
FY 10
FY 11
Volumes (mmscmd)
FY 12E
FY 13E
Tariff to stabilise at Rs.750/mscm post PNGRB approval

1,000
800
CAGR growth FY11-14E: EBITDA +4%, PAT (-3%)

12,000 100% 9,404 9,694 10,094 10,263
10,000 8,000
6,000 898 857
95% 90%
600 400
200
5,064
4,280 794
800 750 4,000 2,000 1,234
4,138
4,794
4,614
85% 80% 75%
FY 09 FY 10 FY 11
Tariff (Rs. /mscm)
FY 12E FY 13E FY 09
PAT (Rs. Mn)
70% FY 10 FY 11 FY 12E FY 13E

EBITDA (Rs. Mn) EBITDA margin % (RHS)
38
GSPL
Valuation
DCF Valuation Estimates Volume (mmscmd) Tariff (Rs. / mscm) NOPAT (Rs. Mn) Depreciation (Rs. Mn) Capex + Change in WC (Rs. Mn) FCFF (Rs. Mn) PV of CF as on March 2012 (Rs. Mn) FY12E 36 800 5,577 1,770 FY13E 39 750 5,620 1,874 FY14E 42 750 5,995 2,068 FY15E 45 750 6,400 2,213 FY16E 50 750 7,227 2,290
CMP Target
Rs. 104 Rs. 96
Absolute Relative
Reduce Underperform
FY17E 51 750 7,219 2,348
FY18E 51 750 7,235 2,406
FY19E 51 750 7,146 2,483
FY20E 51 750 7,092 2,540
FY21E 51 750 7,010 2,560
FY22E 51 750 7,010 2,560
3,919
3,428
3,748
3,747 3,367
5,261
2,802 2,263
1,933
6,680 4,847
1,447
8,071 5,261
704
8,864 5,191
716
8,925 4,696
1,000
8,628 4,079
684
8,948 3,801
(12)
9,581 3,657
0
9,569 3,281
Key DCF Estimates Mar-12 WACC Terminal Growth Rate Total firm Value (Rs. mn) Net debt / (cash) (Rs. mn) Equity Value (Rs. mn) Shares O/s (mn) DCF derived Price (Rs. /share) Investment at Book Value Target Price (Rs./Share) WACC 9% Levelized Tariff 650 700 765 800 850 105 116 127 138 149 11% 69,482 16,162 53,320 562 95 1 96
Current trading Multiples FY11 EPS (Rs.) P/E (x) P/B (x) EV/EBITDA (x) Implied target Multiples 9.0 11.6x 2.9x 7.3x FY12E 8.5 12.2x 2.5x 7.0x FY13E 8.2 12.7x 2.2x 6.9x
FY11
P/E (x) P/B (x) EV/EBITDA (x) 10.7x 2.7x
FY12E
11.3x 2.3x
FY13E
11.7x 2.0x
6.9x
6.6x
6.5x
10% 91 100 110 120 130
11% 78 87 96 105 114
12% 68 76 84 93 101
13% 60 67 75 82 89
39
GSPL
Financial Summary
Abridged Financial Statem ents Rs. m n Profit & Loss Revenues EBITDA Depreciation EBIT Other Income/Exp Interest PBT Net Profit Adjusted Net Profit Balance Sheet Shareholders Equity Total debt Total Netw orth & Liabilities Net fixed assets CWIP Investments Current assets Current liabilities Net current assets Total Assets Cash Flow s Cash flow s from Operations Cash flow s from Investing Cash flow s from Financing Cash Generated Opening Cash Closing Cash 8,862 (7,617) (478) 767 975 1,742 5,922 (5,623) 349 648 1,742 2,390 8,802 (10,500) 381 (1,317) 2,390 1,073 8,112 (10,000) 2,817 929 1,073 2,002 15,638 12,595 29,639 24,368 6,491 666 6,445 8,334 (1,889) 29,639 20,050 14,835 37,541 31,817 3,546 766 8,997 7,586 1,410 37,541 23,862 17,235 44,374 34,548 3,546 6,766 7,545 8,033 (488) 44,374 27,164 22,735 53,176 37,173 3,046 12,766 8,616 8,427 189 53,176 10,009 9,404 2,365 7,039 159 929 6,269 4,138 4,138 10,465 9,694 1,299 8,394 216 961 7,650 5,064 5,064 10,892 10,094 1,770 8,323 260 1,363 7,220 4,794 4,794 11,132 10,263 1,874 8,388 260 1,699 6,949 4,614 4,614 FY 10 FY 11 FY 12E FY 13E Grow th ratios (%) Sales EBITDA Adj. Net Profit Margin ratios (%) EBITDA EBIT Adj. Net Profit Perform ance ratios RoIC (%) RoE (%) RoCE (%) Sales / Total Assets (x) Key m etrics
CMP Target
Rs. 104 Rs. 96
Absolute Relative
Reduce Underperform
FY 10 105.3% 119.7% 235.3% 94.0% 70.3% 41.3% 18% 30% 18% 0.4 0.4 0.81 32.1 176.8
FY 11 4.6% 3.1% 22.4% 92.6% 80.2% 48.4% 18% 28% 18% 0.3 0.3 0.74 30.1 100.9 104
FY 12E 4.1% 4.1% -5.3% 92.7% 76.4% 44.0% 16% 22% 15% 0.3 0.3 0.72 30.1 100.9
FY 13E 2.2% 1.7% -3.8% 92.2% 75.4% 41.5% 15% 18% 13% 0.2 0.3 0.8 30.1 100.9
Fixed Assets Turnover (x) Financial stability ratios Total Debt to Equity (x) Inventory & Debtor days Creditor days Valuation m etrics Current Share Price (Rs.) Market Cap (Rs.mn) Fully Diluted Shares (mn) Adjusted EPS (Rs.) P/E (x) P/B (x) EV (Rs.mn) EV/ EBITDA (x) Dividend Yield (%)
58,512 563 7.4 14.1 3.7 69,348 7.4 1.0%
58,512 563 9.0 11.6 2.9 70,939 7.3 1.0%
58,512 563 8.5 12.2 2.5 74,674 7.4 1.4%
58,512 563 8.2 12.7 2.2 79,245 7.7 1.92%
40
Gujarat Gas
Rising gas cost to normalise margins; Maintain Reduce-UPF
CMP Target
Rs. 420 Rs. 402
Absolute Relative
Reduce Underperform
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
Date Market Data SENSEX Nifty Bloomberg Shares o/s Market Cap
Oct 12, 2011
16536 4974 GGAS IN 128mn Rs. 54bn
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 Sep11. Also, GGAS is likely to follow IGLs 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 Jun11 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.
52-wk High-Low
Rs. 485-300
Rs. 29mn BSE 500
Stock performance (%) 1m GGAS Sensex BSEO&G -6% -2% 0% 3m 4% -12% -4% 12m 7% -18% -20%
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 visibility; rising gas cost; and high sensitivity of operational performance to future price increases. Maintain REDUCE-UPF with a TP of Rs. 402. Financial summary Year FY11 Revenue (Rs. mn) 18,493 EBITDA (Rs. mn) 4,156 PAT (Rs. mn) 2,565 EPS (Rs.) 20.0 P/E(x) 22.4 EV/EBITDA(x) 12.5
FY12E
FY13E
25,280
29,697
5,249
5,566
3,448
3,608
26.9
28.1
16.6
15.9
9.6
8.9
41
Gujarat Gas
Business Overview
Key estimate revision
CY11E Old Volumes (mmscm) 1,286 New 1,281 Change 0% Old 1,389 CY12E New 1,390 Change 0%
CMP Target
Rs. 420 Rs. 402
Absolute Relative
Reduce Underperform
Modest CAGR Volume growth of 7% (CY10-13E)

1600 1400
1200 1000
Realisation (Rs. /scm)

Gross spread (Rs. /scm) Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.)
19.0
5.4 24,767 5,500 3,620 28.23
19.5
5.2 25,280 5,249 3,448 26.88
2%
-3% 2% -5% -5% -5%
20.4
5.3 28,618 5,651 3,666 28.6
21.1
5.2 29,697 5,566 3,608 28.1
4%
-1% 4% -2% -2% -2%
800 600
400 200
1035
1212
1281
1390
1501
0 CY09 CY10 CY11E CY12E CY13E Sales volumes (mmscm)

All figures in Rs. mn, except EPS, which is in Rs.
Gross spread likely to flatten over the next few years (CY12/13)
25.0 19.5
CAGR Growth (CY10-13E): EBITDA = 14%; PAT = 17%

7,000 6,000 5,000
4,156 3,448 2,795 1,729 3,608 5,249
21.1
22.2
6,191 5,566
4,088
20.0
15.0 10.0 9.7 13.4 15.0 15.9 14.3
16.7
4,000 3,000 2,000 2,565
10.6
5.2 CY11E 5.2 CY12E 5.4 CY13E
5.0
0.0 3.7 CY09 Realisation (Rs./scm)
4.3
CY10
1,000 CY09 CY10 CY11E CY12E CY13E PAT (Rs. mn)

Cost of Gas (Rs./scm)
Gross Spread (Rs./scm)
EBITDA (Rs. mn)
42
Gujarat Gas
Valuation
DCF Valuation Estimates Volume (mmscmd) Avg realisation (Rs. / scm) Gross Spread (Rs. /scm) EBITDA (Rs. /scm) CY11E 3.5 19.5 5.2 4.1 CY12E 3.8 21.1 5.2 4.0 CY13E 4.1 22.2 5.4 4.1 CY14E 4.4 22.6 5.1 3.6 CY15E 4.6 22.6 4.7 3.1 CY16E 4.9 22.6 4.7 3.4
CMP Target
Rs. 420 Rs. 402
Absolute Relative
Reduce Underperform
CY17E 5.2 22.6 4.7 3.4
CY18E 5.5 22.6 4.7 3.4
CY19E 5.9 22.6 4.7 3.4
CY20E 6.2 22.6 4.7 3.4
CY21E 6.6 22.6 4.7 3.4
NOPAT (Rs. mn)

Depreciation (Rs. mn) Capex +WC Chgs (Rs. mn) FCFF (Rs. mn) PV of CF as on Mar 12 (Rs. mn)
3,105
614 1,897 1,822 0
3,262
698 1,933 2,026 1,883
3,624
782 1,940 2,466 2,078
3,300
866 1,458 2,708 2,070
2,847
936 965 2,818 1,954
3,456
992 965 3,483 2,191
3,664
1,048 963 3,749 2,139
3,886
1,104 961 4,029 2,085
4,124
1,160 958 4,326 2,030
4,378
1,216 956 4,639 1,975
4,650
1,273 953 4,969 1,919
Key DCF Estimates WACC (%) Terminal Growth Rate (%) PV of Terminal Value (Rs. Mn) Total firm Value (Rs. Mn) Net debt / (cash) (Rs. Mn) Pref. Sh. +Minority (Rs. Mn) Other liabilities (Rs. Mn) Equity Value (Rs. Mn) Shares O/s (Nos. mn) Target Price (Rs. /Share) 10.25% 3% 27,262 47,588 (7,029) Current Trading Multiples 220 2,835 51,562 128 402 EPS (Rs.) P/E (x) P/B (x) EV/EBITDA (x) CY10 20.0 21.0x 6.4x 11.6x CY11E 26.9 15.6x 5.3x 9.2x CY12E 28.1 14.9x 4.6x 8.7x Terminal Growth Mar-12 8% 2.0% 2.5% 3.0% 3.5% 4.0% 498 525 557 595 643 9% 427 446 467 492 521
WACC 10% 374 387 402 419 438 11% 333 343 353 365 379 12% 300 307 315 324 334
Implied target multiple CY10 20.0 20.1x 6.1x 11.1x CY11E 26.9 15.0x 5.1x 8.8x CY12E 28.1 14.3x 4.4x 8.3x
43
Gujarat Gas
Financial Summary
Rs. mn Profit & Loss Revenues EBITDA Depreciation EBIT Other Income/Exp Interest PBT Net Profit Adjusted Net Profit Balance Sheet Shareholders Equity Total debt Total Networth & Liabilities Net fixed assets CWIP Investments Current assets Current liabilities Net current assets Total Assets Cash Flows Cash flows from Operations Cash flows from Investing Cash flows from Financing Cash Generated Opening Cash Closing Cash CY09 14,197 2,795 474 2,321 266 1 2,586 1,750 1,729 7,653 9,963 5,809 1,356 4,238 1,793 3,476 (1,683) 9,963 1,782 (1,966) 39 (146) 225 79 CY10 18,493 4,156 542 3,614 224 5 3,833 2,590 2,565 8,447 11,397 6,359 1,298 5,488 1,960 4,051 (2,091) 11,397 2,874 (2,164) (695) 14 79 94 CY11E 25,280 5,249 614 4,635 440 5 5,070 3,473 3,448 10,100 13,824 7,246 1,798 5,488 4,106 5,156 (1,050) 13,824 4,058 (1,560) (1,051) 1,448 94 1,541 CY12E 29,697 5,566 698 4,868 440 5 5,304 3,633 3,608 11,614 15,846 8,048 2,298 5,488 5,347 5,678 (331) 15,846 3,962 (1,560) (1,616) 786 1,541 2,328
CMP Target
Rs. 420 Rs. 402
Absolute Relative
Reduce Underperform
CY09 Growth ratios (%) Sales EBITDA Adj. Net Profit Margin ratios (%) EBITDA EBIT Adj. Net Profit Performance ratios RoIC (%) RoE (%) RoCE (%) Sales / Total Assets (x) Fixed Assets Turnover (x) Financial stability ratios Total Debt to Equity (x) Inventory & Debtor days Creditor days Valuation metrics Current Share Price (Rs.) Market Cap (Rs.mn) Fully Diluted Shares (mn) Adjusted EPS (Rs.) P/E (x) P/B (x) EV (Rs.mn) EV/ EBITDA (x) Dividend Yield (%) 9.1% 18.8% 8.5% 19.7% 16.4% 12.2% 29% 23% 24% 1.5 2.1 35.5 56.6
CY10 30.3% 48.7% 48.3% 22.5% 19.5% 13.9% 43% 32% 32% 1.7 2.5 33.7 43.1
CY11E 36.7% 26.3% 34.4% 20.8% 18.3% 13.6% 50% 37% 37% 2.0 3.0 32.2 43.1
CY12E 17.5% 6.0% 4.6% 18.7% 16.4% 12.1% 45% 33% 33% 2.0 3.1 32.2 43.1
53,865 128.3 13.5 31.2 7.0 49,548 17.7 1.9%
420 53,865 53,865 128.3 20.0 21.0 6.4 48,284 11.6 2.9% 128.3 26.9 15.6 5.3 46,836 8.9 3.3%
53,865 128.3 28.1 14.9 4.6 46,050 8.3 3.3%
44

Spark Capital - Natural Gas Utilities - In-Depth Report - Alarms On LNG Are Scare Mongering

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Natural Gas Utilities Sector Indepth report

Natural Gas Utilities

Natural Gas Utilities

Natural Gas Utilities

Natural Gas Utilities

Mkt Cap (Rs. mn) 528,955 53,865 58,512 59,640 118,500

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

Natural Gas Utilities

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

Core segments remain attractive

Re-gas tariff (Rs. 34/mmbtu)

Natural Gas Utilities

Source: FEPC, Spark Capital Research

Natural Gas Utilities

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

Natural Gas Utilities

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

Present Present input configuration

Equiv.Cost ($/mbbtu) Spot price ($/mmbtu)

Source: Industry, Spark Capital Research

Total 131,700 Source: Spark Capital Research

Natural Gas Utilities

0.5 Completion by FY15

Natural Gas Utilities

Industrial: Savings on Naphtha/Diesel; Breaks even with FO/LSHS

Source: BPCL, Spark Capital Research

PNG Price Rs/ scm

Savings % -8% Source: IGL, Industry, Spark Capital Research

Natural Gas Utilities

Fertilizer and Power on priority for allocation of domestic natural gas

Natural Gas Utilities

3.8 1.0 4.8

8 8 4.0 2.0 6.0 40 10.7 50.8 21% 3.5

8 8 2.2 1.0 4.0 7.2 46 12.5 58.0 22% 2.6

Consumption of Fertiliser Sector

7.0 7.0 51 14.2 65.0 22% 2.7

3.0 3.0 53 15.0 68.0 22% 5.8

Overall gas potential of 28mmscmd over FY12-16

36 9.2 44.8 21% -3.6

Consumption of Power Sector

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

Natural Gas Utilities

GNVFC, Bharuch (Guj.)

Madras Fertilisers, Manali

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

Gas Req. (mmscmd)

Imported Cost of Urea $570 (FOB+Ship.+Others)

IGFL, Jagdishpur (U.P.)

Fuel Oil $/MT

Source: BPCL, FAI, Spark Capital Research

Natural Gas Utilities

PLF% 64% 65% 54%

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

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

Cost of Power Generation

Domestic Imported Domestic Imported Imported

Pragati III Power

GAIL, IOCL & BPCL - 2 each

Source: Company data, CEA, Spark Capital Research

Natural Gas Utilities

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

Natural Gas Utilities