PETRONET LNG LTD PICK OF THE WEEK

Jan 29, 2018

Industry CMP Recommendation Add on dips to Sequential Targets Time Horizon

LNG ReGAS Rs. 244 Buy at CMP and add on declines Rs. 222-226 Rs. 275-296 4-6 Quarters

We had issued a Pick of the Week on May15, 2017 (when its CMP was Rs.217.50) with a recommendation to buy the stock
at the CMP and add on declines to price band of Rs. 195.50-197.50 for sequential targets of Rs.242 and Rs.257 over the
next 1-2 quarters.Refer: https://www.hdfcsec.com/hsl.research.pdf/Petro.pdf. These prices are adjusted for bonus share
issue at 1:1 (Record date on 4th of July 2017). The stock achieved the first target on Sept 20, 2017 and second target on
HDFC Scrip Code PETLNGEQNR Oct 11, 2017. It later went on to make a high of Rs.275.5 on Nov 09, 2017. We now issue a stock update incorporating
BSE Code 532522 recent updates including results.
NSE Code PETRONET
TALWALKARS Triggers:
Bloomberg PLNG IN
 India's LNG demand is expected to double to 45mn tonnes annually in the next four years due to a glut in the global
CMP Oct 13 2017 Rs. 244
market and increasing demand from the power and fertiliser sectors given the favourable Govt policies in this regard.
Equity Capital(Mn) 15000.0
(Rscr)Value (Rs)
We expect reasonable prices of natural gas and rising gas demand to benefit PLNG going forward, which imports
Face 10
liquefied natural gas (LNG) and re-gassifies it into saleable gas as domestic gas production may not rise meaningfully till
Eq- Share O/S(Mn) 1500.0 FY22.
Market Cap (RsBn) 366.0  Petronet LNG (PLNG) plans to add RLNG capacity of 2.5MMTPA (Million Metric Tonne Per Annum) in Dahej to
Book Value (Rs) 53.9 17.5MMTPA by FY19E. Recently, it has expanded Dahej capacity by 50% to 15MMTPA, 90% of its capacity is contracted.
Avg.52 WkVolume 3484031 Incremental volumes are expected after the completion of the Kochi-Mangalore pipeline, and expansion of the Dahej
52 Week High 275.5 terminal.
52 Week Low 185.6  The Kochi terminal, which was commissioned in 2014 and accounts 35% of the balance sheet , has not broken-even
owing to lack of pipeline capacity. GAIL targets Dec-2018 as the commissioning date for the Kochi-Mangalore pipeline.
Shareholding Pattern% (Dec 31, 2017) This should help to increase terminal utilisation from 15.7% in Q2FY18 to 34% in FY20. This in turn will help the
Promoters 50.0 terminal’s turnaround and contribute positively.
Institutions 35.3  PLNG in Sept 2017 renegotiated Australia’s Gorgon LNG contract with Exxon Mobil Corp that could result in Rs 40bn
Non 14.7 savings; this represents a USD 0.4/mmbtu cut in prices.
Institutions  Over the next three years (FY18-20), PLNG would generate Operating Cash Flow (OCF) of Rs 76.9bn. However, its capex
Total 100.0
requirement is limited at Rs 21.3bn, including capex required for expansion at the Dahej terminal by 2.5mmtpa. This
could lead to higher dividend payout going forward.
Medium term triggers:
 PLNG has initiated talks for buying 25% stake in Indian Oil Corporation Ltd.’s under-construction 5 million tonne terminal
FUNDAMENTAL ANALYST at Ennore, Tamil Nadu.
Abdul Karim  PLNG has signed agreements with Bangladesh Oil, Gas and Mineral Corporation for the construction of a 7.5 MT project
Abdul.karim@hdfcsec.com in Bangladesh at a cost of USD 950mn. PLNG has submitted a commercial proposal for the Bangladesh project in end
December, 2017.

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 PETRONET LNG LTD PICK OF THE WEEK
Jan 29, 2018

 The company will also partner with Japan's Mitsubishi and Sojitz Corp to set up Sri Lanka's first liquefied natural gas
KEY HIGHLIGHTS terminal near Colombo. PLNG will hold 47.5 percent stake, the Japanese firm 37.5 percent and Sri Lanka 15 percent share
in the consortium.
 PLNG plans to enter into the business of electric vehicles (e-vehicles). The plan is backed by the recent boom in investment
 Petronet LNG (PLNG) is a JV in the electric vehicle segment, which could be a major source of transportation in recent future. With this plan, PLNG
between GAIL, ONGC, IOC and BPCL could become the fourth company to enter the business of electric vehicles after NTPC, Power Grid and REC. PLNG aims to
(stake 12.5% each) to set up LNG create charging infrastructure that will be opened at the petrol pumps of IOC and BPCL. It may partner with global
receiving and regasification companies in the electric vehicle segment for the purpose.
terminals in India to facilitate LNG  PLNG plans to venture into retail LNG business and it is expected to test run LNG-fueled buses in Gujarat and Kerala.
imports. PLNG has established itself Company is in discussion with oil marketing companies to develop LNG dispensing infrastructure in India as Ministry of
as an international player and has Road Transport and Highways has approved the usage of LNG as an automotive fuel.
relationships with major LNG
exporters. Financial Summary (Standalone):
(RsMn) Q2FY18 Q2FY17 YoY-% Q1FY18 QoQ-% FY17 FY18E FY19E FY20E
 PLNG had set up its first LNG Revenue 73,991.2 63,385.1 16.7% 60,658.3 22.0% 2,46,160.3 2,93,157.3 2,96,192.6 3,50,925.2
terminal in Dahej, Gujarat (current EBITDA 8,987.3 7,264.3 23.7% 7,442.1 20.8% 25,922.7 29,701.0 32,385.3 39,424.0
capacity post expansion of 15
APAT 5,887.8 4,595.6 28.1% 4,375.8 34.6% 17,056.7 18,408.8 20,725.5 25,355.7
MMTPA). It also has a 5 MMT
Diluted EPS (Rs) 3.9 3.1 28.1% 2.9 34.6% 11.4 12.3 13.8 16.9
terminal at Kochi. A third terminal
RoE-% 23.2 20.9 20.1 20.9
at Gangavaram is also under initial
P/E (x) 21.5 19.9 17.7 14.4
stages of execution.
(Source: Company, HDFC sec)

 PLNG plans to add RLNG capacity of

2.5MMTPA (Million Metric Tonne
Company Description:
Petronet LNG (PLNG) is a JV between GAIL, ONGC, IOC and BPCL (stake 12.5% each) to set up LNG receiving and
Per Annum) in Dahej to 17.5MMTPA
regasification terminals in India to facilitate LNG imports. PLNG has established itself as an international player and has
by FY19E. Recently, it has expanded
relationships with major LNG exporters. PLNG had set up its first LNG terminal in Dahej, Gujarat (current capacity post
Dahej capacity by 50% to
expansion of 15 MMTPA). It also has a 5 MMT terminal at Kochi. A third terminal at Gangavaram is also under initial stages
15MMTPA, 90% of its capacity is
of execution. PLNG earns fixed re-gas margins on long term volumes and additional marketing margins on short term
contracted. Incremental volumes
volumes that are paid by the gas off-takers. The company currently charges Rs 35.85 per MMBTU as regasification charges,
are expected after the completion of
which are set to go up 5% every year in January.
the Kochi-Mangalore pipeline, and
expansion of the Dahej terminal.

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 PETRONET LNG LTD PICK OF THE WEEK
Jan 29, 2018

Key Updates:
Dahej Volume Break Up Dahej Regasification Charges

(Source: Company, HDFC sec)

Asian LNG Prices Kochi Volume Trend Kochi Regasification Charges

(Source: Company, HDFC sec)

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 PETRONET LNG LTD PICK OF THE WEEK
Jan 29, 2018

Key Risks:
 Regulatory: Regulations do not explicitly cover regas charges, particularly for old capacities which have been established
based on back to back commercial arrangements. Though regas charges at Dahej will anyway be lower than those in
newer terminals, any potential regulatory scrutiny by the regulator could be a negative. No more Dahej tariff hikes could
be another risk. Any proposal by the Govt to cut tariffs for supply to power companies or any capping of margins by
PNGRB could negatively impact its earnings and growth.
 Utilisation of large free cash flows over the next few years remains uncertain given lack of opportunities to expand re-
gasification business in India; the company has already initiated further expansion of Dahej terminal, which will require
modest Rs.10-12 bn of capex spread over the next 3-4 years.
 If LNG demand in India remains subdued due to economic slowdown or alternative fuels are available cheaper or global
LNG prices begin to rise sustainably, then capacity utilization may be affected resulting in lower revenues and margins.
 Any meaningful progress on imports via transnational pipelines (IPI, TAPI, SAGE) could impact capacity utilization of
PLNG.
 New capacities of Regas on west coast and south could provide competition to PLNG. Import capacity on the West Coast
may rise 53% by end FY19 (Mundra, Jaigarh, Dahej), while it may double in South on a small base. However PLNG’slong-
term take-or-pay or use-or-pay contracts in Dahej and Kochi, connectivity and low cost structure make it best placed to
navigate the emerging scenario in India.

View and Valuation:

India's LNG demand is expected to double to 45mn tonnes annually in the next four years due to a glut in the global
market and increasing demand from the power and fertiliser sectors. We expect to continue increasing demand and
reasonable prices of natural gas and rising gas demand to benefit PLNG going forward, which imports liquefied natural gas
(LNG) and re-gassifies it into saleable gas. Incremental volumes are expected after the completion of the Kochi-Mangalore
pipeline, and expansion of the Dahej terminal. Apart from this, PLNG has renegotiated the Exxon Gorgon contract in Sept
2017 that may cut LNG import price by ~USD1 mitigating potential offtake risks even if direct benefits are limited.

GAIL’s much awaited Kochi-Mangaluru pipeline is expected to be completed by December 2018. This should boost the
Kochi terminal's regasification utilisation. Despite several new terminals coming up in the next two to three years, the
Dahej terminal is likely to stay competitive due to its lower operating cost. This was the key reason for PLNG to raise Dahej
terminal's tariff by five per cent each year. The company supplies under the long-term contracts with provision of use-or-
pay charges if utilisation falls below 80 percent than contracted quantity. Historically, after rising gas prices during the
current winter (see price chart on page 3), LNG prices have cooled off over the remainder of the year. Hence, the current
price distortion is likely to reduce in the coming months. This makes the company's valuation attractive at the current
stock price.

We feel investors could buy the stock at the CMP and add on dips to Rs. 222-226 band (13.25x FY20E EPS) for sequential
targets of Rs 275 (16.25x FY20E EPS) and Rs 296 (17.5x FY20E EPS). At the CMP of Rs 244 the stock trades at 14.4x FY20E
EPS.

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 PETRONET LNG LTD PICK OF THE WEEK
Jan 29, 2018

Quarterly Financials – (Standalone)

Particulars (RsMn) Q2FY18 Q2FY17 YoY-% Q1FY18 QoQ-% H1FY18 H1FY17 YoY-%
Net Sales 73991.2 63385.1 16.7% 60658.3 22.0% 134649.5 114474.6 17.6%
Other operat- income 3711.1 2758.8 34.5% 3692.8 0.5% 7403.9 5042.4 46.8%
Revenues 77702.3 66143.9 17.5% 64351.1 20.7% 142053.4 119517.0 18.9%
Cost of materials 67427.3 57613.1 17.0% 55466.7 21.6% 122894.0 103380.6 18.9%
Gross Margins 10275.0 8530.8 20.4% 8884.4 15.7% 19159.4 16136.4 18.7%
Employees (-) 193.8 180.3 7.5% 267.8 -27.6% 461.6 363.1 27.1%
Other expenses(-) 1093.9 1086.2 0.7% 1174.5 -6.9% 2268.4 2084.2 8.8%
Total 1287.7 1266.5 1.7% 1442.3 -10.7% 2730.0 2447.3 11.6%
EBITDA 8987.3 7264.3 23.7% 7442.1 20.8% 16429.4 13689.1 20.0%
Other income 1019.3 914.9 11.4% 706.7 44.2% 1726.0 1408.4 22.6%
Depreciation (-) 1038.6 859.7 20.8% 1026.7 1.2% 2065.3 1665.7 24.0%
EBIT 8968.0 7319.5 22.5% 7122.1 25.9% 16090.1 13431.8 19.8%
Finance Cost 464.5 554.2 -16.2% 464.5 0.0% 929.0 1110.6 -16.4%
PBT 8503.5 6765.3 25.7% 6657.6 27.7% 15161.1 12321.2 23.0%
Tax Expenses 2615.7 2169.7 20.6% 2281.8 14.6% 4897.5 3947.0 24.1%
PAT 5887.8 4595.6 28.1% 4375.8 34.6% 10263.6 8374.2 22.6%
EPS 3.9 3.1 28.1% 2.9 34.6% 6.8 5.6 22.6%
(Source: Company, HDFC sec)

Financials (Consolidated):
Income Statement Cash Flow
Particulars (Rs mn) FY16 FY17 FY18E FY19E FY20E Particulars (Rs mn) FY16 FY17 FY18E FY19E FY20E
Net sales 2,71,334 2,46,160 2,93,157 2,96,193 3,50,925 Profit before tax 11,986 23,602 27,476 30,934 37,844
Operating expenses -2,55,478 -2,20,238 -2,63,456 -2,63,807 -3,11,501 Depreciation 3,216 3,691 3,510 3,615 3,903
Operating profit 15,856 25,923 29,701 32,385 39,424 Change in working capital 12,357 -2,090 -573 -40 -1,762
EBITDA 15,856 25,923 29,701 32,385 39,424 Total tax paid -1,911 -5,129 -6,321 -7,116 -8,706
Depreciation -3,216 -3,691 -3,510 -3,615 -3,903 Others 654 -1,370 -1,285 -2,163 -2,323
Other income 1,733 3,466 2,400 3,200 3,360 Cash flow from oper. (a) 26,303 18,703 22,807 25,229 28,957
EBIT 14,374 25,698 28,591 31,970 38,881 Capital expenditure -9,931 -4,796 -7,199 -10,812 -3,350
Finance cost -2,388 -2,097 -1,115 -1,037 -1,037 Change in investments 79 -27,497
Exceptional & extraordinary Others 3,776 3,499 2,400 3,200 3,360
Profit before tax 11,986 23,602 27,476 30,934 37,844 Cash flow from inv. (b) -6,076 -28,794 -4,799 -7,612 10

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 PETRONET LNG LTD PICK OF THE WEEK
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Tax (current + deferred) -2,864 -6,545 -9,067 -10,208 -12,489 Free cash flow (a+b) 20,227 -10,091 18,008 17,617 28,967
P / L form discontinuing operations Equity raised/(repaid) 7,500
Profit / (Loss) for the period 9,122 17,057 18,409 20,726 25,356 Debt raised/(repaid) -2,832 -3,966 -8,469 -1,920 -960
P/L of Associates, Min Int, PrefDiv Dividend (incl. tax) -2,257 -4,513 -4,513 -4,513 -4,513
Reported Profit / (Loss) 9,122 17,057 18,409 20,726 25,356 Others 3,070 17 -9,170 -1,569 -1,547
Adjusted net profit 9,122 17,057 18,409 20,726 25,356 Cash flow from fin. (c) -2,019 -8,462 -14,652 -8,002 -7,021
EPS 6.1 11.4 12.3 13.8 16.9 Net chg in cash (a+b+c) 18,208 -18,553 3,356 9,615 21,946
(Source: Company, HDFC sec)

Balance Sheet Key Ratios

Particulars (Rs mn) FY16 FY17 FY18E FY19E FY20E Particulars (Rs mn) FY16 FY17 FY18E FY19E FY20E
Share capital 7,500 7,500 15,000 15,000 15,000 Adjusted EPS (Rs) 6.1 11.4 12.3 13.8 16.9
Reserves & surplus 58,640 73,439 79,834 96,046 1,16,889 CEPS (Rs) 8.2 13.8 14.6 16.2 19.5
Shareholders' funds 66,140 80,939 94,834 1,11,046 1,31,889 Book NAV/share (Rs) 44.1 53.96 63.2 74.0 87.9
Minority Interests and others Dividend/share (Rs) 1.3 2.5 2.5 2.5 2.5
Non-current liabilities 42,271 35,725 33,289 35,848 39,120 Dividend payout ratio 24.7 26.5 24.5 21.8 17.8
Long-term borrowings 22,329 14,500 9,872 9,872 9,872 EBITDA margin 5.8 10.5 10.1 10.9 11.2
Other non-current liabilities 19,942 21,225 23,417 25,977 29,249 EBIT margin 5.3 10.4 9.8 10.8 11.1
Current liabilities 15,851 21,627 19,585 17,782 18,921 Tax rate 23.9 27.7 33.0 33.0 33.0
ST borrowings, Curr maturity 3,816 7,680 3,840 1,920 960 RoCE 13.4 21.7 22.3 22.8 24.2
Other current liabilities 12,034 13,947 15,745 15,862 17,961 Total debt/Equity (x) 0.4 0.3 0.1 0.1 0.1
Total (Equity and Liabilities) 1,24,261 1,38,291 1,47,708 1,64,677 1,89,930 Net debt/Equity (x) 0.1 (0.1) (0.2) (0.3) (0.4)
Non-current assets 88,402 89,265 92,954 1,00,151 99,598 Du Pont Analysis - ROE
Fixed assets (Net block) 83,610 84,716 88,405 95,602 95,049 Net margin 3.4 6.9 6.3 7.0 7.2
Non-current Investments 3,809 3,599 3,599 3,599 3,599 Asset turnover (x) 2.3 1.9 2.1 1.9 2.0
Long-term loans and advances Leverage factor (x) 1.9 1.8 1.6 1.5 1.5
Other non-current assets 983 950 950 950 950 Return on equity-% 14.6 23.2 20.9 20.1 20.9
Current assets 35,859 49,026 54,754 64,526 90,333 Valuations
Cash & current investment 21,829 30,984 34,340 43,955 65,901 Period end (x) FY16 FY17 FY18E FY19E FY20E
Other current assets 14,030 18,043 20,414 20,571 24,432 PER 40.1 21.5 19.9 17.7 14.4
Total (Assets) 1,24,261 1,38,291 1,47,708 1,64,677 1,89,930 Price/Book 5.5 4.5 3.9 3.3 2.8
Total debt 26,146 22,180 13,711 11,791 10,831 EV/EBITDA 23.4 13.8 11.6 10.3 7.9
Capital employed 1,12,227 1,24,344 1,31,963 1,48,815 1,71,969
(Source: Company, HDFC sec)

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Jan 29, 2018

18 Months Daily Closing Price Chart:

(Source: Company, HDFC sec)

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 PETRONET LNG LTD PICK OF THE WEEK
Jan 29, 2018

Fundamental Research Analyst: Abdul Karim (abdul.karim@hdfcsec.com)

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