Report by JainMatrix Investments

Petronet LNG
Date: 19 December, 2011

CMP: Rs 157 Advice: Invest

Large Cap with Market Cap Rs 11,883 crores Target: Mar`13 - 250 and Mar`14 - 301

Petronet LNG is doubling capacities in the next two years. It provides a clean fuel, LNG to an energy starved country. Being a PSU JV, business risks are lower. The operational performance and capacity addition projects in the last few years have been excellent. It is a gem of a stock that will continue to give equity investors safe and high returns for the next few years.

Index
Petronet LNG - Description and Profile....................................................................................... 1 Industry Note .............................................................................................................................. 2 Stock evaluation, performance and returns ............................................................................... 2 Financial Projections, with FY14 estimates ................................................................................. 5 Risks............................................................................................................................................. 6 Opinion, Outlook and Recommendation .................................................................................... 6

Petronet LNG - Description and Profile

Petronet LNG imports, processes and sells LNG in India, and is a JV of GAIL, ONGC, Indian Oil & BPCL. Turnover in 2011 was Rs 13,197 crores with PAT at 620 crores. PLNG owns and operates a LNG terminal at Dahej, Gujarat that imports 10 mmtpa (Million Metric Tonne Per Annum) of LNG. LNG is sourced through long term contracts (with 7.5 mmtpa from RasGas-Qatar, 1.44 mmtpa from Exxon Mobil-Australia and 2.5 MMT from Gazprom) and also spot cargoes (sourcing 0.6MT in 12 from Gaz De France) that boost volumes and utilize capacity. These contacts indicate stable supplies. Imported LNG is regassified and supplied to customers in pipelines - generally operated by GAIL and GSPL. The customer base includes power plants, household and commercial piped gas, fertilizer plants, Industrial boiler fuel, etc. Most sales are through GAIL, IOCL & BPCL Operationally excellent, the FY11 LNG volumes were 11 mmtpa, a 110% capacity utilization at Dahej. The price of LNG sourced has been rising. It also depends on location, and today varies from 4$/mmbtu in USA to 15$/mmbtu in Japan. However, PLNG is protected from these prices, as it has back to back arrangements with customers. It earns a Rupee denominated marketing margin.

The current projects include:

PLNG is 26% promoter of a JV with Adani Enterprises, called Adani Petronet (Dahej) Port Pvt Ltd. This is a bulk Solid Cargo Port of capacity 12 mmtpa that has started operations this year at Dahej. Construction has started of an additional LNG jetty at Dahej which will take the terminal capacity from 10 to 15 mmtpa by Sept 13. Construction of a new LNG terminal at Kochi, Kerala of 5 mmtpa, which will start by Sept 2012. Started LNG Supply in Cryogenic road Vehicles for supply to isolated customers without pipelines Direct Marketing of LNG in coastal & industrial areas, will develop the market /boost demand

Report by JainMatrix Investments Ltd.

www.jainmatrix.com/

Petronet LNG: Invest

22 December, 2011

Future Plans Plan for forward integration into a power plant of 1200 MW capacity at Dahej using LNG fuel. A plan for building a LNG Terminal on the east coast of India. Location to be decided. Once the Kochi terminal is ready, PLNG may also invest in a power plant here, using LNG fuel. By FY16, total capacity could increase to 25 mmtpa, which is 2.5 times current capacity.

Industry Note:

Gas is a cleaner fuel than Coal and Oil. It burns completely. Usage of Gas is better than other fuels. Gas consumption in India is low compared to global patterns. PLNG is a pioneer that is creating the infrastructure that will improve gas usage and meet demand.

Fig 1 Primary Energy consumption World and India

Today India is energy hungry, and raw fuel deficit, with supply issues: o Coal while there are enough Coal reserves, Coal India has not been able to meet production targets. Their constraints are environmental clearances, logistic challenges, recent heavy rains in mining areas and labor issues. Other mine owners in India are also not producing enough; so many customers need to import coal. Also Coal is a dirty fuel. o India is a crude oil importer and 70% of demand comes from this route. Oil prices are high. o Nuclear energy has suffered a setback in India due to the Japan disaster. New plant construction is a political hot potato. Hydro and Renewables have a high cost of capacity setup. Indian gas demand is expected to reach 381 mscmd by 2015, compared with a current supply trajectory of 202.9 mscmd. There is definitely a huge demand for gas. Domestic supply of Natural gas from Reliance (Krishna Godavari), ONGC and Oil India wells has not scaled up and will not be able to meet above demand. Other LNG terminals are Hazira (Shell owned, 3.5 mmtpa) and Dabhol (GAIL/NTPC, ready by 2012). GAIL also procures LNG in long term contracts, and used the available terminal capacity (including PLNG) to import this.

Stock evaluation, performance and returns

PLNG had its IPO in March 2004 priced at Rs 15. It was oversubscribed 4.2 times.

Report by JainMatrix Investments Ltd.

http://jainmatrix.com/

Petronet LNG: Invest

22 December, 2011

The maiden dividend of Rs 1.3 on FV Rs 10 was paid in 2007. Thereafter dividend has shown a steady to increasing trend (See Figure 2) At CMP of Rs 157 today, the stock has shown a 42% annualized return over the last 8 years! Revenues have grown steadily at 37% CAGR, (Fig 3), along with EBITDA - 35% and Profits 29%.

Petronet LNG - Equity

Investment and Dividend 64 54 44 34 24 14 4 -6 -16 2004 -15 2005 2006 1.3 2007 1.5 2008 1.8 2009 1.8 2010 2 2011 40 20 0 -20 42% CAGR CMP 180 160 140 120 100 80 60

Investment + Dividends Closing price for year

Petronet LNG has given initial IPO investors a 42% return CAGR over the last 8 years

Fig 2 - Petronet LNG stock performance

Quarterly Sales and Net Profits

Sales - Crores 6000
Sales Turnover

EBIDTA and Net Profit - Crores 900 800 700 600 500
EBITDA Net Profit

5000 4000 3000

400 2000 1000 100 0 0 300 200

Fig 3 - Quarterly revenues have grown steadily over the last 7 years

Report by JainMatrix Investments Ltd.

http://jainmatrix.com/

Petronet LNG: Invest

22 December, 2011

Cash flow and EPS are showing a robust growth rate - see graph. A dip in 2010 was temporary, with a substantial recovery in 2011. (Fig 4) With the excellent capacity utilization in 2011, PLNG has partially repaid debt and D/E ratio is 1.0
EPS and Cash Flow

Cash Flow Crores 1200

EPS

9
8
Net Cash From Operating Activities Earnings Per Share

1000 7 800 6
5

600 4 400 3
2

Cash from operating activities is up 29% CAGR over the last 5 years. Annualised EPS is up 29% CAGR

200 1 0 0

Fig 4 - Cash Flow and EPS have grown substantially

Price and PE chart shows that PE has fallen recently close to the 5 year mean of 14 times. (Fig 5). PE today is 13.3 and has fallen 43% from 23 levels. During this fall, the price has only fallen 14% from the recent peak of 183 in Aug 2011. The rest of the fall comes from EPS growth, see fig 6.
Price
180 22.0

PE

24.0

CMP
160

PE
140

20.0

18.0
16.0

120

14.0 100 12.0 80

10.0

60 8.0
40

6.0 4.0

20

Fig 5 - Price and PE Graph

Report by JainMatrix Investments Ltd.

http://jainmatrix.com/

Petronet LNG: Invest

22 December, 2011

14.0

Price

EPS

180

CMP

EPS
160

12.0

140

10.0

120 8.0 100 6.0

80

60

4.0 40
2.0

20

0.0

Fig 6 - Price and EPS Graph

Price and EPS quarterly graph shows that EPS growth has accelerated in recent quarters. This elevated EPS will stabilize in 2012, and any gains will come from interest cost reductions. Volume growth will happen in 2013 with additional capacity coming on stream in Kochi and Dahej. ROCE is between 15 25% PEG is at 0.46 indicates safety and undervalued status

Financial Projections, with FY14 estimates

Mar '08 Sales Turnover - crores Growth % EBITDA - crores Growth % Net Profit - crores Growth % Earnings Per Share - Rs Growth % PE (at current Price) Exhibit 7: Financial Projections 51.8 6555.3 19.0 919.7 34.3 474.7 51.5 6.3 9.2 9.2 6.9 -21.9 6.3 518.5 Mar '09 8428.7 28.6 977.8 -3.4 404.5 -22.0 5.4 53.0 Mar '10 10649.1 26.3 944.3 Mar '11 13197.0 23.9 1284.2 36.0 619.6 53.2 8.3 44.3 13.2 Mar 12 E 17603.0 33.4 1666.5 29.8 894.2 44.3 11.9 16.6 11.3 Mar '13 E 19100.0 8.5 1810.0 8.6 1040.0 16.3 13.9 20.1 9.4 Mar 14 E 26394.0 38.2 2520.0 39.2 1250.0 20.2 16.7

Report by JainMatrix Investments Ltd.

http://jainmatrix.com/

Petronet LNG: Invest

22 December, 2011

Risks:

A global recession, perhaps involving a European country debt default, will depress the equity market overall, and PLNG also. But this even if it happens, will be a temporary condition. There has been a recent spurt in spot LNG price. This was largely due to the March 11 Japan earthquake and nuclear disaster; Japan has started idling their nuclear plants, and turned to LNG in a big way. In India, LNG demand is high, but may drop if prices exceed 18$/ mmbtu. However, spot prices in USA are at <4 $/mmbtu, so this is unlikely. US has low prices as they have started producing LNG from non conventional sources. Pipeline infrastructure from Dahej to customers is a constraint. However this is being aggressively addressed by GAIL and GSPL. Similarly pipelines to demand centers around Kochi have to be set up to evacuate gas. This being addressed by Kerala Government and GAIL Currently, LNG charges regasification tariffs are not under the purview of the regulator. Any policy decision to regulate the tariff may affect the valuation of the stock.

Opinion, Outlook and Recommendation

PLNG has an excellent track record of investing in LNG assets and utilizing/ operating them well. In the last 8 years, all performance metrics of revenues, profits and EPS have improved to a new orbit every time capacity was added. Imminent capacity addition will replay this characteristic. Demand is huge in India, and as of now, all LNG import for the next 6 months are booked by customers. My opinion is that Petronet will continue down the path of solid stock performance and dividends over the next decade. Invest now and systematically for long term outperformance

The projection/ targets for PLNG are o March 13 target is 250 (a 60% appreciation from current levels) o March 14 is 301 (a 92% appreciation) The projections are based on PE expectations of 18 times.

Disclaimer:
These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com . Also see: http://jainmatrix.wordpress.com/disclaimer/

Report by JainMatrix Investments Ltd.

http://jainmatrix.com/