Post on 06-Jun-2020
transcript
Swarnendu Bhushan
swarnendu.bhushan@elaracapital.com
+91 22 6164 8504
Durgesh Poyekar
durgesh.poyekar@elaracapital.com
+91 22 6164 8541
Elara Securities (India) Private Limited Private & Confidential
Worsening climate: a vote for gas
China’s change of heart
Alarm bells: China reports >200 days of smog per annum in major
cities; cost-to-GDP of 13% (Source: Global Commission on Economy &
Climate)
Steps up: fixes 2030 as peak CO2 emissions year; share of non-fossil
fuels to rise to 20% by 2030
Reforms underway: pricing reforms implemented in April 2015; ongoing
retrofitting from coal to natural gas
Fresh pledges: 2x mkt share of gas in the primary energy mix by 2020
Gas – not a cheap story: spends ~USD 60bn over the past 10 years to set
up infrastructure. Consumption rises 7x over 2000-14 (Source:
WoodMackenzie). For eg: ENN Energy and China Gas
Road ahead for India
Pandemic: Air pollution costs USD 18bn annually to the economy
Judicial activism: directs the government to make CNG mandatory in a few
cities of four states
Reluctant signatory: to UNFCCC & Kyoto protocols; agrees to cut
emissions intensity of GDP by ~25% by 2020
Reforms at a snail’s pace: transparent gas pricing, deregulation of petrol &
diesel, and priority to gas for city gas distribution (CGD) consumption;
natural gas currently accounts for 7.1% of primary energy mix
Lack of capex: spends INR 650bn on gas infrastructure over 2004-
14. Consumption rises only 1.9x, given infra & supply constraints
Structural opportunity
All that gas: 700mn Indians out of gas economy; consumption in the
CGD sector to increase to 51 mmscmd by 2022 (currently 15 mmscmd);
benefits CGD firms: Indraprastha Gas and Gujarat Gas
Supply pinch: current domestic supply is ~90mmscmd, which is 35%
lower than demand; the gap to rise to 90mmscmd by FY18E; benefits
LNG importers like Petronet LNG
Pipe dreams: adding 11,000km to existing 15,000km gas grid; benefits
gas transmission firms: GAIL & GSPL
Our top picks
Petronet LNG (PLNG IN, Buy, TP: INR 242, Upside: 37%): expansion-
led volume growth of 49% to boost EBITDA by 56% over FY15-18E; higher
earnings visibility post expansion in December 2016
Indraprastha Gas (IGL IN, Buy, TP: INR 644, Upside: 38%): no
regulatory overhang, volume growth of ~7%; free cash flow of INR 5bn pa
Gujarat State Petronet (GUJS IN, Buy, TP: INR 173, Upside: 44%):
volume CAGR of ~12% over FY15-18E; stable tariff of INR 1,200/tscm
Gujarat Gas (GGAS IN, Buy, TP: INR 910, Upside: 22%): volume
growth of ~9% led by industrial demand; low spot LNG prices to help demand
GAIL India (GAIL IN, Accumulate, TP: INR 347, Upside: 18%):
transmission volume to improve by 19% & trading by 14% over FY15-18E;
profitability of petchem to get a boost from lower LNG cost
2
Elara Securities (India) Private Limited Private & Confidential
Gasping for clean air
Note: *Score of 100 indicates best air quality; Source: Yale university’s Environmental Performance Index, Elara Securities Research
80 - 100
40-80
0 - 40
Air quality score
3
Biggest contributors to CO2 in
2013:
China: 29%
US: 15%
EU: 11%
India: 6%
China and India: culprits in
emissions growth
China’s GDP grows at an average of
9.7% during 2000-14 vs India’s
7.0% (global rate at 2.7%)
Increased industrialization results in
higher emissions
India accounts for 28% of CO2
emissions growth in 2014, the
largest globally, followed by China
at 15%
Elara Securities (India) Private Limited Private & Confidential
Consensus emerges
4
Setting the stage Advantage natural gas
Note: GHG stands for green house gases; Source: Industry, Elara Securities Research
40
60
80
100
0 2 4 6 8 10 12
CO2 (kg/mmBtu)
CH4 (g/mmBtu)
Diesel
Petrol
Bituminous coal
LPG
Natural Gas
Natural gas emits ~30% lower GHGs
1988: the World Meteorological Organization (WMO) & the United Nations
Environment Programme (UNEP) set up Intergovernmental Panel on Climate
Change (IPCC) to assess data on climate change
First report: UN uses IPCC’s report to establish UN Framework Convention on
Climate Change (UNFCCC) to contain GHG emissions
1997 Kyoto Protocol: By 2012, developed countries would reduce emissions
by 5.2% over the 1990 levels. Covers not only CO2 but also other GHGs. Comes
into force from 2005
Promises, promises
Lima, 2014: Countries come forward with proposed emissions reduction targets
in 2015
US pledges: to cut 26-28% emissions by 2025
China fixes 2030 as peak CO2 emissions year; share of non-fossils to rise
to 20% by 2030
India signs UNFCCC & Kyoto protocols: commits to reduce emissions
intensity of GDP by 20-25% by 2020
Paris, December 2015: stricter guidelines for legal enforcement
China & India: the sparring begins
Not even close: Natural gas accounts for 7.0% of primary energy mix in India
and 5.6% in China, well below 24% globally
China’s gas infra ambitions: expanding trunk pipelines by 42%; securing
access to gas sources (USD 70bn pipeline from Russia)
India getting its act together: gearing up for ~70% expansion in trunk
pipelines and doubling LNG import terminal capacity
Elara Securities (India) Private Limited Private & Confidential
No bragging rights over these statistics
PM10 reading in leading cities in India is ~7x WHO norm PM2.5 reading in leading cities in India is 6x WHO norm
Note: PM10 stands for particulate matter smaller than 10 micrometers in size Source: WHO, Elara Securities Research
Note: PM 2.5 stands for particulate matter smaller than 2.5 micrometers in size Source: WHO, Elara Securities Research
Source: WHO, Under The Dome, Yale University, Elara Securities Research Source: WHO, Centre for Science & Environment, Yale University, Elara Securities Research
5
Ranks 176 out of 178 nations in Environmental Performance Index on
air quality (Source: global study by Yale University)
500,000 people die due to air pollution-related diseases
15 types of carcinogens found in PM2.5 samples
More than 200 days of smog in its cities
Ranks 174 out of 178 nations in Environmental Performance Index on
air quality
620,000 pre-mature deaths
Peaks of PM2.5 are 200x acceptable limits
India has not even started exhaustive collection of data on pollution
China – dragon declawed India – defanged tiger
0
50
100
150
200
250
300
350
Delh
i
Mum
bai
Bangalo
re
Chennai
Kolk
ata
Nash
ik
Pune
Koch
i
Agra
Beijin
g
Guangzh
ou
Shanghai
Chengdu
Guangzh
ou
Hangzh
ou
Shenzh
en
Wuhan
Baodin
g
Xia
ngta
n
Hefe
i
Lanzh
ou
Los
Angele
s
Port
erv
ille
Bakers
field
Fre
sno
San D
iego
Atlanta
Fairbanks
Phila
delp
hia
Riv
ers
ide
PM10 (µg/m3)
India - 134 China - 90 US - 20
WHO guideline
Vehicular emissions account for 30-40% of
pollution
0
30
60
90
120
150
180
Delh
i
Mum
bai
Bangalo
re
Chennai
Kolk
ata
Nash
ik
Pune
Koch
i
Agra
Beijin
g
Guangzh
ou
Shanghai
Chengdu
Guangzh
ou
Hangzh
ou
Shenzh
en
Wuhan
Baodin
g
Xia
ngta
n
Hefe
i
Lanzh
ou
Los
Angele
s
Port
erv
ille
Bakers
field
Fre
sno
San D
iego
Atlanta
Fairbanks
Phila
delp
hia
Riv
ers
ide
PM2.5 (µg/m3)
WHO guideline
India - 59 China - 41 USA - 12
Vehicular emissions account for 30-40% of
pollution
Elara Securities (India) Private Limited Private & Confidential
Mission 2030: China’s action plan
6
Steps up reforms
Serpentine infrastructure: thrust on trunk pipelines increasing from
40,000km to 57,000km and seven new LNG terminals
Pricing reforms: implemented in April 2015; 10% discount to a basket of
60% FO and 40% LPG
Coal to natural gas retrofits by 2017 for coal-fired boilers, industrial
furnace & captive coal-fired power plants by 2017; Beijing to close four major
coal-fired power plants by 2016
Shares long-term vision
Declares 2030 as peak year for CO2 emissions: although China ratified
the Kyoto protocol in 2002, it was under no binding contract under the
protocol. Yet, it signed an agreement with the US in 2015 to set limits
Aims to double market share of natural gas in primary energy mix to
10% by 2020 from 5.6% currently to cut emissions
Challenging times ahead for India
Currently, no pan-India pollution parameters for data collection
No pipeline for importing gas: against import pipeline capacity of
115mmscmd in China, India has none. Slow progress on the Turkmenistan-
Afghanistan-Pakistan-India pipeline
Lack of infrastructure: Large regions still do not have access to gas; only
54 areas have an operational CGD
Only four out of 29 states have mandated CNG use: Gujarat,
Maharashtra, Delhi and Karnataka have been mandated to use CNG
Defines “acceptable” pollution norms
Reduce PM10 levels by 10% by 2017 from the levels in 2012 (Source: State
Council, China)
Lower PM2.5 levels by 25% in Beijing-Tianjin-Heibei, 20% in the Yangtze
River Delta and by 15% in the Pearl River Delta
Control fine particulate matter in Beijing below 60micro-gm/m3
Elara Securities (India) Private Limited Private & Confidential
China infrastructure: build it and they will come
Shoring up transmission
Source: Wood Mackenzie, GE, Elara Securities Research
• Trans-Asia Gas Pipeline delivers gas from
Turkmenistan, Uzbekistan & Kazakhstan
• Myanmar-Yunnan Pipeline
• Siberia-China Pipeline by 2020
Import pipelines
• 12 LNG import terminals with capacity of
35mn tonnes pa (20mn tonnes imported in
2014)
• Seven new import terminals & two
expansions with total capacity of 28mn
tonnes pa under construction
LNG import terminals
• Total gas transmission length in excess of
40,000km for trunk pipelines; 17,000km of
trunk pipelines planned
• ~500,000km urban gas pipeline network
• 23bcm of storage capacity planned by 2015
• ~7,000 gas refuelling stations and 2,500 LNG
fuelling stations
Domestic gas infrastructure
7
Existing pipeline infrastructure
Source: US Energy Information Administration, Elara Securities Research
Gas infra beneficiaries in India: Petronet LNG, GAIL, GSPL and CGD firms
Regasification facility, operating
Regasification facility, planned or under construction
Natural gas pipeline, operating
West-to-East Gas Pipeline
Beijing
Shanghai
Hong Kong
Central Asian Gas Pipeline
Elara Securities (India) Private Limited Private & Confidential
China’s transition into a gas economy
8
China’s gas consumption explodes
Source: BP, State Council, Elara Securities Research
China’s primary energy mix turning less polluting
Source: BP, State Council, Elara Securities Research
Sector-wise consumption of gas for China (2014)
Source: Oxford Institute for Energy Studies, Elara Securities Research
Sector-wise consumption of gas for India (2014)
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100
150
200
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
(bcm)
China India
India gas consumption grows 1.9x during 2000-14
Decline due to a fall in KG-D6 supply
Residential 20%
Industrial 43%
Power 20%
Transportation
13%
Others 4%
30.1 17.5 13.0
3.0 5.6 10.0
63.8 66.0 62.0
3.1 10.9 15.0
0%
20%
40%
60%
80%
100%
2000 2014 2020 Oil Natural Gas Coal Non-fossil
Industrial, 62%
Power, 24%
Transportation, 7%
CGD which caters to
industries/commercial, 7%
Source: Ministry of Petroleum & Natural Gas, Elara Securities Research
Elara Securities (India) Private Limited Private & Confidential
China leagues ahead in LNG use
Source: ENN Energy, a listed China gas utility company, Elara Securities Research
9
LNG refueling station in China
A photograph of a LNG truck
Huge potential for Petronet LNG
LNG used in trucking & ship bunkering in China
One LNG fill is adequate for a 500km run
Payback period of just 10 months in China
LNG trucks operate, although in smaller numbers, in the US, Australia and
Europe; these countries are focusing on large-scale expansions
Unexplored LNG opportunity in India
Source: ENN Energy, a listed China gas utility company, Elara Securities Research
China ~2,500 LNG fuelling stations • ~100,000 LNG vehicles currently • 350,000 LNG vehicles in two years
NIL in India
Source: Elara Securities Research
Elara Securities (India) Private Limited Private & Confidential
LNG-powered transportation: country-specific
The US
Source: Marcogas General Assembly, Prague, Elara Securities Research
10
China: ahead of the pack
Started in 1993
~7,000 vehicles running on LNG
~70 LNG stations across the country
Targeting ~30% trucks on LNG by 2020 (for
long-distance transportation)
Australia
Started in 2004
~250 trucks running on LNG
~10 LNG stations across the country
Targeting 5,000 trucks on LNG in the near term
~100,000 heavy duty vehicles running on
LNG
~2,500 LNG stations across the country
Targeting 350,000 vehicles running on LNG in
two years
Europe
LNG Blue Corridor project
14 new LNG stations along four corridors
100 heavy duty vehicles powered by LNG by
2017
Elara Securities (India) Private Limited Private & Confidential
Gas – not a cheap story
Price of auto fuel vs CNG in China and India
Source: ENN Energy, Elara Securities Research
11
0.0
0.2
0.4
0.6
0.8
1.0
1.2
China India
Petrol price (USD/lit) CNG price (USD/kg)
Gas prices in China are much higher than that of India
Gas prices in China among the highest in the world; city gate prices are as
high as USD 16-19/mmBtu
Despite this, the transportation sector accounts for 13% of total gas
consumption in China vs a mere 7% in India
China gas companies grew at a market cap CAGR of 16% during 2011-
15 vs 13% during 2000-10
For India, we estimate market cap will grow by 27%
over next one year from the current market cap
Elara Securities (India) Private Limited Private & Confidential
China companies shine with rise in gas demand
12
ENN Energy grows 13x in market cap over 2005-14
Source: ENN Energy (2688 HK), an utility firm, Elara Securities Research
China Gas grows 21x in market cap over 2005-14
Source: China Gas (1193 HK), an utility firm, Elara Securities Research
ENN Energy
Industrial consumption: 71% of total sales; the rest is equally divided
between domestic and vehicular consumers
Industrial consumption: grows by 26x over 2005-14
Vehicular consumption (CNG & LNG): grows by 84x albeit on low base
Total volume sold to consumers: grows 20x while market cap by 13x
China Gas
Industrial consumption: 77% of total sales; PNG consumers account for
14% while the rest is vehicular consumption
Industrial consumption: grows by 224x over 2005-14
Vehicular consumption (CNG & LNG): grows 2,424x albeit on low base
Total volume sold to consumers: 216x while the market cap grows 20x
0
15,000
30,000
45,000
60,000
75,000
0
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10
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20
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30
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(HKD mn) (mmscmd)
Total PNG/Comm/Industrial/refueling sales (mmscmd)
Market Cap (HKD mn)
0
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30,000
45,000
60,000
75,000
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10
15
20
25
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(HKD mn) (mmscmd)
Total PNG/Comm/Industrial/refueling sales (mmscmd)
Market Cap (HKD mn)
THE INDIA STORY
Elara Securities (India) Private Limited Private & Confidential
India: very little for show and tell
The Judiciary leads the way
1998: SC mandates CNG for public transportation in New Delhi
2001-15: Three more states mandate the use of CNG in public transportation
in leading cities
2015: National Green Tribunal calls for a ban on diesel vehicles older than 10
years and petrol vehicles older than 15 years on New Delhi roads
Government follows, with ad-hoc responses
Petrol deregulation in June 2010
Diesel deregulation in October 2014
Domestic gas prices linkage to international prices
Priority to gas for CGD consumption
Drafts CNG marketing guidelines
A motley, long-term vision taking shape
Pledges to cut emissions intensity of GDP by 20-25% by 2020
Launches Air Quality Monitor in 10 cities; plans afoot to expand to 60
cities in the next few years; gather data to enable better policies
Expands trunk pipelines by ~70% to increase access to gas infrastructure
in 4-5 years; beneficiaries: GAIL & GSPL
Expects CGD volume to touch 51mmscmd in 2022 from 15mmscmd
currently; beneficiaries: Indraprastha Gas & Gujarat Gas
Natural gas supply to see a 50% jump through FY18E; several LNG
import terminals have been announced; beneficiary: Petronet LNG
14
Elara Securities (India) Private Limited Private & Confidential
India’s skewed state of affairs
15
India has 970 CNG stations; China has ~7,000
Source: Industry, Elara Securities Research
India has 15,000km trunk pipelines; China 40,000km
Source: Industry, Elara Securities Research
0
2,000
4,000
6,000
8,000
CNG fuelling stations LNG fuelling stations
China India
India has zero LNG stations
Regulatory boost increases CNG vehicles in India
Source: Industry, Elara Securities Research
Transportation: ~7% of total gas in India vs 13% in China
Source: Industry, Elara Securities Research
40,000
500,000
17,000 15,340 35,000 11,000 0
200,000
400,000
600,000
Major pipelines (excluding city) (km)
Urban pipeline network (km)
Pipelines planned
China India
65
8
0
20
40
60
80
Consumption in transportation (mmscmd)
(mmscmd)
China India
To hike consumption, India needs policy initiatives
1.8
1.9
2.0
2.1
2.2
2.3
2.4
NG vehicles (mn)
(mn)
China India
China has 100,000 LNG vehicles; India none
Elara Securities (India) Private Limited Private & Confidential
Facts, fallacies and foibles of India
Policy mismatch
No new allocation for CGD until 2014: the government states all CGD and
piped natural gas demand via domestic gas allocation; allocation to non-core
sectors could be cut
Land Acquisition Bill yet to be tabled in Parliament: Both Phase-II
evacuation pipeline from Kochi LNG terminal to Mangalore & Bangalore and
Delhi Transport Corporation’s bus depots remain a pipe dream on issues
acquiring land
14-18 approvals needed from different regulatory authorities for laying city
gas pipelines
Pricing woes
Prior to 2014, domestic gas price was fixed at USD 4.2/mmBtu. After
September 2014, the government linked the price to a basket of global gas
prices, which resulted in gas price realization rising by 33% to USD
5.6/mmBtu
Premium for deep & ultra deep water blocks: Production from deep &
ultra deep water projects involves higher expenditure, which requires a price
higher than the current prevailing gas price of USD 5.2/mmBtu
Proportionate supply
Infrastructure boost: ~11,000km of gas trunk pipelines to be added to the
existing ~15,000km network at a capex of ~INR 382bn
Domestic E&P: Monetization of deep & ultra-deep water discoveries under
cloud due to a lack of clarity on gas pricing. The government is likely to come
up with a premium for such fields which would expedite investment in such
blocks
Availability of LNG limited by capacity: current capacity of 25mn tonnes
per annum is yet to be fully operationalized; 10mn tonnes of new capacity is
to be added by FY18E
Pie grows
Petroleum & Natural Gas Regulatory Board drafts guidelines to grant
marketing rights for CNG as transportation fuel, including setting up
CNG stations on highways
The government has completed four rounds of CGD auctions. The
fifth round is currently ongoing. The four rounds had offered 55
geographical areas (GA), out of which only 26 GA were awarded. CGD is
operational only in 12 GA. In the fifth round, bids have been received for 10
GA out of 20 GA
16
Elara Securities (India) Private Limited Private & Confidential
India’s huge CGD potential
*Note: excludes 2-wheelers; Disclaimer: map not to scale; Source: Road Transport Yearbook 2011-12, Elara Securities Research
Kerala
Karnataka Andhra Pradesh
Maharashtra
Madhya Pradesh
Rajasthan
Gujarat
Uttar Pradesh
Punjab
Bihar
Orissa
Jharkhand West
Bengal
Sikkim Arunachal Pradesh
Assam
Tripura
Meghalaya
Mizoram
Manipur
Nagaland
Goa
Pondicherry
Uttaranchal
Jammu &
Kashmir
Haryana
Himachal Pradesh
Delhi
Chhattisgarh
Cities already with CGD presence
Cities without any CGD
Telangana
Agra 89
Ahmedabad 423
Allahabad 89
Amritsar 135
Aurangabad 43
Bengaluru 2,000
Bhopal 151
Chandigarh 321
Chennai 1,059
Coimbatore 219
Delhi 2,452
Dhanbad 165
Durg Bhilai 49
Ghaziabad 137
Gr.Mumbai 856
Gwalior 72
Hyderabad 961
Indore 281
Jabalpur 85
Jaipur 396
Jamshedpur 211
Jodhpur 165
Kanpur 140
Kochi 201
Kolkata 293
Kota 103
Lucknow 221
Ludhiana 255
Tamil Nadu
Madurai 104
Meerut 65
Nagpur 162 Nashik
78
Patna 181
Pune 484
Raipur 92
Rajkot 120
Ranchi 278
Srinagar 108
Surat 229
Tiruchirapalli 79
Varanasi 89
Vijayawada 73
Vadodara 169
Visakhapatnam 145
~50 cities in India with population of over 1mn (Census 2011)
Expansion across adjacent cities could lead to a sharp increase in demand
17
All CGD companies to benefit
Vehicular population* (‘000) in cities with 1mn+ population
Elara Securities (India) Private Limited Private & Confidential
India’s energy mix in need of a booster shot
India (2000) India (2014)
World (2014)
Oil 28%
Natural Gas 7% Coal
57%
Nuclear Energy 1%
Hydro electric 5%
Renewables 2%
Oil 33%
Natural Gas 8%
Coal 56%
Nuclear Energy 1%
Hydro electric 2%
Oil 33%
Natural Gas 24%
Coal 30%
Nuclear Energy 4%
Hydro electric 7%
Renewables 2%
Natural gas: constitutes 24% of primary energy mix globally in 2014
India’s primary energy still coal heavy: gas contributing only 7% in
2014, down 1.5% YoY, vs 8.0% in 2000
Infrastructure woes, supply issues and regulatory hurdles: impede
India’s transition into a gas economy
Source: BP Statistical Review, 2000, Elara Securities Research Source: BP Statistical Review, 2015, Elara Securities Research
Source: BP Statistical Review, 2015, Elara Securities Research
18
Elara Securities (India) Private Limited Private & Confidential
Huge demand – 60% rise in the next 3-4 years
19
Demand to rise from 120mmscmd to 190mmscmd
Source: Ministry of Petroleum & Natural Gas, Elara Securities Estimate
0
50
100
150
200
H1FY15A FY15E FY16E FY17E FY18E FY19E
(mmscmd)
Fertilizer Power
CGD Industrial
Petrochem/Ref/Int Consump Sponge Iron/Steel/Others
Out of ~120mmscmd of total gas consumption currently,
~70mmscmd consumed by price-sensitive power & fertilizer sectors
Power: Although the power sector could consume ~100mmscmd, we
expect demand to improve only by 10-15mmscmd led by the recent power
sector reforms, due to its inability to pass on higher prices to end-consumers
Fertilizer: The government has given the nod to convert plants of MFL, MCFL
& SPIC from naphtha to gas, which would result in 4.2mmscmd of gas
demand; existing expansion & revival of closed plants would
consume an additional 14.4mmscmd
Petrochem: BCPL, Pata expansion and OPaL are key petrochem plants, which
would consume ~10mmscmd
CGD: The government forecast CGD demand to rise to 51.0mmscmd by 2022
at a CAGR of 19% from 16.5mmscmd; our analysis suggests a 10% demand
CAGR, resulting in demand rising to 24mmscmd by FY19E
We expect demand to rise by 60% over the next 3-4 years, from the
current ~120mmscmd to ~190mmscmd
Elara Securities (India) Private Limited Private & Confidential
Gas muscling in on alternate industrial fuels’ terrain
Fuel oil consumption on a secular decline
Source: Petroleum Planning & Analysis Cell (PPAC), Elara Securities Research
0
5
10
15
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
(mn tonnes)
Source: Platts, Bloomberg, Elara Securities Research
Spot LNG declines sharply in the past year
0
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Jan-1
2
Mar-
12
May-1
2
Jul-12
Sep-1
2
Nov-1
2
Jan-1
3
Mar-
13
May-1
3
Jul-13
Sep-1
3
Nov-1
3
Jan-1
4
Mar-
14
May-1
4
Jul-14
Sep-1
4
Nov-1
4
Jan-1
5
Mar-
15
May-1
5
(USD/mmBtu)
Spot LNG Fuel oil
After hovering ~USD 15/mmBtu for over two
years, spot LNG prices have fallen to USD 7/mmBtu
20
3.8
4.5
3.4
3.6
3.8
4.0
4.2
4.4
4.6
Net export in FY15 Elimination of F/LSHS production
(mn tonnes) Upcoming cokers would result
in tight demand & supply
Elimination of FO/LSHS production
Tight situation of FO/LSHS supply
Note: LSHS stands for low sulfur heavy stock, Source: PPAC, Elara Securities Research
Tight situation of pet coke supply
Source: PPAC, Elara Securities Research
2.0
8.1
0
2
4
6
8
10
Net import in FY15 Petcoke reduction
(mn tonnes) Pet coke gasifier would result in an
even worse supply situation
Elara Securities (India) Private Limited Private & Confidential
LNG – unwritten future; not factored into our assumptions
Source: Wikimedia, Elara Securities Research
Petronet LNG to benefit
Feasibility checks
Existing LNG terminals on the West
Coast make it possible to ply LNG
trucks
Upcoming LNG terminals on the
East Coast could make LNG
trucking possible
Draft marketing guidelines also
propose opening CNG outlets on
highways
Technology
Daimler & Volvo manufacture LNG
trucks
LNG refuelling stations are built by
Cummins & Cryostar
21
Elara Securities (India) Private Limited Private & Confidential
Spot LNG prices to remain low – a boon for India
Spot LNG prices halve since FY14, given the supply glut Supply increasing by ~60% of total trade by FY16E
Source: International Gas Union, Elara Securities Estimate Source: Platts, Bloomberg, Elara Securities Research
5 7 9 11 13 15 17 19 21
30
50
70
90
110
130
Apr-
11
Jul-11
Oct
-11
Jan-1
2
Apr-
12
Jul-12
Oct
-12
Jan-1
3
Apr-
13
Jul-13
Oct
-13
Jan-1
4
Apr-
14
Jul-14
Oct
-14
Jan-1
5
Apr-
15
(USD/mmBtu) (USD/bbl)
Brent-LHS Platts JKM-RHS
Spot LNG prices decline despite a rise in crude price
0
100
200
300
400
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016E
(mn tonnes)
Liquefaction Capacity Actual Trade
Huge capacity addition led by Australia
Emergence of new demand centres amid low LNG prices; restart of nuclear reactors in Japan cause for concern
3
4
5
6
7
8
9
Jan-0
0
Oct
-00
Jul-01
Apr-
02
Jan-0
3
Oct
-03
Jul-04
Apr-
05
Jan-0
6
Oct
-06
Jul-07
Apr-
08
Jan-0
9
Oct
-09
Jul-10
Apr-
11
Jan-1
2
Oct
-12
Jul-13
Apr-
14
Jan-1
5
(mn tonnes)
Monthly Japan LNG import
18-20mn tonnes pa increase in consumption due to shutdown of nuclear reactors
Start of nuclear reactors in Japan could reduce demand
Source: Bloomberg, Elara Securities Research
South Korea also plans to start nuclear reactors
Source: IGU, Elara Securities Research
20
30
40
50
60
70
2012 2013 2014 2015E 2016E
(%)
Operating rate of gas fired plants
Increasing attractiveness of alternate fuels to drive utilization lower of gas-fired plants
22
Elara Securities (India) Private Limited Private & Confidential
Rasgas linkage a medium-term problem
At current prices, long-term Rasgas LNG is expected to decline to USD 9.0/mmBtu by FY18E-end
Note: JCC means Japanese Crude Cocktail; Source: Platts, Bloomberg, Elara Securities Research
0
5
10
15
20
25
40
50
60
70
80
90
100
110
120
130
140
Jan-0
9
Apr-
09
Jul-09
Oct
-09
Jan-1
0
Apr-
10
Jul-10
Oct
-10
Jan-1
1
Apr-
11
Jul-11
Oct
-11
Jan-1
2
Apr-
12
Jul-12
Oct
-12
Jan-1
3
Apr-
13
Jul-13
Oct
-13
Jan-1
4
Apr-
14
Jul-14
Oct
-14
Jan-1
5
Apr-
15
Jul-15
Oct
-15
Jan-1
6
Apr-
16
Jul-16
Oct
-16
Jan-1
7
Apr-
17
Jul-17
Oct
-17
Jan-1
8
(USD/mmBtu) (USD/bbl)
JCC LNG FOB-RHS FO-RHS
Petronet benefits due to JCC higher than the five-year average
JCC falls well below the five-year average; even long-term LNG converges with FO by FY18-end
23
Elara Securities (India) Private Limited Private & Confidential
Supply – 20mn tonnes pa (50% rise in gas) by FY18E
Disclaimer: Map not to scale Source: Petronet LNG, Shell Hazira, GSPC LNG, GAIL, H -Energy, Elara Securities Research
Long-term LNG contracts (mn tonnes pa)
GAIL
Cheniere Energy 3.5
Cove Point 2.3
Gazprom – Russia 2.5
IOC
Progress Energy 1.2
Mitsubishi 0.7
Petronet LNG
Gorgon 1.44
Firm contracts signed up 11.64
0
50
100
150
200
250
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(mmscmd)
Domestic R-LNG
Addition of operational volume through Dahej - 5mn tonnes pa Dabhol - 5mn tonnes pa Kochi - 5mn tonnes pa GSPC LNG - 5mn tonnes pa
Tamil Nadu
Kerala
Karnataka
Andhra Pradesh
Maharashtra
Madhya Pradesh
Rajasthan
Gujarat
Uttar Pradesh
Punjab
Bihar
Orissa
Jharkhand West
Bengal
Sikkim Arunachal Pradesh
Assam
Tripura
Meghalaya
Mizoram
Manipur
Nagaland
Goa
Pondicherry
Uttaranchal
Jammu &
Kashmir
Haryana
Himachal Pradesh
Delhi
Chhattisgarh
Existing
Announced
Telangana
MPT- Mumbai 5.0
Petronet LNG – Gangavaram 5.0
Shell/GAIL – Kakinada 3.5
H-Energy - Jaigad 8.0
ONGC – Mangalore 5.0
IOC –Ennore 5.0
IOC –Dhamra 5.0
VGS – Kakinada 3.5
GAIL – Paradip 3.5
H-Energy Digha 6.0
LNG Bharat – Nellore 5.0
HPCL and SP – Chhara 5.0
Swan Energy – Jaffrabad 4.5
Dahej
Dabhol
Hazira
Kochi 5.0
Mundra 5.0
Under construction
Petronet LNG, GAIL, GSPL & CGD companies
to benefit
Domestic gas production is unlikely to ramp up
beyond 100mmscmd by FY18E. As a result, the
supply gap needs to be bridged by importing LNG
24
Elara Securities (India) Private Limited Private & Confidential
Access – 11,431km of trunk pipelines under construction
Source: Petroleum Planning Analysis & Coordination (FY15), Elara Securities Research
Additional 1,200km of pipeline to be awarded by Petroleum and Natural Gas Regulatory Board
2,500km of pipeline to be developed through public private partnership (PPP) and viability gap funding
Existing ~15,000km of trunk pipeline leaves a large part of India without gas infrastructure
~11,000km of pipeline under various stages of construction entailing a capex of ~INR 382bn
25
GAIL & Gujarat State Petronet to benefit
Elara Securities (India) Private Limited Private & Confidential
Key risks to our call
In the five CGD auction rounds which had 55 cities on offer, only 26 cities have been awarded so far and CGD is operational only in 12 areas.
Any delay in auctioning and awarding would prevent CGD from being established across the country
In the past, PNGRB has given orders fixing tariff of IGL, cuts in tariff on transmission pipeline of GAIL, GSPL with the retrospective effect),
which can dis-incentivize entities from investing and expanding
Crude prices have crashed more than 50% over the past year. They currently hover around ~USD 50/bbl. With crude prices remaining low,
it can dis-incentivize customers to either not convert to natural gas or switch back to alternate fuels
The Dahej 5mn tonnes pa expansion is expected to be completed by December 2016. GSPC LNG’s 5mn tonnes pa Mundra terminal is
expected to be commissioned by March 2017. With the domestic supply not expected to increase in the near term, any delay in these two
could be a setback to India’s gas story
26
Elara Securities (India) Private Limited Private & Confidential
Global peer valuation (consensus)
Note: Gujarat Gas details not available; Source: Bloomberg, Elara Securities Estimate
EV/EBITDA (x) P/BV (x) P/E (x)
FY16E / CY15E FY17E / CY16E FY16E / CY15E FY17E / CY16E FY16E / CY15E FY17E / CY16E
Indraprastha Gas 7.7 7.2 2.8 2.4 14.1 12.9
Gujarat State Petronet 7.5 6.9 1.8 1.6 14.1 12.6
Gail India 9.0 7.7 1.1 1.0 12.8 10.6
Petronet LNG 9.6 8.0 2.2 1.9 16.2 13.0
India average 8.5 7.5 1.9 1.7 14.3 12.3
Binhai Investment Company 9.6 8.1 2.2 1.7 7.6 6.1
China Gas Holdings 11.6 10.1 2.7 2.3 14.3 12.1
Hong Kong & China Gas 20.0 18.6 3.0 2.8 22.8 21.1
Towngas China 12.7 11.4 1.0 0.9 11.2 10.1
China Resources Gas Group 9.2 7.9 2.3 2.0 14.3 12.3
Enn Energy Holdings 8.7 7.7 2.4 2.1 15.4 13.3
China average 12.0 10.7 2.3 2.0 14.3 12.5
Tokyo Gas 7.4 8.2 1.5 1.4 14.3 19.4
Osaka Gas 7.1 8.8 1.1 1.1 13.2 17.6
Toho Gas 7.1 8.5 1.4 1.4 17.3 24.5
Korea Gas 12.0 11.3 0.4 0.4 7.2 6.6
Sempra Energy 11.6 10.6 2.2 2.0 21.2 19.7
New Jersey Resources 11.3 13.2 2.6 2.9 16.5 18.3
Piedmont Natural Gas 11.6 10.5 2.2 2.1 21.1 19.1
Northwest Natural Gas 10.0 8.9 1.7 1.6 22.3 20.4
Atmos Energy 9.3 8.7 1.8 1.7 18.4 17.2
South Jersey Industries 12.4 12.1 2.0 1.9 15.9 14.4
Duke Energy 10.1 9.6 1.3 1.3 16.6 15.8
Cms Energy 9.4 8.9 2.5 2.4 19.0 17.8
Centerpoint Energy 8.5 8.1 2.0 1.8 19.0 17.6
Western average 10.5 10.3 2.1 2.1 17.8 17.1
World average 10.0 9.6 2.0 1.8 15.8 15.4
27
India gas utilities are trading at much lower multiples considering their growth potential
Gas utilities in Western countries are trading at an average P/E of 18x
China gas utilities are trading at an average P/E of 14x
The world average for gas utilities is at 16x P/E
Elara Securities (India) Private Limited Private & Confidential
Valuation matrix – P/E vs EPS growth
India gas firms offer attractive valuation compared to global peers (2015)
Source: Bloomberg, Elara Securities Estimate
• Emphasis on greener fuels would lead to higher
growth trajectory for India firms than global peers during
FY15-18
• India companies at lower P/E
• Structural reforms, low domestic & spot LNG prices and
high latent demand position India firms in a
structurally long-term bull cycle
28
Gujarat Gas
IGL GSPL GAIL
Petronet LNG
China Gas
HK & China Gas
Towngas China
China Resources Gas
ENN Energy
Korea Gas
Southwest Gas
Sempra Energy
New Jersey Resources
Piedmont Natural Gas
Northwest Natural Gas
Atmos Energy
South Jersey Ind
Duke Energy
Cms Energy
National Grid
Enagas SA
5
10
15
20
25
0 5 10 15 20 25 30
P/E
(x)
EPS growth (%)
Elara Securities (India) Private Limited Private & Confidential
Valuation matrix – P/BV vs ROE
India gas companies are available at reasonable valuation vs global peers (2015)
Source: Bloomberg, Elara Securities Estimate
29
Gujarat Gas
IGL
GSPL
GAIL
Petronet LNG
Binhai China Gas
Hong Kong & China Gas
Towngas China
China Resources Gas ENN Energy
Tokyo Gas
Osaka Gas
Toho Gas
Korea Gas
Kyungdong City Gas
Sempra Energy
New Jersey Resources
Piedmont Natural Gas
Northwest Natural Gas
Atmos Energy
South Jersey
Duke Energy
Cms Energy
Centerpoint Energy
National Grid Enagas SA
Snam Spa
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0 5 10 15 20 25 30 35
P/B
V (
x)
ROE (%)
Petronet LNG looks expensive on a FY16E ROE of 12.4%; its ROE would expand to 14.8% in FY18E based on higher capacity
Elara Securities (India) Private Limited Private & Confidential
India gas companies set for long-term growth
China companies outperform indices by 100-150% India companies have just mirrored the Nifty
Source: Bloomberg, Elara Securities Research Source: Bloomberg, Elara Securities Research
China firms market cap CAGR at 14.1% over CY06-15
Source: Bloomberg, Elara Securities Research
India gas firms market cap CAGR at 11.6% over CY06-15
Source: IGU, Elara Securities Research
30
140
150
160
170
Relative growth over CY06-15
(%)
Nifty Indian Gas companies
0
50
100
150
200
250
Relative growth over CY06-15
(%)
Hang Seng Shanghai Composite Chinese Gas companies
10.0
10.5
11.0
11.5
12.0
CAGR growth of market cap during CY06-15
(%)
Nifty Indian Gas companies
0
5
10
15
CAGR growth of market cap during CY06-15
(%)
Hang Seng Shanghai Composite Chinese Gas companies
Elara Securities (India) Private Limited Private & Confidential
Economics turns favorable
31
0
5
10
15
20
Bus Taxi Car
Saving (INR/km) Payback (months)
2.0
2.5
3.0
3.5
4.0
PNG Industrial FO LSHS
(INR/'000Kcal)
Savings of 7% & 20% over FO & LSHS, respectively
2
3
4
5
6
PNG commercial LPG commercial
(INR/'000Kcal)
Savings of 22% over commercial LPG
Savings of 37-60% in CNG Savings of 7-20% in industrial PNG
Savings of ~22% in commercial PNG
India CGD companies to benefit
Natural gas offers better economics & shorter payback period
With a ~40% linkage to Henry Hub, domestic gas prices unlikely to rise
sharply
Oil prices are volatile and likely to rise, resulting in even better savings
potential
Source: Industry, Elara Securities Research Source: Industry, Elara Securities Research
Source: Industry, Elara Securities Research
Elara Securities (India) Private Limited Private & Confidential
In a nutshell
32
Source: Elara Securities Research
Key triggers Petronet LNG IGL Gujarat Gas GSPL GAIL
Increase in demand
Increase in LNG supply
Low LNG prices
Low domestic gas prices
Price certainty (domestic gas, deregulation of auto fuels)
Mandatory use of CNG
Land acquisition reform
PETRONET LNG – EBITDA TO JUMP BY ~60% OVER FY15-18E
Elara Securities (India) Private Limited Private & Confidential
Petronet LNG
Investment summary
Capacity-led volume growth: Petronet LNG is expanding capacity at Dahej from 10mn tonnes pa to 15mn tonnes pa at a capex of INR 24bn. Expansion is expected to
be commissioned by December 2016. Post expansion, 14.75mn tonnes pa out of 15.00mn tonnes pa is already booked with offtakers.
Rasgas price to converge to FO by FY18-end: At the current crude price, JCC-linked Rasgas price would match FO price by FY18-end, which would make long-term
RLNG once again attractive vs alternative fuels.
Emerging from short-term pain: The company has suffered due to problems in offtake of high-cost LNG. As the price of high-cost Rasgas converges, volume would
increase
Kochi terminal utilization: Even without Phase-II pipeline, utilization would increase to ~20% by FY18E
Improved financials: EBITDA to jump by ~60% during FY15-18E
Valuation
We value the company based on a DCF method (at a WACC of 12% and a terminal growth rate of 2%) and arrive at a target price of INR 242. We recommend Buy.
Key risks
Downside risks include no resolution on Rasgas long-term volume offtake and delay in Dahej expansion
Key Financials
Note: pricing as on 3 September 2015; Source: Company, Elara Securities Estimate
CMP: INR 177 TP: INR 242 Upside: 37%
PLNG IN Mcap: USD 2.07bn Buy
34
YE March
Revenue (INR mn)
YoY (%)
EBITDA (INR mn)
EBITDA margin (%)
Adj PAT (INR mn)
YoY (%)
Fully DEPS (INR)
ROE (%)
ROCE (%)
P/E (x)
EV/EBITDA (x)
FY15 395,010 4.6 14,390 3.6 8,825 24.0 11.8 14.7 12.6 15.0 10.6
FY16E 361,854 (8.4) 14,431 4.0 8,258 (6.4) 11.0 12.4 10.4 16.1 10.6
FY17E 385,166 6.4 17,049 4.4 10,202 23.5 13.6 13.5 11.0 13.0 9.0
FY18E 709,520 84.2 22,474 3.2 14,170 38.9 18.9 14.8 14.6 9.4 6.8
Elara Securities (India) Private Limited Private & Confidential
PLNG: capacity-led growth
Even Rasgas price converges by FY18E
Source: Company, Elara Securities Research Source: Company, Elara Securities Research
Dahej is fully booked post expansion in December 2016
0
5
10
15
20
25
Jan-0
9
Jun-0
9
Nov-0
9
Apr-
10
Sep-1
0
Feb-1
1
Jul-11
Dec-
11
May-1
2
Oct
-12
Mar-
13
Aug-1
3
Jan-1
4
Jun-1
4
Nov-1
4
Apr-
15
Sep-1
5
Feb-1
6
Jul-16
Dec-
16
May-1
7
Oct
-17
Mar-
18
(USD/mmBtu)
LNG FOB Spot LNG FO
FO prices are likely to rise; even at current prices, Rasgas price would match FO by FY18-end
0
4
8
12
16
Booked fully Spot/short-term Booked fully Spot/short-term
Existing Post expansion in Dec 2016
Capacity (mn tonnes pa)
Existing 7.5mn tonnes pa GAIL: 4.5mn tonnes pa IOCL: 2.25mn tonnes pa BPCL: 0.75mn tonnes pa
Additional contracts GSPC: 2.25mn tonnes pa GAIL: 2.5mn tonnes pa IOCL: 1.5mn tonnes pa BPCL: 1mn tonnes pa
Dahej plans
Capacity-led volume expansion of 50% at Dahej by FY18E
Almost all Dahej capacity is already booked with offtakers
Low spot LNG prices may lead to higher utilization
Plans to further expand Dahej terminal by 2.5mn tonnes pa
Short-term pain
Current LT Rasgas volume of 7.5mn tonnes pa linked to five-year
average JCC
While spot LNG prices fell to ~USD 7-8/mmBtu, long-term Rasgas
quantity remains at ~USD 13-14/mmBtu, finding few offtakers
Back-to-back contract for this quantity with GAIL, IOCL & BPCL
35
Elara Securities (India) Private Limited Private & Confidential
PLNG: emerging from short-term pain
No outperformance over the Nifty
Source: Capitaline, Elara Securities Research
80
90
100
110
120
130
Jul-14
Jul-14
Aug-1
4
Sep-1
4
Sep-1
4
Oct
-14
Nov-1
4
Nov-1
4
Dec-
14
Jan-1
5
Jan-1
5
Feb-1
5
Mar-
15
Apr-
15
Apr-
15
May-1
5
Jun-1
5
Jun-1
5
PLNG NIFTY
Lower utlilzation at Kochi terminal as well as lower offtake of high-priced Rasgas volume results in underperformance
High-priced Rasgas volume finds few takers
Source: Company, Elara Securities Research
Short-term & spot volume gets affected adversely
Source: Company, Elara Securities Research
Low utilization of the Dahej terminal
Source: Company, Elara Securities Research
50
60
70
80
90
100
110
1Q
FY12
2Q
FY12
3Q
FY12
4Q
FY12
1Q
FY13
2Q
FY13
3Q
FY13
4Q
FY13
1Q
FY14
2Q
FY14
3Q
FY14
4Q
FY14
1Q
FY15
2Q
FY15
3Q
FY15
4Q
FY15
1Q
FY16
(Tbtu)
Sales of long term Rasgas volumes
Inability of offtakers to place high-priced Rasgas volume
0
5
10
15
20
25
30
35
1Q
FY12
2Q
FY12
3Q
FY12
4Q
FY12
1Q
FY13
2Q
FY13
3Q
FY13
4Q
FY13
1Q
FY14
2Q
FY14
3Q
FY14
4Q
FY14
1Q
FY15
2Q
FY15
3Q
FY15
4Q
FY15
1Q
FY16
(Tbtu)
High-priced Rasgas contract leaves little room for spot and short-term volume
60%
80%
100%
120%
1Q
FY12
2Q
FY12
3Q
FY12
4Q
FY12
1Q
FY13
2Q
FY13
3Q
FY13
4Q
FY13
1Q
FY14
2Q
FY14
3Q
FY14
4Q
FY14
1Q
FY15
2Q
FY15
3Q
FY15
4Q
FY15
1Q
FY16
Lower volume affects utilization
36
Elara Securities (India) Private Limited Private & Confidential
PLNG: Kochi – rise in uptake from 2016-end without pipeline
Kochi refinery expansion would add to volume Kochi Phase-II pipeline to commence construction soon
Source: Company, Elara Securities Research Source: Company, Elara Securities Estimate
0
5
10
15
20
0
1
2
3
4
FY15 FY18E
(%) (mmscmd)
Kochi refinery gas consumption Utilization (%)
Base case utilization of 2% results in EPS of INR 18.9 & RoE of 14.8% At ~20% utilization, EPS & RoE would rise to INR 21.9 & 16.9% respectively
Kochi refinery is currently taking ~0.6mmscmd from Kochi
terminal
Once the expansion of Kochi refinery is completed by May 2016, it
would offtake ~3.0mmscmd from Kochi terminal
Even without completion of Phase-II pipeline, utilization would
rise to ~20% in FY18E
Petronet has been using Kochi terminal for reloading,
resulting in sales of INR 600mn in Q4FY15 & INR 500mn in
Q1FY16
Turns cash profit for the first time in Q1FY16
Recent news reports state work on Phase-II pipeline may restart
We assume a 50% utilization of Kochi in FY19E; completion of
Phase-II pipeline by GAIL would result in much higher utilization
37
Elara Securities (India) Private Limited Private & Confidential
PLNG: EBITDA to jump by ~60% during FY15-18E
EBITDA to jump by ~60% during FY15-18E EPS to jump by ~60% during FY15-18E
Source: Company, Elara Securities Estimate Source: Company, Elara Securities Estimate
Improvement in return ratios
Source: Company, Elara Securities Estimate
400
500
600
700
800
900
0
5,000
10,000
15,000
20,000
25,000
FY13 FY14 FY15 FY16E FY17E FY18E
(mmBtu) (INR mn)
Total vol EBITDA
Dahej expansion from 10mn tonnes pa to 15mn tonnes pa
(60)
(40)
(20)
0
20
40
60
8
10
12
14
16
18
20
FY13 FY14 FY15 FY16E FY17E FY18E
(%)
(INR)
Diluted EPS (INR) Adj EPS Growth (%)
High marketing margin on spot and short-term cargo
8
13
18
23
28
FY13 FY14 FY15 FY16E FY17E FY18E
(%)
ROE (%) ROCE (%)
High marketing margin on spot & short-term cargo
We assume a meagre 2% utilization until FY18E. Even without Phase-II
pipeline, expansion of Kochi refinery would take utilization to ~20%,
resulting in upside to our estimates
Petronet and other stakeholders have negotiated deferment of 32% of
contracted quantity for CY15, nuances of which would emerge by CY15-
end. Deferment would help in hiking low-priced spot volume in short term
Petronet has been successfully generating revenue from reloading at Kochi,
which we have not taken into consideration
Strong positive triggers
38
Elara Securities (India) Private Limited Private & Confidential
PLNG: assumptions & valuation
Assumptions for volume growth
Source: Company, Elara Securities Estimate
Valuation: DCF-based target price of INR 242
Tbtu FY14 FY15 FY16E FY17E FY18E FY19E FY20E
Total Regas sales volume 440 422 398 440 785 910 1,014
-Dahej
Long-term sales 374 344 360 390 767 767 767
Short-term/spot 62 72 33 46 13 13 13
-Kochi 3 5 6 4 5 130 234
Regas 54 105 123 117 0 0 0
(INR mn) FY16E FY17E FY18E FY19E FY20E
PAT including div/FBT 8,258 10,202 14,170 20,036 23,520
Depreciation 3,431 3,527 3,979 5,760 5,885
Change in net working capital 7,981 13 (416) 943 664
Capex (10,000) (10,000) (5,000) (5,000) (5,000)
FCFF 9,669 3,742 12,732 21,739 25,069
NPV 48,719
Terminal growth rate (%) 2.0%
TV 145,093
Enterprise value 193,812
Net debt 12,553
Equity value 181,259
Target price 242
Source: Elara Securities Research Estimate
39
Meaningful utilization of Kochi
terminal assumed four years
away. The company board has
approved further expansion at
Dahej to 17.5mn tonnes pa,
which has not been considered
while arriving at our valuation
Expansion of Dahej terminal to
15mn tonnes pa to be
completed by December 2016,
resulting in higher volume from
FY18. In addition, 98% of
capacity is tied up, derisking the
business model
Capex phase over by FY18,
resulting in improved FCFF
Elara Securities (India) Private Limited Private & Confidential
PLNG: key financials
40
Income Statement (INR mn) FY15 FY16E FY17E FY18E
Net operating income 395,010 361,854 385,166 709,520
EBITDA 14,390 14,431 17,049 22,474
Depreciation 3,154 3,431 3,527 3,979
EBIT 11,236 11,001 13,522 18,495
Interest Cost 2,935 2,382 1,897 1,435
Other Income 1,548 1,522 1,798 1,584
PBT 9,849 10,140 13,423 18,644
Less: Taxation 1,024 1,882 3,222 4,475
Effective Tax Rate (%) 10.4 18.6 24.0 24.0
PAT 8,825 8,258 10,202 14,170
Balance Sheet (INR mn) FY15 FY16E FY17E FY18E
Equity Capital 7,500 7,500 7,500 7,500
Reserves 49,386 55,519 62,856 73,047
Borrowings 23,738 29,200 25,000 16,000
Deferred taxes 7,270 7,270 7,270 7,270
Long term liability 9,000 9,000 9,000 9,000
Total Liabilities 96,894 108,489 111,626 112,817
Fixed Assets 76,895 83,464 89,938 90,959
Investments 900 900 900 900
Inventories 8,826 9,518 10,085 18,823
Debtors 13,428 15,862 16,884 31,102
Cash 3,641 16,647 13,324 13,077
Loans & Advances 7,493 7,511 7,977 8,079
Other Current Assets 4 140 140 140
Net Current Assets 19,100 24,124 20,788 20,958
Total Assets 96,894 108,489 111,626 112,817
Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E
Operating cash flow 6,440 19,669 13,742 17,732
Capex (8,599) (10,000) (10,000) (5,000)
Free cash flow to firm (2,159) 9,669 3,742 12,732
Investing cash flow (8,100) (10,000) (10,000) (5,000)
Financing cash flow (7,027) 3,336 (7,065) (12,979)
Net change in cash (8,686) 13,006 (3,323) (247)
Opening cash 12,327 3,641 16,647 13,324
Closing cash 3,641 16,647 13,324 13,077
Ratio Analysis FY15 FY16E FY17E FY18E
Income Statement Ratios (%)
Revenue Growth 4.6 (8.4) 6.4 84.2
EBITDA Growth (4.0) 0.3 18.1 31.8
PAT Growth 24.0 (6.4) 23.5 38.9
EBITDAM 3.6 4.0 4.4 3.2
Net Margin 2.2 2.3 2.6 2.0
Return & Liquity Ratios
Int/PBIT 0.3 0.2 0.1 0.1
Net Debt/Equity 0.4 0.2 0.2 0.0
ROE (%) 14.7 12.4 13.5 14.8
ROCE (%) 12.6 10.4 11.0 14.6
Per Share Data & Valuation Ratios
Diluted EPS (INR) 11.8 11.0 13.6 18.9
Adj EPS Growth (%) 24.0 (6.4) 23.5 38.9
Book Value (INR/share) 75.8 84.0 93.8 107.4
DPS (INR) 2.0 2.4 3.3 4.5
P/E (x) 15.0 16.1 13.0 9.4
EV/EBITDA (x) 10.6 10.6 9.0 6.8
Price/Book (x) 2.3 2.1 1.9 1.6
Dividend Yield (%) 1.1 1.4 1.8 2.6
Note: pricing as on 3 September 2015; Source: Company, Elara Securities Estimate
INDRAPRASTHA GAS – RERATING POST COURT ORDER
Elara Securities (India) Private Limited Private & Confidential
Indraprastha Gas
Investment summary
Volume CAGR of 7% over FY15-18E: we expect CNG volume CAGR of 6% over FY15-18E, with a pickup in conversions to CNG among private cars, addition of buses,
taxis and auto rickshaws. Also, with the addition of ~120,000 PNG domestic consumers annually over the next three years and an arrest in decline of PNG industrial volume
due to benign spot LNG prices, overall volume growth of 7% is expected over FY15-18E
Favorable economics: with domestic prices expected to remain low as well as spot LNG prices to remain benign along with historically demonstrated ability of IGL to pass
on gas cost, we expect EBITDA/scm to remain at ~INR 5
Robust free cashflow: With CGD infrastructure laid across most of Delhi, IGL’s high capex phase is over and will generate free cash flow of INR 16bn over FY16-18E
Valuation
With favourable economics, we believe CNG volume growth is back on track. The availability of low-priced spot R-LNG would aid in improving PNG industrial & commercial
volume. We value the company at 15x FY18E EPS of INR 41.7 and add another INR 18.5 for its investments to arrive at a target price of INR 644. We recommend Buy
Key risks
Downside risks include CNG volume growth not picking up and PNG industrial continuing to decline
Key Financials
Note: pricing as on 3 September 2015; Source: Company, Elara Securities Estimate
CMP: INR 468 TP: INR 644 Upside: 38%
IGL IN Mcap: USD 1.00bn Buy
42
YE March
Revenue (INR mn)
YoY (%)
EBITDA (INR mn)
EBITDA margin (%)
Adj PAT (INR mn)
YoY (%)
Fully DEPS (INR)
ROE (%)
ROCE (%)
P/E (x)
EV/EBITDA (x)
FY15 36,810 (6.1) 7,930 21.5 4,377 21.5 31.3 20.9 18.0 15.0 8.2
FY16E 39,745 8.0 8,226 20.7 4,477 2.3 32.0 18.4 16.4 14.6 7.4
FY17E 43,191 8.7 9,141 21.2 5,272 17.8 37.7 18.6 16.2 12.4 6.2
FY18E 45,963 6.4 9,756 21.2 5,835 10.7 41.7 17.9 15.0 11.2 5.3
Elara Securities (India) Private Limited Private & Confidential
IGL: CGD volume CAGR of ~7% over FY15-18E
Source: Company, Elara Securities Research
CNG volume CAGR of 6% CAGR over FY15-18E PNG volume CAGR of 10% over FY15-18E
0
5
10
15
20
25
0.0
0.5
1.0
1.5
2.0
2.5
3.0
FY00
FY04
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(%) (mn kgs per day)
CNG volume Growth (RHS)
(50)
0
50
100
150
0
100
200
300
400
500
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(%) (mscm)
Volumes (LHS) Growth
CNG 93%
PNG 7%
FY07
CNG 82%
PNG 18%
FY11
CNG 76%
PNG 24%
FY15
CGD volume breakdown
43
Source: Company, Elara Securities Estimate Source: Company, Elara Securities Estimate
Elara Securities (India) Private Limited Private & Confidential
IGL: growth drivers for CNG volume
Source: Delhi Regional Transport Office (RTO), Elara Securities Research
Near-term growth drivers
Delhi government plans to deploy ~2,900 buses by December 2016
Out of total 2.6mn private cars in Delhi, only ~20% run on CNG
Autorickshaw numbers pick up from 12,500 in FY14 to 21,650 in FY15
Converted to CNG, 0.52mn
Cars still to be converted to CNG, 2mn
Total private cars are 2.6mn
Only 20% cars in Delhi run on CNG (2014)
Long-term growth drivers
NGT has called for a ban on diesel vehicles older than 10 years and
petrol vehicles older than 15 years to ply on Delhi roads
Delhi government is considering levying taxes on polluting vehicles
Another ~7,900 buses can be added in private bus clusters
Clusters 1 to 9 (current),
1,400 buses
Clusters 1 to 9 (potential),
1,200 buses Clusters 10 to 17 (potential), 6,700 buses
~7,900 buses can be added in private bus clusters
Potential to add another ~7,900 buses (2014)
44
Source: Centre for Science and Environment (CSE), Elara Securities Research
Elara Securities (India) Private Limited Private & Confidential
IGL: growth drivers for PNG volume
Source: Company, Elara Securities Estimate
Source: Platts, Bloomberg Elara Securities Research
Industrial & commercial PNG at ~2% CAGR over FY15-18E
The drop in spot RLNG prices can help arrest PNG industrial &
commercial volume decline
IGL has a 0.44mmscmd sourcing contract for long-term R-LNG. However, it is
sourcing only 0.36mmscmd as on now
IGL is negotiating to replace high-priced, long-term RLNG volume
with short-term & spot volume
Domestic PNG volume at ~19% CAGR over FY15-18E
With infrastructure spread across 67 out of 70 charge areas, IGL can
leverage on its extensive network to expand PNG domestic coverage
Strong domestic customer addition at ~100,000 in FY15, which is
expected to grow to ~120,000 annually over the next three years
5
10
15
20
Apr-
12
Jun-1
2
Aug-1
2
Oct
-12
Dec-
12
Feb-1
3
Apr-
13
Jun-1
3
Aug-1
3
Oct
-13
Dec-
13
Feb-1
4
Apr-
14
Jun-1
4
Aug-1
4
Oct
-14
Dec-
14
Feb-1
5
Apr-
15
Jun-1
5
(USD/mmBtu)
Platts-JKM Fuel oil
0 20,000 40,000 60,000 80,000 100,000 120,000 140,000
0
200,000
400,000
600,000
800,000
1,000,000
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15E
FY16E
FY17E
FY18E
(nos) (nos)
Domestic customers (LHS) Addition (RHS)
Spot RLNG vs fuel oil gap narrowing
Domestic customer addition to pick up
45
Elara Securities (India) Private Limited Private & Confidential
IGL: economics in favor of CNG vs alternate fuels
Source: Company, Industry, Elara Securities Research
High savings can help in conversion of private cars Auto rickshaw numbers have already picked up
2.0
2.5
3.0
3.5
4.0
0
20,000
40,000
60,000
80,000
100,000
120,000
FY10 FY11 FY12 FY13 FY14 FY15 Q1FY16
(INR/km) (nos)
Conversions (LHS) Savings (RHS)
1.0
1.2
1.4
1.6
1.8
2.0
0
10,000
20,000
30,000
40,000
FY10 FY11 FY12 FY13 FY14 FY15 Q1FY16
(INR/km) (nos)
Conversions (LHS) Savings (RHS)
CNG volume growth can hit 10% under the right set of conditions
Even if addition of buses
does not take place in the
short term, CNG volume can
still comfortably grow at 7%
(our assumption: 6%)
FY15 addition
Count Mileage
(km/kg) Running
(km) Consumption
(mmscmd) as % of FY15
CNG consumption
Bus (145) 1,500 4.1 150 0.06 2.0
Private cars 41,650 (pvt cars
+ taxis)
30,000 16.7 20 0.04 1.3
Taxis 10,000 20.0 150 0.08 2.8
Autos 21650 20,000 25.0 150 0.13 4.5
0.31 10.7
46
Source: Company, Elara Securities Research Source: Company, Elara Securities Research
Elara Securities (India) Private Limited Private & Confidential
IGL: cash flow to improve
Source: Company, Elara Securities Estimate
Cash flow to improve
Volume-led growth in EBITDA at ~7% CAGR over FY15-18E
PAT CAGR of ~10% during FY15-18E
3.50
3.75
4.00
4.25
4.50
4.75
5.00
6,000
7,000
8,000
9,000
10,000
FY13 FY14 FY15 FY16E FY17E FY18E
(mmscmd)
(INR mn)
Volume (RHS) EBITDA
Stable EBITDA/scm at INR 5
3,000
4,000
5,000
6,000
7,000
FY13 FY14 FY15 FY16E FY17E FY18E
0
5
10
15
20
25 (INR mn) (%)
PAT Growth (RHS)
5.00
5.25
5.50
5.75
3.50
3.75
4.00
4.25
4.50
4.75
5.00
FY13 FY14 FY15 FY16E FY17E FY18E
(INR) (mmscmd)
Volume EBITDA/scm (RHS)
(3,000)
0
3,000
6,000
9,000
FY13 FY14 FY15 FY16E FY17E FY18E
(INR mn)
Capex Operational Cash Flow Change in borrowing
Source: Company, Elara Securities Estimate Source: Company, Elara Securities Estimate
Source: Company, Elara Securities Estimate
47
Elara Securities (India) Private Limited Private & Confidential
IGL: valuation
FY14 FY15 FY16E FY17E FY18E
Volume (mmscmd) 3.8 3.8 4.1 4.4 4.7
EBITDA/scm (INR) 5.7 5.7 5.5 5.7 5.7
Assumptions
Target P/E (x) 15
Standalone EPS @ FY18E (INR) 41.7
Valuation of core business(INR) 625
Investments (INR) 18.5
Target Price (INR) 644
Valuation (FY18)
One-year forward P/E chart One-year forward P/BV chart
0
200
400
600
800
Jun-0
7
Dec-
07
Jun-0
8
Dec-
08
Jun-0
9
Dec-
09
Jun-1
0
Dec-
10
Jun-1
1
Dec-
11
Jun-1
2
Dec-
12
Jun-1
3
Dec-
13
Jun-1
4
Dec-
14
Jun-1
5
(INR)
IGL 6x 9x 12x 15x 18x
Adverse ruling by PNGRB led to a sharp fall in the stock price Robust volume growth
results in higher multiple
Favourable ruling by SC leads to re-rating 0
200
400
600
800
1,000
Jun-0
7
Dec-
07
Jun-0
8
Dec-
08
Jun-0
9
Dec-
09
Jun-1
0
Dec-
10
Jun-1
1
Dec-
11
Jun-1
2
Dec-
12
Jun-1
3
Dec-
13
Jun-1
4
Dec-
14
Jun-1
5
(INR)
IGL 1x 2x 3x 4x 5x
The stock has traded above 2x P/BV for past few years
Source: Company, Elara Securities Estimate
Source: Company, Bloomberg, Elara Securities Estimate Source: Company, Bloomberg, Elara Securities Estimate
Source: Elara Securities Estimate
48
Elara Securities (India) Private Limited Private & Confidential
IGL: key financials
Note: pricing as on 3 September 2015; Source: Company, Elara Securities Estimate
49
Income Statement (INR mn) FY15 FY16E FY17E FY18E
Net operating income (LHS) 36,810 39,745 43,191 45,963
EBITDA 7,930 8,226 9,141 9,756
Depreciation 1,487 1,641 1,741 1,841
EBIT 6,443 6,585 7,400 7,914
Interest cost 298 140 59 26
Other income 345 237 528 821
PBT 6,490 6,682 7,869 8,709
Less: taxation 2,113 2,205 2,597 2,874
Effective tax rate (%) 32.6 33.0 33.0 33.0
PAT (LHS) 4,377 4,477 5,272 5,835
Balance Sheet (INR mn) FY15 FY16E FY17E FY18E
Equity Capital 1,400 1,400 1,400 1,400
Reserves 19,581 22,912 26,873 31,234
Total Borrowings 1,453 703 203 203
Deferred Taxes 1,272 1,272 1,272 1,272
Others 3,712 4,432 5,152 5,872
Total Liabilities 27,418 30,718 34,900 39,981
Net Block 19,558 19,917 20,176 20,334
CWIP 2,541 2,541 2,541 2,541
Investments 2,909 2,909 2,909 2,909
Current Assets 5,727 9,213 13,507 18,765
Less: Current Liabilities 3,317 3,861 4,232 4,568
Net Working Capital 2,411 5,352 9,275 14,197
Total Assets 27,418 30,718 34,900 39,981
Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E
Operating Cash Flow 5,815 7,215 7,229 7,577
Capex (2,010) (2,000) (2,000) (2,000)
Free Cash Flow 3,805 5,215 5,229 5,577
Investing Cash Flow (3,400) (1,763) (1,472) (1,179)
Financing Cash Flow (2,958) (1,873) (1,706) (1,337)
Net Change in Cash (543) 3,579 4,051 5,061
Opening Cash 2,990 2,447 6,026 10,077
Closing Cash 2,447 6,026 10,077 15,138
Ratio Analysis FY15 FY16E FY17E FY18E
Income statement ratios (%)
Revenue growth (6.1) 8.0 8.7 6.4
EBITDA growth 1.4 3.7 11.1 6.7
Adj PAT growth (RHS) 21.5 2.3 17.8 10.7
EBITDAM (RHS) 21.5 20.7 21.2 21.2
Adj net margin 11.9 11.3 12.2 12.7
Return & liquidity ratios
Interest Coverage Ratio (x) 21.6 47.0 125.6 299.8
Net debt/Equity (x) (0.0) (0.2) (0.3) (0.5)
ROE (%) 20.9 18.4 18.6 17.9
ROCE (%) 18.0 16.4 16.2 15.0
Per share data & valuation ratios
Adj EPS (INR) 31.3 32.0 37.7 41.7
Adj EPS growth (%) 21.5 2.3 17.8 10.7
BVPS (INR) 150 174 202 233
DPS (INR) 6.0 7.0 8.0 9.0
P/E (x) 15.0 14.6 12.4 11.2
EV/EBITDA (x) 8.2 7.4 6.2 5.3
P/BV (x) 3.1 2.7 2.3 2.0
Dividend Yield (%) 1.3 1.5 1.7 1.9
GUJARAT STATE PETRONET – BENEFICIARY OF LNG EXPANSION
Elara Securities (India) Private Limited Private & Confidential
Gujarat State Petronet
Investment summary
Transmission volume CAGR of ~12% over FY15-18E: In the near term, ~5.0mmcmd of demand from the power, steel and other sectors will drive transmission
volume along with power and fertilizer sector reforms, aided by benign spot LNG prices. Dahej terminal expansion and GSPC LNG Mundra RLNG commissioning will drive
volume growth in the long term
Stable transmission tariff: With APTEL’s judgement in favour of GSPL as well as the proposed amendments by PNGRB for tariff determination taking into account industry
concerns, we expect stable transmission tariff of ~INR 1,200/tscm
Stake in GGCL a windfall: GSPL’s 29.1% stake in GSPC Gas has translated into a 25.8% stake in Gujarat Gas (GSPC Gas + GGCL) and valued at INR 24.7bn at the CMP
Valuation
With concerns over volume growth and transmission tariff subsiding, we expect an EPS CAGR of ~20% over FY15-18E. We value the company at 10x FY18E EPS of INR 12.7
and add INR 46 for its stake in Gujarat Gas to arrive at a target price of INR 173. We recommend Buy
Key risks
Downside risk includes transmission tariff being revised downwards from the current levels
Key Financials
CMP: INR 120 TP: INR 173 Upside: 44%
GUJS IN Mcap: USD 1.04bn Buy
51
Note: pricing as on 3 September 2015; Source: Company, Elara Securities Estimate
YE March
Revenue (INR mn)
YoY (%)
EBITDA (INR mn)
EBITDA margin (%)
Adj PAT (INR mn)
YoY (%)
Fully DEPS (INR)
ROE (%)
ROCE (%)
P/E (x)
EV/EBITDA (x)
FY15 10,646 1.3 9,275 87.5 4,104 (2.1) 7.3 11.3 10.1 16.5 7.8
FY16E 12,057 13.3 10,572 88.0 5,409 31.8 9.6 13.2 11.9 12.5 6.5
FY17E 12,952 7.5 11,357 88.0 6,015 11.2 10.7 13.1 11.9 11.2 5.6
FY18E 14,743 13.9 12,927 87.9 7,177 19.3 12.7 13.7 12.7 9.4 4.5
Elara Securities (India) Private Limited Private & Confidential
GSPL: gas grid
Source: GSPL, Elara Securities Research
Gas grid of 2,198km (43mmscmd) in Gujarat GSPL’s cross-country planned pipeline map
GSPL is building cross-country transmission pipelines Mehsana-Bhatinda (2,052
km and 77mmscmd), Bhatinda – Srinagar (725km and 42 mmscmd) and
Mallavaram – Bhilwara (2,035km and 78mmscmd) at a combined project cost of
~INR 140bn
52
Elara Securities (India) Private Limited Private & Confidential
GSPL: gas transmission volume to improve
Source: GSPL, Elara Securities Estimate
Volume to pick up in the near term
Power station Current supply
(mmscmd) Requirement at
30% PLF (mmscmd)
Sugen CCP 1.29 1.84
Pipavav CCPP 0.00 1.12
Peguthan 0.23 1.05
Kawas GT 1.31 1.05
Gandhar GT 1.42 1.04
Others 0.18 5.72
4.43 11.81
Near-term drivers
In the near term, ~2.0mmcmd of demand from the power sector, including
captive, ~1.5mmcmd from steel and ~1.0mmcmd from other sectors will
result in incremental gas volume
Power and fertilizer sector reforms are likely to boost demand for natural gas
Soft spot LNG prices should spur a pickup in demand from industrial
customers of CGD companies
Long-term drivers
Dahej terminal expansion by 5.0mn tonnes pa is expected to be completed by
December 2016. GSPC has booked 2.25mn tonnes pa capacity out of 5.0mn
tonnes pa
GSPC LNG 5.0mn tonnes pa Mundra terminal is expected to be commissioned
in Q4FY17. Combined with expansion at Dahej, this gives a long-term visibility
on transmission volume post FY17
Source: Industry, Elara Securities Research
Gas-based power plants in Gujarat
53
(30)
(20)
(10)
0
10
20
0
10
20
30
40
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(%) (mmscmd)
Transmission volume Growth (RHS)
Elara Securities (India) Private Limited Private & Confidential
GSPL: transmission tariff to remain stable at INR 1,200/tscm
Source: GSPL, Elara Securities Estimate
Tariff determination by PNGRB
In September 2012, PNGRB determined tariff for GSPL pipeline network at
INR 23.99/mmBtu vs the proposed INR 39.55/mmBtu by GSPL
In response GSPL had filed an appeal with The Appellate Tribunal for
Electricity (APTEL) against various provisions of the order
APTEL’s judgment in favor of GSPL
APTEL delivered its judgement in November 2014 and concluded that PNGRB
has been unfair in determining the tariff as it has not taken into consideration
relevant details (inflation rate, utilization levels, system use gas & capex) as
per latest updates.
In APTEL’s view, PNGRB has to reconsider tariff proposals as submitted by
GSPL based on relevant data
Transmission tariff to remain at ~INR 1,200/tscm
Proposed amendment in PNGRB Act in July 2015
PNGRB has proposed to amend PNGRB regulations, which are expected to
take into account actual volume flowing, future capex assumptions and
internal consumption of gas while determining tariff and tariff to be
implemented prospectively.
The proposed changes are favorable for the industry and could lead to higher
tariff for transmission companies
54
0
10
20
30
40
0
500
1,000
1,500
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(mmscmd) (tscm)
Volume (RHS) Transmission tariff
Elara Securities (India) Private Limited Private & Confidential
GSPL: 25.8% stake in largest CGD entity in the country
GSPC Gas
Source: GSPC Gas, Elara Securities Research
Gujarat Gas
At the CMP, Gujarat Gas the GSPL’s stake stands at INR 24.7bn, while at our
target price of Gujarat Gas, the stake is valued at ~INR 32bn
GSPL 25.8%
GSFC 6.8%
GSPC 28.4%
Minority S/H of GGCL 24.9%
Other Gujarat State PSU
14.1% GSPL
29.1%
GSPC 43.4%
GSFC 6.0%
Other Gujarat State PSU
21.5%
GSPL’s 29.1% stake in GSPC Gas has translated into a 25.8% stake in Gujarat
Gas (GSPC Gas + GGCL), the largest CGD entity in the country
55
Source: Gujarat Gas, Elara Securities Research
Elara Securities (India) Private Limited Private & Confidential
0
10
20
30
40
0
4,000
8,000
12,000
16,000
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(mmscmd) (INR mn)
Revenue Transmission volume (RHS)
GSPL: PAT CAGR of ~20% during FY15-18E
PAT CAGR of ~20% during FY15-18E
Source: Company, Elara Securities Estimate
Revenue CAGR at ~11% over FY15-18E
Revenue to grow at ~11% CAGR over FY15-18E
Robust EBITDA growth and stable EBITDA margin
ROE and ROCE improvement over FY15-18
Source: Company, Elara Securities Estimate
Source: Company, Elara Securities Estimate Source: Company, Elara Securities Estimate
56
84
86
88
90
92
94
0
3,000
6,000
9,000
12,000
15,000
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(%) (INR mn)
EBITDA EBITDA margin (RHS)
(30)
(20)
(10)
0
10
20
30
40
0
2,000
4,000
6,000
8,000
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(%) (INR mn)
PAT Growth (RHS)
5
10
15
20
25
30
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(%)
ROE ROCE
Elara Securities (India) Private Limited Private & Confidential
GSPL: valuation
One-year forward P/BV chart One-year forward PE chart
FY14 FY15 FY16E FY17E FY18E
Volume (mmscmd) 21.1 23.0 26.0 28.0 32.0
Trasnmission tariff (INR/tscm)
1,322 1,227 1,227 1,227 1,227
Assumptions
Target P/E (x) 10
EPS (INR) 12.7
Core business (INR) 127
Investment in Gujarat Gas CGD (INR) 46
Target price (INR) 173
Valuation (FY18E)
0
30
60
90
120
150
Mar-
06
Aug-0
6
Jan-0
7
Jun-0
7
Nov-0
7
Apr-
08
Sep-0
8
Feb-0
9
Jul-09
Dec-
09
May-1
0
Oct
-10
Mar-
11
Aug-1
1
Jan-1
2
Jun-1
2
Nov-1
2
Apr-
13
Sep-1
3
Feb-1
4
Jul-14
Dec-
14
May-1
5
(INR)
GSPL 3x 6x 9x 12x 15x
0
40
80
120
160
200
Mar-
06
Sep-0
6
Mar-
07
Sep-0
7
Mar-
08
Sep-0
8
Mar-
09
Sep-0
9
Mar-
10
Sep-1
0
Mar-
11
Sep-1
1
Mar-
12
Sep-1
2
Mar-
13
Sep-1
3
Mar-
14
Sep-1
4
Mar-
15
(INR)
GSPL 0.5x 1x 1.5x 2x 2.5x
Source: Company, Elara Securities Estimate Source: Elara Securities Estimate
Source: Company, Bloomberg, Elara Securities Estimate Source: Company, Bloomberg, Elara Securities Estimate
57
Elara Securities (India) Private Limited Private & Confidential
GSPL: key financials
Note: pricing as on 3 September 2015; Source: Company, Elara Securities Estimate
58
Income Statement (INR mn) FY15 FY16E FY17E FY18E
Net operating income (LHS) 10,646 12,057 12,952 14,743
EBITDA 9,275 10,572 11,357 12,927
Depreciation 2,013 2,127 2,232 2,337
EBIT 7,261 8,446 9,126 10,590
Interest cost 1,178 975 795 615
Other income 520 603 648 737
PBT 6,603 8,073 8,978 10,712
Less: taxation 2,500 2,664 2,963 3,535
Effective tax rate (%) 37.9 33.0 33.0 33.0
PAT (LHS) 4,104 5,409 6,015 7,177
Balance Sheet (INR mn) FY15 FY16E FY17E FY18E
Equity Capital 5,630 5,630 5,630 5,630
Reserves 30,601 35,219 40,444 46,831
Total Borrowings 8,879 7,379 5,879 4,379
Deferred Taxes 4,504 4,504 4,504 4,504
Others
Total Liabilities 49,613 52,732 56,457 61,344
Net Block 31,858 32,231 32,500 32,663
CWIP 6,561 6,561 6,561 6,561
Investments 6,487 6,487 6,487 6,487
Current Assets 10,498 13,366 16,973 21,896
Less: Current Liabilities 5,790 5,913 6,063 6,263
Net Working Capital 4,708 7,453 10,909 15,633
Total Assets 49,613 52,732 56,457 61,344
Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E
Operating Cash Flow 5,240 7,555 8,070 8,643
Capex (2,278) (2,500) (2,500) (2,500)
Free Cash Flow 2,962 5,055 5,570 6,143
Investing Cash Flow (2,915) (2,500) (2,500) (2,500)
Financing Cash Flow (2,800) (2,663) (2,438) (2,169)
Net Change in Cash (475) 2,392 3,132 3,974
Opening Cash 4,710 4,235 6,627 9,759
Closing Cash 4,235 6,627 9,759 13,733
Ratio Analysis FY15 FY16E FY17E FY18E
Income statement ratios (%)
Revenue growth 1.3 13.3 7.5 13.9
EBITDA growth (0.1) 14.0 7.4 13.8
Adj PAT growth (RHS) (2.1) 31.8 11.2 19.3
EBITDA margin 87.5 88.0 88.0 87.9
Adj net margin 38.7 45.0 46.6 48.8
Return & liquidity ratios
Interest Coverage Ratio (x) 6.2 8.7 11.5 17.2
Net debt/Equity (x) 0.1 0.0 (0.1) (0.2)
ROE (%) 11.3 13.2 13.1 13.7
ROCE (%) 10.1 11.9 11.9 12.7
Per share data & valuation ratios
Adj EPS (INR) 7.3 9.6 10.7 12.7
Adj EPS growth (%) (22.1) (2.1) 31.8 11.2
BVPS (INR) 64 73 82 93
DPS (INR) 1.2 1.2 1.2 1.2
P/E (x) 16.5 12.5 11.2 9.4
EV/EBITDA (x) 7.8 6.5 5.6 4.5
P/BV (x) 1.9 1.7 1.5 1.3
Dividend Yield (%) 1.0 1.0 1.0 1.0
GUJARAT GAS – LARGEST CGD ENTITY IN THE COUNTRY
Elara Securities (India) Private Limited Private & Confidential
Gujarat Gas
Investment summary
Largest CGD player: With merger of GGCL and GSPC Gas, the new entity Gujarat Gas, emerges as the largest player in the country
Volume growth CAGR of 10% over FY15-18E: A pickup in industrial activity, softening of spot LNG prices as well as environmental concerns discouraging the use of
alternate polluting fuels are expected to drive consumption of natural gas. With CNG penetration in Gujarat low at ~10%, Gujarat Gas plans to expand aggressively and set
up ~20 new CNG stations every year. We expect overall volume CAGR of 9% over FY15-18E
Favorable sourcing mix: Gujarat Gas has ~30% sourcing from domestic gas, 30% from spot, 25% from medium-term RLNG and only 15% from long-term RLNG
Improving margin: Low domestic gas prices and benign spot LNG prices will help to improve profitability. We expect EBITDA/scm to improve to ~INR 5, from an average
of ~INR 3 seen over FY11-15.
Valuation
With favourable economics as well as an aggressive management intent to chase volume growth, aided by favourable sourcing mix, we expect an EPS CAGR of ~23% over
FY15-18E. We value the company at 15x FY18E EPS of INR 60.7 to arrive at a target price of INR 910. We recommend Buy.
Key risk
Spot LNG prices increasing significantly from the current levels of ~USD 8/mmBtu and sustained low crude oil prices are key downside risks
Key Financials*
CMP: INR 746 TP: INR 910 Upside: 22%
GGAS IN Mcap: USD 1.5bn Buy
60
Note: *historical financials of the merged entity Gujarat Gas not available. We here provide financials for GGCL, pricing as on 3 September 2015; Source: Company, Elara Securities Estimate
YE March
Revenue (INR mn)
YoY (%)
EBITDA (INR mn)
EBITDA margin (%)
Adj PAT (INR mn)
YoY (%)
Fully DEPS (INR)
ROE (%)
ROCE (%)
P/E (x)
EV/EBITDA (x)
FY15 25,129 (35.6) 4,326 17.3 3,138 (25.0) 24.5 20.2 14.0 30.5 22.7
FY16E 20,976 (16.5) 4,355 21.0 2,906 (7.4) 22.7 17.0 11.5 32.9 22.5
FY17E 22,627 7.9 4,504 20.1 2,960 1.9 23.1 15.8 10.9 32.3 21.8
FY18E 24,450 8.1 4,932 20.4 3,201 8.1 25.0 15.5 11.0 29.9 19.9
Elara Securities (India) Private Limited Private & Confidential
GGCL+ GSPC Gas = largest CGD player
Note: *latest data available for GGCL is from June 2013 and for GSPC Gas is from Annual Report FY14 Source: GGCL, GSPC Gas, Gujarat Gas, Elara Securities Research
GGCL
Surat, Ankleshwar, Bharuch
~2mmscmd
437,959
833
6,792
56
205,000
GSPC Gas
South, Central Gujarat & Saurashtra
~4.2mmscmd
512,165
1,942
1,967
161
90,000
Area of operations
CGD volume
Household customers*
Industrial customers*
Commercial customers*
CNG stations*
CNG vehicles*
Gujarat Gas
Almost two-third of Gujarat
~6.2mmscmd
1,019,170
2,768
11,474
231
300,000
+ =
GGCL
GDNL 74%
Minority S/H 26%
GSPL 29%
GSPC 43%
GSFC 6%
Other Gujarat
State PSU 22%
GSPL 26%
GSFC 7%
GSPC 28%
Minority S/H of GGCL
25%
Other Gujarat
State PSU 14%
+ =
GSPC Gas Gujarat Gas
Minority shareholders of GGCL stand to gain sizably
61
GGCL+ GSPC Gas = largest CGD player
Elara Securities (India) Private Limited Private & Confidential
GGAS services two-thirds of Gujarat
Source: GGCL, GSPC Gas, Gujarat Gas, Elara Securities Research
Existing
Announced
Vapi
Gandhinagar
Rajkot
Umargaon
Karjan
Surendranagar
Wadhwan
Sarigam
Halol
Morbi
Bilimora
Nadiad
Thangadh
Gundlav
Palej
Morai
Khambhat
Navsari
Dahej
Surat
Petlad
Valsad
Ankaleshwar Bharuch
Jamnagar
Bhavnagar
Kutch
Hazira
DFC alignment
DMIC influence
Significant geographic presence across the proposed Delhi-Mumbai Industrial Corridor and Dedicated Freight Corridor
62
Elara Securities (India) Private Limited Private & Confidential
GGAS: volume growth drivers
PNG volume CAGR of 7% over FY15-18E
Over FY12-14 due to high RLNG prices, industrial consumers have shifted to
alternate fuels, which are expected to come back with softening in spot LNG
prices
We expect a pickup in industrial activity as the economy bottoms out, driving
consumption of natural gas
Environmental concerns discouraging the use of alternate polluting fuels,
such as fuel oil
New GAs (Jamnagar, Bhavnagar, Kutch [West] and Hazira in Gujarat, UT of
Dadra & Nagar Havelli and Thane (excl MGL areas) in Maharashtra will give a
fillip to volume
CNG volume CAGR of ~17% over FY15-18E
With allocation of domestic gas for the CNG segment, Gujarat Gas plans to
expand aggressively and set up ~20 new CNG stations every year
In 2012, Gujarat HC ordered all vehicles (private & public) to be converted to
CNG within a year
Huge potential for faster CNG volume growth (2014)
LMV - goods, 448,958
Buses, 67,546 Taxis, 83,038
LMV - passengers,
561,740
Cars, 1,411,898
Jeeps, 167,991
CNG penetration in Gujarat low at ~10%
Volume over FY12-14 declines due to high RLNG prices
The ceramic
industry at Morbi
stopped off-taking
gas in FY14 after
consistent hikes.
However, it came
back post lower
prices as well as the
SC mandate
Source: Company, Elara Securities Research
Source: Company, Elara Securities Research
63
(20)
(10)
0
10
20
5.0
5.5
6.0
6.5
7.0
7.5
FY11 FY12 FY13 FY14 FY15P
(%) (mmscmd)
Volume Growth (RHS)
Prices touch high of INR 42/scm in FY14 from the lows of INR 26/scm in FY12
Elara Securities (India) Private Limited Private & Confidential
GGAS: favorable sourcing mix (FY15)
GGCL
Source: GGCL, GSPC Gas, Gujarat Gas, Elara Securities Research
+ =
GSPC Gas Gujarat Gas
PMT 32%
Cairn 9%
APM 13%
Mid-term LNG 32%
Spot LNG 14%
APM 18%
LT LNG 23%
Mid-term LNG 22%
Spot LNG 37%
PMT 10% Cairn
3%
APM 17%
LT LNG 15%
Mid-term LNG 25%
Spot LNG 30%
Gujarat Gas will have ~30% sourcing from domestic gas, 30% from spot, 25% from medium-term RLNG and only 15% from long-term RLNG. Low spot LNG prices will help to improve profitability
64
Elara Securities (India) Private Limited Private & Confidential
GGAS: PAT CAGR of ~34% during FY14-18E
EBITDA/scm to improve to ~INR 5
PAT CAGR of ~34% during FY14-18E
Volume CAGR of ~9% over FY14-18E
EBITDA CAGR of 28% over FY14-18E
65
Source: Company, Elara Securities Estimate
Source: Company, Elara Securities Estimate
Source: Company, Elara Securities Estimate
Source: Company, Elara Securities Estimate
(20)
(10)
0
10
20
5
6
7
8
9
10
FY11 FY12 FY13 FY14 FY15P FY16E FY17E FY18E
(%) (mmscmd)
Volume Growth (RHS)
2
3
4
5
6
5
6
7
8
9
FY11 FY12 FY13 FY14 FY15P FY16E FY17E FY18E
(INR) (mmscmd)
Volume EBITDA/scm (RHS)
(20)
0
20
40
60
80
100
0
5,000
10,000
15,000
20,000
FY11 FY12 FY13 FY14 FY15P FY16E FY17E FY18E
(%) (INR mn)
EBITDA Growth (RHS)
(50)
0
50
100
2,000
4,000
6,000
8,000
10,000
FY11 FY12 FY13 FY14 FY15P FY16E FY17E FY18E
(%) (INR mn)
PAT Growth (RHS)
Elara Securities (India) Private Limited Private & Confidential
GGAS: valuation
One-year forward P/BV chart One-year forward P/E chart
FY14 FY15 FY16E FY17E FY18E
Volume (mmscmd) 6.0 6.5 6.9 7.6 8.4
EBITDA/scm (INR) 2.7 4.7 5.2 5.2 5.2
Key assumptions
Target P/E (x) 15
EPS (INR) 60.7
Target Price (INR) 910
Valuation (FY18E)
0
150
300
450
600
750
900
Jul-06
Jan-0
7
Jul-07
Jan-0
8
Jul-08
Jan-0
9
Jul-09
Jan-1
0
Jul-10
Jan-1
1
Jul-11
Jan-1
2
Jul-12
Jan-1
3
Jul-13
Jan-1
4
Jul-14
Jan-1
5
(INR)
GGCL 9x 12x 15x 18x 21x
0
150
300
450
600
750
900
Jul-06
Jan-0
7
Jul-07
Jan-0
8
Jul-08
Jan-0
9
Jul-09
Jan-1
0
Jul-10
Jan-1
1
Jul-11
Jan-1
2
Jul-12
Jan-1
3
Jul-13
Jan-1
4
Jul-14
Jan-1
5
(INR)
GGCL 1x 2x 3x 4x 5x
Source: Company, Elara Securities Estimate
Source: Company, Bloomberg, Elara Securities Estimate, not trading since 26 May 2015
Source: Elara Securities Estimate
Source: Company, Bloomberg, Elara Securities Estimate, not trading since 26 May 2015
66
Elara Securities (India) Private Limited Private & Confidential
GGAS: key financials
Note: pricing as on 3 September 2015; Source: Company, Elara Securities Estimate
67
Income Statement (INR mn) FY15 FY16E FY17E FY18E
Net operating income (LHS) 25,129 20,976 22,627 24,450
EBITDA 4,326 4,355 4,504 4,932
Depreciation 603 746 813 881
EBIT 3,724 3,609 3,691 4,051
Interest cost 2 0 0 0
Other income 799 750 750 750
PBT 4,520 4,360 4,441 4,802
Less: taxation 1,380 1,452 1,479 1,599
Effective tax rate (%) 30.5 33.3 33.3 33.3
PAT (LHS) 3,140 2,908 2,962 3,203
Minority Interest 2.2 2.2 2.2 2.2
Cons PAT 3,138 2,906 2,960 3,201
Balance Sheet (INR mn) FY15 FY16E FY17E FY18E
Equity Capital 257 257 257 257
Reserves 15,316 16,871 18,481 20,331
Minority Interest 109 111 113 115
Total Borrowings 0 0 0 0
Deferred Taxes 1,344 1,344 1,344 1,344
Others 3,293 3,543 3,793 4,043
Total Liabilities 20,318 22,125 23,987 26,090
Net Block 9,606 10,361 11,048 11,667
CWIP 705 705 705 705
Investments 9,380 9,380 9,380 9,380
Current Assets 2,773 3,266 4,554 6,139
Less: Current Liabilities 2,146 1,587 1,699 1,802
Net Working Capital 627 1,680 2,855 4,338
Total Assets 20,318 22,125 23,987 26,090
Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E
Operating Cash Flow 3,147 2,429 3,013 3,301
Capex (1,290) (1,500) (1,500) (1,500)
Free Cash Flow 1,857 929 1,513 1,801
Investing Cash Flow (3,073) (750) (750) (750)
Financing Cash Flow 248 (1,100) (1,100) (1,100)
Net Change in Cash 322 579 1,163 1,451
Opening Cash 415 737 1,315 2,479
Closing Cash 737 1,315 2,479 3,929
Ratio Analysis FY15 FY16E FY17E FY18E
Income statement ratios (%)
Revenue growth (35.6) (16.5) 7.9 8.1
EBITDA growth (30.4) 0.7 3.4 9.5
Adj PAT growth (RHS) (25.0) (7.4) 1.9 8.1
EBITDAM (RHS) 17.3 21.0 20.1 20.4
Adj net margin 12.6 14.0 13.2 13.2
Return & liquidity ratios
Interest Coverage Ratio (x) 1,692.5 - - -
Net debt/Equity (x) (0.4) (0.4) (0.4) (0.5)
ROE (%) 20.2 17.0 15.8 15.5
ROCE (%) 14.0 11.5 10.9 11.0
Per share data & valuation ratios
Adj EPS (INR) 24.5 22.7 23.1 25.0
Adj EPS growth (%) (25.0) (7.4) 1.9 8.1
BVPS (INR) 121 134 146 161
DPS (INR) 0.0 9.0 9.0 9.0
P/E (x) 30.5 32.9 32.3 29.9
EV/EBITDA (x) 22.7 22.5 21.8 19.9
P/BV (x) 6.1 5.6 5.1 4.6
Dividend Yield (%) 0.0 1.2 1.2 1.2
GAIL – OVERCOMING NEAR-TERM CONCERNS
Elara Securities (India) Private Limited Private & Confidential
GAIL India
Investment summary
Transmission volume CAGR of ~6% over FY15-18E: the resolution of Rasgas long-term offtake, Dahej terminal expansion and higher gas offtake from the Kochi
refinery will drive volume in the near term while commissioning of GSPC LNG Mundra terminal, progress at Kochi pipeline and break-water facility at the Dabhol terminal
could be long-term drivers
Trading volume growth: Contractual volume of 2.5mn tonnes pa from Dahej expansion in December 2016, higher uptake from the Kochi refinery, possible volume from
Dabhol and completion of Kochi pipeline along with benign spot LNG price can aid in trading volume growth
Petchem profitability to improve: If GAIL is able to decrease quantity of high-priced, long-term Rasgas in its petchem feedstock from the current ~85%, profitability
would improve
Valuation
With some visibility on transmission and trading volume growth, we expect an EPS of INR 25.0 in FY18E. We assign 10x FY18E P/E and further add INR 97 for its investments to
arrive at a target price of INR 347. The stock has corrected significantly (~30%) in past three months; hence, we recommend Accumulate
Key risks
Downside risks include no resolution on Rasgas volume offtake and enforcement of take-or-pay obligation
Key Financials
69
CMP: INR 295 TP: INR 347 Upside: 18%
GAIL IN Mcap: USD 5.40bn Accumulate
Note: pricing as on 3 September 2015; Source: Company, Elara Securities Estimate
YE March
Revenue (INR mn)
YoY (%)
EBITDA (INR mn)
EBITDA margin (%)
Adj PAT (INR mn)
YoY (%)
Fully DEPS (INR)
ROE (%)
ROCE (%)
P/E (x)
EV/EBITDA (x)
FY15 567,420 (1.3) 46,962 8.3 30,392 (26.6) 24.0 10.8 7.2 12.3 9.4
FY16E 563,373 (0.7) 49,572 8.8 26,020 (14.4) 20.5 8.7 6.5 14.4 8.9
FY17E 639,735 13.6 52,913 8.3 29,313 12.7 23.1 9.2 6.7 12.8 8.4
FY18E 692,059 8.2 56,720 8.2 31,665 8.0 25.0 9.4 7.0 11.8 7.8
Elara Securities (India) Private Limited Private & Confidential
GAIL: transmission volume, tariff to increase by FY18
Growth in transmission volume by FY18 We build in a 5% increase in tariff from FY16E
Volume CAGR of ~6% over FY15-18E
Source: Company, Elara Securities Estimate
80
90
100
110
120
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(mmscmd)
Gas transmission
Decline in KG-D6 followed by decline in
RLNG volume
Normalization of Andhra Pradesh pipeline which had fire incident, rise in RLNG volume
Petronet has deferred offtake of 32% of the contracted quantity in CY15.
Nuances of this would be clear only towards CY15-end
Higher offtake from Kochi refinery in May 2016 would result in growth of
transmission volume from 0.6mmscmd to 3.0mmscmd
Dahej expansion would result in an increase of 9.5mmscmd in FY18E
Progress in Dabhol breakwater facility as well as Kochi Phase-II pipeline
could be additional triggers
Upside to transmission tariff
20
24
28
32
36
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(INR/mmBtu)
NG transmission tariff
Source: Company, Elara Securities Estimate
Recent favourable judgement of APTEL in GSPL vs PNGRB suggests there
could be an upward revision in transmission of GAIL
Draft PNGRB guidelines also suggest favourable volume divisor from the
sixth year of operations
We estimate a 5% change in transmission tariff will change FY16E EBITDA
by 3%
70
Elara Securities (India) Private Limited Private & Confidential
GAIL: trading volume to increase
Low spot LNG prices to aid in trading volume Trading volume CAGR to increase by 4% over FY15-18E
Source: Company, Elara Securities Estimate
GAIL has contracted 2.5mn tonnes pa from Dahej expansion in December
2016. This itself would result in a ~13% increase in trading volume over
FY15
Higher uptake from Kochi refinery, possible volume from Dabhol and
completion of Phase-II Kochi pipeline could lead to additional volume
Deferment of long-term Rasgas quantity also would increase sale of spot
cargo
65
70
75
80
85
90
FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
(mmscmd)
NG sales
Spot LNG prices have fallen from ~USD 20/mmBtu in early 2014 to USD 7-
8/mmBtu, led by the decline in oil prices, increased LNG supply and tepid
growth in LNG demand
LNG demand is likely to decline further, led by the start of Japan and South
Korea nuclear reactors while supply waves from Australia, the US and Africa
are expected to inundate the market
We expect spot LNG prices to remain low in the long run, thereby aiding
growth in GAIL’s trading volume
5
9
13
17
21
30
60
90
120
150
Apr-
11
Jul-11
Oct
-11
Jan-1
2
Apr-
12
Jul-12
Oct
-12
Jan-1
3
Apr-
13
Jul-13
Oct
-13
Jan-1
4
Apr-
14
Jul-14
Oct
-14
Jan-1
5
Apr-
15
(USD/mmBtu) (USD/bbl)
Brent-LHS Platts JKM-RHS
Spot LNG prices decline despite a rise in crude price
Source: Platts, Elara Securities Research
71
Elara Securities (India) Private Limited Private & Confidential
GAIL: petchem, LPG & LHC profitability to improve
Possible upside is significant Petchem suffers from high-cost Rasgas LNG
Source: Company, Elara Securities Research
Currently, ~85% of feedstock for petchem is long-term Rasgas quantity.
Since petchem realization has fallen while Rasgas LNG price remains high,
the petchem segment has seen gross margin contraction
If GAIL is able to decrease the quantity of long-term Rasgas in its petchem
feedstock, profitability would improve
Source: Platts, Elara Securities Estimate
(4,000)
(2,000)
0
2,000
4,000
6,000
1Q
FY11
2Q
FY11
3Q
FY11
4Q
FY11
1Q
FY12
2Q
FY12
3Q
FY12
4Q
FY12
1Q
FY13
2Q
FY13
3Q
FY13
4Q
FY13
1Q
FY14
2Q
FY14
3Q
FY14
4Q
FY14
1Q
FY15
2Q
FY15
3Q
FY15
4Q
FY15
1Q
FY16
(INR mn)
Petchem gross margin
LPG & LHC profitability improves
(5,000)
0
5,000
10,000
1Q
FY11
2Q
FY11
3Q
FY11
4Q
FY11
1Q
FY12
2Q
FY12
3Q
FY12
4Q
FY12
1Q
FY13
2Q
FY13
3Q
FY13
4Q
FY13
1Q
FY14
2Q
FY14
3Q
FY14
4Q
FY14
1Q
FY15
2Q
FY15
3Q
FY15
4Q
FY15
1Q
FY16
(INR mn)
LPG/LHC gross margin
Source: Company, Elara Securities Research
72
4,240
4,280
4,320
4,360
4,400
FY16E FY17E
(INR mn)
Change in Petchem/LPG/LHC EBITDA due to USD 1/mmBtu change in gas cost
Elara Securities (India) Private Limited Private & Confidential
GAIL: financials to show improvement
Return ratios with ROE of ~9% and ROCE of ~7% EBITDA growth of ~6% CAGR over FY15-18E
Source: Company, Elara Securities Estimate
Source: Company, Elara Securities Estimate
Source: Company, Elara Securities Estimate
EPS to be INR 25 in FY18E
We estimate a moderate improvement in EBITDA and EPS. However, we
envisage positive triggers, such as possible increase in transmission &
trading volume and reduction in gas cost for petchem, which could give
potential uptick for the stock
73
(40)
(20)
0
20
0
20,000
40,000
60,000
80,000
FY14 FY15 FY16E FY17E FY18E
(%) (INR mn)
EBITDA EBITDA growth (%)-RHS
15
20
25
30
35
FY14 FY15 FY16E FY17E FY18E
(INR)
0
2
4
6
8
10
12
FY15 FY16E FY17E FY18E ROE (%) ROCE (%)
Elara Securities (India) Private Limited Private & Confidential
GAIL: valuation
Source: Company, Bloomberg, Elara Securities Estimate Source: Company, Bloomberg, Elara Securities Estimate
Source: Company, Elara Securities Estimate Source: Elara Securities Estimate
100
200
300
400
500
600
Mar-
06
Sep-0
6
Mar-
07
Sep-0
7
Mar-
08
Sep-0
8
Mar-
09
Sep-0
9
Mar-
10
Sep-1
0
Mar-
11
Sep-1
1
Mar-
12
Sep-1
2
Mar-
13
Sep-1
3
Mar-
14
Sep-1
4
Mar-
15
(INR)
GAIL 8x 10x 12x 14x 16x
0
200
400
600
800
Mar-
06
Sep-0
6
Mar-
07
Sep-0
7
Mar-
08
Sep-0
8
Mar-
09
Sep-0
9
Mar-
10
Sep-1
0
Mar-
11
Sep-1
1
Mar-
12
Sep-1
2
Mar-
13
Sep-1
3
Mar-
14
Sep-1
4
Mar-
15
(INR)
GAIL 1x 1.5x 2x 2.5x 3x
Target P/E (x) 10
EPS (INR) 25.0
Core business (INR) 250
Investments (INR) 97
Target price (INR) 347
One-year forward P/BV chart
Key assumptions Valuation (FY18E)
One-year forward P/E chart
FY14 FY15 FY16E FY17E FY18E
NG transmission volume (mmscmd)
96 92 89 100 110
NG trasnmission tariff (INR/mmBtu)
30.4 25.4 31.4 33.4 35.0
NG trading (mmscmd) 79 72 70 75 82
Petchem sales (kilo tonne) 445 441 590 900 900
74
Elara Securities (India) Private Limited Private & Confidential
GAIL: key financials
Note: pricing as on 3 September 2015; Source: Company, Elara Securities Estimate
75
Income Statement (INR mn) FY15 FY16E FY17E FY18E
Net operating income 567,420 563,373 639,735 692,059
EBITDA 46,962 49,572 52,913 56,720
Depreciation 9,743 12,129 12,476 13,316
EBIT 37,219 37,443 40,437 43,404
Interest cost 3,613 4,125 3,450 3,520
Other income 8,609 5,836 6,981 7,611
PBT 42,215 39,155 43,968 47,495
Exceptional item (629) 0 0 0
Less: taxation 12,452 13,135 14,654 15,830
Effective tax rate (%) 29.1 33.5 33.3 33.3
Adj PAT 30,392 26,020 29,313 31,665
Balance Stee (INR mn) FY15 FY16E FY17E FY18E
Equity capital 12,685 12,685 12,685 12,685
Reserves 278,510 295,398 314,423 334,974
Total borrowings 80,483 84,500 88,000 88,000
Deferred taxes 33,087 33,087 33,087 33,087
Total liabilities 404,765 425,669 448,194 468,745
Fixed assets 321,197 334,068 346,592 358,277
Investments 43,224 43,224 43,224 43,224
Inventories 20,811 12,514 13,713 14,588
Debtors 30,945 23,019 26,151 28,295
Cash 11,416 31,916 40,029 47,685
Loans & advances 69,576 75,967 85,671 92,498
Other current assets 31,764 100 100 100
Net current assets 40,344 48,377 58,378 67,245
Total assets 404,765 425,669 448,194 468,745
Cash Flow Statement (INR mn) FY15 FY16E FY17E FY18E
Operating cash flow 30,693 50,615 39,902 43,770
Capex (18,895) (25,000) (25,000) (25,000)
Free cash flow to firm 11,798 25,615 14,902 18,770
Investing cash flow (21,089) (25,000) (25,000) (25,000)
Financing cash flow (24,698) (5,115) (6,789) (11,114)
Net change in cash (15,093) 20,499 8,113 7,656
Opening cash 26,510 11,416 31,916 40,029
Closing cash 11,416 31,916 40,029 47,685
Ratio Analysis FY15 FY16E FY17E FY18E
Income Statement Ratios (%)
Revenue growth (1.3) (0.7) 13.6 8.2
EBITDA growth (29.9) 5.6 6.7 7.2
Adj PAT growth (26.6) (14.4) 12.7 8.0
EBITDAM 8.3 8.8 8.3 8.2
Adj net margin 5.4 4.6 4.6 4.6
Return & Liquidity Ratios
Int/PBIT 0.1 0.1 0.1 0.0
Net debt/Equity (x) 0.2 0.2 0.1 0.1
ROE (%) 10.8 8.7 9.2 9.4
ROCE (%) 7.2 6.5 6.7 7.0
Per Share Data & Valuation Ratios
Diluted Adj EPS (INR) 24.0 20.5 23.1 25.0
Adj EPS growth (%) (26.6) (14.4) 12.7 8.0
Book Value (INR) 229.5 242.8 257.8 274.0
DPS (INR) 6.0 6.2 6.9 7.5
P/E (x) 12.3 14.4 12.8 11.8
EV/EBITDA (x) 9.4 8.9 8.4 7.8
Price/Book (x) 1.3 1.2 1.1 1.1
Dividend yield (%) 2.0 2.1 2.3 2.5
Elara Securities (India) Private Limited Private & Confidential
The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information purposes. The sole purpose of this Note is to provide preliminary information on the business activities of the company and the projected financial statements in order to assist the recipient in understanding / evaluating the Proposal. Nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved) and should consult its own advisors to determine the merits and risks of such an investment. Nevertheless, Elara Securities (India) Private Limited or any of its affiliates is committed to provide independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Elara Securities (India) Private Limited or any of its affiliates have not independently verified all the information given in this Note and expressly disclaim all liability for any errors and/or omissions, representations or warranties, expressed or implied as contained in this Note. The user assumes the entire risk of any use made of this information. Elara Securities (India) Private Limited or any of its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for or solicit investment banking or other business from any company referred to in this Note. Each of these entities functions as a separate, distinct and independent of each other. This Note is strictly confidential and is being furnished to you solely for your information. This Note should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This Note is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Elara Securities (India) Private Limited or any of its affiliates to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. Upon request, the Recipient will promptly return all material received from the company and/or the Advisors without retaining any copies thereof. The Information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This Information is subject to change without any prior notice. Elara Securities (India) Private Limited or any of its affiliates reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Elara Securities (India) Private Limited is under no obligation to update or keep the information current. Neither Elara Securities (India) Private Limited nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. This Note should not be deemed an indication of the state of affairs of the company nor shall it constitute an indication that there has been no change in the business or state of affairs of the company since the date of publication of this Note. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Elara Securities (India) Private Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.
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Elara Securities (India) Private Limited was incorporated in July 2007 as a subsidiary of Elara Capital (India) Private Limited.
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Elara Securities (India) Private Limited’s business, amongst other things, is to undertake all associated activities relating to its broking business.
The activities of Elara Securities (India) Private Limited were neither suspended nor has it defaulted with any stock exchange authority with whom it is registered in last five years. However, during the routine course of inspection and based on observations, the exchanges have issued advise letters or levied minor penalties on Elara Securities (India) Private Limited for minor operational deviations in certain cases. Elara Securities (India) Private Limited has not been debarred from doing business by any Stock Exchange / SEBI or any other authorities; nor has the certificate of registration been cancelled by SEBI at any point of time.
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Elara Securities (India) Private Limited is maintaining arms-length relationship with its associate entities.
Research Analyst or his/her relative(s) may have financial interest in the subject company. Elara Securities (India) Private Limited does not have any financial interest in the subject company, whereas its associate entities may have financial interest. Research Analyst or his/her relative does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Elara Securities (India) Private Limited does not have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Associate entities of Elara Securities (India) Private Limited may have actual/beneficial ownership of 1% or more securities of the subject company at the end of the month immediately preceding the date of publication of Research Report. Research Analyst or his/her relative or Elara Securities (India) Private Limited or its associate entities does not have any other material conflict of interest at the time of publication of the Research Report.
Disclosures & Confidentiality for non U.S. Investors
Elara Securities (India) Private Limited Private & Confidential
India
Elara Securities (India) Pvt. Ltd.
Indiabulls Finance Centre, Tower 3, 21st Floor,
Senapati Bapat Marg, Elphinstone Road (West)
Mumbai – 400 013, India
Tel : +91 22 6164 8500
Europe
Elara Capital Plc.
29 Marylebone Road,
London NW1 5JX,
United Kingdom
Tel : +4420 7486 9733
USA
Elara Securities Inc.
36W 44th Street, 803, New York, NY 10036, USA
Tel :+1-212-430-5870
Asia / Pacific
Elara Capital (Singapore) Pte.Ltd.
30 Raffles Place
#20-03, Chevron House
Singapore 048622
Tel : +65 6536 6267
Disclaimer for non U.S. Investors The information contained in this note is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its completeness, accuracy or adequacy and it should not be relied upon as such. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Certain statements in this report, including any financial projections, may constitute “forward-looking statements.” These “forward-looking statements” are not guarantees of future performance and are based on numerous current assumptions that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these “forward-looking statements” and financial information.
Disclaimer for U.S. Investors
Research Analyst or his/her relative(s) has not served as an officer, director or employee of the subject company.
Research analyst or Elara Securities (India) Private Limited or its associate entities have not received any compensation from the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities have not managed or co-managed public offering of securities for the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities have not received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months. Research analyst or Elara Securities (India) Private Limited or its associate entities may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company or third party in connection with the Research Report in the past twelve months.
Disclosures for U.S. Investors The research analyst did not receive compensation from Petronet LNG Limited, Indraprastha Gas Limited, Gujarat Gas Company Limited, GAIL (India) Limited and Gujarat State Petronet Limited. Elara Capital Inc.’s affiliate did not manage an offering for Petronet LNG Limited, Indraprastha Gas Limited, Gujarat Gas Company Limited, GAIL (India) Limited and Gujarat State Petronet Limited. Elara Capital Inc.’s affiliate did not receive compensation from Petronet LNG Limited, Indraprastha Gas Limited, Gujarat Gas Company Limited, GAIL (India) Limited and Gujarat State Petronet Limited in the last 12 months. Elara Capital Inc.’s affiliate does not expect to receive compensation from Petronet LNG Limited, Indraprastha Gas Limited, Gujarat Gas Company Limited, GAIL (India) Limited and Gujarat State Petronet Limited in the next 3 months.
Elara Securities (India) Private Limited Private & Confidential
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Elara Securities (India) Private Limited
CIN: U74992MH2007PTC172297
SEBI RA Regn. No.: INH000000933
Member (BSE, NSE)
Regn Nos: CAPITAL MARKET SEBI REGN. NO.: BSE: INB
011289833, NSE: INB231289837 DERIVATIVES SEBI REGN.
NO.: NSE: INF 231289837
CLEARING CODE: M51449.
Website: www.elaracapital.com Investor Grievance Email ID:
investor.grievances@elaracapital.com
Team Details
Harendra Kumar Managing Director harendra.kumar@elaracapital.com +91 22 6164 8571
Vishal Purohit Co-Head Institutional Equities vishal.purohit@elaracapital.com +91 22 6164 8572
Sales
Deepak Sawhney India deepak.sawhney@elaracapital.com +91 22 6164 8549
Kalpesh Parekh India kalpesh.parekh@elaracapital.com +91 22 6164 8513
Nishit Master India nishit.master@elaracapital.com +91 22 6164 8521
Prashin Lalvani India prashin.lalvani@elaracapital.com +91 22 6164 8544
Sushil Bhojwani India sushil.bhojwani@elaracapital.com +91 22 6164 8512
Varun Joshi North America varun.joshi@elaracapital.com +91 22 6164 8558
Sales Trading & Dealing
Manan Joshi India manan.joshi@elaracapital.com +91 22 6164 8555
Manoj Murarka India manoj.murarka@elaracapital.com +91 22 6164 8551
Sanjay Joshi India sanjay.joshi@elaracapital.com +91 22 6164 8554
Vishal Thakkar India vishal.thakker@elaracapital.com +91 22 6164 8552
Research
Aarthisundari Jayakumar Analyst Pharmaceuticals aarthi.jayakumar@elaracapital.com +91 22 6164 8510
Aashish Upganlawar Analyst FMCG, Media aashish.upganlawar@elaracapital.com +91 22 6164 8546
Abhishek Karande Analyst Technical & Alternate Strategy abhishek.karande@elaracapital.com +91 22 6164 8562
Adhidev Chattopadhyay Analyst Infrastructure, Real Estate adhidev.chattopadhyay@elaracapital.com +91 22 6164 8526
Aliasgar Shakir Analyst Mid caps, Telecom aliasgar.shakir@elaracapital.com +91 22 6164 8516
Ashish Kejriwal Analyst Metals & Mining ashish.kejriwal@elaracapital.com +91 22 6164 8505
Ashish Kumar Economist ashish.kumar@elaracapital.com +91 22 6164 8536
Deepak Agrawala Analyst Power, Capital Goods deepak.agrawala@elaracapital.com +91 22 6164 8523
Jay Kale, CFA Analyst Auto & Auto Ancillaries jay.kale@elaracapital.com +91 22 6164 8507
Rakesh Kumar Analyst Banking & Financials rakesh.kumar@elaracapital.com +91 22 6164 8559
Ravi Menon Analyst IT Services ravi.menon@elaracapital.com +91 22 6164 8502
Ravi Sodah Analyst Cement ravi.sodah@elaracapital.com +91 22 6164 8517
Sumant Kumar Analyst Agri, Travel & Hospitality, Paper sumant.kumar@elaracapital.com +91 22 6164 8503
Swarnendu Bhushan Analyst Oil and gas swarnendu.bhushan@elaracapital.com +91 22 6164 8504
Bhawana Chhabra Sr. Associate Strategy bhawana.chhabra@elaracapital.com +91 22 6164 8511
Manuj Oberoi Sr. Associate Banking & Financials manuj.oberoi@elaracapital.com +91 22 6164 8535
Durgesh Poyekar Associate Oil and gas durgesh.poyekar@elaracapital.com +91 22 6164 8541
Harshit Kapadia Associate Power, Capital Goods harshit.kapadia@elaracapital.com +91 22 6164 8542
Hemanshu Srivastava Associate Pharmaceuticals hemanshu.srivastava@elaracapital.com +91 22 6164 8525
Parin Vora Associate Metals & Mining parin.vora@elaracapital.com +91 22 6164 8519
Saiprasad Prabhu Associate FMCG, Media saiprasad.prabhu@elaracapital.com +91 22 6164 8518
Priyanka Sheth Editor priyanka.sheth@elaracapital.com +91 22 6164 8568
Gurunath Parab Production gurunath.parab@elaracapital.com +91 22 6164 8515
Jinesh Bhansali Production jinesh.bhansali@elaracapital.com +91 22 6164 8537