Setting the Pace | Value Research Despite the slowing economy, Petronet LNG will reap the benefits of coming up with alternative fuels
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Setting the Pace

Despite the slowing economy, Petronet LNG will reap the benefits of coming up with alternative fuels

Petronet LNG Limited (PLL) is one of India's fastest growing companies in the energy sector. PLL has set up India's first LNG receiving and re-gasification terminal at Dahej in Gujarat. To keep up with future demand, it is in process of building another such terminal at Kochi in Kerala as well. Currently its sole activity is importing and re-gasification of LNG. It sources its LNG primarily from RasGas and sells it to public sector majors Gail, IOC and BPCL.

PLL is co-promoted by the four public sector oil and gas companies of India - ONGC, IOC, GAIL and BPCL. All of them have their representatives on the board of directors. PLL also has been able to draw keen interest from global energy stars like the French national gas company GAZ de France (GDF) and Qatar's Ras Laffan Liquefied Natural Gas Company Ltd (RasGas). While the former is PLL's strategic partner, the latter has signed a sale and purchase agreement to supply LNG in India.

Investment Rationale
Stake Offered to RasGas

The Indian government is said to have offered a 10 per cent stake in PLL to Qatar's RasGas. This move is said to be a part of the government's hydrocarbon diplomacy and if it goes through, it would benefit PLL immensely. PLL would then be in a better position to tie-up higher LNG volumes from RasGas in the future. PLL's stock went up by 9.1 per cent on 15th January, 2009 when conjectures about the stake sale came out.

Robust Demand for LNG
The fundamental arguments are very much in favour of PLL as there is a robust demand for LNG. In the coming times, Reliance Industries Limited's (RIL) KG Basin gas is expected to come online and compete with PLL. However, PLL's current position and plans of capacity expansion will help the company hold its own at least up to FY11E.

Stock Trading at Discount
Despite the stock price going up considerably, in the last few quarters the stock is still trading at discount of 57 per cent to the Discounted Cash Flow (DCF) value of Rs 87 per share.

The DCF calculations were further stressed by assuming that the Kochi LNG terminal sits idle after construction. This brought the stock's DCF value down to Rs 47, which is still 25 per cent more than its current price. Moreover, a sensitivity analysis of the DCF calculations was carried out for shortfalls in volumes and re-gasification charges. And if both of these variables are considered down by 10 per cent, the DCF value comes to Rs 50, which is still 33 per cent more than the current market price.

Risk & Concerns
Alternative Fuels
LNG faces tough competition from alternative fuels like Naphtha, coal, fuel oil. And these alternatives fuels are widely used by the end user industries. It also competes with natural gas. Though LNG is competitively priced against these alternative fuels still any reduction in prices of these alternative fuels would put pressure on pricing on LNG suppliers and can have adverse impact on the future growth of the company.

Competition from RIL
As mentioned earlier, LNG also competes with natural gas. And RIL's gas discovery in KG Basin and its proposed plans to go online very soon would mean newer competitor for PLL. While initially, this may not affect PLL but in a few years' time the company will face stiff competition from RIL.

Limited customers' base
PLL has Long Term Gas Sales Purchase Agreement with Gail, IOC and BPCL for a period of 25 years. While this assures market for the entire production, however, limited customers' base exposes the company to any adversity faced by its buyers.

After the market crash, currently the stock trades at a P/E of 6.8x FY09E and 6.4x FY10E earnings, which is very cheap considering the kind of growth expected. With new capacities coming online from Q1 FY10 onwards, this will nearly double the capacity from current levels. Moreover at a market price of Rs 37.6, the stock is trading at a discount to its peers in the natural gas space.

The company is in talks with various players for sourcing of additional LNG, which if comes through, would enable it to fully utilize its added capacity. At the same time, if a Government effort to make Qatar as one of the shareholder takes shape then it would be a major trigger for the scrip. The current market price offers considerable margin of safety and thus, making PLL a value pick at present.

  FY06  FY07  FY08  9 Mths*
Net sales (cr)  3,877 5,558 6,616 5,774
PAT(cr)  195 313 475 314
Operating profit (cr)  387 546 763 560
Int.payments (cr) 106 100 94 75
Borrowings (cr) 1,260 1,383 1,578 
RONW (%) 17 21 32 
ROCE (%)  18 23 28 
* FY09

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