Hold Petronet LNG - Nirmal Bang

We had an interaction recently with the management of Petronet LNG to get its perspective on capacity ramp-up, long-term gas supply arrangement and commissioning of Kochi LNG (liquefied natural gas) terminal. Key takeaways are as follows:

Kochi terminal commissioning: Kochi LNG terminal, which was scheduled to start operations in January 2013, is likely to start operations in March-April 2013. The commissioning of the terminal got delayed after FACT or Fertilisers and Chemicals Travancore (one of the key consumers of Kochi terminal) said its infrastructure was not ready to start taking gas from the terminal. FACT is expected to consume ~1.2mmscmd and BPCL's (Bharat Petroleum Corporation) Kochi refinery is expected to consume ~0.5mmscmd of gas. The management expects initial off-take from Kochi terminal at ~2.0mmscmd-2.5mmscmd as the terminal is likely to be delayed by around five-six months from the earlier commissioning deadline of October-November 2012. We expect the Kochi terminal to bring its first cargo in the second-half of March 2013 and capacity utilisation rate of the terminal is likely to be 14%/45% in FY14E/FY15E, respectively.

Kochi-Bangalore pipeline: Phase one of the pipeline (44km long) is already in place and phase two is likely to be delayed by two-three months from the earlier deadline of December 2013. The management said the Prime Minister's Office and Kerala government are actively involved in sorting out land acquisition-related hurdles, like ironing out the differences between the farmers and the company as early as possible.

Long-term gas sourcing arrangement: The management said it is not in a hurry to sign a long-term arrangement for US shale gas, as finding the price direction of Henry Hub is uncertain. The company is planning a basket of gas sourcing arrangements in different geographies to mitigate the risk of over-concentration on a particular geography in case the prices surge. The company is looking at signing long-term deals having a slope of 13.0%-13.5% to crude oil.

Capacity ramp-up:The Gangavaram terminal is awaiting environmental clearance and if the company goes ahead with FSRU (floating, storing and re-gasification unit) in 2014, then the land-based terminal would be commissioned in FY17-FY18, or else without the FSRU the terminal would start operations in FY16-FY17. The Gangavaram terminal would be built under the SPV (special purpose vehicle) route. The second jetty at Dahej would be commissioned in late 2014 and an additional 5mtpa capacity would be operational by 2016E.

Outlook and valuation: We have retained our Hold rating on Petronet LNG with a target price of Rs183 to reflect: (1) Slower ramp-up at Kochi terminal due to infrastructure constraints, (2) Initial gas off-take at Kochi terminal to have limited ability to command a marketing margin and the re-gasification margin expected at Rs50/mmBtu, and (3) Higher interest costs and depreciation on account of Kochi terminal to depress FY14 earnings.

Source : Equity Bulls

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