India Energy - Religare Capital Markets

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India Energy
A rare alignment in fundamentals
28 March 2016
Rohit Ahuja | +91 22 6766 3437
Akshay Mane | +91 22 6766 3438
[email protected]
[email protected]
Sector Report
INDIA
ENERGY
28 March 2016
India Energy
We see an unusual alignment in fundamentals across the natural
gas value chain, visible from the following trends: (a) low global
natural gas prices, (b) favourable government policies, (c) a surge
in LNG regasification capacities, and (d) a positive rationalising of
PNGRB’s role as suggested by recent court verdicts. We find a
strong rationale for long-term investment in the sector, and initiate
coverage on GAIL, PLNG, IGL, GUJS and GGAS with BUY ratings.
 Expect gas demand revival from price-sensitive segments: Spot LNG
prices have declined to <US$ 4.5/mmbtu, making it viable for pricesensitive segments such as power generation and industrial applications
using liquid fuel. While these prices may not sustain, global oversupply
in LNG will ensure it remains competitive against alternate fuels.
REPORT AUTHORS
Rohit Ahuja
+91 22 6766 3437
[email protected]
Akshay Mane
+91 22 6766 3438
[email protected]
 Supportive government policies: Some government-driven initiatives
such as LNG price pooling for the power and fertiliser segments,
pollution control drives through the diesel vehicle ban and the push for
CNG vehicles have led to further improvement in LNG demand. We
expect most of these initiatives to continue well beyond FY17.
Companies
Ticker
GAIL (India)
Petronet LNG
Indraprastha Gas
Gujarat State Petronet GUJS IN
 Better prospects for pipeline and LNG infrastructure: Over
100mmscmd of LNG regasification capacities are expected to be
commissioned over five years. Since most of these would commission
on viability from long-term contracts, they offer gas supply certainty.
Gujarat Gas
 Improving clarity on PNGRB’s role: Limiting PNGRB’s role to setting bid
guidelines and ensuring fair play in current operations is the need of the
hour. The Supreme Court verdict in favour of IGL has set the ball rolling
for more investments in the city gas distribution (CGD) business across
the country. A similar ruling on tariffs for GAIL’s pipelines – after being
slashed by an average of 60% over the last four years due to the
regulator’s heavy-handed intervention – will ensure a strong revival in
investment sentiments for cross-country natural gas pipelines.
 Top ideas: GAIL, PLNG and IGL would be our top picks
(1) GAIL gains from a presence across the value chain where favourably
aligned fundamentals provide a good investment opportunity.
(2) Petronet LNG (PLNG) is one of the few stocks offering good longterm earnings visibility as ~80% of capacity (incl. Kochi) is contracted.
(3) Indraprastha Gas (IGL) is ripe for a re-rating given its superior
margins profile and acceleration in volume growth.
(4) Gujarat State Petronet’s (GUJS) presence in Gujarat – the primary
hub of natural gas consumption in India – makes it an important bet
on a revival in gas consumption from Industrial segments.
(5) Gujarat Gas (GGAS) differs from IGL in terms of business model
with ~60% of its volumes being from the industrial segment. It gains
the most from revival in Industrial demand.
CMP (Rs)
TP (Rs)
REC
GAIL IN
358
450
BUY
PLNG IN
249
340
BUY
IGL IN
542
710
BUY
133
180
BUY
523
660
BUY
GUJGA IN
Gas consumption
(mmscmd)
250
200
Power
Fertilizer
City Gas
Industrial
Petrochemicals / Refineries /
Internal Consumption
Sponge Iron / Steel
150
100
50
0
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
Source: Industry, RCML Research
Global fuel consumption mix as a % of total consumption
(%)
40
Liquids
Coal
Hydroelectricity
Natural Gas
Nuclear Energy
Renewables
30
20
10
0
FY00 FY05 FY10 FY14 FY15 FY20 FY25 FY30 FY35
Source: BP Energy Outlook 2016, RCML Research
This report has been prepared by Religare Capital Markets Limited or one of its affiliates. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of
this report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, and
trading securities held by a research analyst account.
India Energy
Sector Report
INDIA
ENERGY
Fig 1 - Domestic gas industry flowchart
Domestic Field
(RIL/ONGC/CAIRN/OINL)
93mmscmd
R- LNG
(PLNG/GAIL)
40mmscmd
Directorate General of
Hydrocarbons
$3.50-$5.73/mmbtu
$5.00-$7/mmbtu
+ Re-gasification
tariffs (GAIL/PLNG)
+ Transportation tariffs
(GAIL/GSPL)
Petroleum & Natural Gas
Regulatory Board
+ Marketing Margins
(GAIL/PLNG)
Approved by Govt. for APM; fixed
through Gas Sale Purchase
Agreements for non APM.
+ State Taxes (VAT)
Set by individual states
PRIORITY SECTORS
92mmscmd
Power
29mmscmd
Fertiliser
46mmscmd
CGD (GGAS/
IGL)
17mmscmd
NONPRIORITY
SECTORS
Ministries and Sector Regulators
Refineries,
etc
41mmscmd
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Sector Report
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ENERGY
Fig 2 - Recommendation snapshot
Bloomberg
Ticker
CMP
(Rs)
TP
(Rs)
Upside
(%)
EPS (Rs)
FY17E FY18E
EPS
Consensus
PE (x)
RoE (%)
CAGR
EPS
(%)
Key investment arguments
(FY16EFY17E FY18E FY17E FY18E FY17E FY18E
FY18E)

GAIL IN
358
450
25.8
29.4
34.9
26.2
26.7
32.5
12.2
10.3
11.8
12.9



PLNG IN
249
340
36.7
18.9
25.9
34.4
15.2
22.2
13.2
9.6
20.1
23.3



IGL IN
542
710
31.0
41.0
45.3
20.1
37.0
40.5
13.2
12.0
21.8
20.5


GUJS IN
133
180
35.7
10.2
10.7
15.1
10.5
11.9
13.0
12.5
13.7
13.1




GUJGA IN
523
660
26.1
25.9
38.9
82.8
37.9
38.7
20.2
13.4
17.2
29.5


Key risks to our recommendation
Petrochemicals business to turn around
from FY17 on lower gas costs, higher
utilisation
Gas pipeline tariffs expected to improve by
~20% on PNGRB’s review



Gas volumes to improve on higher LNG
consumption by power/fertiliser sectors
Among the best levels of earnings visibility
from long-term contracts at Dahej
LNG pooling mechanism to sustain high
near-term utilisation at Dahej


Valuations factoring in impact from low
utilisation at Kochi
Volume growth to accelerate from antipollution drives in Delhi
Decline in domestic gas price to drive nearterm margins
Deserves higher earnings multiple as 80%
of volumes come from retail segment
Gas pipeline tariffs to improve by ~20%
Decline in volumes from RIL to be offset
by revival overall gas demand
Investments in GGAS offer additional
upsides to pipeline business valuations
Volumes to improve from revival in gas
consumption at Morbi
Margins to turn around as prices and
volumes normalise
Highest earnings growth among peers








Lower-than-expected growth in gas
transmission and trading volumes
Negative margins from higher pricing
of US LNG contracts
Sharp decline in oil prices (to
<US$ 30/bl) could impact LPG and
petrochemical business earnings
Any new regulations on re-gas tariffs
Competition from other LNG
upcoming regasification terminals
Lower-than-expected volume growth
for CNG
PNGRB regulations with regard to
marketing exclusivity
Reduction in allocation of domestic
gas for CGD
Lower-than-expected pipeline
tariffs on any change in PNGRB
regulations
for the industrial segment
PNGRB regulations with regards to
marketing exclusivity
Reduction in allocation of domestic
gas for CGD
Source: RCML Research, Bloomberg
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ENERGY
Contents
Price slump opens window for demand revival ...........................4
Macro climate turning favourable for higher gas consumption from power
segment .............................................................................................................. 5
Consumption trend from fertiliser sector relatively better off ...................... 7
Steep decline in LNG prices supportive .......................................................... 8
Natural gas consumption will continue to accelerate.................................... 9
Govt. policy aligned to promote gas consumption ........................10
LNG price pooling yields results.................................................................... 10
Pollution control initiatives augur well for CGD volumes ........................... 11
Robust outlook for gas infrastructure.........................................13
Surge in LNG re-gas capacities a viable alternative for gas supplies ....... 13
Pipeline utilisation close to all-time lows – can only get better ................. 14
Potential redrawing of PNGRB’s role ..........................................16
Tariff calculation remains a contentious issue ............................................ 16
Key tariff-linked disputes ................................................................................ 17
Opportunity for PNGRB to redeem itself through tariff reviews ................. 17
Companies..................................................................................... 18
GAIL (India) ........................................................................................................ 19
Petronet LNG ..................................................................................................... 31
Indraprastha Gas .............................................................................................. 39
Gujarat State Petronet ...................................................................................... 48
Gujarat Gas........................................................................................................ 57
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Price slump opens window for demand revival
Spot LNG prices have declined to less than US$ 4.5/mmbtu, making usage viable for
price-sensitive segments such as power generation and liquid fuel industrial applications.
While these prices may not sustain, global oversupply in LNG will ensure it remains
competitive against alternate fuels.
Traditionally, demand for natural gas in India has been primarily driven by the power and
fertiliser sectors. Since these sectors are regulated by the government, gas consumption
is not purely a function of free market principles and hence is extremely price sensitive –
especially for power generation. Low gas prices would help into supporting the LNG
pooling mechanism, and therefore offer an excellent opportunity for a revival in
consumption growth from these sectors.
Decline in gas price offers one of the
best opportunities for demand to
expand
Fig 3 - Gas consumption
Power
(mmscmd)
Fertilizer
City Gas
Industrial
Petrochemicals / Refineries /
Internal Consumption
Sponge Iron / Steel
250
200
150
100
50
0
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
Fig 4 - Current pricing seems good enough to bridge demand-supply gap (mmscmd)
112
326
FY16 potential
demand
Low consumption from power sector
the primary reason for demand-supply
gap
26
46
133
9
FY16 consumption
US$10/mmbtu
US$7/mmbtu
US$5/mmbtu
US$3-5/mmbtu
Existing
consumption
SMEs/CGD
demand
Other Industrial
(petrochemicals,
refineries,
iron/steel)
Fertiliser
Power generation
Macro climate turning favourable for higher gas consumption from
power segment
Various factors impacted power sector consumption
Gas consumption in the power sector has been declining consistently since FY13,
constrained by the higher cost of gas and its scarce availability across regions. Coal is the
cheapest and more preferred fuel option for power generation. This is followed by
Multiple factors behind falling power
sector gas consumption – pricing the
most notable
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ENERGY
domestic gas, which is cost effective vis-à-vis liquid fuels, contracted LNG and imported
coal. Use of imported coal could lead to a lower-than-expected cost of generating power,
as most of the new power projects are coming up in coastal areas (cutting down
transportation costs) and buyers are entering into long-term contracts.
Key reasons for the decline in gas demand from the power sector include:

Increase in average gas pricing: The decline in domestic gas production has spelled
trouble for the power sector. Currently, 19mmscmd of domestic gas is being
allocated to the sector, which is a fraction of the overall demand of ~141mmscmd
(24GW of generation capacity). Another 10mmscmd is being routed through the LNG
price pooling mechanism.
The average cost of gas surged to ~US$ 8/mmbtu in H1FY16 from US$ 6/mmbtu in
FY13, affecting power plant utilisation and lowering PLFs to 25% (from ~50% in FY13).

Limited LNG import infrastructure: The Dahej regasification terminal is currently
operating at peak utilisation of 110%, while the Dabhol terminal is unable to operate in
the monsoons, limiting its utilisation to ~40% of total capacity. The Kochi regasification
terminal has no pipeline connectivity to western or northern pipeline grids.

Inability of SEBs to take regular power tariff hikes: Several state electricity boards
(SEB) have been unable to hike tariffs on political compulsions. Mounting losses of
SEBs aggravated concerns for gas based generation capacities
Fig 5 - Power sector gas consumption
(mmscmd)
Power demand
Power consumption
160
140.8
140
122.7
120
100
104.6
86.5
80
60
42.5
40
29.4
28.8
28.6
FY14
FY15
FY16
20
0
FY13
Window of opportunity from low gas prices
The crash in global gas prices presents one of the best opportunities for the government
to bring gas-based power plants out of the woods. At an LNG price of US$ 5/mmbtu
(US$ 4.5/mmbtu on 25% blending with domestic gas), power tariffs would work out to
~Rs 4/unit. While this is still above the average Rs 3.5/unit for domestic coal-based
generation capacity, it makes the blended costs comfortable enough for SEBs to buy
power from gas-based plants.
Crash in global gas prices could help
government bring the power sector
out of the woods, but only just
The planned increase in LNG regasification capacities on the west coast by ~14mmtpa (or
49mmscmd) by FY19 will remove bottlenecks in LNG import capacity. Domestic gas
production might also improve by 10-15mmscmd by FY19.
We expect ~25mmscmd (out of ~40mmscmd) of incremental gas supplies to be absorbed
by the power sector, as the government’s pooling policy strives to achieve average PLFs
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of 30% by FY20 (on a base of expanded power generation capacity of 38,000MW). In a
way, we don’t expect gas-based power generation capacities to just about survive on
government support. This implies deficit in gas consumption would expand to staggering
130mmscmd levels for the power sector by FY18. There can therefore be only upsides to
our gas consumption estimates, if prices continue to sustain at current levels.
Fig 6 - Gas consumption deficit for power
(mmscmd)
FY15
Power sector consumption (RCML Estimate)
Power sector demand (PNGRB Estimate)
Supply Deficit
FY16E
FY17E
FY18E
FY19E
FY20E
28.8
28.6
35.2
44.0
52.8
61.5
122.7
140.8
158.9
173.9
188.9
203.9
(94)
(112)
(124)
(130)
(136)
(142)
Gas consumption deficit a staggering
130mmscmd for power sector (FY18E),
as PLFs to average at 30%
Fig 7 - Current PLF remains well below comfort levels
Region
Monitored
Capacity
(MW)
FY16
Feb’16
April’15 – Feb’16
PLF (%)
Target (MU)
Generation (MU)
PLF (%)
Northern
5,331
1,105
1,009
27.2
12,693
11,714
27.3
Western
10,815
859
1,486
19.8
10,516
15,497
17.8
Southern
6,464
488
609
13.6
5,489
7,660
16.5
170
-
-
-
-
-
-
Eastern
North Eastern
All India
Target (MU) Generation (MU)
1,674
811
725
62.2
8,559
7,538
57.0
24,454
3,263
3,830
22.5
37,257
42,409
22.2
Source: Central Electricity Authority, RCML Research
Consumption trend from fertiliser sector relatively better off
While there are multiple factors concerning demand from the power sector, fertiliser
sector demand is constrained mainly by the limited availability of gas (domestic or LNG).
The sector is regulated and subsidised with the government controlling the end price of
urea, which limits the cost at which raw material like natural gas can be bought.
Fertiliser consumption can improve on
added LNG supply, since alternative
naphtha will always be priced higher
The fertiliser industry uses natural gas both as feedstock and fuel in the production of
urea. The government has capped the allocation of domestic gas at 31.5mmscmd for the
fertiliser sector. This has led to an increase in LNG consumption from this sector to
14mmscmd. Limitations in regasification capacity are a major hindrance for increasing
LNG consumption. Three more fuel oil/naphtha-based fertiliser units are planning to
convert to gas-based feedstock, but are facing delays due to a lack of pipeline
connectivity and non-availability of gas.
Fig 8 - Gas consumption deficit for fertiliser
(mmscmd)
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
Fertiliser sector consumption (RCML Estimate)
41.8
45.7
45.7
50.7
55.7
60.7
Fertiliser sector demand (PNGRB Estimate)
60.4
72.1
96.9
103.5
105.7
105.7
Supply Deficit
(19)
(26)
(51)
(53)
(50)
(45)
63.23
65.27
67.65
67.80
67.23
66.54
Power/Fertiliser out of total demand (%)
Key drivers of consumption
Fertiliser sector consumption can improve led by the following key drivers:

Conversion of another three naphtha-based units to gas-based can add ~4mmscmd
to gas consumption (by end-FY17).
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
Commissioning of urea expansion projects and revival of some closed units can add
~10mmscmd to gas consumption (expected by FY18/FY19).

Direct Benefit Transfer (DBT) of urea subsidy would aid free pricing of urea – leading
to better price elasticity in gas demand for the fertiliser sector (making LNG offtake
more viable).
Fertiliser sector to consume an
additional 15mmscmd LNG by FY19
Fig 9 - Consumption ramp-up from fertiliser segment
(mmscmd)
80
Existing
Naphtha to gas conversion
Brownfield expansion
Revival of closed units
Greefield units
70
4.8
60
9.6
50
6.6
4.2
6.6
4.2
40
30
20
41.8
41.8
41.8
41.8
41.8
FY15
FY16E
FY17E
FY18E
FY19E
10
0
Steep decline in LNG prices supportive
Global LNG prices have crashed to ~US$ 4.5/mmbtu levels in March, almost at par with
fuel oil (FO) prices. Historically, spot LNG prices have either been at par or lower than FO
prices. Industrial gas demand has lagged over the last six months due to a wide
divergence away from FO prices. LNG prices now seem to be well aligned and
competitive against alternative options. Although coal remains the cheapest fuel option,
decline in differentials with LNG makes it easy for the governments globally to incentivize
a shift towards natural gas to some extent.
LNG price crash makes it more
acceptable for pooling for power
sector consumption
Interestingly, there has been a steep decline in LNG prices as a percentage of crude prices
as well. This indicates LNG becoming more of a Buyer’s market now. Many of the longterm LNG contracts may be soon altered to prevailing market trends
Fig 10 - LNG price movement vs. alternatives
Spot LNG price (Japan)
Fuel Oil
Coal
(US$/mmbtu)
30
Fig 11 - Spot LNG price vs. 5-year average price
Naphtha
LPG
(US$/mmbtu)
20
5-year average
18
16
25
14
12
20
10
15
8
6
10
4
5
2
Jan-16
Jul-15
Oct-15
Apr-15
Jan-15
Jul-14
Oct-14
Apr-14
Jan-14
Jul-13
Oct-13
Apr-13
Jan-13
Jul-12
Oct-12
Apr-12
Jan-12
Jul-11
Oct-11
Jan-16
Jul-15
Oct-15
Apr-15
Jan-15
Jul-14
Oct-14
Apr-14
Jan-14
Jul-13
Oct-13
Apr-13
Jan-13
Jul-12
Oct-12
Apr-12
Jan-12
Jul-11
Oct-11
Apr-11
Source: Bloomberg, RCML Research
Apr-11
0
0
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Fig 12 - LNG vs. Brent
Brent
(US$/mmbtu)
LNG as % of Brent (R)
(%)
Feb-16
Oct-15
Dec-15
Aug-15
Apr-15
Jun-15
Feb-15
Oct-14
Dec-14
Aug-14
Apr-14
Jun-14
Feb-14
Oct-13
Dec-13
Aug-13
Apr-13
Jun-13
Feb-13
0
Oct-12
0
Dec-12
5
Aug-12
5
Apr-12
10
Jun-12
10
Feb-12
15
Oct-11
15
Dec-11
20
Aug-11
20
Apr-11
25
Jun-11
25
Natural gas consumption will continue to accelerate
Globally, natural gas is expected to dominate the fuel consumption mix, considering its
environmental benefits. An increase in consumption would be at the cost of coal and oil.
Renewables sources of energy would continue to top the agenda, but would struggle to
cross 10% of overall consumption due to technology limitations. Gas would always be the
preferred fallback for most countries (especially India), if renewable energy investments
(such as solar, wind and biofuel) fail to take off as expected.
Gas is a viable, readily available fuel
alternative to meet environment
conservation objectives
Fig 13 - Global fuel consumption mix as a % of total consumption
(%)
40
Liquids
Natural Gas
Coal
Nuclear Energy
Hydroelectricity
Renewables
35
30
25
20
15
10
5
0
FY00
FY05
FY10
FY14
FY15
FY20
FY25
FY30
FY35
Source: BP Energy Outlook 2016, RCML Research
Fig 14 - Global gas consumption
(mn tonnes oil
equivalent)
2,000
Transport
Power
Industry
Other sector
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
FY00
FY05
FY10
FY14
FY15
FY20
FY25
FY30
FY35
Source: RCML Research, BP Statistical Review 2015
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Govt. policy aligned to promote gas consumption
Regulated sectors such as power and fertiliser require government intervention to
increase their consumption of gas, as free market principles are not fully applicable here.
Some government-driven initiatives such as LNG price pooling for the power and fertiliser
sectors, pollution control drives through the diesel vehicle ban and the push for a shift to
CNG vehicles have led to further improvement in LNG demand. We expect most of these
initiatives to continue well beyond FY17.
LNG price pooling yields results
LNG price pooling for the power sector from Apr’15 has generated ~10mmscmd of LNG
demand from existing gas-based power plants.
LNG price pooling has revitalised
power plants – scheme likely to be
widened as re-gas capacities expand
Power sector pooling mechanism

Through reverse bidding, power plants quote a tariff for LNG. The subsidy for the
winning bids is released through the Power Sector Development Fund (PSDF).

Price pooling does not affect the domestic gas allocation to existing users.

GAIL is in charge of importing LNG for the power plants.

Incentives would be provided across the chain – reduction in state VAT, 50%
discount for pipeline tariffs (GAIL and GUJS) and marketing margins on LNG (GAIL).

Currently, 10mmscmd of LNG is being supplied through this mechanism. Volumes
are expected to increase to ~15mmscmd in FY17 as more states come on board
(Maharashtra and Andhra Pradesh).
This scheme in its current form is applicable till Mar’17. Considering its success, we see a
high probability of an extension beyond FY17 along with coverage of a wider demand
base factoring upto 50% power plant PLF by FY19/FY20 (~50mmscmd LNG pooling
volumes from 15-20mmscmd currently). Incremental LNG regasification capacities of
40-50mmscmd on the west coast by FY18/FY19 would make this more feasible. The
pooling mechanism is intended to revive 31 stranded power projects (14,305MW
capacity). It will also aid 12 other power plants operating at less than 30% PLF.
Fertiliser sector pooling mechanism
The LNG pooling scheme has been implemented for the fertiliser sector as well (in two
phases from 1Jul15), but excludes concessions over the value chain as compared to that
for power. It has led to ~6mmscmd of additional LNG demand since inception.

Phase I (FY16-FY18): Pooling of gas for existing units along with naphtha conversion
units which will be supplied gas as and when pipeline connectivity is established
(increase in gas consumption: 6-10mmscmd).

Phase II (FY19 onwards): Pooling of gas considering the requirement of existing units
including conversion units and proposed brownfield/greenfield units (increase in gas
consumption: 10-15mmscmd).
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Pollution control initiatives augur well for CGD volumes
Pollution control initiatives have taken priority for the government in light of the
aggressive push by various environment control agencies. Almost all Indian cities have
come under the scanner for higher-than-permissible pollution levels.
After power, CGD expected to see the
most action – an upshot of
environment control initiatives
Recent initiatives to curb vehicular pollution

Domestic gas allocation policy altered by the central government to give priority to
CNG and domestic PNG volumes

Delhi government experimenting with odd-even vehicle scheme

Ban on sale of diesel vehicles above 2,000cc in Delhi

Supreme Court (SC) order mandating commercial taxi operators in Delhi to convert
to CNG by 31Mar16

SC order mandating all public transport to run on CNG

SC order mandating the government to set up 104 CNG stations to remove
bottlenecks for consumers
Delhi is currently being singled out for stringent pollution control measures. However, we
see this agenda being extended across the country, especially where natural gas
infrastructure is accessible. Gujarat and Maharashtra (Mumbai/Pune) could be next in
line for similar stringent measures.
Pan-India coverage for CGD (covering all large cities) can be achieved over 4-5 years, once
cross-country pipelines such as Kochi-Mangalore-Bangalore, Jagdishpur-Haldia and
Ennore-Kakinada pipelines are completed. The government has mandated all CGD
companies to accelerate Piped Natural Gas (PNG) connectivity. The primary objective is
to transfer LPG consumption from urban to rural areas, ensuring most of the urban
consumers shift to PNG from LPG (subsidised for retail consumers).
Economic and environmental rationale support higher consumption of CNG
Running costs for CNG currently work out ~50% cheaper than petrol and ~30% cheaper
than diesel. Excise duty hikes on petrol and diesel have further tilted the economics in
favour of CNG – and cushioned the price differential from the crude price decline.
Differentials should get better after another cut in domestic gas prices by the
government from 1Apr16.
CNG offers significant economic
advantage over Petrol/Diesel
Fig 15 - Average savings for CNG vehicles (Delhi)
Parameters
Average daily running (km)
CNG vs. Petrol
CNG vs. Diesel
75
75
Mileage/litre
14.0
20.0
Mileage/kg
19.5
24.0
Price/litre (Delhi)
56.6
46.4
Price/kg
78.7
55.7
CNG Price/kg
37.2
37.2
2.1
0.7
57,237
20,207
4,797
1,736
Savings/km
Annual Savings (Rs)
Monthly Savings for CNG vehicles (Rs)
28 March 2016
Page 11 of 67
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ENERGY
Relative ease of use and safety makes PNG a better alternative to LPG
Post the decline in oil prices, PNG currently commands ~25% premium over subsidised
LPG cylinders, while being ~8% cheaper than non-subsidised LPG cylinders. Considering
an average of consumption of ~9 subsidised cylinders per household, incremental
monthly expense for shifting to PNG works out to an insignificant Rs 80/month (for urban
areas). PNG should therefore find many takers among urban households considering its
ease of use over LPG (continuous flow of gas, ease of billing). PNG also provides
significant safety advantages over LPG, hence justifying the marginal premium.
Fig 16 - PNG economics for a household (Delhi)
Value
No. of subsidised cylinders allowed
12
Average no. of cylinders per household
9.0
Retail Price - non-subsidised (Rs/cylinder)
575.0
Retail Price (Rs/scm)
26.8
Retail Price for subsidised LPG (Rs/cylinder)
419.0
Retail Price (Rs/scm)
19.5
Retail PNG Price (Rs/scm)
24.7
Premium for PNG over subsidised (%)
26.2
Premium for PNG over non-subsidised (%)
(8)
Avg. monthly additional expense (Rs)
82
Annual additional expense (Rs)
988
Infrastructure penetration needed for expanding CGD reach
As the availability of gas improves, we see clear potential for the downstream gas business
to expand. The expansion in volumes is bottlenecked by a lack of infrastructure in terms of
both end-user and cross-country pipeline connectivity. The lead time for laying CGD
pipelines is typically longer than that for a cross-country pipeline, as the former requires
additional approvals at the local level. CGD businesses can evolve to their fullest potential
once cross-country pipeline networks are commissioned across the country. Though the
government has classified CGD among priority sectors for allocation of gas, the availability
of gas is still a challenge due to the paucity of necessary transmission infrastructure.
CGD expansion bottlenecked by poor
end-user and cross-country pipeline
connectivity
Fig 17 - CGD demand in India
CGD demand
(mmscmd)
CGD demand as a % of total gas demand (R)
(%)
40
9
7.7
35
7.1
6.5
30
5.9
5.6
8
7
5.9
6
25
5
20
4
15
3
10
2
5
1
17.2
18.2
22.3
26.6
31.2
35.9
FY15
FY16E
FY17E
FY18E
FY19E
FY20E
0
0
28 March 2016
Page 12 of 67
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INDIA
ENERGY
Robust outlook for gas infrastructure
Over 75mmscmd of incremental gas supplies appear probable on the back of LNG
regasification capacities being commissioned over the next five years. These capacities
are usually viable with long-term contracts, hence assure gas supplies on commissioning.
They offer a viable alternative to domestic gas supply in the current low pricing scenario.
We see a turnaround in the offing for India’s cross-country gas pipeline infrastructure,
which is reeling under abysmally low average utilisation levels of ~41%. Along with an
increase in volumes, we expect an increase in tariffs upon review by PNGRB.
Over 75mmscmd of incremental gas
supplies likely in five years as LNG
re-gas capacities come online
Surge in LNG re-gas capacities a viable alternative for gas supplies
PLNG leads the LNG regasification capacity expansion drive and is on track to commission
5mmtpa of incremental capacity at Dahej by Dec’16, taking its effective capacity to
17.5mmtpa. Of this, 6mmtpa has been contracted for the long-term, implying that at
least 22mmscmd of incremental volumes are assured from Dahej starting FY18/FY19.
Key upcoming LNG re-gas capacities:
PLNG expansion at Dahej, Mundra, and
Pipavav
Key LNG regasification terminals in the works

Mundra LNG terminal (GSPC-Adani JV, 5mmtpa) – construction activities commenced
and expected to be commissioned by end-FY18; ~2.5mmtpa capacity expected to be
contracted by GSPC group

Pipavav LNG terminal – expected to be commissioned in FY18 (Swan Energy,
5mmtpa); would be looking to contract 2mmtpa capacity to ONGC, IOC and BPCL

Dabhol LNG terminal – expected to start work on its long-pending breakwater facility
(making it feasible to operate in the monsoon), that could add ~2.5mmtpa capacity
by FY19/FY20

GAIL-Shell-GDF Suez JV’s floating storage regasification unit (FSRU) – expected to be
commissioned on the east coast by end-FY18, adding ~5mmtpa capacity; GAIL, Shell
and Engie have an MOU for formation of an LNG supply and marketing company
primarily to market this LNG
Fig 18 - Upcoming LNG regasification terminals
(mmtpa)
60
50
PLNG
Hazira, Shell & Total
Mundra, GSPC & Adani, Greenfield
Pipavav, Swan Energy, FSRU
Dabhol, GAIL & NTPC, Greenfield
GAIL, FSRU, East Coast
IOCL, Ennore, Greenfield
5.0
4.0
2.5
5.0
40
30
1.3
20
2.5
5.0
2.5
5.0
2.5
5.0
10
17.5
17.5
18.8
FY15
FY16E
FY17E
2.0
2.5
5.0
4.0
5.0
5.0
5.0
5.0
5.0
5.0
22.5
25.0
25.0
FY18E
FY19E
FY20E
1.3
5.0
0
28 March 2016
Page 13 of 67
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INDIA
ENERGY
Fig 19 - Another 15 mmtpa LNG regasification terminals are being considered
Hiranandani, Jaigarh
5 mmtpa
ONGC, Mangalore
5 mmtpa
HPCL, Gujarat
5 mmtpa
Source: Company, RCML Research
Pipeline utilisation close to all-time lows – can only get better
India’s 130bn km cross-country natural gas pipeline network with a carrying capacity of
337mmscmd lies significantly underutilised, as consumption of gas languishes at
140mmscmd. GAIL has been affected the most considering its ambitious expansion drive
(mostly government-led). Hence no major investment in cross-country pipeline
infrastructure is likely over 3-5 years until existing utilisation improves.
Utilisation levels to improve
eventually, as gas consumption from
most segments picks up
Scope for turnaround of existing pipelines
We believe the following industry trends offer a turnaround in fundamentals for existing
pipeline networks:



Focus on improving utilisation of existing networks aided by o
More LNG volumes to the power and fertiliser segments through the gas pooling
mechanism
o
Neat term volumes increase from expansion of existing LNG regasification
capacities on the west coast
o
Long-term supply outlook from greenfield LNG regasification terminals at
Mundra and Pipavav
Increase in pipeline tariffs to justify investments on existing networks
o
Approved tariffs for new pipelines were based on 100% utilisation from the fifth
year of operations, while the ground reality is very different
o
PNGRB is reviewing tariffs for most pipelines and we see a high probability of
tariff hikes (by +20% at least)
Relook at planned pipelines’ viability
o
Planned pipelines such as Mehsana-Bhatinda, Surat-Paradip or MallavaramBhilwara could gain viability by altering routes so as to connect with the existing
pipeline networks of GAIL/GUJS/RGTIL
o
New routes only if demand-supply equation is justified: Jagdishpur-Haldia
(demand from fertiliser plants), Kochi-Mangalore-Bangalore (PLNG’s Kochi
terminal is significantly under utilised) and Ennore-Kakinada (IOCL’s proposed
Ennore LNG regasification terminal) pipeline networks
28 March 2016
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Sector Report
INDIA
ENERGY
Fig 20 - Natural gas transmission infrastructure in India
Name of Entity
Length
(km)
Design Capacity
(mmscmd)
HVJ+GREP+DVPL
GAIL
4,222
53
DVPL-GREP Upgradation
GAIL
1,280
54
Dahej-Uran-Panvel-Dabhol
GAIL
815
19.9
Agartala P/L network
GAIL
61
2.3
Mumbai regional P/L network
GAIL
129
7
Assam regional P/L network
GAIL
8
2.5
KG Basin regional P/L network
GAIL
878
16
Gujarat regional P/L network
GAIL
760
3.9
Name of pipeline
Cauvery regional P/L network
GAIL
271
3.9
EWPL
RGTIL
1,460
80
Gujarat Gas Grid network ( HP & LP)
GSPL
1,950
43
Hazira-Ankleshwar
GGCL
73
5
Assam network
AGCL
105
6
Dadri-Panipat
IOCL
132
9.5
Dadri-Bawana-Nangal
GAIL
886
31
13,030
337
Total
India gas consumption
Utilisation
139
41.2%
28 March 2016
Page 15 of 67
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INDIA
ENERGY
Potential redrawing of PNGRB’s role
Limiting the Petroleum and Natural Gas Regulatory Board’s (PNGRB) role to setting bid
guidelines and ensuring fair play in current operations is the need of the hour. The
Supreme Court verdict in favour of IGL has set the ball rolling for more investments in the
CGD business across the country. A similar ruling on tariffs for GAIL’s pipelines – after
being slashed by an average of 60% over the last four years due to the regulator’s heavyhanded intervention – will ensure a strong revival in investment sentiments for crosscountry natural gas pipelines.
PNGRB seems to be embroiled in
litigation rather than regulation
Tariff calculation remains a contentious issue
GAIL has been hit the hardest by various PNGRB orders for its pipelines, most of which
have led to severe tariff cuts – largely due to controversial reasoning that often defies the
very purpose of regulations. This has led to a pile-up of litigations, causing PNGRB to
spend a lot of time defending it decisions in court rather than constructively facilitating
development of the industry.
Fig 21 - Tariff orders for GAIL
Tariff Submitted
Tariff Approved
Reduction
%
(Rs/mmbtu)
(Rs/mmbtu)
(Rs/mmbtu)
Reduction
From April, 2010: 62.12
25.46
9.93
28.1
N/A
53.65
N/A
DUPL-DPPL
40.16
24.49
15.67
39.0
Mumbai Regional: Uran-Thal-Usar
10.74
3.49
7.25
67.5
7.66
1.04
6.62
86.4
27.73
11.85
15.88
57.3
13.34
4.16
9.18
68.8
Pipeline Network
HVJ-DVPL Existing
HVJ-DVPL Upgradation
Mumbai Regional: Trombay
Upto March 31, 2010: 35.39
Mumbai network
Dadari-Bawana-Nangal
Others- 9.75 & Lanco - 27.37
Chhainsa-Hissar
KG Basin Network*
Wt. avg. rate of 11.81
5.56
6.25
52.9
Cauvery Basin Network
Narimana & Kuthalam: 16.8
7.47
9.33
55.5
Cauvery Basin Network
Ramnad: 6.45
3.07
3.38
52.4
Dabhol Bengaluru
73.49
44.65
28.24
38.7
Kochi Mangalore/Bengaluru
59.99
28.99
31
51.7
Agartala-Dukti Maharajganj
40.77
6.13
34.64
85.0
Gujarat-South Guj Grid
11.74
7.81
3.39
30.3
6.8
0.42
6.38
93.8
23.27
0.78
22.49
96.6
Total KG/Cauvery basin
Gujarat-South Guj GGCL-UPL
Total South Gujarat
Gujarat-Motwan
Gujarat-North Guj Kadi-Kalol
4.34
1.84
2.5
57.6
Gujarat-North Guj Kadi-Ramol
94.34
6.86
87.48
92.7
Gujarat-North Guj Mehsana
11.07
1.86
9.21
83.2
5.03
0.58
4.45
88.5
Gujarat-Pallyad Grid
Source: PNGRB, RCML Research
*KG basin pipeline network tariffs have been recently revised to Rs45/mmbtu on completion of the review process
28 March 2016
Page 16 of 67
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Sector Report
INDIA
ENERGY
Key tariff-linked disputes

Capital base for pipelines existing before PNGRB regulations: PNGRB wrongly
considers net fixed assets as per books. Instead, the depreciation rate of 5.17%
should be considered retrospectively to arrive at the net fixed asset base. GAIL was
charging depreciation at 8.17% upto 2005, leading to a much lower value of assets
for tariff calculation.

Volume divisors: Regulations wrongly estimate normative utilisation of 50%, 60%,
70%, etc. for tariff calculation. Instead, the calculation should be based on actuals as
utilisation is extremely volatile and driven by many parameters outside the
company’s control. Actual contracted quantity can also be considered. The use of
normative capacities has led to an unfair reduction in tariffs and impacted IRR. The
recently issued PNGRB draft regulations have relaxed these norms to some extent,
but still do not provide complete freedom to operators.

Unaccounted gas loss: Unaccounted gas through loss of volumes during
transportation is a realistic cost incurred by operators, and hence cannot be ignored.
It defeats the very purpose of regulated returns after factoring all costs. PNGRB in all
its tariff orders issued to date has refused to recognise this cost, leading to a steep
reduction in tariffs.

Inflation rate for projecting costs: PNGRB has fixed the rate at 4.5%, while realistic
inflation rates based on CPI/WPI have been much higher. Companies have proposed
to consider actual rates based on WPI for calculating cost escalation.

Future capex/opex: Regulations do not factor in capex that is yet to be approved by
the company board or by the central government. Since capex which is to be over 10
years cannot be approved by any organization in advance, the company’s
assessment of pipeline operations should be taken into consideration. Tariff reviews
can always keep a check on capex and accordingly factor these in based on actuals.

No. of working days: Regulations consider 355 days of operations, while companies
have proposed 345 days. As per GAIL, a minimum 20 days of maintenance for a
pipeline is rational, based on past experience of operations and peer group
comparisons across the world. PNGRB is penalising operators by assuming 355
working days.

Interest costs during construction: Regulations do not consider interest costs
capitalised during construction. In reality, companies need to raise debt during
construction. By excluding interest costs, the actual return on capital employed is
being compromised.
Most gas companies’ tariff calculations
diverge from PNGRB’s – review of all
tariff approvals a must
Opportunity for PNGRB to redeem itself through tariff reviews
PNGRB is expected to review most of its pipeline orders in FY17. We see this as a golden
opportunity for the regulator to align the tariffs to ground realities. The recent tariff
order for GAIL’s KG basin pipeline network is a good start.
Likely order review in FY17 a golden
opportunity for the regulator to align
tariffs to ground realities
Utilisation of gas pipelines is well below commercially viable levels. The draft policy
recently issued for lowering the volume base after factoring in utilisation at 75% of
capacity has not been finalised yet. While PNGRB has indicated that it is open to being
flexible on the volume divisor, the industry needs to see some confirmation of this stance
through favourable tariff orders.
28 March 2016
Page 17 of 67
India Energy
Sector Report
INDIA
ENERGY
Companies
28 March 2016
Page 18 of 67
Company Initiation
INDIA
ENERGY
28 March 2016
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Earnings turnaround begins
We initiate coverage on GAIL with BUY and a Mar’17 TP of Rs 450. GAIL is
poised for a turnaround in earnings as petrochemical operations normalise
and return to profits in FY18E on the back of low-cost LNG. Gas
transmission volumes may have bottomed out in FY16, as renegotiation of
the RasGas LNG contract clears the way for more LNG consumption in India.
Near-term earnings triggers from lower domestic gas prices and potential
pipeline tariff hikes add to the buoyant long-term outlook on the stock.
 Turnaround in petrochemicals business: GAIL’s petrochemicals business is set to
turn around after a year of losses stemming from operational bottlenecks and
higher input costs. We expect operating profits to resume from Q1FY17 as plant
utilisation ramps up. Decline in LNG costs would be a key enabler.
 Tariff improvement most likely to be a structural trend: GAIL’s base pipeline tariffs
can improve by ~20% on average considering the tariff reviews due by PNGRB in FY17
(increase in KG basin pipeline tariff is a good start). We see a structural upward trend
for pipeline tariffs, as actual returns would be well below that assumed by regulations
(75% utilisation or ~175msmcmd volumes unlikely to materialise until FY20).
 Volume upsides for gas transmission/trading: Volume ramp-up would be another
positive as gas consumption improves on lower LNG costs. Earnings from gas trading
can accelerate relatively faster amid higher LNG volumes. Trading and transmission
combined are expected to contribute over 70% to GAIL’s earnings over FY17/FY18.
Being non-cyclical in nature, they deserve a high valuation multiple.
 Initiate with BUY: We have an SOTP-based Mar’17 TP of Rs 450 for GAIL, of which gas
transmission and trading constitutes 73%. The stock is at 10.3x FY18E EPS, well below
its long-term average due to petrochemical losses. As this business turns around, a rerating is inevitable.
REPORT AUTHORS
Rohit Ahuja
+91 22 6766 3437
[email protected]
Akshay Mane
+91 22 6766 3438
[email protected]
PRICE CLOSE (28 Mar 16)
INR 357.75
MARKET CAP
INR 453.8 bln
USD 6.8 bln
SHARES O/S
1,268.5 mln
FREE FLOAT
43.3%
3M AVG DAILY VOLUME/VALUE
1.7 mln / USD 8.8 mln
52 WK HIGH
52 WK LOW
INR 418.00
INR 260.05
Financial Highlights
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
638,801
636,718
566,930
573,216
679,897
(INR)
Revenue (INR mln)
550
EBITDA (INR mln)
64,384
45,237
46,749
58,942
69,366
Adjusted net profit (INR mln)
45,510
31,145
27,775
37,316
44,237
450
35.9
24.6
21.9
29.4
34.9
400
4.4
(31.6)
(10.8)
34.4
18.5
Adjusted EPS (INR)
Adjusted EPS growth (%)
500
350
Stock Price
Index Price
29,410
24,410
19,410
300
DPS (INR)
10.4
10.0
10.0
10.0
10.0
ROIC (%)
12.1
7.4
6.4
8.3
9.5
Adjusted ROAE (%)
17.7
11.1
9.3
11.8
12.9
Adjusted P/E (x)
10.0
14.6
16.3
12.2
10.3
EV/EBITDA (x)
8.1
11.7
11.2
8.6
7.4
P/BV (x)
1.7
1.6
1.5
1.4
1.3
Source: Company, Bloomberg, RCML Research
250
14,410
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Company Initiation
INDIA
ENERGY
Investment rationale
Turnaround in petrochemicals business
We expect GAIL’s petrochemical operations to normalise and return to profits after a
year of losses caused by operational logjams and higher input costs. Low-cost LNG supply
from RasGas would be a key enabler, supporting higher plant utilisation and likely
translating to operating profits from Q1FY17. This apart, high leverage to oil price implies
significant earnings triggers from any improvement in the oil market.
Improvement in almost all parameters expected
GAIL’s Rs 80bn PATA expansion by 400ktpa (810ktpa cumulative) was commissioned in
Mar’15. This business has been in trouble ever since, reporting losses as costs mount and
production declines.
Petrochemicals business turnaround
would be the primary earnings driver
for GAIL over FY17/18
The following trends highlight the concerns:

Reallocation of domestic gas from the petrochemicals to the LPG business (to align
with the government’s gas allocation policy)

Forced use of the then high-cost RasGas LNG (throughout CY15) to meet minimum
offtake obligation to Petronet, as other consumers declined to offtake

Decline in HDPE/LLDPE prices to ~US$ 1,000/MT (along with crude prices), while LNG
costs remained elevated at US$ 10-11/mmbtu levels (RasGas contract mispricing)

Commissioning process for second-phase PATA capacity leading to frequent
shutdowns, affecting utilisation and volumes
Almost all the above factors have started turning around – LNG costs have declined to
<US$ 5/mmbtu, HDPE prices have improved marginally to US$ 1,100/MT, and volumes
are expected to ramp up to 140-150ktpa from Q1FY17 (raising utilisation to ~70%) due to
low-cost LNG supply from RasGas.
Natural gas (prices down ~40% from Jan’16) constitutes ~70% of the costs for this
business and hence we expect GAIL’s petrochemicals operations to start turning around
from Q1FY17 as volumes pick up.
Fig 1 - Petrochemicals business performance
('000 MT)
Petrochemicals volumes
EBIT (R)
(Rs mn)
140
6,000
5,000
120
4,000
100
3,000
80
2,000
1,000
60
0
40
(1,000)
(2,000)
20
(3,000)
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
(4,000)
Q1FY13
0
Source: RCML Research, Company
28 March 2016
Page 20 of 67
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Company Initiation
INDIA
ENERGY
Petrochemicals and LPG businesses highly leveraged to oil prices
Global PE and LPG prices usually move in tandem with oil prices. However, operating
costs for GAIL’s ethylene cracker change with a lag, primarily driven by LNG prices that in
turn move with a lag vis-à-vis PE prices. GAIL’s petrochemical business earnings are
therefore highly leveraged to PE price movements. A minor movement in PE prices can
have a significant impact on GAIL’s petrochemical business earnings.
We assume PE prices trend lower than current levels of US$ 1,150/MT, as we factor in
risks from declining oil prices. Upside to earnings can be exponential from this business if
PE prices were to improve to US$ 1,400/MT (typically at ~US$ 50/bl oil price levels).
Fig 2 - Petrochemicals earnings metrics
FY14
Sales volumes (‘000 MT)
FY15
FY16E
FY17E
FY18E
445
441
320
480
720
Realisation (US$/MT)
1,704
1,750
1,400
1,000
1,050
Operating costs (US$/MT)
1,129
1,668
1,601
960
1,002
575
82
(201)
40
48
EBITDA (US$/MT)
EBITDA (Rs mn)
15,460
2,220
(6,748)
1,306
2,350
GAIL's total EBITDA (Rs mn)
64,384
45,237
46,749
58,942
69,366
% of total EBITDA
24.0%
4.9%
-14.4%
2.2%
3.4%
A small improvement in PE and LPG
prices can lead to exponentially higher
earnings for these businesses
Fig 3 - Petrochemicals EBITDA sensitivity (FY18E)
Operating costs
(US$/MT)
PE prices (US$/MT)
EBITDA (Rs mn)
850
950
1,050
1,150
1,250
800
2,448
7,344
12,240
17,136
22,032
900
(2,448)
2,448
7,344
12,240
17,136
1,000
(7,442)
(2,546)
2,350
7,246
12,142
1,100
(12,240)
(7,344)
(2,448)
2,448
7,344
1,200
(17,136)
(12,240)
(7,344)
(2,448)
2,448
Source: RCML Research
A similar argument applies to GAIL’s LPG business earnings. This business is being fully
allocated domestic gas, where prices change with a 6-months lag to oil prices. LPG
earnings are relatively more leveraged to movement in prices as compared to
petrochemicals.
Fig 4 - LPG business earnings
Sales volumes (‘000 MT)
FY14
FY15
FY16E
FY17E
FY18E
1319
1,279
1,050
1,360
1,360
Realisation (US$/MT)
924
774
460
450
450.00
Operating costs (US$/MT)
546
393
346
302
318
EBITDA (US$/MT)
378
380
114
148
132
EBITDA (Rs mn)
11,120
19,760
7,867
13,682
12,202
GAIL's total EBITDA (Rs mn)
79,450
56,200
47,508
59,150
69,452
14.0
35.2
16.6
23.1
17.6
% of total EBITDA
28 March 2016
Page 21 of 67
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Company Initiation
INDIA
ENERGY
Fig 5 - LPG EBITDA sensitivity (FY18E)
Operating costs
(US$/MT)
LPG prices (US$/MT)
350
400
450
500
550
236
10,544
15,168
19,792
24,417
29,041
286
5,919
10,544
15,168
19,792
24,417
318
2,960
7,584
12,202
16,833
21,457
368
(1,665)
2,960
7,584
12,208
16,833
418
(6,289)
(1,665)
2,960
7,584
12,208
Growth in pipeline business earnings after a long hiatus
An ambitious expansion drive amid declining gas consumption in India has saddled GAIL
with a large network of unutilised pipeline infrastructure. PNGRB’s retrospective tariff
reduction orders on several pipelines have exacerbated matters for the company. But
with PNGRB set to review most of GAIL’s pipelines in FY17, we expect a minimum 20%
increase in tariffs as the regulator aligns its tariff calculation to ground realities. We also
see significant upsides from the gas trading business as LNG volumes improve.
Investment in anticipation of high domestic gas supplies
GAIL had raised gas transmission capacity to 220mmscmd in anticipation of a ramp-up in
volumes. Instead, its pipeline volumes have been declining steadily since FY13, almost in
line with the decline in India’s gas consumption. Various factors have haunted the sector,
foremost among them being the decline in consumption from the power sector.
Declining volumes coupled with
irrational tariff cuts by PNGRB had
derailed GAIL’s pipeline business
As such, GAIL’s expansion plans in anticipation of much higher domestic gas production
and consumption turned out to be a damp squib. This was true of investments across the
gas value chain, including various power generation plants that invested aggressively in
the hope of receiving low-cost domestic gas. The unutilised infrastructure remains a
major concern for the company.
PNGRB’s tariff orders exacerbated matters
Various tariff orders from PNGRB worsened the situation for GAIL, as the company not
only took a cut in tariffs but also had to write-off ~Rs 30bn from the P&L on retrospective
adjustments. Tariffs for almost all of GAIL’s pipelines were slashed by ~60% on an
average (as compared to calculations submitted by the company). The turmoil created by
PNGRB’s regulatory orders has made pipeline business earnings extremely volatile
(against a relatively steady decline in gas transmission volumes, depicted below).
Fig 6 - Gas transmission business performance
(mmscmd)
Natural gas transmission volumes
EBIT (R)
115
(Rs mn)
7,000
110
6,000
105
5,000
100
4,000
95
3,000
90
2,000
85
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
0
Q3FY13
75
Q2FY13
1,000
Q1FY13
80
28 March 2016
Page 22 of 67
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Company Initiation
INDIA
ENERGY
Fig 7 - Gas transmission business outlook
India gas consumption
Power consumption
GAIL's market share (R)
(mmscmd)
180
Gail pipeline volumes
Fertiliser sector consumption
(%)
85
160
140
79
80
77
120
75
100
72
80
70
70
60
67
40
65
20
0
60
FY14
FY15
FY16E
FY17E
FY18E
Tariff and volume improvement ahead
GAIL’s base pipeline tariffs can improve by ~20% on average considering the tariff reviews
due by PNGRB in FY17 (increase in KG basin pipeline tariff is a good start). We see a
structural upward trend for pipeline tariffs, as actual returns would be well below that
assumed by regulations (75% utilisation or ~175msmcmd volumes unlikely to materialise
until FY20).
Most of GAIL’s pipelines undergoing
PNGRB review – could lead to 20%
surge in tariffs
We highlight the significance and mechanism of the tariff review below:

Sub-optimal utilisation: Actual utilisation for GAIL’s gas pipelines is currently ~45%
(average), well below the theoretical assumption of 100% in PNGRB’s tariff
calculations.

Lower volume divisor: PNGRB has decided to lower assumptions for the volume
divisor to 75% utilisation (from 100%), which could imply ~25% increase in tariffs.
This is still far from comforting for companies as it should have been as per actual
utilisation. Nonetheless, it does offer relief to pipeline companies.

Retrospective adjustments: To date, GAIL has written off ~Rs 30bn towards
retrospective tariff cuts by PNGRB for its pipelines. As calculations change upon
re-basing pipeline tariffs to 75% utilisation, this retrospective write-off will be
recovered. Unlike in the past, these write-offs will have to be built into pipeline
tariffs instead of a one-time recovery – implying additional upside to tariffs.

9x increase in KG basin pipeline tariff an exception: The steep hike in tariffs for
GAIL’s KG basin pipeline to Rs 45.5/mmbtu (from Rs 5.56) was because calculations
assumed one year (FY17) of economic life for the pipelines. Tariffs should adjust
lower (maybe to Rs 20/mmbtu levels) from FY18, depending on GAIL’s plans.
Gas trading plus pipeline business can launch earnings into a new orbit
Gas trading has been perceived as a non-recurring business with volatile earnings,
harboring limited potential to contribute to GAIL’s earnings over the long-term. We
believe it’s actually the opposite – the gas trading business has saved the day for GAIL
while its pipeline business was facing the heat from PNGRB’s tariff orders.
28 March 2016
Page 23 of 67
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Company Initiation
INDIA
ENERGY
As more LNG volumes are absorbed, GAIL’s gas trading volumes would improve in
tandem. Trading business earnings are usually a mark-up that GAIL earns over pipeline
tariffs. These currently do not come under the purview of PNGRB regulations. The
Supreme Court order in favour of IGL clearly spells out that PNGRB has no control on end
pricing of natural gas. Regulating marketing margins implies control on end user prices,
which according to SC bars pricing freedom.
Gas trading earnings can accelerate
faster than transmission business on
higher LNG volumes
Marketing margins are set by the government for domestically produced natural gas,
while margins on LNG are not regulated (with the exception of pooling volumes for the
power sector). Hence, the more the LNG volumes, the better the prospects for GAIL’s
trading business earnings. The trading and transmission businesses combined are
expected to contribute ~70% to GAIL’s earnings over FY17/FY18. These earnings are noncyclical and driven more by macroeconomic fundamentals. Considering the non-cyclical
nature of these businesses, they deserve a much higher multiple.
Fig 8 - Transmission & Trading business contribution
(Rs mn)
EBITDA from gas pipeline
60,000
EBITDA from gas trading
% total EBITDA (R)
(%)
100
91
90
50,000
80
69
73
40,000
60
50
55
70
30,000
50
40
20,000
30
20
10,000
10
0
0
FY14
FY15
FY16E
FY17E
FY18E
Fig 9 - Volume trends
(mmscmd)
Transmission volumes
Trading volumes
120
111
104
100
96
93
92
80
90
84
79
72
75
60
40
20
0
FY14
FY15
FY16E
FY17E
FY18E
28 March 2016
Page 24 of 67
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Company Initiation
INDIA
ENERGY
Valuations
Initiate with BUY
We value GAIL at Rs 450/sh based on a sum-of-the-parts (SOTP) methodology, wherein
the gas transmission and trading businesses constitute 73% of the valuation. The stock is
currently trading at 10.4x FY18E EPS, well below its long-term average due to concerns
over losses in the petrochemicals business. As this business turns around, a re-rating in
multiples is inevitable.
Multiple valuation triggers
Our Mar’17 SOTP target price of Rs 450 for GAIL is based on:

Natural gas and LPG transmission businesses valued on DCF (Discounting FCFE, on
cost of equity at 11.7% and terminal growth at 5%

Gas trading business at 5x FY18E EBITDA

Cyclical LPG/LHC and petrochemicals businesses at 7x FY18E EBITDA

Earnings from unlisted CGD JVs at 13x FY18E EPS

Investments in listed companies at 20% discount to market prices.
Valuations driven by gas pipelines and
trading business. Cyclical businesses
can surprise on earnings if prices
improve with oil prices
Key earnings triggers:

Additional transmission/trading gas volumes from LNG price pooling for the power
and fertiliser sectors

Increase in gas pipeline tariffs

Decline in domestic gas prices from Apr’16 (as per domestic gas pricing formula),
leading to improvement in earnings for the LPG business

Improvement in petrochemical business volumes

Increase in oil prices, leading to higher LPG and PE prices
Fig 10 - SOTP valuation
Details
Natural gas and LPG transmission
Value (Rs mn) Value (Rs/sh)
Description
383,947
303
DCF
Gas trading
91,745
72
5x FY18E EV/EBITDA
LPG & LHC production
63,506
58
7x FY18E EV/EBITDA
Petrochemicals production
16,451
13
7x FY18E EV/EBITDA
Value of investment in listed companies
53,096
42
20% discount to CMP
Other business valuations
60,013
47
Unlisted CGD JVs, E&P
668,758
535
Total EV
Less: Net debt
93,480
85
FY17E
Equity Value
575,278
450
Implies 13x FY18E EPS
28 March 2016
Page 25 of 67
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Company Initiation
INDIA
ENERGY
Fig 11 - Key assumptions
FY14
FY15
FY16E
FY17E
FY18E
Gas transmission volumes (mmscmd)
96
92
93
104
111
Transmission tariffs (Rs/scm
1.2
1.00
1.16
1.17
1.18
Gas trading volumes (mmscmd)
79
72
75
84
90
Gas trading margins (Rs/scm)
0.6
0.3
0.6
0.4
0.6
PE sales volumes (000 tpa)
445
441
320
480
720
PE realisation (US$/MT)
1,704
1,750
1,400
1,000
1,050
LPG/LHC sales volumes (000 tpa)
1,319
1,279
1,050
1,350
1,360
924
774
460
450
450
LPG/LHC realisation (US$/MT)
Key risks

Lower-than-expected growth in gas transmission and trading volumes

Negative margins from higher pricing of US LNG contracts

Sharp decline in oil prices (to <US$30/bl) could impact LPG and petrochemical
business earnings
Risks from low oil prices and mispricing
of US LNG contracts
Fig 12 - Rolling P/E bands (one-year forward)
(Rs)
Price
8x
10x
12x
14x
16x
700
600
Max
23.0
Min
8.5
Avg
13.1
Median 12.1
Last
12.2
500
400
300
200
100
Mar-16
Aug-15
Jan-15
Jul-14
Dec-13
Jun-13
Nov-12
May-12
Oct-11
Apr-11
0
Fig 13 - Rolling P/B (one-year forward)
Max
Min
Avg
Median
Last
(Rs)
1,000
800
2.8
1.1
1.8
1.7
1.4
Price
1x
2x
3x
4x
In a normalised business scenario, GAIL
has usually traded above 15x P/E on the
diversified nature of its earnings. As
earnings from all its businesses
improve, a stock re-rating is imminent
600
400
200
Mar-16
Aug-15
Jan-15
Jul-14
Dec-13
Jun-13
Nov-12
May-12
Oct-11
Apr-11
0
28 March 2016
Page 26 of 67
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Company Initiation
INDIA
ENERGY
Company profile
GAIL, incorporated in August 1984, started as a natural gas transmission company and
has grown organically by building:

a large network of natural gas pipelines covering more than 10,900km with a
capacity of ~200mmscmd;

two LPG pipelines covering 2,040km with a capacity of 3.8mmtpa;

seven gas processing plants for production of LPG and other liquid hydrocarbons,
with a production capacity of 1.4mmtpa; and

a gas-based integrated petrochemical plant of 410,000tpa polymer capacity which is
further being expanded to 900,000tpa.
The company also has 70% equity share in Brahmaputra Cracker and Polymer (BCPL)
which is setting up a 280,000tpa polymer plant in Assam. Further, GAIL is a co-promoter
with 15.5% equity stake in ONGC Petro-additions (OPaL) which is implementing a
greenfield petrochemical complex of 1.1mmtpa ethylene capacity at Dahej in the state of
Gujarat. GAIL has 32.86% stake along with NTPC as equal partner in JV company RGPPL at
Dabhol which is house to the largest gas-based power generation facility and an LNG
regasification terminal operated by GAIL. In 2013, GAIL commissioned its 5mmtpa Dabhol
LNG terminal and will remain its commercial operator for 25 years. The company has also
moved into upstream activities of the gas value chain, i.e. exploration & production and
currently has stakes in 20 E&P blocks including 2 blocks overseas (in Myanmar).
GAIL is present in the City Gas Distribution (CGD) business in India, with Indraprastha Gas
(IGL) in Delhi and Mahanagar Gas (MGL) in Mumbai being its biggest success stories.
Besides IGL and MGL, it has set up several JVs for CGD to supply gas to households, the
transport sector and commercial consumers in various cities. In 2008, it incorporated a
wholly owned subsidiary, GAIL Gas (GGL), to exclusively focus on CGD. The company has
also successfully set up wind energy power projects of 118MW across the states of
Gujarat, Tamil Nadu and Karnataka.
GAIL has formed a wholly-owned subsidiary company, GAIL Global (Singapore), in
Singapore for pursuing overseas business opportunities including LNG and petrochemical
trading. In the US, it has 20% working interest with Carrizo Oil & Gas in the Eagle Ford
shale acreage, Texas, through a wholly owned subsidiary GAIL Global (USA).
Subsequently, a wholly owned subsidiary of GAIL Global (USA) was formed in order to
explore LNG import/liquefaction capacity booking opportunities from the US.
GAIL is also an equity partner in two retail gas companies of Egypt, namely Fayum Gas
Company (FGC) and National Gas Company (Natgas). Further, it is an equity partner in a
retail gas company involved in city gas and CNG in China – China Gas Holdings (China
Gas). GAIL and China Gas have formed a JV company – GAIL China Gas Global Energy
Holdings – for pursuing gas sector opportunities primarily in China.
In addition, GAIL is part of a consortium in two offshore E&P blocks in Myanmar and also
holds a participating interest in the JV company – South East Asia Gas Pipeline Company
– incorporated for transportation of gas produced from the two blocks in Myanmar
to China.
28 March 2016
Page 27 of 67
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Company Initiation
INDIA
ENERGY
Fig 14 - Board of Directors
Name
Designation
Brief Profile
B C Tripathi
Chairman & Managing Director
Subir Purkayastha
Director (Finance)
Joined GAIL in 1985 as a Finance Officer and rose to the position of
Director.
Ashutosh Karnatak
Director (Projects)
Has served as Executive Director (Projects) in GAIL and has managed
diverse infrastructure projects during his rich career span of over 30 years.
M Ravindran
Director (HR)
CNG and PNG in Delhi and the NCR. Was the first CEO of GAIL’s wholly
owned subsidiary, GAIL Gas, from 2008 to 2011.
Ashutosh Jindal
Director (Government Nominee)
Part-time Director (Government Nominee) w.e.f. 24Feb15.
Anuradha Sharma Chagti
Director (Government Nominee)
Part-time Director (Government Nominee) w.e.f. 21May15.
Started his career in ONGC and subsequently joined GAIL in 1984 when the
gas industry in India was at its infancy. Was one of the founder employees of
GAIL and has worked in different capacities in different departments in GAIL.
Has served as MD of IGL, a JV of GAIL & BPCL and the largest supplier of
28 March 2016
Page 28 of 67
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Company Initiation
INDIA
ENERGY
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
37.7
24.9
21.9
29.4
34.9
Adjusted EPS
35.9
24.6
21.9
29.4
34.9
DPS
10.4
10.0
10.0
10.0
10.0
213.9
230.3
240.5
258.2
281.3
BVPS
Valuation Ratios
Y/E 31 Mar (x)
FY14A
FY15A
FY16E
FY17E
FY18E
EV/Sales
0.8
0.8
0.9
0.9
0.8
EV/EBITDA
8.1
11.7
11.2
8.6
7.4
Adjusted P/E
10.0
14.6
16.3
12.2
10.3
1.7
1.6
1.5
1.4
1.3
FY14A
FY15A
FY16E
FY17E
FY18E
P/BV
Financial Ratios
Y/E 31 Mar
Profitability & Return Ratios (%)
EBITDA margin
10.1
7.1
8.2
10.3
10.2
EBIT margin
8.2
5.6
5.8
7.8
8.0
Adjusted profit margin
7.1
4.9
4.9
6.5
6.5
Adjusted ROAE
17.7
11.1
9.3
11.8
12.9
ROCE
10.2
6.7
6.0
7.5
8.3
YoY Growth (%)
Revenue
23.6
(0.3)
(11.0)
1.1
18.6
EBITDA
2.5
(29.7)
3.3
26.1
17.7
Adjusted EPS
4.4
(31.6)
(10.8)
34.4
18.5
25.1
6.9
0.6
7.7
6.0
Receivables (days)
15
17
20
20
18
Inventory (days)
13
17
15
15
14
Payables (days)
22
26
23
22
20
Current ratio (x)
1.5
1.4
1.7
1.8
2.0
Quick ratio (x)
0.3
0.1
0.4
0.4
0.5
Gross asset turnover
2.1
1.7
1.3
1.3
1.5
Total asset turnover
1.4
1.3
1.1
1.0
1.1
14.4
9.8
4.6
6.4
6.4
0.3
0.2
0.2
0.2
0.2
FY14A
FY15A
FY16E
FY17E
FY18E
64.7
69.9
69.1
68.5
68.4
121.7
120.7
91.0
96.7
95.8
8.2
5.6
5.8
7.8
8.0
Asset turnover (Revenue/Avg TA)
142.0
127.9
108.8
103.6
114.5
Leverage (Avg TA/Avg equities)
175.2
176.8
174.6
175.0
173.5
17.7
11.1
9.3
11.8
12.9
Invested capital
Working Capital & Liquidity Ratios
Turnover & Leverage Ratios (x)
Net interest coverage ratio
Adjusted debt/equity
DuPont Analysis
Y/E 31 Mar (%)
Tax burden (Net income/PBT)
Interest burden (PBT/EBIT)
EBIT margin (EBIT/Revenue)
Adjusted ROAE
28 March 2016
Page 29 of 67
BUY
GAIL India
TP: INR 450.00
 25.8%
GAIL IN
Company Initiation
INDIA
ENERGY
Income Statement
Y/E 31 Mar (INR mln)
FY14A
FY15A
FY16E
FY17E
FY18E
638,801
636,718
566,930
573,216
679,897
EBITDA
64,384
45,237
46,749
58,942
69,366
EBIT
52,622
35,494
33,058
44,764
54,575
Net interest income/(expenses)
(3,662)
(3,613)
(7,117)
(6,984)
(8,555)
Other income/(expenses)
11,614
10,334
4,138
5,493
6,266
3,450
629
0
0
0
60,574
42,215
30,079
43,273
52,286
(20,271)
(12,452)
(9,294)
(13,645)
(16,507)
0
0
0
0
0
4,115
1,199
6,990
7,689
8,458
47,868
31,591
27,775
37,316
44,237
0
0
0
0
0
45,510
31,145
27,775
37,316
44,237
FY14A
FY15A
FY16E
FY17E
FY18E
Accounts payables
39,748
33,205
31,850
31,207
36,814
Other current liabilities
33,056
53,611
53,611
53,611
53,611
Provisions
18,530
10,347
10,347
10,347
10,347
Debt funds
102,681
80,483
89,649
99,913
113,424
Other liabilities
25,664
35,251
46,834
46,834
46,834
Equity capital
12,685
12,685
12,685
12,685
12,685
Reserves & surplus
258,647
279,394
292,328
314,804
344,200
Shareholders' fund
271,332
292,079
305,013
327,489
356,885
Total liabilities and equities
491,010
504,975
537,303
569,401
617,915
Cash and cash eq.
26,510
11,416
38,035
38,512
53,503
Accounts receivables
28,120
30,945
30,237
32,067
36,393
Inventories
22,548
20,811
18,970
19,294
22,865
Other current assets
58,820
77,240
74,617
82,235
86,628
Investments
42,887
43,224
48,224
53,224
58,224
214,847
277,739
268,120
269,468
270,203
Total revenue
Exceptional items
EBT
Income taxes
Extraordinary items
Min. int./Inc. from associates
Reported net profit
Adjustments
Adjusted net profit
Balance Sheet
Net fixed assets
CWIP
97,279
43,600
59,100
74,600
90,100
Intangible assets
0
0
0
0
0
Deferred tax assets, net
0
0
0
0
0
Other assets
0
0
0
0
0
Total assets
491,010
504,975
537,303
569,401
617,915
FY14A
FY15A
FY16E
FY17E
FY18E
Net income + Depreciation
59,306
42,029
52,893
51,468
59,002
Interest expenses
0
0
0
0
0
Non-cash adjustments
0
0
0
0
0
Changes in working capital
(9,744)
(13,680)
3,816
(10,414)
(6,682)
Other operating cash flows
(12,400)
(1,376)
7,446
(5,493)
(6,266)
37,162
26,974
64,155
35,561
46,054
(67,926)
(19,651)
(31,000)
(31,000)
(31,000)
(5,000)
Cash Flow Statement
Cash flow from operations
Capital expenditures
Change in investments
(5,697)
(337)
(5,000)
(5,000)
Other investing cash flows
11,614
10,334
4,138
5,493
6,266
Cash flow from investing
(62,009)
(9,654)
(31,862)
(30,507)
(29,734)
Equities issued
Debt raised/repaid
Interest expenses
Dividends paid
0
0
0
0
0
12,046
(22,198)
9,166
10,264
13,511
(3,662)
(3,613)
(7,117)
(6,984)
(8,555)
(15,434)
(14,841)
(14,841)
(14,841)
(14,841)
Other financing cash flows
34,828
8,238
7,117
6,984
8,555
Cash flow from financing
27,778
(32,413)
(5,675)
(4,577)
(1,330)
2,930
(15,094)
26,618
477
14,991
26,509
11,416
38,035
38,512
53,503
Changes in cash and cash eq
Closing cash and cash eq
28 March 2016
Page 30 of 67
Company Initiation
INDIA
ENERGY
28 March 2016
BUY
Petronet LNG
TP: INR 340.00
 36.7%
PLNG IN
Best earnings visibility among peers
PLNG offers the best earnings visibility in the sector considering that most
of the expanded capacity at its Dahej regasification terminal has been
contracted for the long term. This strategy has worked well to mitigate the
REPORT AUTHORS
negative impact from low utilisation at its Kochi terminal. The recent
renegotiation of RasGas contract alleviates the risk of buyers reneging on
off-take commitments. We recommend PLNG as an ideal long-term play on
the revival in gas consumption. Initiate with BUY and a Mar’17 TP of Rs 340.
 Incremental Dahej contracts offer avenue to boost marketing margins: PLNG has
contracted 16.5mmtpa of capacities at Dahej for the long-term (mostly to large
PSUs such as ONGC, GAIL, BPCL and IOCL). Of this, ~10mmtpa is backed by firm
long-term LNG supply contracts from RasGas and Gorgon. The remaining contracts
for 6.5mmtpa are restricted to regasification services, leaving contractors to
arrange for LNG volumes. We see an opportunity for PLNG to facilitate short-term
LNG purchases for these volumes, thereby earning additional marketing margins.
Further earnings upsides from Dahej volumes are therefore highly probable.
Rohit Ahuja
+91 22 6766 3437
[email protected]
Akshay Mane
+91 22 6766 3438
[email protected]
INR 248.65
 LNG pooling to sustain higher utilisation at Dahej: Until incremental re-gasification
contracts at Dahej commence from FY18, the pooling mechanism for LNG for gasbased power plants and fertiliser units would ensure that PLNG continues to
operate the Dahej terminal at ~120% utilisation levels. Dahej and Dabhol (owned by
GAIL) are the only feasible regasification terminals for pool operator GAIL.
MARKET CAP
 Initiate with BUY: PLNG offers one of the most robust, well-hedged earnings
models in the sector. The strategy to completely de-risk Dahej terminal capacity via
long-term contracts augurs well. We expect the Kochi terminal to break-even in
FY19, assuming volumes from this terminal ramp up to >1.2mmtpa levels. PLNG is
an ideal long-term pick amid improving gas consumption in India – we initiate
coverage with BUY and a Mar’17 DCF-based TP of Rs 340 which offers +35% upside
FREE FLOAT
INR 186.5 bln
USD 2.8 bln
SHARES O/S
750.0 mln
50.0%
52 WK HIGH
52 WK LOW
INR 272.70
INR 159.50
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
Revenue (INR mln)
377,476
395,010
281,373
233,801
264,291
EBITDA (INR mln)
14,985
14,390
19,499
24,399
31,740
7,119
8,825
10,737
14,176
19,395
9.5
11.8
14.3
18.9
25.9
190
(38.1)
24.0
21.7
32.0
36.8
140
19,410
DPS (INR)
2.0
2.0
2.9
3.8
5.2
90
14,410
ROIC (%)
11.6
12.8
14.4
16.1
19.8
Adjusted ROAE (%)
15.1
16.5
17.6
20.1
23.3
Adjusted P/E (x)
26.2
21.1
17.4
13.2
9.6
EV/EBITDA (x)
13.6
14.4
10.6
8.3
6.5
3.7
3.3
2.9
2.5
2.1
(INR)
Adjusted EPS (INR)
P/BV (x)
Stock Price
Index Price
290
29,410
240
24,410
BUY
Petronet LNG
TP: INR 340.00
 36.7%
PLNG IN
Company Initiation
INDIA
ENERGY
Long-term contracts a key positive
The PLNG-RasGas deal renegotiation now pegs long-term LNG close to spot price levels
and minimises the risk of lower offtake by buyers, making it a win-win deal for all
parties. With firm supply commitments in place from RasGas and Gorgon, PLNG has
contracted out its entire 16.5mmtpa capacity for the long term. Of this, 6.5mmtpa is
purely for regasification services, leaving room for the company to earn additional
marketing margins.
RasGas deal renegotiations not a one-sided win
In our view, the renegotiated RasGas contract terms are a win-win for all parties,
rather than a one-sided victory for Indian players as claimed by the media (and
some companies
RasGas deal renegotiation now pegs
long-term LNG price close to spot price
levels – making it a win-win deal for all
Gains for RasGas

Contract expanded to 8.5mmtpa volumes (from 7.5mmtpa earlier)

Immediate realisation of higher prices if crude bounces back to US$ 50-60/bl. Pricing
would almost match that of spot LNG – this evens out the gap between spot and
long-term gas prices, a big positive in a rising oil price scenario
Gains for GAIL-BPCL-IOCL-PLNG

No take-or-pay liability (US$ 1.5bn liability for CY15 also cancelled)

Pricing changed to ~13% of three-month average Brent (from 12.7% of five-year
average Brent earlier) – this brings the price down to US$ 7/mmbtu from
US$ 12/mmbtu earlier

The off-takers (GAIL-BPCL-IOCL) will now at least adhere to contractual
commitments for volume offtake from CY16, given comfort from the revised pricing
of LNG – this reduces risks of lower utilisation for PLNG
Dahej long-term contracts offer option to earn additional marketing margins
PLNG has contracted 16.5mmtpa of capacities at Dahej for the long-term (mostly to large
PSUs such as ONGC, GAIL, BPCL and IOCL). Of this, ~10mmtpa is backed by firm long-term
LNG supply contracts from RasGas (8.5mmtpa from CY16 at the new price) and Gorgon
(supply to partially commence from H2CY16 before scaling up to 1.4mmtpa by CY17).
Long-term contracts at Dahej leave
room for PLNG to earn marketing
margins
The remaining contracts for 6.5mmtpa are restricted to regasification services, leaving
it open for contractors to arrange for LNG volumes. These limit the contractors’ liability
to regasification tariffs and hence are easier to honour. We see an opportunity for
PLNG to facilitate short-term LNG purchases for these volumes, thereby earning
additional marketing margins. More earnings upsides from Dahej volumes are therefore
highly probable.
28 March 2016
Page 32 of 67
BUY
Petronet LNG
TP: INR 340.00
 36.7%
PLNG IN
Company Initiation
INDIA
ENERGY
Fig 1 - Contracts for Dahej
Company
Current contracts
(mmtpa)
8.5
GAIL
5.1
IOCL
2.6
BPCL
0.9
GSPC
1.25
Post Expansion (FY18 onwards)
8.5
GAIL
2.5
GSPC
1
IOCL
1.5
BPCL
1
Torrent Power
0.75
Total long-term contracts
16.5
Dahej expansion offers govt. leeway to expand LNG pooling volumes
PLNG’s Dahej terminal is the best fit for offering regasification capacity for LNG pooling
volumes for the power and fertiliser sectors, given that pool operator GAIL’s own Dabhol
terminal cannot run during the monsoons. We expect PLNG to operate close to 100%
utilisation even at expanded capacities as pooling volumes increase
GAIL’s Dabhol terminal cannot operate in the monsoons
GAIL, being the LNG pool operator for the power and fertiliser sectors, will always prefer
either PLNG’s Dahej regasification terminal (GAIL is a co-promoter) or its own Dabhol
terminal for importing LNG. Considering Dabhol is unable to operate during the
monsoons, PLNG’s Dahej terminal would always remain the first choice.
PLNG’s Dahej terminal is the best fit
for offering regasification capacity for
LNG pooling volumes
Post expansion, the Dahej terminal would offer 3.5mmtpa (14mmscmd) of additional
capacities to GAIL/GSPC from FY18. This could facilitate the expansion of pooling
volumes to cover more power and fertiliser plants. As per our estimates, for the
government to meet its objective of 30% PLF for all gas-based power plants by FY18, it
will need to arrange for an additional 25 mmscmd of LNG supply (assuming 38GW of gasbased power generation capacities are operational by FY19/FY20). Another 10mmscmd
LNG would have to be arranged for fertiliser plants.
Until incremental contracts commence from FY18, the LNG pooling mechanism for gasbased power plants and fertiliser units would ensure that PLNG continues to operate the
Dahej terminal at 120% utilisation levels
Fig 2 - Gas demand-supply
(mmscmd)
Power sector consumption (RCM Estimate)
FY15
28.8
FY16E
28.6
FY17E
35.2
FY18E
44.0
FY19E
52.8
FY20E
61.5
Power sector demand (PNGRB Estimate)
122.7
140.8
158.9
173.9
188.9
203.9
Consumption deficit from Power
(94)
(112)
(124)
(130)
(136)
(142)
Fertilizer sector consumption (RCM Estimate)
41.8
45.7
45.7
50.7
55.7
60.7
Fertilizer sector demand (PNGRB Estimate)
60.4
72.1
96.9
103.5
105.7
105.7
Consumption deficit from Fertilsier
(19)
(26)
(51)
(53)
(50)
(45)
LNG supply potential
52
52
55
76
120
127
Domestic gas production
92
93
97
97
100
103
Total gas supply potential
144
145
152
174
221
230
Total gas consumption
119
133
145
166
183
202
24
12
6
7
38
28
Surplus capacity
28 March 2016
Page 33 of 67
BUY
Petronet LNG
TP: INR 340.00
 36.7%
PLNG IN
Company Initiation
INDIA
ENERGY
Valuation
PLNG offers the best earnings visibility in the sector considering most of the expanded
capacity at its Dahej regasification terminal has been contracted for the long term. This
strategy has worked extremely well to mitigate the negative impact from low utilisation at
its Kochi terminal. The recent renegotiation of RasGas contract terms alleviates the risks of
buyers reneging on existing contract commitments. We recommend PLNG as an ideal
long-term pick to play the revival in gas consumption in India.
Initiate with BUY for +30% upside
PLNG offers one of the most robust, well-hedged earnings models in the sector. The
strategy to completely de-risk Dahej terminal capacity augurs well. We expect the Kochi
terminal to break-even in FY19, assuming volumes here ramp up to >1.2mmtpa levels.
We initiate coverage on PLNG with BUY and a Mar’17 DCF-based TP of Rs 340.
PLNG offers the best earnings visibility
among peers in the sector
Fig 3 - PLNG valuation
Dahej Terminal
NPV of FCFE (Rs mn)
Terminal value (Rs mn)
EV (Rs mn)
Kochi
Total
157,900
9,618
167,518
66,057
14,828
80,885
223,956
24,446
248,402
298
32
EV (Rs/share)
330
Add: Cash, other investments (Rs mn)
8,288
Equity Value (Rs mn)
256,690
Equity value (Rs/share)
340
Key assumptions for our DCF valuation are as follows:

Cost of equity – 11.5%, Terminal growth – 1%

Dahej regasification charges not to be raised beyond Rs 60/mmbtu (2024 levels),
while Kochi terminal continues to get escalation in charges on relatively lower
utlisation levels

Kochi terminal to break-even from FY19 once volumes cross 1.2mmtpa levels. Peak
utilisation at this terminal to hit 3mmtpa by FY21 (assuming Kochi-MangaloreBangalore pipeline is commissioned by then)

Brent Oil prices at US$ 45/bl and US$ 50/bl for FY17 and FY18 respectively; LNG
prices calculated accordingly. USDINR at Rs 68 for FY17/FY18
Fig 4 - Key assumptions
FY14
FY15
FY16E
FY17E
FY18E
Dahej terminal
Volumes (mmtpa)
10.6
9.5
10.2
11.6
13.4
Re-gas tariffs (Rs/mmbtu)
37.2
39.1
41.0
43.1
45.3
Volumes (mmtpa)
0.14
0.10
0.13
0.15
0.50
Re-gas tariffs (Rs/mmbtu)
62.8
65.9
69.2
72.7
70.7
Kochi terminal
Total volumes (mmtpa)
EBITDA (Rs/mmbtu)
73.3
75.4
79.4
84.3
84.1
26.06
22.87
25.38
26.77
29.21
28 March 2016
Page 34 of 67
BUY
Petronet LNG
TP: INR 340.00
 36.7%
PLNG IN
Company Initiation
INDIA
ENERGY
Fig 5 - Fair value sensitivity
Terminal growth
Cost of Equity
(Rs)
9.5%
10.5%
11.5%
12.5%
13.5%
0%
418
371
333
301
273
1%
436
384
340
308
279
2%
459
400
354
316
285
3%
488
420
368
326
292
4%
529
447
386
339
302
Fig 6 - Operating history
EBITDA margin (R) (Rs/mmbtu)
50
45
40
35
30
25
20
15
10
5
0
Blended margin (R)
160
140
120
100
80
60
40
20
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
Q4FY12
0
Q3 FY16
Tolling
Q2 FY16
Spot
Q1FY16
Term
180
Q4FY15
(tbtu)
Fig 7 - Rolling P/E band (one-year forward)
(Rs)
350
8x
Price
Max
Min
Avg
Median
Last
300
250
200
10x
12x
16x
14x
15.8
8.5
12.2
11.9
13.2
Improved long-term earnings visibility
implies PLNG should be trading higher
than long-term average multiples –
positives yet to be factored in
150
100
50
Aug-15
Mar-16
Aug-15
Mar-16
Jan-15
Jul-14
Dec-13
Jun-13
Nov-12
May-12
Apr-11
Oct-11
0
Fig 8 - Rolling P/B band (one-year forward)
(Rs)
Price
1x
2x
3x
4x
450
Max
Min
Avg
Median
Last
400
350
300
3.5
1.4
2.3
2.3
2.5
250
200
150
100
50
Jan-15
Jul-14
Dec-13
Jun-13
Nov-12
May-12
Oct-11
Apr-11
0
28 March 2016
Page 35 of 67
BUY
Petronet LNG
TP: INR 340.00
 36.7%
PLNG IN
Company Initiation
INDIA
ENERGY
Key risks

Regulations: Regasification tariffs charged by PLNG are currently not regulated by
PNGRB, the sector regulator. However, any such initiative by the government can
lead to a significant de-rating of the stock.

Competition from other LNG regasification terminals: About 20mmtpa of
regasification capacities are planned across India over 3-5 years. The closest terminal
to Dahej is the Mundra terminal (GSPC/Adani JV) in Gujarat to be ready by FY19.
PLNG might have to compete for incremental contracts in case it decides to expand
its Dahej capacity to 20mmtpa.
Although current contracts completely hedge PLNG against competition,
marketing margins on spot volumes will be affected once additional capacities
become available.
Company profile
PLNG was formed as a joint venture by the Government of India to import LNG and set
up LNG terminals in the country. PLNG’s promoters are GAIL, ONGC, IOCL and BPCL
(holding 10% each).
The company has set up two LNG receiving and regasification terminals at Dahej, Gujarat,
and Kochi, Kerala. Dahej terminal has a nominal capacity of 10mmtpa (equivalent to
40mmscmd of natural gas) and Kochi has a capacity of 5mmtpa (equivalent to
20mmscmd of natural gas). The company is in the process of building a third terminal at
Gangavaram, Andhra Pradesh, with an initial capacity of 5mmtpa.
Name
Designation
Brief Profile
K D Tripathi
Chairman
Secretary to the Govt. of India in the Ministry of Petroleum & Natural Gas. Portfolio
includes formulation and implementation of policies and projects in upstream,
midstream and downstream activities in the sector
Prabhat Singh
Managing Director & CEO
Has around 35 years of relevant experience in the Hydrocarbon industry, both in an
MNC (British Gas) and Maharatna PSUs (GAIL, NTPC, EIL)
R K Garg
Director (Finance)
Has over three decades of experience in the areas of Finance, Commercial, Legal and
Compliance
Rajender Singh
Director (Technical)
Associated with PLNG since 2001 as part of the Project Management Team of ONGC
for construction of LNG Terminal Dahej Phase-I; later joined PLNG in 2006
D K Sarraf
Director
CMD, ONGC
Subir Purkayastha
Director
Director (Finance), GAIL
S Varadarajan
Director
CMD, BPCL
Philip Olivier
Director
President, GDF SUEZ LNG
Debasis Sen
Director
Director (P&BD), IOCL
Atanu Chakraborty
Director
MD, GSPC (a nominee Director of Gujarat Maritime Board (GMB) on the board of
PLNG)
28 March 2016
Page 36 of 67
BUY
Petronet LNG
TP: INR 340.00
 36.7%
PLNG IN
Company Initiation
INDIA
ENERGY
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
9.5
11.8
14.3
18.9
25.9
Adjusted EPS
9.5
11.8
14.3
18.9
25.9
DPS
2.0
2.0
2.9
3.8
5.2
66.5
75.8
86.8
101.3
121.1
FY14A
FY15A
FY16E
FY17E
FY18E
0.5
0.5
0.7
0.9
0.8
EV/EBITDA
13.6
14.4
10.6
8.3
6.5
Adjusted P/E
26.2
21.1
17.4
13.2
9.6
3.7
3.3
2.9
2.5
2.1
FY14A
FY15A
FY16E
FY17E
FY18E
EBITDA margin
4.0
3.6
6.9
10.4
12.0
EBIT margin
3.2
2.8
5.7
8.7
10.1
1.9
2.2
3.8
6.1
7.3
Adjusted ROAE
15.1
16.5
17.6
20.1
23.3
ROCE
10.2
12.3
14.1
15.7
18.9
BVPS
Valuation Ratios
Y/E 31 Mar (x)
EV/Sales
P/BV
Financial Ratios
Y/E 31 Mar
YoY Growth (%)
Revenue
20.0
4.6
(28.8)
(16.9)
13.0
EBITDA
(22.6)
(4.0)
35.5
25.1
30.1
Adjusted EPS
(38.1)
24.0
21.7
32.0
36.8
15.0
12.1
4.9
17.2
(2.0)
Receivables (days)
18
16
19
23
20
Inventory (days)
10
9
25
40
32
Payables (days)
21
11
28
53
40
Current ratio (x)
1.4
1.4
1.3
1.3
1.6
Quick ratio (x)
0.4
0.2
0.3
0.2
0.5
6.6
4.8
3.3
2.4
2.2
3.3
3.4
2.2
1.6
1.8
5.4
3.8
6.2
9.6
14.5
0.4
0.4
0.2
0.3
0.0
Invested capital
DuPont Analysis
Y/E 31 Mar (%)
FY14A
FY15A
FY16E
FY17E
FY18E
67.5
89.6
76.0
75.0
75.0
88.6
87.7
87.4
92.8
96.5
3.2
2.8
5.7
8.7
10.1
328.3
343.0
218.2
163.3
179.1
243.7
215.8
211.4
202.9
176.9
15.1
16.5
17.6
20.1
23.3
Adjusted ROAE
28 March 2016
Page 37 of 67
BUY
Petronet LNG
TP: INR 340.00
 36.7%
PLNG IN
Company Initiation
INDIA
ENERGY
Income Statement
FY14A
FY15A
FY16E
FY17E
FY18E
377,476
395,010
281,373
233,801
264,291
EBITDA
14,985
14,390
19,499
24,399
31,740
EBIT
11,904
11,236
16,161
20,356
26,801
(2,196)
(2,935)
(2,601)
(2,126)
(1,853)
838
1,548
568
670
912
0
0
0
0
0
EBT
10,545
9,849
14,128
18,901
25,860
Income taxes
Total revenue
Exceptional items
(3,426)
(1,024)
(3,391)
(4,725)
(6,465)
Extraordinary items
0
0
0
0
0
0
0
0
0
0
7,119
8,825
10,737
14,176
19,395
Reported net profit
Adjustments
0
0
0
0
0
7,119
8,825
10,737
14,176
19,395
FY14A
FY15A
FY16E
FY17E
FY18E
Accounts payables
18,868
3,209
36,896
23,455
27,065
9,469
18,148
6,928
5,540
6,152
Provisions
2,729
1,936
1,936
1,936
1,936
Debt funds
32,669
23,738
28,282
24,868
21,454
Other liabilities
5,530
7,270
7,550
7,830
8,110
Equity capital
7,500
7,500
7,500
7,500
7,500
42,361
49,386
57,611
68,470
83,326
Adjusted net profit
Balance Sheet
Reserves & surplus
Shareholders' fund
49,861
56,886
65,111
75,970
90,826
119,127
111,187
146,704
139,598
155,543
Cash and cash eq.
12,327
3,641
12,589
5,288
19,028
20,157
13,428
16,173
13,419
15,119
Inventories
9,557
8,826
26,572
18,728
21,293
4,237
7,497
2,316
1,923
2,172
Investments
1,399
900
900
900
900
62,650
69,426
60,639
88,951
95,401
Net fixed assets
CWIP
8,799
7,469
27,514
10,389
1,630
Intangible assets
0
0
0
0
0
0
0
0
0
0
Other assets
0
0
0
0
0
Total assets
119,127
111,187
146,704
139,598
155,543
FY14A
FY15A
FY16E
FY17E
FY18E
10,198
11,973
14,075
18,218
24,334
Interest expenses
0
0
0
0
0
0
0
0
0
0
(5,104)
3,165
418
(3,838)
(291)
Cash Flow Statement
783
192
(288)
(390)
(632)
5,876
15,330
14,205
13,990
23,412
(8,143)
(8,094)
(14,596)
(15,230)
(2,630)
0
0
0
0
0
838
(2,256)
9,908
2,796
2,765
(7,306)
(10,350)
(4,688)
(12,434)
135
0
0
0
0
0
Debt raised/repaid
2,328
(8,931)
4,544
(3,414)
(3,414)
Interest expenses
(2,196)
(2,935)
(2,601)
(2,126)
(1,853)
Dividends paid
(1,755)
(1,755)
(2,513)
(3,317)
(4,538)
0
(45)
0
0
0
(1,623)
(13,666)
(569)
(8,857)
(9,806)
(3,053)
(8,686)
8,948
(7,301)
13,741
9,633
3,641
12,589
5,288
19,028
Equities issued
28 March 2016
Page 38 of 67
Company Initiation
INDIA
ENERGY
28 March 2016
BUY
Indraprastha Gas
TP: INR 710.00
 31.0%
IGL IN
Emerging consumer business play
IGL is clearly one of the best plays on growth in the downstream gas sector,
with 80% of its business being consumer facing. The company appears to be
transiting from a utility to a marketing entity as it embarks on aggressive
REPORT AUTHORS
expansion of CNG retail outlets. With a favourable SC verdict giving IGL
control over end-pricing of natural gas, the anticipated return of volume
Rohit Ahuja
growth and ongoing business transition, the stock merits a valuation premium
over pure utilities. Initiate with BUY and a Mar’17 DCF-based TP of Rs 710.
+91 22 6766 3437
[email protected]
 Anti-pollution drive to revive CNG business growth: IGL is expected to gain from
the anti-pollution drive in its primary market of Delhi, comprising a government ban
on sale of diesel vehicles, the odd-even scheme for plying of vehicles on alternate
days, and the Supreme Court (SC) order for the addition of over 104 CNG stations
in the NCR and for conversion of commercial cabs to CNG (by Apr’16). All of these
measures are set to drive CNG consumption growth for IGL to 8-10% over
FY17-FY19.
Akshay Mane
 Decline in gas prices to drive margins: Domestic gas prices are set to decline by
~20% from Apr’16 as per the government’s pricing formula. IGL is unlikely to pass on
the entire decline as it maintains a cushion for rising operating expenses and USDINR
movement. We expect IGL’s gas business margins to improve by ~10% in FY17. LNG
costs too have declined post renegotiation of the RasGas deal, implying that its
industrial business margins could revive to normalised levels of Rs 1-1.5/scm.
INR 542.15
 Initiate with BUY: We value IGL at Rs 710/sh based on DCF (implying 15x FY18E
EPS). Post the SC verdict against PNGRB, we believe the pricing cap issue is beyond
the government’s control. Thus, IGL’s business model can be considered as an
emerging consumer business play (underpinned by pricing power, brand and
product exclusivity), warranting a much higher multiple than its utility business
peers. Initiate with BUY.
FREE FLOAT
+91 22 6766 3438
[email protected]
MARKET CAP
INR 75.9 bln
USD 1.1 bln
SHARES O/S
140.0 mln
55.0%
52 WK HIGH
52 WK LOW
INR 608.00
INR 375.35
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
Revenue (INR mln)
39,174
36,810
36,668
36,032
42,009
EBITDA (INR mln)
7,776
7,930
7,844
9,114
9,583
580
3,603
4,377
4,392
5,743
6,341
480
25.7
31.3
31.4
41.0
45.3
380
1.7
21.5
0.3
30.8
10.4
280
DPS (INR)
5.5
6.0
7.5
8.0
8.0
180
ROIC (%)
17.6
19.9
18.1
21.5
21.7
Adjusted ROAE (%)
22.1
22.7
19.5
21.9
20.5
Adjusted P/E (x)
21.1
17.3
17.3
13.2
12.0
EV/EBITDA (x)
10.3
9.7
9.6
8.0
7.3
4.3
3.6
3.2
2.7
2.3
(INR)
Adjusted EPS (INR)
P/BV (x)
Stock Price
Index Price
29,410
24,410
19,410
14,410
BUY
Indraprastha Gas
TP: INR 710.00
 31.0%
IGL IN
Company Initiation
INDIA
ENERGY
Margins set to improve
We expect IGL’s gas sourcing cost to decline by ~15% (weighted average basis) from
Apr’16 as (1) the government’s gas pricing formula kicks in and (2) LNG prices reduce in
light of the renegotiated RasGas deal. This coupled with a revival in industrial margins
should support ~100 bps gain in EBITDA margins by FY18. We note that IGL needs to
expand margins to maintain its stated ROCE target of ~20% and can be expected to make
pricing decisions accordingly.
Gas prices to decline
Domestic gas supplies constitute 89% of IGL’s supply mix (including 11% from the PMT
fields), allocated for CNG and domestic PNG sales. These prices (other than PMT) are set
to decline by ~20% as per the government’s gas pricing formula. A similar decline is
expected in prices of LNG being purchased by IGL (11% of total volumes, for commercial
and industrial users) post renegotiation of the RasGas deal. Thus, IGL’s overall weightedaverage gas sourcing cost is expected to decline by ~15% from Apr’16, implying a golden
opportunity for the company to expand margins.
Fig 1 - IGL gas supply mix
Composition
(%)
Volumes
(mmscmd)
Current
pricing, FOB
(US$/mmbtu)
Pricing
from FY17
(US$/mmbtu)
APM
67
2.814
4.2
3.424
PMT
22
0.924
5.7
5.7
RLNG
11
0.462
Total
4.2
7
5
4.8
4.1
Average price reduction (%)
(15.3)
Margin expansion on declining input costs
We find the doubts raised over IGL’s margin expansion outlook surprising, but
acknowledge that these largely arise from a lack of clear communication by the
management and the perception that IGL does not have complete freedom over
CNG/PNG pricing yet.
Decline in gas prices expected to lead
to better margins in FY17
However, if we analyse the company’s recent historical performance (FY13-FY15), we
find that IGL has done well to expand margins despite several challenges. We expect
this trend of margin expansion to continue as the macro environment is far more
conducive now.
The period over FY13-FY15 was one of the most challenging for IGL considering:

PNGRB court case concerns were at their peak, raising doubts about the entire CGD
business model

Delhi elections threw up a surprise, electing a government that came with
a perceived socialist mindset – this worsened the misgivings over IGL’s
pricing freedom

Gas prices were rising continuously – APM gas volumes were falling short of
CNG/PNG volume growth, forcing IGL to buy more CNG (CGD was given priority
allocation of domestic gas from Q4FY15)
28 March 2016
Page 40 of 67
BUY
Indraprastha Gas
TP: INR 710.00
 31.0%
IGL IN
Company Initiation
INDIA
ENERGY
Fig 2 - Key margin trends
FY13
FY14
FY15
FY16E
FY17E
FY18E
Gross spreads (Rs/scm)
8.7
8.9
9.2
9.5
10.3
10.5
EBITDA (Rs/scm)
5.6
5.6
5.6
5.3
5.8
5.5
PAT (Rs/scm)
2.6
2.6
3.1
3.0
3.6
3.7
Margin expansion needed to maintain ROCE levels
Another way to look at IGL’s margin outlook would be to consider the return ratios.
Companies typically aim to maintain healthy ROCE and base their pricing decisions
accordingly. A similar argument has been offered by the IGL management which has a
stated ROCE target of ~20%.
IGL needs to expand margins to
maintain current ROCE levels
Now if we calculate the margins that IGL needs to maintain ROCE at ~20%, this works out
to ~Rs6.5/scm (EBITDA) – well above our estimates. IGL is expected to maintain capex
levels of ~Rs 2.5bn per year over FY16-FY19 toward aggressive expansion of CNG outlets
and PNG connectivity. Hence, there is a high probability that the management’s pricing
strategy for CNG and commercial/industrial segments could be more aggressive, and
offer higher than expected EBITDA in the near term.
Fig 3 - Profitability trend
FY13
FY14
FY15
FY16E
FY17E
FY18E
Gross spreads (Rs/scm)
8.7
8.9
9.2
9.5
10.3
10.5
EBITDA (Rs/scm)
5.6
5.6
5.6
5.3
5.8
5.5
PAT (Rs/scm)
2.6
2.6
3.1
3.0
3.6
3.7
ROCE (%)
16.2
17.4
15.4
17.6
16.8
16.1
ROE (%)
22.1
22.7
19.5
21.8
20.4
19.2
4,117
2,005
3,682
2,400
2,400
2,400
Capex (Rs mn)
Volume growth to pick up
IGL is expected to gain from the following anti-pollution drives in its key market of Delhi:

Government ban on sale of diesel vehicles

SC order mandating ramp-up in CNG stations in the NCR (by 104 stations) by April’16

SC verdict mandating commercial cab conversion to CNG by April’16

Odd-even vehicle scheme experiment of the Delhi government (exempts CNG
vehicles)
These measures are set to drive CNG consumption growth to 8-10% levels over FY17FY19 (well above ~2% growth seen over the last three years).
New CNG stations to be operational in three months
IGL’s management has indicated that it will be able to commission 90 stations by May’16.
These will come up at OMC retail outlets and hence carry extra operating expenses.
Most of the stations (50-60) are close to IGL’s pipeline networks. Pipeline connectivity
for the remaining would be completed by FY18. We expect the following impact on
IGL’s financials:

IGL will be able to comply with SC
order for setting up CNG stations;
these would initially impact margins
Initial operating costs for these stations are expected to be higher than the average,
affecting margins (mostly in FY18, once these stations start contributing to volumes
28 March 2016
Page 41 of 67
BUY
Indraprastha Gas
TP: INR 710.00
 31.0%
IGL IN
Company Initiation
INDIA
ENERGY
meaningfully). However, we expect IGL to ultimately pass on these costs through
incremental price revisions.

CNG volume growth will improve to ~8% levels for FY17/FY18. Acceleration in CNG
volumes is unlikely to have a significant impact on IGL’s volume mix. We expect
industrial PNG volumes to revive by H2FY17, as low LNG prices get absorbed.
Fig 4 - IGL’s volume mix
CNG (mn kg)
% growth
FY14
FY15
FY16E
FY17E
FY18E
774
805
837
907
977
2.2
4.0
4.0
8.3
7.7
% total
74.4
76.6
76.6
76.6
75.0
PNG (incl. Industrial) (mmscm)
357
330
342
372
437
17.7
% growth
% total
Total volumes (mmscm)
Total volumes (mmscmd)
7.2
(7.4)
3.6
8.5
25.6
23.4
23.4
23.4
25.0
1,393
1,409
1,464
1,587
1,747
3.8
3.9
4.0
4.3
4.8
Acceleration in CNG car penetration the next key driver
Penetration of CNG cars in Delhi is just ~22% (the highest in India though), despite CNG
infrastructure being available in the city for more than 15 years. Since most commercial
vehicles (buses, autos) have shifted to CNG post a court mandate, we believe the next
major growth area for CNG consumption could be from conversion of private cars.
CNG penetration for private cars in
Delhi (~22%) is well below other
commercial counterparts
Despite the economic benefits from using a CNG vehicle (against petrol/diesel), softer
issues such as higher waiting time at CNG stations (due to a lack of adequate stations in
large consumption areas), non-availability of CNG for long-distance travel within the NCR
and perceived underperformance of CNG cars have led to a resistance towards
converting to (or buying) a CNG-enabled car. We believe the increase in CNG stations
across the NCR would play a major role in addressing most of these concerns.
The Delhi government’s experiment with running cars carrying odd and even license
plates on alternate days exempts CNG-fitted vehicles. This scheme, if implemented
regularly, will incentivise more conversions to CNG-fitted vehicles.
Fig 5 - IGL’s CNG vehicle penetration
IGL CNG Vehicles
(number)
Penetration (R)
(%)
1,000,000
120
900,000
100
800,000
700,000
99.0
99.6
98.6
80
600,000
500,000
60
400,000
40
300,000
200,000
29.5
20
22.3
100,000
0
0
Buses
Auto/LGV
RTV
Cars/Taxi
Total
28 March 2016
Page 42 of 67
BUY
Indraprastha Gas
TP: INR 710.00
 31.0%
IGL IN
Company Initiation
INDIA
ENERGY
Valuation
Initiate with BUY
We value IGL at Rs 710/sh based on DCF (implying 15x FY18E EPS). Post the SC verdict
against PNGRB, we believe natural gas pricing is beyond the government’s control
(centre or state). Hence, IGL’s business model can be considered as an emerging
consumer business play underpinned by pricing power, brand and product exclusivity,
thereby warranting a much higher multiple than its utility business peers. Now that the
regulatory threat has been alleviated and volume growth is reviving, we believe IGL
should re-rate to pre-FY12 P/E levels of 17-20x. Initiate with BUY.
DCF value conservatively assumes
ROCE to decline to 14% over the long
term – stock still offers 31% upside
Fig 6 - IGL valuations
Valuation parameters
WACC (%)
10.8
Terminal Year growth (%)
4.0
PV of FCF
33,844
Terminal value
128,698
PV of terminal value
56,455
Firm Value
90,299
Less Net Debt
(9,469)
Equity value
99,768
NPV/IGL share (Rs)
710
Key DCF assumptions:

Discounting FCFF estimates based on WACC of 10.8% (factoring cost of equity –
11.7%, Debt cost -9%; Debt-Equity ratio – 15%), terminal growth at 4%

Long-term average yearly growth in volumes at 6% till 2025

Long-term average EBITDA to remain stable at Rs 5.5/scm, implying ROE to decline
to 14% levels over five years (from 19% currently) – we are clearly conservative in
this regard
Fig 7 - Valuation sensitivity
Terminal growth
WACC
(Rs)
9.0%
10.0%
10.8%
12.0%
13.0%
2%
780
685
621
553
505
3%
855
737
661
581
527
4%
960
807
710
617
553
5%
1,118
905
782
662
586
6%
1,381
1,052
879
723
628
28 March 2016
Page 43 of 67
BUY
Indraprastha Gas
TP: INR 710.00
 31.0%
IGL IN
Company Initiation
INDIA
ENERGY
(Rs)
Price
900
Max
Min
Avg
Median
Last
800
700
600
8x
11x
14x
17x
IGL is trading close to its long-term
average P/E. However, this average
was hit by concerns over litigation with
PNGRB over the last three years…
20x
19.1
7.6
12.2
12.3
13.3
500
400
300
200
100
Mar-16
Aug-15
Jan-15
Jul-14
Dec-13
Jun-13
Nov-12
May-12
Apr-11
Oct-11
0
(Rs)
Price
2,000
Max
Min
Avg
Median
Last
1,800
1,600
1,400
3x
2x
4x
…with threats from regulations
alleviated and volume growth reviving,
we believe IGL should re-rate to preFY12 P/E levels of 17-20x
5x
4.7
1.4
2.5
2.2
1.5
1,200
1,000
800
600
400
200
Mar-16
Aug-15
Jan-15
Jul-14
Dec-13
Jun-13
Nov-12
May-12
Oct-11
Apr-11
0
Key risks

Reduction in allocation of domestic gas for CGD could be a major concern. If
domestic gas production continues to decline, there is a case for the government to
consider reallocation of gas from CGD to the power or fertiliser sectors. However,
we note that the SC has ruled in favour of CGD companies for the allocation of
domestic gas. Considering various anti-pollution initiatives, it is unlikely that the
government will cut back this allocation.

Lower-than-expected volume growth for CNG and PNG.

PNGRB regulations with regard to marketing exclusivity in Delhi are still
ambiguous. The decline in domestic gas prices has led to attractive CNG retailing
margins and hence many companies could vie for a piece of the CNG market. But
considering the high penetration of IGL’s CNG infrastructure across Delhi, it would
be difficult for a small player to compete. Additionally, with promoters such as GAIL
and BPCL, we don’t foresee any major competition from oil PSUs.
Regulation and government policies
remain key risk
28 March 2016
Page 44 of 67
BUY
Indraprastha Gas
TP: INR 710.00
 31.0%
IGL IN
Company Initiation
INDIA
ENERGY
Company profile
Incorporated in 1998, IGL is in the business of supplying Compressed Natural Gas (CNG)
to the transport sector and Piped Natural Gas (PNG) to the domestic, industrial and
commercial sectors in Delhi and the National Capital Region (NCR). IGL took over Delhi
City Gas Distribution Project in 1999 from GAIL. The project was started to lay a network
for the distribution of natural gas in Delhi to consumers in the domestic, transport and
commercial sectors. With the backing of strong promoters – GAIL and Bharat Petroleum
Corporation (BPCL) – IGL plans to provide natural gas in the entire capital region.
IGL continues to augment its infrastructure to meet the increasing demand for CNG
arising out of a growing number of CNG vehicles in Delhi. Growth drivers for higher CNG
demand are: car manufacturers coming up with CNG variants and the Delhi
government’s directive making it mandatory for all LCVs operating in Delhi to run on
CNG. The company is in the process of enhancing its compression capacity by adding
new stations.
On the PNG front, IGL plans to expand its business activities in Delhi and neighboring
towns like Noida, Greater Noida and Ghaziabad. Customers will now benefit from the
supply of PNG for non-cooking applications such as geysers. IGL is also working towards
expanding its PNG network to cover all charge areas of Delhi. The industrial and
commercial segments would be the focus areas for the company in future.
Name
Designation
M Ravindran
Chairman
Narendra Kumar
Managing Director
V Nagarajan
Director (Commercial)
I S Rao
Director
S S Rao
Director
V Ranganathan
Director
Santosh Kumar
Director
Raghu Nayyar
Director
Dr Sudha Sharma
Director
28 March 2016
Page 45 of 67
BUY
Indraprastha Gas
TP: INR 710.00
 31.0%
IGL IN
Company Initiation
INDIA
ENERGY
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
25.7
31.3
31.4
41.0
45.3
Adjusted EPS
25.7
31.3
31.4
41.0
45.3
5.5
6.0
7.5
8.0
8.0
125.9
149.9
171.8
203.0
238.8
FY14A
FY15A
FY16E
FY17E
FY18E
2.0
2.1
2.0
2.0
1.7
EV/EBITDA
10.3
9.7
9.6
8.0
7.3
Adjusted P/E
21.1
17.3
17.3
13.2
12.0
4.3
3.6
3.2
2.7
2.3
FY14A
FY15A
FY16E
FY17E
FY18E
EBITDA margin
19.9
21.5
21.4
25.3
22.8
EBIT margin
14.2
17.5
17.0
20.4
18.3
9.2
11.9
12.0
15.9
15.1
Adjusted ROAE
22.1
22.7
19.5
21.9
20.5
ROCE
18.3
19.9
17.6
19.6
18.0
Revenue
16.3
(6.0)
(0.4)
(1.7)
16.6
EBITDA
2.6
2.0
(1.1)
16.2
5.2
Adjusted EPS
1.7
21.5
0.3
30.8
10.4
Invested capital
3.1
2.9
7.9
5.7
5.1
21
DPS
BVPS
Valuation Ratios
Y/E 31 Mar (x)
EV/Sales
P/BV
Financial Ratios
Y/E 31 Mar
YoY Growth (%)
Receivables (days)
19
23
23
23
Inventory (days)
5
6
7
8
7
Payables (days)
23
24
21
19
16
Current ratio (x)
1.6
1.7
2.6
4.1
5.4
Quick ratio (x)
0.7
0.7
1.3
2.5
3.6
1.4
1.2
1.1
1.0
1.1
1.4
1.2
1.1
1.0
1.0
12.6
21.6
64.6
130.5
424.4
0.1
0.0
(0.1)
(0.2)
(0.3)
FY18E
DuPont Analysis
Y/E 31 Mar (%)
FY14A
FY15A
FY16E
FY17E
66.7
67.4
67.0
72.0
73.0
96.7
100.7
105.4
108.7
112.9
14.2
17.5
17.0
20.4
18.3
143.0
124.2
114.2
101.1
103.7
168.3
153.5
142.6
135.8
130.9
22.1
22.7
19.5
21.9
20.5
Adjusted ROAE
28 March 2016
Page 46 of 67
BUY
Indraprastha Gas
TP: INR 710.00
 31.0%
IGL IN
Company Initiation
INDIA
ENERGY
Income Statement
FY14A
FY15A
FY16E
FY17E
FY18E
Total revenue
39,174
36,810
36,668
36,032
42,009
EBITDA
7,776
7,930
7,844
9,114
9,583
EBIT
5,581
6,443
6,218
7,338
7,692
(441)
(298)
(96)
(56)
(18)
259
345
434
694
1,012
Exceptional items
EBT
Income taxes
0
0
0
0
0
5,398
6,490
6,556
7,977
8,686
(1,795)
(2,113)
(2,163)
(2,233)
(2,345)
Extraordinary items
0
0
0
0
0
0
0
0
0
0
3,603
4,377
4,392
5,743
6,341
Reported net profit
Adjustments
0
0
0
0
0
3,603
4,377
4,392
5,743
6,341
FY14A
FY15A
FY16E
FY17E
FY18E
1,887
1,892
1,484
1,303
1,561
409
293
293
293
293
Provisions
1,001
1,163
1,163
1,163
1,163
Debt funds
3,525
1,453
953
453
0
Other liabilities
4,067
4,953
5,553
6,153
6,753
Adjusted net profit
Balance Sheet
Accounts payables
Equity capital
1,400
1,400
1,400
1,400
1,400
Reserves & surplus
16,232
19,581
22,649
27,026
32,037
Shareholders' fund
17,632
20,981
24,049
28,426
33,437
28,520
30,735
33,495
37,791
43,207
Cash and cash eq.
2,514
2,315
3,729
6,847
10,710
2,196
2,352
2,311
2,270
2,647
Inventories
371
409
422
415
483
690
652
1,252
1,852
2,452
Investments
Net fixed assets
CWIP
1,174
2,909
2,909
2,909
2,909
18,953
19,558
21,672
22,297
22,806
2,623
2,541
1,200
1,200
1,200
Intangible assets
0
0
0
0
0
0
0
0
0
0
Other assets
0
0
0
0
0
Total assets
28,520
30,735
33,495
37,791
43,207
FY14A
FY15A
FY16E
FY17E
FY18E
5,670
5,801
6,019
7,518
8,232
Interest expenses
0
0
0
0
0
0
0
0
0
0
(542)
(63)
(380)
(133)
(187)
(1,012)
Cash Flow Statement
(259)
(345)
(434)
(694)
4,869
5,393
5,205
6,691
7,032
(2,257)
(1,946)
(2,400)
(2,400)
(2,400)
253
(1,735)
0
0
0
259
345
434
694
1,012
(1,746)
(3,336)
(1,966)
(1,706)
(1,388)
0
0
0
0
0
Debt raised/repaid
(1,060)
(2,072)
(500)
(500)
(453)
Interest expenses
(441)
(298)
(96)
(56)
(18)
Dividends paid
(901)
(983)
(1,229)
(1,311)
(1,311)
Equities issued
1,283
1,097
0
0
0
(1,119)
(2,256)
(1,825)
(1,867)
(1,782)
2,004
(200)
1,414
3,119
3,863
2,514
2,314
3,729
6,847
10,710
28 March 2016
Page 47 of 67
Company Initiation
INDIA
ENERGY
28 March 2016
BUY
Gujarat State Petronet
TP: INR 180.00
 35.7%
GUJS IN
Long-term value
GUJS offers one of the most simplistic business models in the industry,
driven primarily by gas transmission. The company gains the most from
upward tariff revision by PNGRB. While volumes are unlikely to revive in the
REPORT AUTHORS
near term, the company’s dominant pipeline grid connectivity in Gujarat
offers long-term value. Its stake in Gujarat Gas (GGAS) consolidates
Rohit Ahuja
upsides from a revival in the downstream gas business as well. We initiate
coverage with BUY and a Mar’17 TP of Rs 180.
+91 22 6766 3437
[email protected]
Akshay Mane
 Tariff hike imminent: PNGRB is yet to notify the revised tariff calculations for GUJS’
Gujarat grid pipelines. The appellate tribunal has ruled in GUJS’ favour, raising
tariffs to ~Rs 1/scm (from Rs 0.9/scm), and directed PNGRB to rework retrospective
adjustments for FY08 to FY12 into forward tariffs. We expect GUJS’ overall pipeline
tariffs to improve by ~20% to ~Rs 1.2/scm from FY17 which would flow to earnings.
 Long-term growth in volumes from upcoming LNG projects: The decline in LNG
prices is expected to lead to a revival in industrial gas demand, especially from
ceramic and power generation units. We expect consumption from these sectors to
improve by 4-5mmscmd over FY17-FY18. Additionally, ~50mmscmd of incremental
LNG regasification capacities are expected in Gujarat by FY19-FY20, which could
more than make up for the expected decline in RIL’s volume offtake from FY18.
 Valuations compelling: We value GUJS at Rs 180/sh, as the sum of DCF for its
pipeline business (Rs 161/sh) and the value of its stake in Gujarat Gas (Rs 18/sh).
Our pipeline business valuation implies a P/E of ~15x FY18E EPS, in line with gas
utility peers. The company is not exposed to marketing margins, ensuring relatively
lower earnings volatility. At the same time, the 25% stake in GGAS offers upsides
from an improving CGD outlook. Initiate with BUY.
+91 22 6766 3438
[email protected]
INR 132.65
MARKET CAP
INR 74.7 bln
USD 1.1 bln
SHARES O/S
563.2 mln
FREE FLOAT
62.3%
52 WK HIGH
52 WK LOW
INR 154.15
INR 108.00
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
Revenue (INR mln)
10,507
10,615
10,158
11,835
11,977
EBITDA (INR mln)
9,289
9,249
8,624
10,185
10,177
4,191
4,245
4,539
5,753
6,008
120
7.4
7.5
8.1
10.2
10.7
100
(22.1)
1.3
6.9
26.7
4.4
DPS (INR)
1.0
1.0
1.2
1.4
1.5
ROIC (%)
12.5
12.2
11.2
13.1
12.6
Adjusted ROAE (%)
13.4
12.2
12.1
14.0
13.1
Adjusted P/E (x)
17.8
17.6
16.4
13.0
12.4
EV/EBITDA (x)
8.9
8.7
9.2
7.9
7.7
P/BV (x)
2.3
2.0
1.9
1.7
1.6
(INR)
Adjusted EPS (INR)
Stock Price
Index Price
160
140
80
29,410
24,410
19,410
60
40
14,410
BUY
TP: INR 180.00
 35.7%
Company Initiation
Gujarat State
Petronet
INDIA
ENERGY
GUJS IN
Tariff hike imminent
PNGRB is yet to notify the revised tariff calculations for GUJS’ Gujarat grid pipelines. We
expect the company’s overall pipeline tariffs to improve by ~20% to ~Rs 1.2/scm from
FY17 which would flow to earnings.
Tariffs expected to improve by ~20% in
FY17
Key highlights of our outlook on tariffs:

The appellate tribunal has ruled in GUJS’ favour, raising tariffs to ~Rs 1/scm (from
Rs 0.9/scm). This change is primarily on account of tariffs being notified from FY13
(vs. FY09 earlier).

The tribunal also directed PNGRB to rework retrospective adjustments pending for
GUJS (impact of higher rates from FY08-FY12) into forward tariffs.

Combining the above, GUJS’ tariffs should increase at least by ~20% from FY17.
Since the actual utilisation of GUJS’ pipeline network has been more than 75% recently
(which is the flat rate assumed by the regulator to calculate tariffs), the company will
not gain much from the revised guidelines in the subsequent round of tariff reviews.
Fig 1 - GUJS’ operational outlook
Volumes
(mmscmd)
Revenue (R)
EBITDA (R)
(Rs/scm)
30
1.4
25
1.2
1.0
20
0.8
15
0.6
10
0.4
5
0.2
0
0.0
FY14
FY15
FY16E
FY17E
FY18E
28 March 2016
Page 49 of 67
BUY
Company Initiation
Gujarat State
Petronet
TP: INR 180.00
 35.7%
INDIA
ENERGY
GUJS IN
Volume decline from RIL to be offset by overall demand revival
We expect GUJS’ volumes to remain flat until FY19 as the expected revival in industrial
gas consumption – primarily from ceramic units and power generation plants – would
offset a sharp reduction in offtake from RIL once its petcoke gasification unit comes
on-stream. Over the longer term, however, we see volume visibility from upcoming LNG
regasification terminals in Gujarat where 50mmscmd of cumulative capacity is expected
by FY19-FY20.
Industrial demand reviving gradually
GUJS, like GAIL, gains from the pooling of LNG for the fertiliser and power sectors. The
company’s volumes have been improving steadily since Q4FY15 due to this mechanism.
We also see upsides from a demand revival in the ceramic manufacturing industry in
Morbi, Gujarat. Gas demand from this segment had reduced by ~2mmscmd over FY13FY15 as several companies shifted to coal gas as an input fuel. This is set to change as
natural gas prices decline.
Near term upsides to volumes from a
revival in consumption from the
ceramic manufacturing industry
GGAS’ move to reduce prices of PNG for industrial users (by Rs 5/scm from Jan’16 and
another Rs 2/scm from Apr’16) has given a new lease of life to Morbi’s ceramic industry,
which was reeling from a demand slowdown and fierce competition from China
(causing 350 units to down shutters in Nov’15). This price reduction would have the
following impact:

Around 600 odd ceramic tile units in Morbi consume 2.5mmscmd gas. A dip in gas
price by Rs 5/scm will bring their fuel cost down by Rs 12.5mn per day (as per the
management). Ceramic tile manufacturers estimate a 10% decrease in production
cost.

According to industry players, the availability of gas at Rs 22-23/scm will give the
Morbi ceramic industry a competitive edge over China.

The reduction in gas price lowers the incentive for ceramic manufacturers to use
coal gas, particularly given the risk of action by the Gujarat pollution board.
Fig 2 - Volume trends
(mmscmd)
Volumes
Revenue (R)
(Rs/scm)
EBITDA (R)
2.0
35
1.8
30
1.6
25
1.4
20
1.2
1.0
15
0.8
10
0.6
0.4
5
0.2
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
Q4FY12
0.0
Q3FY12
0
28 March 2016
Page 50 of 67
BUY
TP: INR 180.00
 35.7%
Company Initiation
Gujarat State
Petronet
INDIA
ENERGY
GUJS IN
Long-term volume growth from new infrastructure projects
GUJS has been supplying ~4mmscmd of gas to RIL’s Jamnagar refinery. Once RIL
commissions its petcoke gasification unit at the refinery in Jamnagar (scheduled for
H2FY17), its consumption of LNG will come down to <1mmscmd levels. Thus, any volume
growth due to a revival in consumption from ceramic units in Morbi and power plants
in Gujarat in FY17 (4-5mmscmd increase) will be set off against the reduction in
RIL’s offtake.
Upcoming LNG regasification terminals
in Gujarat provide long-term visibility
for volumes
However, we see long-term volume growth potential from new infrastructure projects to
link upcoming LNG regasification capacities. GUJS has plans to expand through three
major pipeline networks extending outside Gujarat – Mehsana-Bhatinda, MallavaramBhilwara and Bhatind-Srinagar. These pipelines are planned in a JV with OMCs (52% stake
for GUJS). Considering the lack of near-term volume growth, many of the planned
pipelines may not take off. However, we expect volume growth from following projects:

Development of Cairn India gas field in Rajasthan: The Mehsana-Bhatinda pipeline
is being implemented in phases, initially connecting Cairn India’s gas producing field
at Rajasthan (Rageshwari deep gas field). The development of this field is dependent
on GUJS’ pipeline connectivity. We expect ~2mmscmd of volumes from this pipeline
in FY18. The line would then be extended to HPCL’s Bhatinda refinery by FY19, which
could add 3-4mmscmd of volumes.

Dahej LNG terminal expansion: PLNG is expected to commission an additional
5mmtpa of capacity at Dahej by Q4FY17. We expect ~5mmscmd of incremental
volumes for GUJS from this terminal (GSPC group has booked 2.5mmtpa capacity
here).

Mundra LNG terminal: The Gujarat pipeline grid would be extended to connect the
upcoming Mundra LNG terminal (5mmtpa, GSPC-Adani JV). Commissioning of this
terminal would be completed by FY19, adding 5-10mmscmd of volumes in the initial
phase of operations.

Pipavav LNG terminal: Swan Energy is expected to commission this terminal
(5mmtpa capacity) by FY19, which could add 4-5mmscmd of volumes for GUJS
from FY20.
Fig 3 - Upcoming regasification terminals
(mmtpa)
60
50
PLNG
Hazira, Sh ell & Total
Mundra , GSP C & Adan i, Gree nfie ld
Pipa va v, S wa n E nergy, FSRU
Dabho l, GAIL & NTPC, Gre enfield
GAIL, FSRU, East Coast
IOCL, Enn ore, G reenfield
5.0
4.0
2.5
5.0
40
30
20
10
1.3
2.5
5.0
2.5
5.0
2.5
5.0
17.5
17.5
18.8
FY15
FY16E
FY17E
2.0
2.5
5.0
4.0
5.0
5.0
5.0
5.0
5.0
5.0
22.5
25.0
25.0
FY18E
FY19E
FY20E
1.3
5.0
0
28 March 2016
Page 51 of 67
BUY
TP: INR 180.00
 35.7%
Company Initiation
Gujarat State
Petronet
INDIA
ENERGY
GUJS IN
Valuation
Initiate with BUY
We value GUJS at Rs 180/sh, as the sum of DCF for its pipeline business (Rs 161/sh) and
the value of its stake in GGAS (Rs 18/sh). Our pipeline business valuation implies a P/E of
~15x FY18E EPS, in line with gas utility peers. The company is not exposed to marketing
margins, making its earnings relatively less volatile (compared to GAIL). At the same time,
its stake in GGAS offers upsides from an improving CGD outlook. Initiate with BUY.
Earnings not subject to marketing
margins and thus insulated from
volatility
Fig 4 - GUJS valuation
Valuation type
Value
PV of FCFE (Rs mn)
26,485
Terminal Value (Rs mn)
149,291
PV of terminal value (Rs mn)
61,077
Less: Net Debt (Rs mn)
(2,884)
Investments value - Incl. GGAS stake (Rs mn)
10,236
Equity value (Rs mn)
100,682
Equity value (Rs/share)
180
Key DCF assumptions:

Discount FCFE estimates at Cost of Equity of 11.8%. We factor terminal growth at 5%

Flat volumes until FY18, and then gradually improving to >30mmscmd levels after
FY20. Long-term tariffs stable at ~Rs 1.25/scm (almost in line with our assumption
for GAIL)

Average long-term EBITDA at Rs 1.1/scm (~81% operating margins)

ROCE to sustain at ~11% levels over the long term implying we are being
conservative on tariff assumptions. Technically, as we move towards the end of the
economic life of its assets, GUJS’ average ROCE should improve to >14-15% levels to
justify 12% IRR for its pipeline investments
Terminal growth
Cost of Equity
(Rs)
10.0%
11.0%
11.8%
13.0%
14.0%
3%
194
169
153
134
122
4%
215
184
164
142
128
5%
245
204
180
153
135
6%
289
231
199
166
145
7%
363
273
227
183
157
28 March 2016
Page 52 of 67
BUY
Company Initiation
Gujarat State
Petronet
TP: INR 180.00
 35.7%
INDIA
ENERGY
GUJS IN
Price
(Rs)
Max
Min
Avg
Median
Last
160
140
120
6x
8x
10x
12x
14x
16.1
6.5
10.4
9.8
12.9
100
80
60
40
20
Mar-16
Aug-15
Jan-15
Jul-14
Dec-13
Jun-13
Nov-12
May-12
Apr-11
Oct-11
0
(Rs)
1x
Price
Max
Min
Avg
Median
Last
350
300
2x
3x
GUJS was one of the fastest growing
gas utilities and hence would
consistently trade at >15x multiples
4x
2.4
0.8
1.5
1.4
1.7
Current low multiples factor in nearterm pressure on volumes, but ignore
upsides from its stake in CGD
businesses
250
200
150
100
50
Mar-16
Aug-15
Jan-15
Jul-14
Dec-13
Jun-13
Nov-12
May-12
Oct-11
Apr-11
0
Key risks

Regulations: GUJS’ pipeline tariffs are being regulated by PNGRB. Any reduction
in tariffs on account of a change in guidelines could have a significant impact
on earnings.

Lower-than-expected volume growth: It can take longer than expected for GUJS to
make up for the loss of 4mmscmd of volumes from RIL, which could impact nearterm earnings.
28 March 2016
Page 53 of 67
BUY
TP: INR 180.00
 35.7%
Gujarat State
Petronet
Company Initiation
INDIA
ENERGY
GUJS IN
Company profile
GUJS operates one of the largest natural gas transmission networks in India. It is a part of
the GSPC group and was established for the purpose of constructing and managing a
statewide gas transmission network in the state of Gujarat. The company commenced
transporting natural gas in Nov 2000. The infrastructure it developed enabled the flow of
LNG and domestic gas from various sources including the KG Basin to various regions of
Gujarat. The company transported 8,395mmscm of natural gas during 2015, an increase
of 9% over the previous year’s 7,693mmscm.
GUJS now owns and operates the largest gas transmission network in Gujarat totaling to
~2,192km (as on 31Mar15). Its gas grid reaches 24 of 33 districts in the state.
Further, the company through special purpose vehicles, namely GSPL India Gasnet
Limited (GIGL) and GSPL India Transco Limited (GITL), is focusing on the development of
three pan-India pipeline projects, namely Mallavaram-Bhopal-Bhilwara-Vijaipur,
Mehsana-Bhatinda, and Bhatinda-Jammu-Srinagar. These pipelines with a total length of
~4,291km would traverse through 9 states and 59 districts of the country, thereby
improving the capacity utilisation of LNG terminals as well as GUJS’ Gujarat gas grid.
Name
Designation
Brief Profile
Has wide administrative and corporate experience and has held various positions in
M M Srivastava
Chairman
Atanu Chakraborty
Managing Director
Dr J N Singh
Non-Executive Director
government departments prior to his retirement, including Member (Finance) of Gujarat
Electricity Board, Managing Director of Gujarat Agro Industries Corporation, Secretary in
Finance Department, Commissioner of Commercial Tax Department, Principal Secretary
of Energy and Petrochemicals Department, and Additional Chief Secretary of Finance
Department, Government of Gujarat.
Has wide experience in various State as well as Central government departments and
public sector undertakings. At present, he is also Managing Director, Gujarat State
Petroleum Corp.
Has wide experience in various government departments and public sector undertakings.
At present, he is Additional Chief Secretary, Finance Department, Govt. of Gujarat.
Has wide experience in various government departments and public sector undertakings
L Chuaungo
Shridevi Shukla
and has significant exposure to the power sector. At present, he is Principal Secretary,
Energy and Petrochemicals Department and is the Managing Director of GUVNL and
Chairman of GIPCL.
Has held various senior level positions in Government of Gujarat departments prior to her
retirement. Recently appointed as State Information Commissioner, Gujarat Information
Commission, from May’14 to Feb’15.
28 March 2016
Page 54 of 67
BUY
TP: INR 180.00
 35.7%
Company Initiation
Gujarat State
Petronet
INDIA
ENERGY
GUJS IN
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
7.4
7.5
8.1
10.2
10.7
Adjusted EPS
7.4
7.5
8.1
10.2
10.7
DPS
1.0
1.0
1.2
1.4
1.5
58.5
64.8
68.4
77.3
85.6
BVPS
Valuation Ratios
Y/E 31 Mar (x)
FY14A
FY15A
FY16E
FY17E
FY18E
EV/Sales
7.8
7.5
7.8
6.8
6.6
EV/EBITDA
8.9
8.7
9.2
7.9
7.7
Adjusted P/E
17.8
17.6
16.4
13.0
12.4
2.3
2.0
1.9
1.7
1.6
FY14A
FY15A
FY16E
FY17E
FY18E
EBITDA margin
88.4
87.1
84.9
86.1
85.0
EBIT margin
70.9
69.3
67.0
68.9
66.8
39.9
40.0
44.7
48.6
50.2
Adjusted ROAE
13.4
12.2
12.1
14.0
13.1
ROCE
10.7
10.5
9.9
12.0
11.4
P/BV
Financial Ratios
Y/E 31 Mar
YoY Growth (%)
Revenue
(10.4)
1.0
(4.3)
16.5
1.2
EBITDA
(13.3)
(0.4)
(6.8)
18.1
(0.1)
Adjusted EPS
(22.1)
1.3
6.9
26.7
4.4
(6.0)
6.4
7.9
6.2
4.0
Invested capital
Receivables (days)
Inventory (days)
87
69
56
54
57
287
325
314
280
290
Payables (days)
39
74
94
93
92
Current ratio (x)
1.6
1.9
1.9
2.1
2.5
Quick ratio (x)
0.8
0.8
0.6
0.3
0.8
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
5.3
6.2
9.8
15.1
22.2
0.2
0.1
0.2
0.1
0.0
FY18E
DuPont Analysis
Y/E 31 Mar (%)
FY14A
FY15A
FY16E
FY17E
63.7
63.4
67.0
70.0
72.0
88.4
91.0
99.6
100.8
104.3
70.9
69.3
67.0
68.9
66.8
19.7
19.4
18.2
20.8
20.1
170.9
158.0
149.2
139.0
130.2
13.4
12.2
12.1
14.0
13.1
Adjusted ROAE
28 March 2016
Page 55 of 67
BUY
TP: INR 180.00
 35.7%
Company Initiation
Gujarat State
Petronet
INDIA
ENERGY
GUJS IN
Income Statement
FY14A
FY15A
FY16E
FY17E
FY18E
Total revenue
10,507
10,615
10,158
11,835
11,977
EBITDA
9,289
9,249
8,624
10,185
10,177
EBIT
7,450
7,356
6,802
8,153
8,002
(1,418)
(1,178)
(692)
(539)
(361)
552
520
665
605
703
(1)
(1)
0
0
0
6,583
6,698
6,775
8,218
8,345
Exceptional items
EBT
Income taxes
(2,391)
(2,453)
(2,236)
(2,465)
(2,337)
Extraordinary items
0
0
0
0
0
0
0
0
0
0
4,191
4,245
4,539
5,753
6,008
Reported net profit
Adjustments
Adjusted net profit
0
0
0
0
0
4,191
4,245
4,539
5,753
6,008
FY14A
FY15A
FY16E
FY17E
FY18E
152
405
387
451
456
5,406
4,222
2,955
2,364
2,364
Balance Sheet
Accounts payables
Provisions
715
913
913
913
913
Debt funds
10,365
8,879
8,421
5,064
3,950
Other liabilities
4,442
4,755
5,059
5,429
5,805
Equity capital
5,627
5,627
5,627
5,627
5,627
Reserves & surplus
27,321
30,845
32,876
37,860
42,519
Shareholders' fund
32,948
36,472
38,503
43,487
48,147
54,028
55,645
56,238
57,708
61,636
Cash and cash eq.
4,992
4,352
2,544
1,294
2,825
2,490
1,504
1,609
1,875
1,898
694
1,102
805
938
949
1,847
3,540
3,133
3,546
3,581
Inventories
Investments
Net fixed assets
CWIP
5,850
6,487
7,087
7,687
8,287
31,593
30,896
36,838
39,029
40,736
6,561
7,765
4,223
3,339
3,361
Intangible assets
0
0
0
0
0
0
0
0
0
0
Other assets
0
0
0
0
0
Total assets
54,028
55,645
56,238
57,708
61,636
FY14A
FY15A
FY16E
FY17E
FY18E
6,022
6,030
6,362
7,785
8,183
Interest expenses
0
0
0
0
0
0
0
0
0
0
3,082
(1,800)
(685)
(1,339)
(63)
Cash Flow Statement
(216)
(218)
(360)
(235)
(328)
8,888
4,012
5,317
6,211
7,792
(2,209)
(2,291)
(4,223)
(3,339)
(3,903)
(4,109)
(637)
(600)
(600)
(600)
213
472
665
605
703
(6,106)
(2,456)
(4,158)
(3,335)
(3,799)
Equities issued
0
0
0
0
0
Debt raised/repaid
(5,910)
(1,486)
(458)
(3,357)
(1,113)
Interest expenses
(1,418)
(1,178)
(692)
(539)
(361)
Dividends paid
(658)
(658)
(790)
(922)
(988)
1,666
1,126
(1,027)
692
0
(6,320)
(2,196)
(2,967)
(4,126)
(2,462)
(3,538)
(640)
(1,808)
(1,249)
1,531
4,992
4,352
2,544
1,294
2,825
28 March 2016
Page 56 of 67
Company Initiation
INDIA
ENERGY
28 March 2016
BUY
Gujarat Gas
TP: INR 660.00
 26.1%
GUJGA IN
Turnaround story
Gujarat Gas (GGAS) is a turnaround story as the decline in gas prices drives a
normalisation in CGD business margins and volumes. Pricing for all LNG
contracts is now aligned to current low crude prices. GGAS benefits the most
REPORT AUTHORS
among CGD companies, considering the price-sensitive industrial segment
constitutes 63% of its volumes. A revival in industrial demand in Gujarat and an
aggressive foray into new areas of operations could result in industry-leading
volume growth for GGAS. Initiate with BUY and a Mar’17 DCF TP of Rs 660.
 Volumes to revive: GGAS has recently passed on a major portion of the decline in
LNG prices to consumers, rekindling consumption from many industrial units. A
revival in gas offtake from ceramic manufacturers in Morbi, Gujarat, could add
~1mmscmd of volumes for GGAS in the near term. There are also indications of
some revival in consumption from co-generation captive power units in Gujarat.
Volumes for GGAS are expected to initially normalise to ~6mmscmd in FY17 (from
5.6mmscmd in FY16), before gradually improving to 8mmscmd by FY20 (matching
the peak levels achieved in FY14). If current low LNG prices continue, the increase in
volumes could be steeper than estimated.
Rohit Ahuja
+91 22 6766 3437
[email protected]
Akshay Mane
+91 22 6766 3438
[email protected]
INR 523.25
MARKET CAP
 Structural turnaround in margins imminent: LNG contracts have now been aligned
to prevailing crude prices, leading to an average decline of ~US$ 3/mmbtu. GGAS has
passed on most of these benefits to consumers through a phased Rs7/scm cut in gas
price for the industrial retail segment. Sustained margin improvement appears
imminent as GGAS explores a flexible pricing strategy for industrial consumers. This
strategy would be critical in cushioning margins against volatility in LNG prices.
INR 72.0 bln
USD 1.1 bln
 Initiate with BUY: We value GGAS at Rs 660/share based on DCF. GGAS has the
most leveraged balance sheet among its peers. The company gains the most from
improvement in industrial volumes. The expansion in ROEs (4x expansion to 29% by
FY18E) is steep, as its margins and volumes normalise over FY17/18.
SHARES O/S
137.7 mln
FREE FLOAT
39.1%
52 WK HIGH
52 WK LOW
INR 680.00
INR 453.20
Y/E 31 Mar
FY15A
FY16E
FY17E
FY18E
Revenue (INR mln)
90,063
47,434
46,355
55,069
EBITDA (INR mln)
11,102
6,600
10,189
12,314
4,476
1,604
3,572
5,358
32.5
11.7
25.9
38.9
1474.4
(64.2)
122.7
50.0
DPS (INR)
9.8
3.5
7.8
11.7
ROIC (%)
19.9
6.4
10.5
14.0
Adjusted ROAE (%)
24.7
8.4
19.7
29.5
Adjusted P/E (x)
16.1
44.9
20.2
13.4
EV/EBITDA (x)
7.1
11.4
9.2
7.7
P/BV (x)
3.6
3.9
4.1
3.9
Adjusted EPS (INR)
(INR)
690
640
590
540
490
440
Stock Price
Index Price
28,800
27,800
26,800
25,800
24,800
23,800
22,800
21,800
BUY
Gujarat Gas
TP: INR 660.00
 26.1%
GUJGA IN
Company Initiation
INDIA
ENERGY
Volumes to revive as macro fundamentals improve
The primary concern for a city gas distribution (CGD) portfolio that is more exposed to
industrial segments is the volatility in consumption patterns. Industrial offtake constitutes
~63% of GGAS’ volume mix, while the domestic retail segment forms ~26%. This is in stark
contrast to IGL’s portfolio where >80% is composed of retail demand. Margins in industrial
segments usually trend lower, while volumes are extremely price sensitive.
Consumption from some industrial segments (mostly ceramic manufacturers) has been
declining since Q1FY16, on account of a pricing mismatch for some of GGAS’ LNG supply
contracts (~2mmsmcd from RasGas and BG contracts) and issues with the macro
dynamics of end-user industries.
Pass-through of lower LNG prices
rekindling interest in gas consumption
from industrial units
These contracts have now been aligned to prevailing crude prices, leading to
~US$ 4/mmbtu decline in input costs. GGAS has passed on most of these benefits to
consumers through a phased Rs 7/scm cut in gas prices for the industrial retail segment.
Fig 1 - Volume trend
(mmscmd)
CNG
Fig 2 - % contribution to total volume
Domestic PNG
Industrial
Commercial
8.0
Commercial
11%
7.0
6.0
0.7
0.6
3.0
4.1
0.7
Domestic
PNG
13%
0.6
5.0
4.0
CNG
13%
0.7
4.6
3.6
3.9
4.3
2.0
1.0
0.0
0.7
0.7
0.7
0.7
0.8
1.0
0.6
0.6
0.8
0.9
FY14
FY15
FY16E
FY17E
FY18E
Industrial
63%
Volume growth from new areas, consolidation with group CGD companies
GGAS currently operates in 19 districts in Gujarat. The company has recently won bids for
the rural Thane and Palghar districts in Maharashtra. These areas would be an extension
of its CGD operations in Surat and Vapir. GGAS will largely target industrial demand in
this region. It has also bid for an additional eight cities in Gujarat for the setup of retail
CNG stations.
GSPC group might merge SGL with
GGAS
The GSPC group might merge GGAS with another local entity, Sabarmati Gas (SGL). SGL is
a 50-50 joint venture with BPCL, with operations in the Gandhinagar, Sabarkantha and
Mehsana districts of North Gujarat. SGL’s sales volumes are expected to be ~0.8mmscmd
in FY17 (~60% industrial segment – similar to GGAS), with Rs 1bn in net profits. BPCL may
continue to hold some stake in the merged entity. This merger will help GGAS tap the
North Gujarat and Mehsana regions which are strong industrial belts.
28 March 2016
Page 58 of 67
BUY
Gujarat Gas
TP: INR 660.00
 26.1%
GUJGA IN
Company Initiation
INDIA
ENERGY
Structural turnaround in margins imminent
GGAS is considering implementing a flexible pricing strategy for the price-sensitive
industrial consumer segment to cushion volumes and margins against demand volatility.
This apart, should the Gujarat government follow Delhi’s pollution control initiatives,
GGAS may see a potential shift in volume mix towards retail consumers (primarily for
CNG), imparting further stability to its margin and earnings profile.
Change in pricing strategy needed for sustained margin gains
Considering lower industrial volumes hit GGAS the hardest among peers, it is quite
obvious that the company would gain the most on a realignment of fundamentals.
We could see structural margin improvement for GGAS based on the following:
Flexible pricing needed for industrial
consumers; retail pricing approach
unsuitable given LNG price volatility

Long-term LNG pricing is now aligned to crude, providing GGAS more flexibility to
price gas for industrial segments and compete against movement in prices of
alternate fuels such as fuel oil, imported coal, naphtha and LPG.

The GSPC group may thus explore a differential pricing mechanism for industrial
consumers depending on their use of alternative fuels (against the current
mechanism of a similar retail price for all).

Differential pricing would give GGAS the ability to aggressively price natural gas for
certain price-sensitive consumers (such as ceramic manufacturers), while charging a
premium to other consumers in order to even out the average price.
Fig 3 - Gas price reduction for GGAS supply portfolio
Volumes
(mmscmd)
Pricing
(US$/mmbtu)
FY17 onwards
(US$/mmbtu)
Chg (%)
APM
1.2
4.2
3.5
(16.7)
PMT
0.2
5.7
5.7
0.0
BG LNG contract
2.5
12
6.5
(45.8)
RasGas
1.0
12
6
(50.0)
Spot/others
1.0
6
6
0.0
Total
5.9
9.2
5.7
(38.0)
Source
Fig 4 - Profitability profile
(Rs/scm)
8
Gross spreads
EBITDA
RoCE (R)
(%)
30
RoE (R)
24.7
7
25
23.0
6
20
17.2
5
4
15
16.0
3
2
12.5
7.8
10
9.6
5.4
5
1
5.9
3.2
0
0
FY14
FY15
FY16E
FY17E
FY18E
28 March 2016
Page 59 of 67
BUY
Gujarat Gas
TP: INR 660.00
 26.1%
GUJGA IN
Company Initiation
INDIA
ENERGY
Potential shift in volume mix could drive margin gains
The state of Gujarat has one of the most well developed infrastructure frameworks for
natural gas transportation and marketing. Considering the recent focus on pollution
control in Delhi, it won’t be long before some of these initiatives are extended across the
country, especially in areas where gas infrastructure is readily available.
Gujarat best equipped to
accommodate higher gas consumption
from pollution control initiatives
Tilting the volume mix towards retail consumers (primarily CNG) would help reduce the
volatility in GGAS’s earnings profile. Economics are in favour of CNG consumption, as
depicted in the table below. Commercial segments should, therefore, be willing to accept
a mandatory order for conversion to CNG (with an acceptable timeframe for setting up
requisite CNG stations).
Fig 5 - CNG economics (Ahmedabad prices)
Car (Petrol)
Average Daily running (km)
Car (Diesel)
75
75
Mileage (km/ltr)
12.0
20.0
Price (Rs/ltr)
63.0
53.0
CNG Price (Rs/kg)
46.8
46.8
Savings/km (Rs)
Annual Savings (Rs)
Monthly Difference (Rs)
2.4
0.7
66,993
19,220
5,506
1,580
28 March 2016
Page 60 of 67
BUY
Gujarat Gas
TP: INR 660.00
 26.1%
GUJGA IN
Company Initiation
INDIA
ENERGY
Valuation
Initiate with BUY
We value GGAS at Rs 660/share based on DCF. GGAS has the most leveraged balance
sheet among its peers. The company gains the most from improvement in industrial
volumes. The expansion in ROEs (4x expansion to 29% by FY18E) is steep, as its margins
and volumes normalise over FY17/18.
We value GGAS at Rs 660. The
company’s RoEs are expected to surge
4x over FY17/18, hence could see a
significant re-rating in multiples
Fig 6 - GGAS valuations
Value (Rs mn)
PV of FCFE
59,092
Terminal value
25,526
EV
84,618
Add: cash equivalents
6,261
Total Equity Value
90,879
Total Equity Value (Rs/share)
660
Our key DCF assumptions are:

Discounting FCFE estimates, based on Cost of equity of 12.3% ; and factoring
terminal growth of 4%

Long-term average assumptions for FCFE–
o
Volume growth at 5%
o
gross spreads at Rs 7.7/scm
o
EBITDA at Rs 4.2/scm
o
ROCE at 12%
Terminal growth
Cost of Equity
(Rs)
10.0%
11.0%
12.3%
13.0%
14.0%
2%
789
707
624
587
541
3%
825
732
640
600
551
4%
873
764
660
616
562
5%
940
807
685
635
576
6%
1,041
867
719
661
594
28 March 2016
Page 61 of 67
BUY
Gujarat Gas
TP: INR 660.00
 26.1%
GUJGA IN
Company Initiation
INDIA
ENERGY
Key risks

Lower-than-expected volume growth for the industrial segment.

PNGRB regulations with regard to marketing exclusivity still seem ambiguous. The
decline in domestic gas prices has led to attractive CNG retailing margins. Many
companies could therefore vie for a piece of CNG market share.

Reduction in allocation of domestic gas for CGD is a key risk. If domestic gas
production continues to decline, there is a case for the government to consider
reallocation of gas from CGD to the power or fertiliser sectors. However, we note
that the Supreme Court has ruled in favour of CGD companies for the allocation of
domestic gas. Considering various anti-pollution initiatives, it is unlikely that the
government will reduce this allocation.
Regulations and government policies
remain key risk
Company profile
GGAS is engaged in the distribution of gas from sources of supply to centres of demand
and to end customers. The company’s underground pipelines consist of mild steel (ME)
and polyethylene (PE). These lines supply gas to residential, industrial and commercial
users. The company supplies Piped Natural Gas (PNG) to residential customers and
Compressed Natural Gas (CNG) to retailers.
GGAS is a part of the GSPC group, which has consolidated its CGD businesses. The new
amalgamated entity, Gujarat Gas Limited (formerly known as GSPC Distribution Networks
Limited), has emerged as India’s largest city gas distribution player with a presence
spread across 19 districts in the state of Gujarat and Union Territory of Dadra Nagar
Haveli and Thane GA, which includes the Palghar district of Maharashtra. The size and
scale of the combined entity gives it the ability to achieve efficiencies and effectively
manage the transformational changes in the sector.
GGAS has India’s largest customer base in major user segments. The company has a
15,800km-long gas pipeline network and 241 CNG stations constituting 24% of all CNG
stations in the country. It provides 5.6mmscmd of natural gas to 35% of all domestic
customers (1.1mn), 53% of all commercial customers and 47% of all industrial customers
in India.
Name
Designation
Brief Profile
G R Aloria
Non-Executive Chairman
Has wide experience in public administration and has held several key positions.
Currently Chief Secretary, Govt. of Gujarat.
Atanu Chakraborty
Managing Director
Has wide experience in various State as well as Central government
departments and public sector undertakings. Currently Managing Director,
Gujarat State Petroleum Corp.
Has wide experience in various government departments and public sector
undertakings and has significant exposure to the power sector. Currently,
Principal Secretary, Energy and Petrochemicals Department, and Managing
Director of GUVNL and Chairman of GIPCL.
L Chuaungo
Director
Sanjeev Kumar
Director
Secretary to Govt. of Gujarat, Finance Department (Expenditure).
Mukesh Kumar
Director
IAS officer
28 March 2016
Page 62 of 67
BUY
Gujarat Gas
TP: INR 660.00
 26.1%
GUJGA IN
Company Initiation
INDIA
ENERGY
Per Share Data
Y/E 31 Mar (INR)
FY15A
FY16E
FY17E
FY18E
Reported EPS
32.5
11.7
25.9
38.9
Adjusted EPS
32.5
11.7
25.9
38.9
9.8
3.5
7.8
11.7
144.6
134.0
129.0
135.1
DPS
BVPS
Valuation Ratios
Y/E 31 Mar (x)
FY15A
FY16E
FY17E
FY18E
EV/Sales
0.9
1.6
2.0
1.7
EV/EBITDA
7.1
11.4
9.2
7.7
Adjusted P/E
16.1
44.9
20.2
13.4
3.6
3.9
4.1
3.9
FY15A
FY16E
FY17E
FY18E
P/BV
Financial Ratios
Y/E 31 Mar
EBITDA margin
12.3
13.9
22.0
22.4
EBIT margin
9.7
8.9
16.4
17.4
5.0
3.4
7.7
9.7
Adjusted ROAE
24.7
8.4
19.7
29.5
ROCE
18.0
6.1
10.9
15.7
Revenue
15.5
(47.3)
(2.3)
18.8
EBITDA
93.4
(40.6)
54.4
20.9
1474.4
(64.2)
122.7
50.0
2.9
57.1
1.6
0.1
17
YoY Growth (%)
Adjusted EPS
Invested capital
Receivables (days)
18
23
19
Inventory (days)
2
3
2
2
Payables (days)
22
29
22
18
Current ratio (x)
0.7
2.4
1.9
1.5
Quick ratio (x)
0.5
1.6
1.0
0.6
1.8
0.9
0.9
1.0
1.3
0.7
0.8
0.9
2.6
1.7
2.5
3.6
0.2
1.2
1.3
1.1
DuPont Analysis
Y/E 31 Mar (%)
FY15A
FY16E
FY17E
FY18E
69.3
60.0
67.0
72.0
74.0
63.0
69.9
77.6
9.7
8.9
16.4
17.4
133.0
71.6
75.1
92.3
373.5
345.3
341.1
328.2
24.7
8.4
19.7
29.5
Adjusted ROAE
28 March 2016
Page 63 of 67
BUY
Gujarat Gas
TP: INR 660.00
 26.1%
GUJGA IN
Company Initiation
INDIA
ENERGY
Income Statement
FY15A
FY16E
FY17E
FY18E
Total revenue
90,063
47,434
46,355
55,069
EBITDA
11,102
6,600
10,189
12,314
8,725
4,243
7,623
9,588
(3,332)
(2,502)
(3,020)
(2,647)
1,071
932
729
501
(8)
0
0
0
6,464
2,674
5,332
7,442
EBIT
Exceptional items
EBT
Income taxes
(1,980)
(1,069)
(1,760)
(2,084)
Extraordinary items
0
0
0
0
0
0
0
0
4,476
1,604
3,572
5,358
Reported net profit
Adjustments
0
0
0
0
4,476
1,604
3,572
5,358
FY15A
FY16E
FY17E
FY18E
4,262
2,318
1,977
2,345
19,631
1,996
1,702
2,020
Provisions
855
855
855
855
Debt funds
14,908
30,000
27,273
24,545
Other liabilities
9,361
9,896
10,429
10,978
Equity capital
1,377
1,377
1,377
1,377
Reserves & surplus
18,532
17,075
16,382
17,225
Shareholders' fund
19,909
18,452
17,759
18,602
68,926
63,517
59,995
59,345
Cash and cash eq.
11,748
8,315
4,641
3,252
3,606
2,385
2,331
2,769
411
207
202
240
2,427
1,433
1,409
1,598
Adjusted net profit
Balance Sheet
Accounts payables
Inventories
Investments
Net fixed assets
CWIP
1,620
1,620
1,620
1,620
44,867
45,310
45,544
45,619
3,572
3,572
3,572
3,572
Intangible assets
2
2
2
2
0
0
0
0
Other assets
673
673
673
673
Total assets
68,926
63,517
59,995
59,345
FY15A
FY16E
FY17E
FY18E
6,853
3,961
6,138
8,084
Interest expenses
0
0
0
0
0
0
0
0
834
(17,159)
(553)
570
Cash Flow Statement
(406)
(397)
(196)
(501)
7,281
(13,596)
5,390
8,153
(3,362)
(2,800)
(2,800)
(2,800)
0
0
0
0
1,071
932
729
501
(2,290)
(1,868)
(2,071)
(2,299)
0
0
0
0
Debt raised/repaid
(1,053)
15,092
(2,727)
(2,727)
Interest expenses
(3,332)
(2,502)
(3,020)
(2,647)
Dividends paid
(1,561)
(559)
(1,246)
(1,868)
0
0
0
0
(5,946)
12,031
(6,993)
(7,243)
(955)
(3,433)
(3,674)
(1,389)
11,748
8,315
4,641
3,252
Equities issued
28 March 2016
Page 64 of 67
RESEARCH TEAM
ANALYST
SECTOR
EMAIL
TELEPHONE
Varun Lohchab
(Head – India Research)
Consumer, Strategy
[email protected]
+91 22 6766 3470
Mihir Jhaveri
Auto, Auto Ancillaries, Cement
[email protected]
+91 22 6766 3459
Siddharth Vora
Auto, Auto Ancillaries, Cement
[email protected]
+91 22 6766 3435
Misal Singh
Capital Goods, Infrastructure, Utilities
[email protected]
+91 22 6766 3466
Prashant Tiwari
Capital Goods, Infrastructure, Utilities
[email protected]
+91 22 6766 3485
Manish Poddar
Consumer
[email protected]
+91 22 6766 3468
Premal Kamdar
Consumer
[email protected]
+91 22 6766 3469
Rohit Ahuja
Energy
[email protected]
+91 22 6766 3437
Akshay Mane
Energy
[email protected]
+91 22 6766 3438
Parag Jariwala, CFA
Financials
[email protected]
+91 22 6766 3442
Vikesh Mehta
Financials
[email protected]
+91 22 6766 3474
Rumit Dugar
IT, Telecom, Media
[email protected]
+91 22 6766 3444
Saumya Shrivastava
IT, Telecom, Media
[email protected]
+91 22 6766 3445
Pritesh Jani
Metals
[email protected]
+91 22 6766 3467
Arun Baid
Mid-caps
[email protected]
+91 22 6766 3446
Praful Bohra
Pharmaceuticals
[email protected]
+91 22 6766 3463
Aarti Rao
Pharmaceuticals
[email protected]
+91 22 6766 3436
Arun Aggarwal
Real Estate
[email protected]
+91 22 6766 3440
Jay Shankar
Economics & Strategy
[email protected]
+91 11 3912 5109
Rahul Agrawal
Economics & Strategy
[email protected]
+91 22 6766 3433
28 March 2016
Page 65 of 67
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Analyst Certification
Each of the analysts identified in this report certifies, with respect to the companies or securities that
the individual analyses, that (1) the views expressed in this report reflect his or her personal views
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Stock Ratings are defined as follows
Recommendation Interpretation (Recommendation structure changed with effect from March 1, 2009)
Recommendation
Buy
Hold
Sell
Expected absolute returns (%) over 12 months
More than 15%
Between 15% and –5%
Less than –5%
Expected absolute returns are based on the share price at market close unless otherwise stated.
Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our
target price represents the fair value of the stock based upon the analyst’s discretion. We note that
future price fluctuations could lead to a temporary mismatch between upside/downside for a stock
and our recommendation.
Stock Ratings Distribution
As of 1 March 2016, out of 185 rated stocks in the RCM coverage universe, 108 have BUY ratings
(including 5 that have been investment banking clients in the last 12 months), 55 are rated HOLD and
22 are rated SELL.
Research Conflict Management Policy
RCM research has been published in accordance with our conflict management policy, which is
available here.
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Religare Capital Markets does and seeks to do business with companies covered in our research
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Any reference to a third party research material or any other report contained in this report represents
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Other Disclosures by Religare Capital Markets Limited under SEBI (Research Analysts)
Regulations, 2014 with reference to the subject companies(s) covered in this report:
Religare Capital Markets Limited (“RCML”) is engaged in the business of Institutional Stock Broking
and Investment Banking. RCML is a member of the National Stock Exchange of India Limited and
BSE Limited and is also a SEBI-registered Merchant Banker. RCML is a subsidiary of Religare
Enterprises Limited which has its various subsidiaries engaged in the businesses of commodity
broking, stock broking, lending, asset management, life insurance, health insurance, wealth
management, portfolio management, etc. RCML has set up subsidiaries in Singapore, Hong Kong
and Sri Lanka to render stock broking and investment banking services in respective jurisdictions.
RCML’s activities were neither suspended nor has it defaulted with any stock exchange authority with
whom it has been registered in the last five years. RCML has not been debarred from doing business
by any Stock Exchange / SEBI or any other authority. No disciplinary action has been taken by any
regulatory authority against RCML impacting its equity research analysis activities.
RCML or its research analyst or his/her relatives do not have any financial interest in the subject
company.
RCML or its research analyst or his/her relatives do not have actual/beneficial ownership of one per
cent or more securities in the subject company at the end of the month immediately preceding the
date of publication of this research report.
28 March 2016
Page 66 of 67
RESEARCH DISCLAIMER
Research analyst or his/her relatives do not have any material conflict of interest at the time of
publication of this report.
RCML may from time to time solicit or perform investment banking services for the company(ies)
mentioned in this report.
Research analyst has not received any compensation from the subject company in the past 12
months.
RCML or its associates may have material conflict of interest at the time of publication of this
research report.
RCML may have managed or co-managed a public offering of securities for the subject company in
the past 12 months.
RCML’s associates may have financial interest in the subject company. RCML’s associates may have
received compensation from the subject company in the past 12 months. RCML’s associates may
hold actual / beneficial ownership of one per cent or more securities in the subject company at the
end of the month immediately preceding the date of publication of this research report.
RCML may have received compensation from the subject company in the past 12 months.
Research analyst has not served as an officer, director or employee of the subject company.
RCML or its research analyst is not engaged in any market making activities for the subject company.
RCM has obtained registration as Research Entity under SEBI (Research Analysts) Regulations,
2014.
Digitally signed by AHUJA ROHIT
Date: 2016.03.28 22:13:52 +05'30'
28 March 2016
Page 67 of 67
Religare Capital Markets
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India Energy - Religare Capital Markets

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