India Natural Gas
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India Natural Gas ‘Fuel for Growth’ India’s primary energy basket is on the threshold of witnessing a GAIL – BUY quantum jump in contribution from natural gas. While the demand for CMP: Rs451 Target: Rs525 gas has always been strong in the country, availability of transmission Doubling gas transmission infrastructure and regulatory issues has restricted supply matching up capacity in two years to the demand growth. However, the medium term outlook has Exposure to city gas projects improved considerably with 1) increased availability of gas; both and E&P fields value accretive domestic and imports, 2) huge investments in gas pipeline Huge expansion planned for infrastructure and 3) fast pace implementation of related reforms. the petrochemical segment Subsidy an overhang, but 1) Improved domestic availability of natural gas: Recently, relatively better placed concerns have been raised with respect to sustenance of current level of gas production in the country given the declining trend of gas production from Reliance Industries’ KG-D6 field. However, we GSPL – BUY believe that in the near term, higher LNG imports will offset the CMP: Rs97 Target: Rs113 impact to some extent, while over the medium to longer term; Expansion of transmission production at KG-D6 would revive. Furthermore, in the next three capacity to serve rising demand in Gujarat to five years, new fields such as GSPC’s Deendayal field, ONGC’s KG Basin field and Reliance Industries NEC-25 field are expected to Three cross-country pipelines to add value commence production. Higher LNG import capacities with LNG Tariffs to remain flattish post terminals of Petronet, Shell and Dabhol project will also add to the PNGRB authorization supply. As per GAIL, domestic production of gas will increase from about 145mmscmd in CY10 to about 215mmscmd by CY15. 2) Better pipeline infrastructure: Lack of adequate pipeline Indraprastha Gas – BUY CMP: Rs370 Target: Rs409 infrastructure has always been a key hindrance in meeting the rising demand for natural gas, especially so in the southern and Improving CNG economics and wider availability to drive eastern regions. Going ahead, GAIL, which transports more than demand in NCR region 70% of gas available in the country, has embarked upon an aggressive capacity expansion program to double its transmission Under-penetration to propel demand for PNG capacity over the next three years from about 8,000kms currently. Pricing power to enable Companies such as GSPL and Reliance Gas Infrastructure are also margin sustenance adding material capacities in the near future. 3) Reforms have gathered pace: Realizing the importance of gas Petronet LNG – BUY sector, the Indian government has over the past five years, CMP: Rs141 Target: Rs162 implemented significant reforms such as i) raising APM gas prices Near term LNG demand to and bringing them closer to market price, ii) regulating pipeline remain strong on lower tariffs, iii) streamlining processes for awarding CGD projects and production at KG-D6 field many more. Furthermore, the government is contemplating Expanding capacities at implementation of gas price pooling, which would even out the opportune time prices for end consumers. Regasification tariffs would continue to rise Financial summary Sales yoy OPM PAT yoy EPS P/E RoE (Rs mn) (%) (%) (Rs mn) (%) (Rs) (x) (%) FY11E 325,365 30.2 17.0 35,611 13.4 28.1 16.1 19.8 GAIL FY12E 368,258 13.2 18.3 44,269 24.3 34.9 12.9 21.2 FY13E 395,401 7.4 19.2 45,828 3.5 36.1 12.5 18.8 FY11E 10,465 4.6 92.6 5,064 22.4 9.0 10.8 28.4 GSPL FY12E 11,680 11.6 93.3 5,699 12.5 10.1 9.6 25.2 FY13E 12,848 10.0 93.3 6,290 10.4 11.2 8.7 22.5 FY11E 17,505 62.4 28.5 2,598 20.5 18.6 19.9 28.4 IGL FY12E 23,431 33.9 24.8 2,938 13.1 21.0 17.6 26.6 FY13E 30,288 29.3 24.7 3,821 30.0 27.3 13.5 28.3 FY11E 131,973 23.9 9.2 6,196 53.2 8.3 17.1 25.2 Petronet FY12E 185,990 40.9 7.9 6,691 8.0 8.9 15.8 22.8 FY13E 237,469 27.7 7.3 7,600 13.6 10.1 13.9 21.9 Research Analyst Prayesh Jain Source: Company, India Infoline Research [email protected] June 14, 2011 India Natural Gas These developments, we believe, have created investment opportunities across the natural gas value chain. Pricing reforms are expected to be beneficial to both producers and LNG importers. While producers will gain from better realizations, LNG importers will benefit from correction in the pricing disparity (making LNG more affordable vis-à-vis domestic gas). Higher gas availability will lead to a jump in volumes for transmission companies. This coupled with stable tariffs would translate into better earnings visibility. City gas companies, which provide last mile connectivity for consumption by industries and vehicles, would also gain from increase in supplies and widening pipeline infrastructure of transmission companies. We recommend investors to BUY GAIL, GSPL, Indraprastha Gas and Petronet LNG. GAIL: GAIL, being the nodal gas transmission company in the country is all set to gain from the rising natural gas supplies in the country. The company is in the process of doubling its gas transmission capacity from current 8,000kms. It is also expanding its presence in the city gas business from 15 cities currently to about 50 cities in four years. E&P business will only add value as and when the discoveries are made. It also has aggressive expansion plans for its petrochemical segment. The subsidy overhang, we believe, has already been priced in. We expect FY11-13E revenue and PAT CAGR of 10% and 16% respectively. GSPL: With Gujarat accounting for about 30% of the natural gas demand in the country and rapid growth in industrialization in the state, the demand for gas is expected to surge. Furthermore, supplies from Petronet LNG and E&P players are also increasing over the medium term. With GSPL widening its transmission network in Gujarat from about 1,900kms currently to 2,400kms, it will be well poised to leverage on this opportunity. New cross-country pipelines will establish it as a nation-wide player. Additionally, its exposure to city gas projects will increase value for the company. We expect FY11-13E revenue and PAT CAGR of 11% and 12% respectively. Indraprastha Gas: Rising crude oil prices have improved the economic viability of CNG as an auto fuel. IGL, with a virtual monopoly in the NCR region is all set to gain from rising private vehicle conversions to CNG. Under penetration of PNG in both households and the industrial market will drive demand for the fuel. Its expansion beyond the Delhi region will add to its revenue and earnings growth over the medium term. We expect FY11-13E revenue and PAT CAGR of 32% and 21% respectively. Petronet LNG: With demand-supply for natural gas likely to remain strained in the country, we expect the demand for LNG to continue on a strong trajectory. Petronet is expanding its regasification capacity at Dahej from current 10.5mtpa to 14mtpa by FY14 and its Kochi terminal with a capacity of 2.5mtpa (expandable to 5mtpa) will commence operations in FY13. With majority of the volume on long term contracts and limited risk to regasification charges, earnings visibility remains strong. We expect FY11-13E revenue and PAT CAGR of 34% and 11% respectively. Sector Report 2 India Natural Gas Contents Topics Page No Industry section India’s appetite for natural gas to remain strong 4 Robust growth in gas supplies 7 Huge investments in pipeline infrastructure 8 Regulations have gathered pace 8 Company Section GAIL 12 Investment rationale 13 Key concerns 17 Company background 19 Financials 20 GSPL 21 Investment rationale 22 Key concerns 26 Company background 27 Financials 28 Indraprastha Gas 29 Investment rationale 30 Key concerns 34 Company background 35 Financials 37 Petronet LNG 38 Investment rationale 39 Key concerns 42 Company background 43 Financials 44 Sector Report 3 India Natural Gas India’s appetite for natural gas to remain strong Primary energy mix to change in favour of natural gas India’s primary energy consumption has witnessed a CAGR of 6.5% over the last decade as against 9.5% for China, 5.9% for Asia Pacific In India, natural gas accounts for only region and 2.7% for the entire world. Over the next three years, India 10.6% of the primary energy basket is expected to report the second fastest GDP growth in the world. This as compared to global average of 24% would translate into a strong demand for primary energy. The current primary energy mix is dominated by coal and crude oil, which contributes about 53% and 30% respectively. Natural gas accounts for only 10.6% of the basket as compared to global average of 24%. Primary energy mix World India China Hy dro Hydro Renew - Hydro Renew - Nuc lear Renew - Nuc lear pow er pow er Nuc lear pow er ables ables ables Oil Energy 6% Ener gy Oil Energy Oil 5% 1% 7% 18% Natural 1% 1% 30% 1% 0% 5% 34% Gas 4% Coal 30% Coal Natural Natural 52% Gas Coal Gas 11% 70% 24% Source: BP statistical review 2010, India Infoline Research India currently consumes about 170mmscmd of gas. Power sector accounts for the maximum demand followed by fertilizers and industries.