VISIT NOTE

PETRONET LNG
Capex to drive earnings
India Equity Research| Oil, Gas and Services

Post our recent meeting with Petronet LNG (PLNG) management, we reiterate our bullish stance on the company and believe that the new capex (Kochi LNG, Gangavaram LNG, Kerala power plant) will drive growth going forward. We have revised up our EPS estimates to INR14.2 and INR14.4 for FY13 and FY14 from INR13.2 and INR13.5, respectively, incorporating higher marketing margins for FY13/14 (correction in spot LNG prices). Consequently we have also raised our target price to INR200/share from INR190/share earlier. Maintain BUY.
Dahej LNG terminal: Management expects FY13 volume to be marginally higher than FY12 (107% utilisation). Volumes are expected to increase as second jetty commences in December 2013 (capacity will rise from 10.7 mtpa to 11.5 mtpa) and start of additional vapourisers in December 2015 (capacity increase to 15.0 mtpa plus). Further, until the expansion of Dahej gets completed, capacity commitments imply that PLNG will be left with a small 6-8% capacity for self-spot volumes (refer chart 1). Kochi LNG terminal: The terminal is ready and awaiting start of phase 1 of GAILs KochiBengaluru-Mangalore pipelinedemand estimate of 0.7 mtpa (Kochi refinery, HOCL, FACT, power plant). Phase II pipeline expected in December 2013 is estimated to bring incremental demand of 3.5 mtpa, leading to total utilisation level of over 80%. Also the construction of the Kerala power plant will be completed in three phases of 350 MW each, generating 1.2 mtpa LNG demand for terminal. This will be a 50:50 JV with the Kerala state government. PLNG will have to invest INR6-7bn equity for its stake in the next three-four years. Management expects PPA at INR6.0-6.5/unit to be signed by FY13 end. Gangavaram LNG terminal: Construction of the facility is likely to commence by March 2013 (after environmental clearance). Total capex planned at INR45bn.

EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Outperformer Low Overweight

MARKET DATA (R: PLNG.BO, B: PLNG IN) CMP Target Price 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn) : INR 162 : INR 200 : 180 / 122 : 750.0 : 121/ 2,341

Avg. Daily Vol.BSE/NSE(000) : 2,018.1 SHARE HOLDING PATTERN (%) Current Q4FY12 Promoters % MF's, FI's & BKs FII's others 50.0 5.9 14.7 29.4
:

Q3FY12 50.0 7.1 14.3 28.6

NIL

50.0 5.9 14.7 29.4

* Promoters pledged shares (% of share in issue)

PRICE PERFORMANCE (%) Stock 1 month 3 months 12 months 3.0 9.3 1.3 Nifty 6.9 10.8 15.3 EW O & G Index 1.2 7.8 1.2

Outlook and valuations: Capex holds the key; maintain BUY

Upside risks: (a) Higher/faster utilisation at Kochi terminal against est. full utilisation by FY18; (b) we have assumed zero marketing margins FY17 onwards; and (c) higher re-gas charges for Kochi terminal est. INR50/mmbtu. Downside risk: (a) regulation of re-gas charges and marketing margins (we see low possibilities). We are marginally tweaking our DCF (12% WACC) based target price to INR200 (INR190 earlier). PLNGs CEPS is expected to grow at 14.3% CAGR over FY12-14. Maintain BUY/Sector Outperformer.

Financials
Year to March Net revenue EBITDA Net profit Diluted EPS (INR) Diluted PE (x) EV/EBITDA (x) FY11 131,973 12,163 6,196 8.3 19.5 11.5 FY12 226,959 18,292 10,575 14.1 11.5 7.7 FY13E 399,318 20,028 10,652 14.2 11.4 7.4

(INR mn)
FY14E 416,464 23,240 10,819 14.4 11.2 6.2
Niraj Mansingka, CFA
+91 22 6623 3315 niraj.mansingka@edelcap.com

Kunal Gupta
+91 22 6623 3482 kunal.gupta@edelcap.com

October 4, 2012 Edelweiss Securities Limited

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

Oil, Gas and Services

Other key takeaways from our meeting
LNG demand markets: Incremental demand for LNG to come from (a) Refineries increasing complexity leaves refiners with no fuel oil for internal usage; (b) Petrochemicals GAIL Pata, ONGC Dahej, HPCL Vizag and BPCL Kochi; (c) City-Gas Distribution and (d) Industrials power demand especially from Andhra Pradesh and Kerala. Marketing margin: Management believes that marketing margins cannot be cost-based as there are risks involved while sourcing LNG. Moreover, spot cargoes do not guarantee full capacity utilization of the plant. Re-gas charges: PLNG plans to increase Dahej regas charges by 5% YoY in-line with the understanding entered earlier with other players. PLNGs regas charges are much lower than Shell Hazira and other global comparables (mostly INR40/mmbtu plus).

Chart 1: Contribution of self spot cargoes remains low till FY15 end
100% 90% 80% 70% 60% 50% 35% 28% 21% 14% 7% 0%

Q1FY13

Q2FY13

Q3FY13

Q4FY13

Q1FY14

Q2FY14

Q3FY14

Q4FY14

Q1FY15

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Capacity contracted (%) - LHS

Remaining available for self-spot (%) - RHS

Source: Company, Edelweiss research

Table 1: Change in estimates

New 399,318 20,028 5.0 10,652 2.7 FY13E Old 421,296 18,863 4.5 9,865 2.3 8.0 % change (5.2) 6.2 New 416,464 23,240 5.6 10,819 2.6 FY14E Old 460,573 22,106 4.8 10,143 2.2 6.7 Higher Marketing margins % change Comments (9.6) 5.1 Higher Marketing margins

Net Revenue EBITDA EBITDA Margin Core profit PAT Margin

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Q4FY16

Petronet LNG
Company Description
PLNG is the largest domestic player in India importing, storing and regasifying LNG. It has a unique risk-free business model, generating revenues by charging re-gasification margins on the imported LNG. Its supply and demand side risks are hedged through a long-term sourcing contract from Ras-Gas Qatar and off take contracts from three of its heavyweight promoters GAIL India (GAIL), Indian Oil Corporation (IOCL), and Bharat Petroleum Corporation (BPCL). PLNG owns and operates a LNG terminal at Dahej, Gujarat with a nameplate capacity of 10 MMTPA in FY12 (operable at 10.7 mmtpa currently).

Investment Theme
With a new terminal coming up in Kochi (5.0 mmtpa by Dec-2012) and a favorable environment for LNG in the Indian natural gas market, processed LNG volume is set to grow 17% CAGR over the next three years. We believe that upside triggers to the stock would come as: (i) PLNG ties up long term/medium-term supply contracts for Dahej expansion and Kochi Greenfield terminals; (ii) start up of PLNGs Kochi terminal (iii) More clarity on timelines of Gangavaram LNG and (iv) Start of Power Plant in Kerala.

Key Risks
Higher-than-expected dip in re-gasification charges due to relatively higher R-LNG prices. High gas prices may lower demand for R-LNG, thus making it unviable for PLNG to source more long term supplies. Cap by the regulator PNGRB on marketing margins charged by PLNG on spot cargos.

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Oil, Gas and Services

Financial Statements
Key Assumptions Year to March Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Sector Crude Price Under recovery (INR bn) % sharing by Govt % sharing by upstream % sharing by OMCs USD/INR (Avg) Company Sales volumes Capacity utilsation % Spot volumes (incl third party) Income statement Year to March Net revenue Materials costs Operating expenses EBITDA Depreciation and amortisation EBIT Other income Interest expenses Profit before tax Provision for tax Net profit Profit after minority interest Shares outstanding (mn) Diluted EPS (INR) Dividend per share (INR) Dividend payout (%) Common size metrics - as % of net revenues Year to March Gross margin EBITDA margins EBIT margins Net profit margins Growth ratios (%) Year to March Rev. growth (%) EBITDA Net profit EPS growth (%) FY10 8.4 3.6 5.0 47.4 70 460 56.5 31.2 12.3 47.5 7.8 70.5 2.2 FY11 8.4 9.9 6.8 45.6 87 782 52.5 38.7 8.8 45.6 8.5 77.5 1.1 FY12 6.5 8.8 8.5 47.9 115 1,385 60.3 39.7 0.0 47.9 10.6 96.2 3.4 FY13E 5.8 7.8 7.5 53.5 105 1,200 57.7 39.0 3.3 53.5 10.6 74.7 3.4 FY14E 6.5 6.0 6.8 52.0 115 1,359 58.1 39.0 2.9 52.5 11.5 73.0 4.2 (INR mn) FY14E 416,464 389,295 3,929 23,240 4,165 19,075 567 3,812 15,829 5,010 10,819 10,819 750 14.4 2.5 20.2

FY10 106,491 96,648 1,379 8,465 1,609 6,856 978 1,839 5,995 1,950 4,045 4,045 750 5.4 1.8 32.4

FY11 131,973 118,012 1,798 12,163 1,847 10,316 680 1,931 9,064 2,868 6,196 6,196 750 8.3 2.0 24.2

FY12 226,959 205,867 2,799 18,292 1,842 16,451 849 1,774 15,525 4,950 10,575 10,575 750 14.1 2.5 17.7

FY13E 399,318 375,574 3,716 20,028 2,390 17,638 611 2,607 15,642 4,991 10,652 10,652 750 14.2 2.5 17.6

FY10 9.2 7.9 6.4 3.8

FY11 10.6 9.2 7.8 4.7

FY12 9.3 8.1 7.2 4.7

FY13E 5.9 5.0 4.4 2.7

FY14E 6.5 5.6 4.6 2.6

FY10 26.3 (6.1) (22.0) (22.0)

FY11 23.9 43.7 53.2 53.2

FY12 72.0 50.4 70.7 70.7

FY13E 75.9 9.5 0.7 0.7

FY14E 4.3 16.0 1.6 1.6

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Petronet LNG
Balance sheet As on 31st March Equity capital Reserves & surplus Shareholders funds Secured loans Unsecured loans Borrowings Deferred tax liability Sources of funds Gross block Depreciation Net block Capital work in progress Total fixed assets Investments Inventories Sundry debtors Cash and equivalents Loans and advances Other current assets Total current assets Sundry creditors and others Provisions Total current liabilities & provisions Net current assets Uses of funds Book value per share (INR) Free cash flow Year to March Net profit Depreciation Deferred tax Others Gross cash flow Less: Changes in WC Operating cash flow Less: Capex Free cash flow Cash flow metrics Year to March Operating cash flow Investing cash flow Financing cash flow Net cash flow Capex Dividends paid (INR mn) FY14E 7,500 41,899 49,399 31,123 1,000 32,123 5,330 86,852 88,636 16,897 71,739 8,877 80,616 1,500 8,551 18,517 6,862 4,115 104 38,149 31,094 2,318 33,413 4,736 86,852 65.9 (INR mn) FY14E 10,819 4,165 1,500 577 17,061 (1,033) 18,095 9,366 8,729

FY10 7,500 14,849 22,349 22,998 2,000 24,998 3,262 50,608 35,495 6,667 28,828 13,184 42,012 5,386 2,223 5,035 3,405 1,523 31 12,216 7,449 1,557 9,006 3,211 50,608 29.8

FY11 7,500 19,302 26,802 30,356 1,806 32,161 3,480 62,443 35,537 8,513 27,024 22,029 49,053 11,649 2,480 8,472 1,540 1,336 47 13,874 10,348 1,786 12,134 1,741 62,443 35.7

FY12 7,500 27,698 35,198 29,342 998 30,340 3,630 69,168 35,560 10,355 25,205 32,910 58,115 1,399 7,124 12,859 9,839 2,689 86 32,597 20,658 2,285 22,943 9,654 69,168 46.9

FY13E 7,500 35,754 43,254 32,420 1,000 33,420 3,830 80,504 79,738 12,745 66,993 8,410 75,403 1,500 8,036 18,420 4,694 3,878 95 35,123 29,223 2,298 31,521 3,601 80,504 57.7

FY10 4,045 1,609 540 1,059 7,253 (3,026) 10,279 10,472 (193)

FY11 6,196 1,847 218 1,893 10,154 1,079 9,075 8,889 186

FY12E 10,575 1,842 150 925 13,492 (386) 13,878 10,904 2,975

FY13E 10,652 2,390 200 1,545 14,786 (907) 15,693 19,678 (3,984)

FY10 10,279 (12,358) (1,094) (3,173) (10,472) (1,313)

FY11 9,075 (14,766) 3,826 (1,865) (8,889) (1,313)

FY12E 13,878 195 (5,775) 8,299 (10,904) (2,179)

FY13E 15,693 (19,125) (1,713) (5,145) (19,678) (2,186)

FY14E 18,095 (8,820) (7,107) 2,168 (9,366) (2,186)

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Oil, Gas and Services

Profitability & efficiency ratios Year to March ROAE (%) ROACE (%) Inventory day Debtors days Payable days Cash conversion cycle (days) Current ratio Interest coverage Operating ratios Year to March Total asset turnover Fixed asset turnover Equity turnover Valuation parameters Year to March Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%)
Peer comparison valuation Gas companies GAIL IGL PLNG GSPL Global utility companies median Price 385 263 162 81 NA Market Cap (INR 488 37 121 46 NA P/E FY13E 11.7 13.9 11.4 9.8 16.8 FY14E 11.4 12.8 11.2 11.0 15.5 P/BV FY13E 1.8 2.7 2.8 1.6 1.7 FY14E 1.6 2.4 2.5 1.5 1.7 ROE FY13E 15.8 20.5 27.2 17.7 10.0 FY14E 14.8 19.9 23.4 14.1 10.5

FY10 19.2 15.7 11 20 28 4 1.4 3.7

FY11 25.2 21.5 7 19 28 (2) 1.1 5.3

FY12 34.1 27.7 9 17 27 (2) 1.4 9.3

FY13E 27.2 24.0 7 14 24 (3) 1.1 6.8

FY14E 23.4 23.2 8 16 28 (4) 1.1 5.0

FY10 2.2 4.9 5.0

FY11 2.3 4.7 5.4

FY12 3.4 8.7 7.3

FY13E 5.3 8.7 10.2

FY14E 5.0 6.0 9.0

FY10 5.4 (22.0) 8.3 29.9 5.4 1.3 16.2 1.1

FY11 8.3 53.2 11.0 19.5 4.5 1.1 11.5 1.2

FY12 14.1 70.7 16.8 11.5 3.4 0.6 7.7 1.5

FY13E 14.2 0.7 17.7 11.4 2.8 0.4 7.4 1.5

FY14E 14.4 1.6 22.0 11.2 2.5 0.3 6.2 1.5

Source: Bloomberg, Edelweiss research

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RATING & INTERPRETATION

Company
Aban Offshore Cairn India Essar Oil Gujarat State Petronet Indian Oil Corporation ONGC Reliance Industries

Absolute reco
REDUCE HOLD BUY HOLD BUY BUY BUY

Relative reco
SU SO SO SP SO SO SO

Relative risk
H M H M M L M

Company
Bharat Petroleum Corporation Chennai Petroleum Corporation GAIL (INDIA) Hindustan Petroleum Corporation Indraprastha Gas Petronet LNG

Absolute reco
BUY BUY HOLD BUY BUY BUY

Relative reco
SO SO SP SO SO SO

Relative Risk
M H L L M L

ABSOLUTE RATING
Ratings Buy Hold Reduce Expected absolute returns over 12 months More than 15% Between 15% and - 5% Less than -5%

RELATIVE RETURNS RATING

Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return

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Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098. Board: (91-22) 4009 4400, Email: research@edelcap.com
Vikas Khemani Nischal Maheshwari Nirav Sheth Head Institutional Equities Co-Head Institutional Equities & Head Research Head Sales vikas.khemani@edelcap.com nischal.maheshwari@edelcap.com nirav.sheth@edelcap.com +91 22 2286 4206 +91 22 4063 5476 +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s):

Aban Offshore, Bharat Petroleum Corporation, Cairn India, Essar Oil, GAIL (INDIA), Gujarat State Petronet, Hindustan Petroleum Corporation, Indraprastha Gas, Indian Oil Corporation, Chennai Petroleum Corporation, ONGC, Petronet LNG, Reliance Industries

Recent Research Date 13-Sep-12 11-Sep12 Company Title Price (INR) Recos

Oil and Gas Diesel price hike a bold step; Sector Update Gujarat State Tariff cut in line with our Petronet expectations; EdelFlash Oil and Gas Tight supply fuels GRM surge; Sector Update 75 Hold

05-Sep-12

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Rating Distribution* * 1 stocks under review > 50bn Market Cap (INR) 114 113 Hold 53 Reduce 19 Total 186 < 10bn 14 Rating Interpretation Rating Buy Hold Reduce 58 Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period

Between 10bn and 50 bn

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Petronet LNG
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