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SHARETIPSINFO >>Stock Market Buzz >>Indian Natural gas- Fuel for the growth (Added on 15 June, 2011)

 

India Natural Gas – ‘Fuel for Growth’

India’s primary energy basket is on the threshold of witnessing a quantum jump in contribution from natural gas. While the demand for gas has always been strong in the country, availability of transmission infrastructure and regulatory issues has restricted supply matching up to the demand growth. However, the medium term outlook has improved considerably with …

1) Increased availability of gas; both domestic and imports,
2) Huge investments in gas pipeline infrastructure and
3) Fast pace implementation of related reforms.

Improved domestic availability of natural gas:
Recently, 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 believe that in the near term, higher LNG imports will offset the impact to some extent, while over the medium to longer term; production at KG-D6 would revive. Furthermore, in the next three 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 commence production. Higher LNG import capacities with LNG terminals of Petronet, Shell and Dabhol project will also add to the supply. As per GAIL, domestic production of gas will increase from about 145mmscmd in CY10 to about 215mmscmd by CY15.

Better pipeline infrastructure:
Lack of adequate pipeline infrastructure has always been a key hindrance in meeting the rising demand for natural gas, especially so in the southern and eastern regions. Going ahead, GAIL, which transports more than 70% of gas available in the country, has embarked upon an aggressive capacity expansion program to double its transmission capacity over the next three years from about 8,000kms currently. Companies such as GSPL and Reliance Gas Infrastructure are also adding material capacities in the near future.

Reforms have gathered pace:
Realizing the importance of gas sector, the Indian government has over the past five years, implemented significant reforms such as i) raising APM gas prices and bringing them closer to market price, ii) regulating pipeline tariffs, iii) streamlining processes for awarding CGD projects and many more. Furthermore, the government is contemplating implementation of gas price pooling, which would even out the prices for end consumers.

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.

Industry Outlook:

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 region and 2.7% for the entire world. Over the next three years, India is expected to report the second fastest GDP growth in the world. This 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%. India currently consumes about 170mmscmd of gas. Power sector accounts for the maximum demand followed by fertilizers and industries.

On the supply side, domestic production is about 154mmscmd, while remaining is through LNG imports. However, considering the advantages of natural gas over other fuels, the total demand would actually be much higher than the current supply. The demand - supply gap today is estimated to be about 30mmscmd. The growth was primarily on account of commencement of production from RIL’s KG-D6 field, which is currently producing ~45mmscmd after reaching a peak of 60mmscmd. With the company encountering technical glitches in the field, the production levels might remain flat over the next couple of years. Nevertheless, we believe increased imports of LNG and higher production from domestic fields will offset the impact to a greater extent.
We believe this scenario is set to change considering improved supply situation and strengthening pipeline infrastructure in the country. Between 2008 and 2015, IEA expects natural gas demand and production in India to witness a CAGR of 9.8% and 11.1% respectively.

INVESTMENT RATIONALE:

Power deficit at unsustainable levels:
The power deficit in the country is at 10%. The current gas based power capacity in the country is about 17,700MW. For this capacity to operate at a plant load factor of 90%  more  than 85mmscmd of natural gas supply is required.

Critical for curtailing fertilizer subsidies:
Fertilizer subsidy has been of the key factors of a huge fiscal deficit in India. With agriculture GDP expected to remain strong backed by government initiatives, the demand for fertilizers will continue to remain strong. Higher gas availability for the sector will not only improve financial performance of manufacturers, but will also lead to a reduction in subsidy burden for the government. Currently, about 25% of the India’s gas output is supplied to the fertilizer sector.

Refineries demand to gain traction:
India’s refining capacity is set to increase from 184mn tons in FY10 to about 240mn tons over  the next  couple  of  years.  Most refineries are currently using fuel oil, which when replaced with natural gas could result in improvement in gross refining margins. RIL’s refineries have a
combined demand of 9mmscmd of gas. With India having plans to emerge as a refining hub, usage of gas will allow refiners to be cost effective and improve their competitiveness.

City gas demand to witness multi-fold jump:
Currently, city gas projects are active in more than 25 cities in India. With rising economic advantages of compressed natural gas (CNG) over petrol or diesel and that of piped natural gas (PNG) over liquefied petroleum gas (LPG) or other liquid fuels, the number of cities with CGD projects is likely to increase rapidly.


Domestic E&P fields on east coast to drive supply surge:
India’s east coast, especially the fields in Krisha-Godavari basin are likely to translate into strong gas supply growth over the medium term. Apart from expected scale-up of RIL’s KG-D6 field (beyond FY13), RIL’s D-3, D-9 blocks, ONGC’s NDA field and GSPC’s Deendayal
field are expected to commence production of gas over the next three to four years.

New LNG terminals and expansion of existing to propel supply:
Currently, two LNG terminals are in operation Petronet LNG’s Dahej terminal and Shell’s Hazira terminal. Together these two plants have a capacity of 12.5mtpa. While Petronet LNG is increasing its capacity at Dahej to 14mtpa by FY14, Shell’s Hazira terminal has infrastructure for
an additional 2.5mtpa.

Pricing of gas: moving towards market prices:
One of the key reasons discouraging national oil majors ONGC and Oil India to increase their gas production was irrational APM gas pricing. However, in June 2010, government nearly doubled APM prices. This has made gas producing a positive cash flow business for ONGC and
Oil India. These moves have reduced the ambiguity on future pricing of the fuel, thus attracting new bidders to future rounds of NELP.

Financial Summary: 

Sales (Rs mn)

yoy (%)

OPM (%)

PAT
(Rs mn)

EPS (Rs)

P/E (X)

FY 11E

325365

30.2

17

35611

28.1

16.1

GAIL

FY 12E

368258

13.2

18.3

44.269

34.9

12.9

FY 13E

395401

7.4

19.2

45828

36.1

12.5

FY 11E

10465

4.6

92.6

5064

9

10.8

GSPL

FY 12E

11680

11.6

93.3

5669

10.1

9.6

FY 13E

12848

10

93.3

6290

11.2

8.7

FY 11E

17505

62.4

28.5

2598

18.6

19.9

IGL

FY 12E

23431

33.9

24.8

2938

21

17.6

FY 13E

30288

29.3

24.7

3821

27.3

13.5

FY 11E

131973

23.9

9.2

6196

8.3

17.1

Petronet

FY 12E

185990

40.9

7.9

6691

8.9

15.8

FY 13E

237469

27.7

7.3

7600

10.1

13.9

We recommend investors to BUY GAIL, GSPL, Indraprastha Gas and Petronet LNG.

 

GAIL – BUY
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 discoverie 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.

CMP Rs451, Target Rs525,

±       Doubling gas transmission capacity in two years
±       Exposure to city gas projects and E&P fields value accretive
±       Huge expansion planned for the petrochemical segment
±       Subsidy an overhang, but relatively better placed

 

GSPL – BUY
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.

CMP Rs97, Target Rs113,

±       Expansion of transmission capacity to serve rising demand in Gujarat
±       Three cross-country pipelines to add value
±       Tariffs to remain flattish post PNGRB authorization

 

Indraprastha Gas – BUY
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.

CMP Rs370, Target Rs409,
±       Improving CNG economics and wider availability to drive demand in NCR region
±       Under-penetration to propel demand for PNG
±       Pricing power to enable margin sustenance

 

Petronet LNG – BUY
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.

 

CMP Rs141, Target Rs162,

±       Near term LNG demand to remain strong on lower production at KG-D6 field
±       Expanding capacities at opportune time
±       Regasification tariffs would continue to rise

 

 

 

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