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(Delayed) Spark Capital - PLNG: Pipeline delays defer Kochi upside by a year; Maintain Buy on strong long term growth visibility




Spark Capital Advisors(India) Private Limited


16 Apr 2013





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Pipeline delays defer Kochi upside by a year; Maintain Buy on strong long term growth visibility We spoke to senior officials of GAIL in Bangalore and Chennai to take an update on the Kochi-Bangalore Phase II Pipeline project, which is key for PLNG’s Kochi LNG terminal. The officials were completely perturbed by Tamil Nadu Govt’s stance of disallowing construction of pipeline underneath agricultural lands and rerouting the same alongside highways. This would require rerouting of 100kms (in TN) entailing significant cost and time overrun. GAIL finds this rerouting impractical both from technical and a safety perspective. Stalling this project would stymie the development of gas market in Southern India. It may also act as a precedent and propel protests against land acquisition for future pipelines in other parts of the country. This could also instigate farmers in the Kerala stretch where GAIL has progressed well on the RoU issues. As per the Petroleum and Minerals Pipelines (Acquisition of right of user inland) Act, GAIL can legally acquire Right of Use (RoUs) and construct PLs underneath the farm lands and state govt has no right to intervene. Hence, it can either file a petition in HC against TN state govt’s directions or directly approach SC. Nevertheless, similar to other infra projects, pipeline projects are also difficult to execute without state govt’s support. Presently, GAIL officials are trying to work out a strategy which could oil the cogs on this pipeline project. Valuations price in only Dahej terminal’s earnings; Kochi terminal comes almost for free Kochi terminal is almost complete and awaits readiness of anchor customers (like FACT) for commissioning. While BPCL’s Kochi refinery is ready to take the gas, FACT would be through with the conversion only by June’13. Phase I anchor customers have a potential to offtake ~1MMT of gas. Given the delay in commissioning of Kochi terminal (COD June’13) and uncertainty over the phase II PL project, we reduce our Kochi volume estimates from 0.6/2.5/3.5 to 0.3/0.8/2.5 in FY14E/15E/16E. Hence, reduce our EPS estimates from Rs. 14.5/23 to Rs. 13.4/16.5 for FY14E/FY15E. While the Kochi growth story has become a bit back ended (FY16E), timely commissioning of second jetty and sustained marketing margins along with 5% escalation in tariffs would support earnings in FY15E. Valuations seem to factor in only Dahej earnings (@10x) without reflecting any value for already complete Kochi terminal (replacement value of ~$1bn) and upsides from Dahej’s expansion. We maintain our positive stance on the stock due to valuation comfort and strong long term earnings visibility. We roll forward our DCF based valuation to Mar’14 with a revised TP of Rs. 210 (Rs. 218). Maintain Buy

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