Motilal Oswal Financial Services

Sector Update | 27 August 2020

Oil & Gas

A deep-dive into the draft

regulation for unified tariff

Flying high on NGT’s besom



Over the past few years, The National Green Tribunal (NGT) has been at the forefront

in implementing pollution reduction in the country through both policy and punitive

measures.

The Central Pollution Control Board (CPCB) had highlighted back in 2017–18 that 100

industrial clusters across India are polluted. NGT has called for strict action against

such units, including recovering the cost of damage done to the environment for the

past five years. In terms of air pollution levels, 32 of these were critically polluted,

while 28 were severely polluted.

Since the start of 2020 alone, NGT has levied a total of INR4b in fines across industries.

In its July 2020 order, it also asked CPCB to file an Action Taken Report (ATR) on

restricting the use of petcoke and fuel oil by Jan’21.

Natural gas is expected to be at the center of the fight against air pollution. We

highlight Petronet LNG, GUJGA, GAIL, and GSPL as the biggest beneficiaries of these

actions against industrial pollution (air).

Recent punitive measures by NGT



Industrial pollution: Next

driver for gas consumption



Excluding the INR4b fine imposed on 608 ceramic manufacturers at Morbi in

2019, the NGT has levied an additional INR4b in fines totally on 11 companies

since Jan’20 alone.

While none of the above may call for higher usage of natural gas, NGT in its

Jul’20 order asked the CPCB to file an ATR by Jan’21 on restricting the use of

petcoke and fuel oil. The movement against these polluting fuels has been

gaining momentum, and our earlier study suggested a ban on these may

generate new demand of 25mmscmd of natural gas (16% of total gas

consumption in FY20).

While 16% may not look lucrative, combined with coal and other polluting fuels,

replacement demand for dirty fuels could easily be ~100mmscmd (report

link).

Additional demand of 36mmscmd over next 2–3 years, in addition to dirty

fuel replacement



Several of the existing refineries – Paradeep, Barauni, Haldia, Vizag, Bhatinda,

and Mangaluru – are not connected to the gas grid as yet. They could generate

demand of 12mmscmd over the next two to three years as the necessary

pipeline infrastructure gets completed.

In addition to the four existing fertilizer plants – MCFL, MFL, SPIC, and Matix –

four more are under construction – three belong to HURL and one is at

Ramagundam, which is currently under commissioning. They could generate

total gas demand of 15mmscmd.

The City Gas Distribution sector reported total consumption of 28mmscmd in

FY20, and could generate an additional 10mmscmd over the next two to three

years. In total, 36mmscmd of incremental demand could emerge over the next

two to three years.

India has a total gas-based power generation capacity of 25GW. At 80% plant

load factor (PLF), it could consume a total of 91mmscmd of natural gas, against

consumption of 31mmscmd in FY20.

Power sector could provide the icing on the cake



Swarnendu Bhushan- Research Analyst

(Swarnendu.Bhushan@MotilalOswal.com)

Sarfraz Bhimani - Research Analyst

(Sarfraz.Bhimani@MotilalOswal.com)

Investors are advised to refer through important disclosures made at the last page of the Research Report.

27 August 2020

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Oil & Gas



At LNG price of USD3/mmBtu, total cost of power generation stands at

INR3.8/kwh. Recent low LNG prices have created optimism regarding higher

usage from gas-based power plants.

Although gas generation using oil-linked LNG contracts would still cost

INR5.5/kwh, gas pooling may reduce the cost of gas for power plants, thus

increasing PLFs and gas consumption.

Global LNG trade increased by 40.9mmt to 354.7mmt in 2019. Against this

incremental trade, incremental global liquefaction capacity stood at 42.5mmt,

taking the total liquefaction capacity to 430.5mmtpa. An expanding glut led to

decade-low Asian spot LNG prices at USD5.49/mmBtu in 2019.

The global glut has resulted in new types of contracts. Shell and Tokyo Gas

signed the world’s first LNG contract indexed to coal. 43% of all sales and

purchase agreements signed in 2019 did not specify the final destinations. These

flexibilities are likely to make LNG more attractive to users looking to switch

from coal or other fuels/feedstock to LNG.

While oil-linked LNG prices are at ~USD6/mmBtu, spot prices have declined

further to <USD3/mmBtu, even below the bottom of USD4.1/mmBtu in 2019.

Low LNG prices have also rekindled negotiations with major suppliers such as

Qatargas, which bodes well for consumers.

India’s gas consumption has been constrained by the poor availability of both

domestic gas as well as LNG, in addition to lack of pipeline infrastructure.

Fortunately, they are expected to increase in the coming years.

India’s available LNG capacity is expected to rise from 30.4mmtpa

(109.5mmscmd) to 56.4mmtpa (203mmscmd) over the next two to three years.

However, many such as Chhara (5mmtpa), Dhamra (5mmtpa), Mundra

(1.5mmtpa), and Ennore (2mmtpa) are likely to be completed only toward the

end of the next five years and witness poor utilization.

Additionally, domestic gas is expected to get a boost, with ONGC and RIL adding

16mmscmd and 28mmscmd, respectively, over the next two to three years.

Low LNG prices, driven by global glut, remain the key



Higher availability of gas to aid consumption



Exhibit 1: Peer comparison – valuation snapshot

Company

(%)

(INR) Upside

EPS (INR)

P/E (x)

P/BV (x)

EV/EBITDA (x)

ROE (%)

Div.

Yield

FY20

6.4

0.4

0.9

0.7

3.4

2.8

GAIL (India)

150

Gujarat Gas

360

Guj.St.Petronet

300

Indraprastha Gas

470

Mahanagar Gas 1,200

Petronet LNG

336

FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E

16.5 11.8 15.3

6.1 8.4 6.5 0.9 0.9 0.8 6.3 6.9 5.5 15.0 11.7 13.9

17.3 11.4 16.4 18.8 28.7 20.0 6.8 5.8 4.7 14.5 15.7 11.5 43.6 21.7 25.9

19.7 17.8 19.9 11.1 12.3 11.0 1.8 1.6 1.4 5.2 4.6 3.4 17.8 14.0 13.9

16.2 10.4 17.9 25.5 39.6 23.1 5.7 5.1 4.4 17.6 24.7 14.5 28.3 13.7 20.4

80.3 50.5 75.0 12.6 20.1 13.5 3.4 3.1 2.8 8.3 11.9 7.8 29.7 16.3 22.0

18.5 19.0 21.3 13.4 13.0 11.6 3.4 3.1 2.9 8.1 6.7 5.9 26.4 25.1 26.0

Source: MOFSL

27 August 2020

Oil & Gas

Exhibit 2: Summary of projected demand and supply

~49mmscmd of this supply (LNG) would be completed

only towards the end of next 2-3 years

75.0

25.0

36.4

153.3

Increased pipeline penetration & stricter

enforcement of environmental norms could

boost demand

Replacement of

other dirty fuels

290.4

Consumption in Base case demand Ban on petcoke

FY20

in 2-3 years

and fuel oil

Total supply

capacity

Source: MOFSL

Exhibit 3: Cost of power generation with regard to LNG prices

Variable cost (INR/KWH)

Fixed cost (INR/KWH)

4.9

3.1

3.4

3.8

4.9

Total cost (INR/KWH)

5.5

2.5

2.9

3.2

4.3

LNG price FOB (USD/mmBtu)

Source: MOFSL

Exhibit 4: Recent punitive measures by NGT

Date

8/15/2020

Co_Name

Aegis Logistics

BPCL

HPCL

Sealord Containers

Greater Calcutta

Gas Supply

Corporation Ltd

IOCL

NTPC

Sub-sector

Reason for Fine Region of incident

Logistics of storing

oil, gas and

chemicals

Mumbai's

OMC "Gas chamber" like

Ambapada,

conditions

Mahul,

OMC

Chembur

Logistics of storing

oil, gas and

chemicals

Gas

Refinery

Gas leak

Bad quality of air,

water & earth

Breach of fly ash

dyke

Kolkata

Panipat refinery

Type of pollution

Amount (INR m)

1,420

Air

675

765

7/30/2020

7/26/2020

7/16/2020

Air

Air, Water

Water

250

100

7/8/2020

6/25/2020

5/8/2020

9/13/2019

Sainor Life Sciences

Spy Agro industry

Oil India

LG Polymers India

608 ceramic units

Vindhyachal Super

Utilities

Thermal Power

Station in Singrauli

Parawada,

Gas leak

Visakhapatnam,

Andhra Pradesh

Kurnool, Andhra

Gas leak

Pradesh

Blowout at Baghjan

Refinery

Baghjan, Assam

well

Chemicals

Styrene gas leak

Visakhapatnam

Units were running

Ceramics

Morbi

on coal gasifiers

Air

Air, Water

Air

250

500

4000

Source: NGT, industry, MOFSL

27 August 2020

Oil & Gas

Petronet LNG remains the biggest beneficiary



Incremental domestic gas of 44mmscmd may appear higher than incremental

demand of 36mmscmd. However, considering that the ban on dirty fuels alone

could generate 100mmscmd of incremental demand, the focus on imports

would be strong as ever.

A total of 94mmscmd of incremental LNG capacity is also expected to emerge

over the next two to three years. However, ~49mmscmd is expected to come up

only toward the end of the next five years. Additionally, upcoming demand

centers such as ssLNG, with potential 6–8mmtpa in LNG trucking alone, could

further ensure high utilization in all upcoming LNG terminals announced thus

far.

The Kochi–Mangaluru pipeline is expected to be commissioned soon. Dahej is

expected to expand its capacity by 2mmtpa with the two tanks of INR13b and a

third jetty of INR10b. The management has tried to allay concerns on

investments in the Tellurian project, although the MOU remains in force up to

Dec’20.

We expect an EBITDA CAGR of 15% for PLNG over FY20–22. The stock is trading

at 11.6x FY22 EPS of INR21.3 and 5.9x FY22 EV/EBITDA. We value PLNG using

DCF at INR336/share. The board’s approval of the Gopalpur LNG terminal would

be the biggest trigger for the stock, which would ease the double-edged

concerns of its investors – usage of cash and long-term volume growth.

Since NGT’s April 2019 order banning coal gasifiers at Morbi, we have seen gas

consumption at Morbi rising to the peak of 6.2–6.4mmsmcd from an erstwhile

~2.4mmscmd. Gujarat is home to five critically polluted industrial clusters. NGT’s

orders may prove to be a boon in these areas.

Gujarat was awarded six new geographical areas during the recently concluded

CGD bidding round. These would aid volume growth for the company in the

longer run. Additionally, the regulatory board (PNGRB) ruled that GAIL stop

supply to consumers designated for CGD at Tarapur and Thane. This could add

~0.3mmscmd of volumes in the short term. Similar rulings are expected at Dahej

as well.

With ~400 CNG outlets, GUJGA sells only 1.5mmscmd of CNG v/s 4.5mmscmd

that IGL sells in NCR alone. Gujarat is home to ~78k buses, ~90k taxis, and ~850k

autos. With the increasing penetration of CNG outlets, the CNG segment is

expected to pick up soon.

GUJGA is trading at 20x FY22 EPS of INR16.4 and 11.5x FY22 EV/EBITDA. We

value GUJGA at 22x FY22. With target price of INR360, we reiterate Buy on the

stock. GUJGA is also one of our MOFSL portfolio stocks.

With ever-increasing gas demand in the country, transmission pipelines would

play a critical role in reaching both imported and domestically produced gas to

consumers. This should encourage the development of new pipeline

infrastructure in the country.

Currently, ~10mmscmd of gas is sold outside of India (of the total contracted

volumes of 46–47mmcscmd). From Jun’21, the entire volume would be sold in

India with the commissioning of the four fertilizer plants (on JHDBPL), and

should reach full capacity of 16mmscmd as pipeline construction connecting the

refineries is completed (in 2021 with Phase-II).

GUJGA – new areas, NGT’s directives, long-term CNG potential



GAIL – surge likely in trading and transmission volumes in near future



27 August 2020

Oil & Gas



Additionally, domestic gas is expected to get a boost with ONGC and RIL adding

16mmscmd and 28mmscmd, respectively, over the next two to three years.

Considering that most potential users in the KG Basin are power plants that may

not be able to bear the high cost of the KG Basin gas, GAIL could boost

transmission volumes by 29% simply by routing 70% of the gas to the western

coast.

We expect an EBITDA CAGR of ~11% over FY20–22, with FY22 EV/EBITDA of

5.5x. The Transmission segment would likely remain the major contributor to

EBITDA (~50% share), with volumes estimated to grow to ~125mmscmd in FY22.

The stock trades attractively at 6.5x FY22E EPS of INR15.3 and PBV of 0.8x FY22E

BV of INR124. It maintains a strong dividend payout of ~35%, yielding 3.5–4.5%.

We value GAIL at 8x FY21E EPS, adjusted for other income, and then add the

value of investments. With target price of INR150, we reiterate our Buy rating.

Available LNG regas capacity is expected to jump 54% from 24mmtpa currently

to 40mmtpa over the next two to three years in Gujarat. This presents massive

volume growth opportunity for Gujarat State Petronet (GUJS).

On the gas evacuation front, the reach of LNG terminals such as the Anjar–

Chotila expansion and partial completion of the 77mmscmd/76mmscmd

Mehsana–Bhatinda / Mallavaram–Bhilwara pipelines should increase to the rest

of India.

Additionally, five industrial clusters in Gujarat are classified as severely/critically

polluted. Strict actions (as taken for Morbi) could increase transmission volumes

for GUJS. We believe Gujarat Gas (GUJGA) could see a major boost of ~10% in

volume CAGR over the medium term on the highest volume base among peers

(link

to report).

The company currently has a pipeline capacity of ~42mmscmd. Considering an

additional 15.5mmtpa of gas on its grid (i.e., ~56mmscmd v/s current annual

volumes of 40–42mmscmd), we believe capex is inevitable.

GUJS may spend INR18b on spur lines and capacity augmentation by end-FY23.

Also, the company plans to spend another ~INR22b over the next three to four

years as capacity utilization increases from upcoming terminals. This is against

the net fixed assets (NFA) of INR43b for the HP pipeline, when its tariff was

decided in 2018.

At a 25% holding company discount, 54% stake in Gujarat Gas (and 27.5% stake

in Sabarmati Gas) provides a valuation of INR141/share for GUJS, implying 3.6x

FY22E P/E for the standalone business.

The stock is trading at 11x FY22E P/E, and we value GUJS at 8x standalone. We

reiterate Buy with target price of INR300/share.

Gujarat State Petronet – rise in volumes would dwarf possible cuts in tariffs



Thus far, the regulator has not cut tariff for the lower tax rate adjustment. However,

this is likely to be docked soon. As per our model assumptions, for every 10% change

in tariff, the sensitivity to change in EBITDA/EPS is 5%/6% for GAIL and 12%/15% for

GSPL.

27 August 2020

Oil & Gas

Exhibit 5: Upcoming fertilizer plants and their gas consumption demand

Sl No

New Plants (gas based)

Existing plants to start consuming gas

Location

Gorakhpur

Sindri

Barauni

Ramagundam

Mangalore

Manali

Tuticorin

West Bengal

Company

Hindustan Urvarak & Rasayan Limited

Ramagundam Fertilizers & Chemicals Ltd

Mangalore Chemicals & Fertilizers Ltd

Madras Fertilizers Ltd

Southern Petrochemicals Industries Ltd

Matix Fertilizers & Chemicals Ltd

Capacity (mmtpa)

1.3

Gas demand

(mmscmd)

2.4

0.4

0.7

0.5

0.9

0.6

1.1

1.3

2.4

Source: industry, MOFSL

Exhibit 6: Refineries not connected with gas grid

Location

Paradeep

Barauni

Haldia

Vizag

Bhatinda

Manali

Mangaluru

Total

Manali is already connected

Company

Indian Oil

Hindustan Petroleum

HPCL Mittal

Chennai Petroleum

Mangalore Refinery & Petrochem

Refinery capacity Expected gas consumption

(mmtpa)

(mmscmd)

2.5

1.0

1.3

2.5

1.9

1.8

2.5

11.6

Source: industry, MOFSL

Expected sales in 3yrs

Incremental (mmscmd)

(mmscmd)

8.2

1.8

12.4

3.0

3.4

0.5

14.3

4.9

10.2

Source: industry, MOFSL

Exhibit 7: Expected growth in consumption from CGDs

Company

IGL

Gujarat Gas

MGL

Others

Total

Sales vol. FY20

(mmscmd)

6.4

9.4

3.0

9.4

Exhibit 8: Economies of spot LNG v/s alternative fuel…

USD/mmbtu

-2

-10

Source: Reuters, MOFSL

Spot LNG

Naphtha

LPG

Exhibit 9: …remain attractive despite reviving off the trough

USD/mmbtu

-8

Source: Reuters, MOFSL

Spot LNG

Diesel

Petrol

27 August 2020

Oil & Gas

Exhibit 10: Fuel oil consumption in India stands at ~5.3mmt… Exhibit 11: …and petcoke consumption is at ~10.9mmt

Fuel Oil (tmt)

Petcoke (tmt)

Source: Data as of FY19 PPAC, MOFSL

27 August 2020

Oil & Gas

NOTES

27 August 2020

Oil & Gas

Explanation of Investment Rating

Investment Rating

Expected return (over 12-month)

BUY

>=15%

SELL

< - 10%

NEUTRAL

< - 10 % to 15%

UNDER REVIEW

Rating may undergo a change

NOT RATED

We have forward looking estimates for the stock but we refrain from assigning recommendation

*In case the recommendation given by the Research Analyst is inconsistent with the investment rating legend for a continuous period of 30 days, the Research Analyst shall within

following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.

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********************************************************************************************************************************

27 August 2020

Oil & Gas

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clients which are not considered in above disclosures.

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the

research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report.

Terms & Conditions:

This report has been prepared by MOFSL and is meant for sole use by the recipient and not for circulation. The report and information contained herein is strictly confidential and

may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent

of MOFSL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in

nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty,

representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The

report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial

instruments for the clients. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. MOFSL will not treat recipients as

customers by virtue of their receiving this report.

Disclaimer:

The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or

distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for

informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing

in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances.

The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment

objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this

document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this

document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views

expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade

securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of

the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and

should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make

modifications and alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and the employees may from

time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to

perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a

separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of

information that is already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or

may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on,

directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or

entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law,

regulation or which would subject MOFSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in

all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost

revenue or lost profits that may arise from or in connection with the use of the information.

The person accessing this information specifically agrees to exempt MOFSL or any of its

affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOFSL or any of its affiliates or employees responsible for any such

misuse and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses, costs, damages,

expenses that may be suffered by the person

accessing this information due to any errors and delays.

Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263;

Website

www.motilaloswal.com.CIN

no.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road,

Malad(West), Mumbai- 400 064. Tel No: 022 7188 1000.

Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst:

INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company

Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth

Management Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is

a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt.

Ltd. which is a group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL.

Research & Advisory services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no

assurance or guarantee of the returns. Investment in securities market is subject to market risk, read all the related documents carefully before investing. Details of Compliance

Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.

* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National

Company Law Tribunal, Mumbai Bench.

27 August 2020