RasGas price renegotiation to benefit Petronet LNG 3-fold: IIFL

With Qatar agreeing to lower the price of gas it sells to India on a long-term contract by about USD 6 billion, and India's biggest gas importer Petronet LNG Ltd (PLL) signing a revised contract with RasGas of Qatar, Harshvardhan Dole, Vice President Institutional Equities, IIFL sees a three benefits flowing in for the company.The move is expected to result in a positive generation outlook for gas-based power plants because so far gas supply has been a weak link for Indian power generation, Dole said, adding that plant load factor (PLFs) for gas based plants could go up to 60 percent over the medium term.For Petronet LNG, the benefits are three-fold: uncertainty over offtake goes away, recovery in shipping costs goes away; higher utilisation for the plant could derive more synergies. "These can lead to higher PE and EPS for the company," he said.According to him, global LNG prices will remain weak over next 3-4 years.With regards to other private power companies, he says they officially have no recommendations on Lanco and Reliance Power but expects significant benefits to flow to Torrent Power because it has some untied gas based capacity.Meanwhile for companies like GVK Power, GMR Infra, the problems are beyond gas, which is less than 10-15 percent of the overall balance sheet exposure for them, says Dole.Below is the transcript of Harshvardhan Dole’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Q: How do you see this development of Qatar agreeing to lower the price of gas it sells to India benefitting gas based power companies?A: Gas has been one of the weakest links in the power sector for India for a while now and for obvious reasons, that the cheap Administered Pricing Mechanism (APM) gas supplies have dwindled down and we have to rely more on the unpredictable, volatile LNG. I think there is a short-term window available here for the next 3-4 years which will create a scenario whereby the global LNG prices will remain weak and perhaps offer an opportunity for the gas based power plants to operate at more than 60-65 percent plant load factors (PLF). And the reason why I say so, if you look at the total capacity of 23,000 megawatt installed capacity, 14,000-15,000 megawatts, rests with companies such as NTPC and the State power sector utilities. These have signed definite power purchase agreements (PPA) which are coming with take or pay obligations.So, regardless of the actual generation, these companies continue to recover their fixed costs. And now, at a time when the LNG prices are much more competitive and likely to be so, their generation outlook will definitely be much better than what it is today. To me, these companies will definitely generate more and their PLFs will definitely go up.Earnings however, I am not so sure for the reason these are take or pay contracts and their earnings will actually remain static regardless of the actual generation. There are a few power sector companies in the private side which could benefit out of this medium-term window which has opened up naming Torrent Power or selectively maybe Lanco or so on and so forth. But, these to me need to be viewed in the larger context of what is happening in the power sector and whether these will be seen as trading bets of more of long-term opportunities to invest. Sonia: Can we talk particularly about Petronet LNG and what the impact could be because I understand that this RasGas deal could improve the utilisation of the Dahej terminal quite a bit. You were talking about the increase in PLFs as well and we do know that this Dahej terminal was facing issues for the last many quarters now. Going forward, what could the impact be particularly on Petronet LNG? A: Petronet LNG, there uncertainty over the off-take will certainly get eliminated, that is number one. The terminal will start operating not only at name-plate capacity which is 10 million tonnes, but the way they have been operating terminal, there is a good chance that the utilisation may even exceed about 120-125 percent, at least till the time new capacity comes in. And third most importantly, because of lower off-take of this long-term contract, they had been facing under-recovery on the shipping cost which was estimated to be anywhere between Rs 100 crore o about 150 crore. So, that now gets eliminated. And to that extent, the earnings in FY17 could get restructured upwards by about 8-10 percent. In long-term, if the gas prices remain weak, essentially the terminal off-take will only be closer to the nameplate capacity even after the expansion is through. So, the benefits are actually three-fold. The uncertainty over off-take goes away, so that is more of a price-earnings (P/E) rerating event. Secondly, the under recovery on the shipping cost goes away, so that is an EPS impact and thirdly, because of the higher utilisation, probably the plant could derive more operational synergies thereby leading to further EPS upgrades. Latha: The gas based power plants which could be advantaged would be RE Power, Lanco, GVK, GMR, JSW Energy. In what order would you have buys in any of them? A: I am not sure whether JSW Energy has any gas based plant. Amongst the rest of the names that you have put forth, we officially, do not have any recommendation on Lanco or even Reliance Power, but as we understand, Reliance Power is in a process of moving out its plants from India to Bangladesh and this is the Samalkot unit which is probably the largest gas based power plant ever built by Reliance Power so far. And incrementally, this particular news flow may not directly benefit or impact negatively to Reliance Power. I think significant benefits could come to Torrent Power because it has got some untied gas based capacity, particularly on the degen side. And if gas prices remain weak for the next foreseeable period of time, that offsets the uncertainty associated with the power generated from that unit. I am unable to quantify the benefit for the reason they will have to sign either a short-term or a medium-term PPA, but certainly that is one stock which amongst the private sector should see some benefits. Latha: No, benefit at all for GMR, GVK or Lanco? A: For the other private sector private sector companies, the problem is beyond gas. Gas is probably less than 10-15 percent of the overall balance sheet exposure for these companies. At the margin, certainly it is positive, but the market is really worried on the 88-85 percent capital which is being allocated to assets other than gas, that is essentially coal based power plants.