The Company has announced a major greefield capex into setting up a new petrochemical facility at Dahej, Gujarat.
- The proposed project includes 750 KTPA of Propane Dehydrogenation (PDH) & 500 KTPA of Propylene (PP) plant including propane and ethane handling facility.
- The project will generate revenue from the sale of polypropylene, propylene, propane, hydrogen and ethane.
- The company claims to have signed a binding agreement with Deepak Phenolics Ltd. for the off take of 2,50,000 TPA of PP and 11,000 TPA of hydrogen from the project for a period of 15 years from the date of the first supply of the two products.
- It entails an investment of Rs 20,685 crore (with a variation of + 10%) to be spent over a period of 4 years.
- Funding will be through a mix of internal accruals and debt
- The project will be commissioned after 4 years
- According to the company, the project will benefit by utilising the ‘cold energy’ of its existing Dahej LNG terminal, making this project energy-efficient.
- The management mentioned an expected EBITDA of Rs 4,000 crore from the project at a steady state. This is around 80% of Company’s last twelve months EBITDA from the existing business.
- Internal IRR of the project is projected at 19-20% and equity IRR at 30%
Given the size of the project relative to Petronet’s own size and an unrelated diversification, analysts are concerned about the project.
Analysts believe the capex plans in non-core petchem businesses will stress the company’s balance sheet and could be value-destructive. Petchem investment needs very high margins to meet management targets of profitability and hence most believe that the Company is over estimating the projected returns.
Management informs that the projected returns are based on detailed work that the independent advisor (SBI Caps) has undertaken and hence are achievable. They have assumed the pricing based on the last 7 years of averages to mitigate the inherent volatility in this business.