Petronet LNG: Buy For 34% Return On Investment

“Petronet LNG’s (PLNG) Q1FY13 results were ahead of our estimates on bottom-line front despite a lower than expected regassification volume. In the quarter, sales increased 52.1% Y-o-Y and 10.3% sequentially to Rs. 70.3 bn while PAT increased 5.5% Y-o-Y and 10.5% sequentially to Rs. 2.71 bn, ahead of our estimates of Rs. 2.42 bn, on account of higher than expected margins.”

“In the quarter, the company regassified 127 TBTU of LNG, down 5% Y-o-Y and 6% sequentially, as against our expectations of 134.6 TBTU, on account of lower volume offtake due to shutdown of five fertilize plants in the month of April 2012. However, LNG off take is back to normal level in the quarter. The gross margin of the company came ahead of our estimates of Rs.38.2 per mmbtu to Rs.41.9 per mmbtu, despite a lower capacity utilization which declined to ~ 100% in Q1FY12 as against capacity utilization of ~ 105% in Q4 FY12 and ~104% in Q1 FY12. The gross margin increased on account of a 200 mn saving in the charter hires charges coupled with increase in the marketing margins.”

“PLNG’s Dahej and Shell’s Hazira terminal both operates over 100% capacity utilization which under scores the natural gas demand-supply deficit in the domestic markets. With the domestic gas production on decline amid strong gas demand, LNG will hold key to plug the demand- supply deficit. To cater to the demand, PLNG is increasing the Dahej plant capacity to 15 mmtpa. PLNG could operate the Dahej plant at a regassification capacity of 12.-12.5 mmt once the second jetty opens by FY14. Also, Kochi terminal is on track and is likely to get operational by the end of CY2012. To cater to the gas demand in the eastern part of India, PLNG is setting up a LNG terminal at Gangavaram.”

“Net sales and PAT are likely to increase at a CAGR of 31.1% and 4.9% respectively over FY11-FY14E while EBIDTA is expected to grow at a CAGR of 7.7% in the same period on account of increase in the regassification volume coupled with increase in the regassification margins. We assume 5% escalation in the regassification tariff at the Dahej terminal till FY15E and remain flat afterwards and, for the Kochi terminal; we assume a regassification margin of Rs. 50 per mmbtu. We assume marketing margin of Rs.25-20 per mmbtu on spot cargoes/ short term cargoes over FY12-FY15E and long term marketing margin of Rs. 10 per mmbtu. At CMP, PLNG is trading at 11.1x FY13E and 9.4x FY14E EPS of Rs. 13.1and Rs. 15.5 respectively and at an EV/EBIDTA of 7.6x FY13E and 5.4x FY13E. We maintain buy rating on PLNG with a DCF based target price of Rs.195 per share, implying a potential return of 34% from the current levels,” says FinQuest Securities research report.