Buy Petronet LNG - TP Rs.195 - Emkay

Buy, Target Price Rs 195 Current valuation factors marketing margin cap concern

Demand to increase in the future: Demand for imported RLNG would continue to increase from of 33mmscmd in FY11 to 81mmsacmd in FY14E, as domestic supplies fall short to We expect volume growth would sustain in the coming years, as domestic natural gas supply continues to fall short to meet the growing demand. source mainly RIL's KG D6.

Volume to grow at 7% CAGR to 12.4 mtpa in FY14: With demand supply extremely skewed, we expect regasification charges and volume growth continue to remain high for Petronet LNG. We expect volume to grow at 7% CAGR from 10.7mtpa in FY12 to 12.4mtpa in FY14E. Incremental volumes growth comes from Kochi Terminal.

Planning to setup 3rd LNG terminal: Looking at the growing domestic demand for natural gas, company is planning to setup 3rd LNG terminal at Gangavaram port, Andhra Pradesh, with the total capacity of 5mntpa and Capex of Rs.45bn respectively. The company will take about 48 months to complete the terminal after the approval of DFR, which is likely to be submitted by April 2012.

Limited impact on Marketing margin cap: We believe cap on gas marketing margins should not be levied on imported LNG and only on domestic production and its sale in the country. We believe down side risk in earnings from marketing margin cap is limited as for every 10% change in marketing margin on spot volume EPS impact by 1.7% for FY13E.

Near term catalyst and earnings performance: We expect volume growth would sustain in the coming years, as domestic natural gas supply continues to fall short to meet the growing demand. Thus ensuring comfortable ROE of 23%+ going forward. However current valuation captures marketing margin concerns and hence offers attractive valuations at 9.5x FY14E EPS.

Source : Equity Bulls

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