Petronet LNG - Strong outlook for LNG markets - IIFL

While the domestic gas production is expected to bottom out, we expect the growth in supply to lag the gas demand significantly. Amidst this scenario, LNG imports are will play an important role in bridging the gap. In FY13, LNG prices have hovered at US$13-14/mmbtu levels, keeping a significant portion of the demand latent. However, we note that the prices in LNG market are negatively skewed for Asian importers on back of oil linkage. We strongly believe this is not sustainable and as the lower priced Henry hub linked contracts start delivery, the LNG prices will cool off. While earliest delivery of such contracts is still far off, the pricing pressure on oil linked contracts will start coming in much before on back of long term nature of such contracts.

Expanding capacity... Kochi ramp up to be the next trigger

Petronet has a current capacity of 10mtpa on its Dahej terminal wherein it has been operating at more than 100% utilization levels. The company is targeting a cumulative capacity of 25mtpa by FY17E through marine and regasification capacity expansion (5mtpa) at Dahej, new Kochi terminal (5mtpa) and recently announced 5mtpa terminal on Gangavaram port in Andhra Pradesh. We believe such opportune expansion would help Petronet to remain at centre stage of the LNG growth story in India. While the recent under performance of the stock has been driven by delays in Kochi ramp-up, we believe the long term story remains intact and the meaningful commission at Kochi will act as a positive trigger for the stock.

Robustness in business model

The business model of PLNG is robust wherein 70% of the volumes are tied on long term contracts thereby providing superior revenue visibility. Additionally, it operates on a risk free model wherein it does not take any pricing risk on itself (locks in the price with suppliers and buyers) thereby enabling the company to earn clean re-gasification margins on the volumes processed. The re-gasification charges at Dahej terminal have an escalation clause of 5% p.a. which has been successfully implemented over the last few years. While marketing margins face downside risks from regulation, we believe regas tariffs (80% of profitability) will not be impacted by regulations.

Source : Equity Bulls

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