Buy Petronet LNG - Motilal Oswal

Petronet LNG (owns LNG import terminal) (PLNG IN, M Cap: US$1.7b, CMP: Rs110, Buy)

- Kochi Terminal construction on track; to increase Dahej capacity by 30%: Construction of the 5mmtpa regasification terminal at Kochi is on track, with likely completion by December 2012. The company plans to increase the capacity at Dahej from the current 10mmtpa to 13mmtpa by FY13 at an estimated capex of Rs10b. This expansion is at a significantly lower cost compared to greenfield capacity. As against the benchmark cost of Rs10b/mmtpa, this expansion will cost just Rs3.3b/mmtpa. This is because the expansion entails only marine-side de-bottlenecking. Also, further expansion at Dahej will not be a problem, given the modular plant, adequate storage and land availability.

- Beneficiary of delay in KG-D6 ramp-up: Petronet's spot volumes have increased in the last few months due to sudden halt in the increase of domestic production (KG-D6 and PMT fields). Its current 10mmtpa capacity (v/s 1QFY11 annualized volume of 7.6mmt) leaves ample scope for further volume growth.

- More clarity required on proposed "Common User Facilities" (CUF) by PNGRB: PNGRB has mooted the proposal (to come up with draft regulations) for providing common carrier capacity (similar to pipeline regulations) at the LNG regasification terminals. In case of a pipeline network, once the capacity is allocated, a third party can access the network according to its needs. However, in case of access to LNG terminals, the third party will have to adjust its imports as per the terminal owner's gas receipt and dispatch schedule, and will thus have little flexibility.

- Long-term contracts available at/above US$9/mmbtu: Petronet is in talks with several LNG suppliers and is likely to sign a deal in the coming few months. However, the management indicated that in the current international environment, it is difficult to enter into a long-term contract at under US$9/mmbtu. China has signed up long-term contracts at US$9/mmbtu in the last 1-2 years.

- Triggers: (1) Long-term tie-up for additional gas; (2) Progress on Kochi terminal; (3) Valuation of the ADB stake sale; (4) Short-term regasification charges in coming quarters, and 5) Increase in regasification charges in January 2011.

Valuation and view: We expect Petronet's volumes to grow at a CAGR of 12% by FY14. We have built a throughput of 9.5mmtpa in FY11 and 10.5mmtpa in FY12. We have built in marketing margin of Rs5/mmbtu over and above the regasification charges. The stock trades at 11.4x FY12E EPS of Rs9.7. Our DCF-based fair value for the stock is Rs127/share.

Source : Equity Bulls

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