Petronet LNG: Downgrade to Hold: Robust Outlook, Unattractive Valuations :: Citi

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Petronet LNG (PLNG.BO)
Downgrade to Hold: Robust Outlook, Unattractive Valuations
 Downgrade to Hold — After a strong performance (stock up ~55% in past four
months), we believe valuations have run slightly ahead of fundamentals, and
downgrade from Buy to Hold. We raise our TP to Rs135 (from Rs106) driven by:
(i) roll forward to Mar-11E and (ii) increase in our medium/long-term vols as we
see further LT LNG price reductions feasible, while largely maintaining our nearterm
vol/earning forecasts. Our risk rating improves from Medium to Low, in line
with our quant system, and factors in improved business outlook.
 Remain structurally positive — Our previous positive thesis on stock – (i) expected
upsurge in gas demand, unlikely to be fully met through domestic sources, and (ii)
increase in spot vols as new pipeline capacity comes on-stream – remains intact.
Notwithstanding higher prices vis-à-vis domestic gas, we expect LNG imports to
continue to grow, as economics vs. naphtha/FO still remain favorable. Also, with
delay in KG ramp-up and shutdown at PMT, Petronet has already witnessed higher
spot vols, which should continue near-term (press reports suggest 4 spot cargoes
in 3Q vs. 2 in 2Q). Further, our cost curve for Australian LNG projects suggests
IRRs >10% at an LNG price of US$10 (i.e., slope of 13.5% at US$70 crude),
which implies LT prices could fall further from current levels (14.5% slope).
 Valuations not compelling — The strong stock performance factors in the robust
growth outlook and business momentum, in our view, but valuations at 15x P/E,
10x EV/EBITDA, and 3.2x P/B (FY12E) leave limited room for upside. Further,
potential catalysts, in the form of signing of a LT contract or higher-than-expected
increase in spot vols, may be missing in the near-term, as prices for LT contracts
remain high, resumption of PMT could (albeit marginally) impact near-term vols,
and GAIL's pipeline expansions occur in a phased manner over next ~6 months
(starting Nov). We estimate vols of 8.1 MMT in FY11E vs. 3.8 in 1H.