Petronet LNG In a lucky ‘Spot’ ::Macquarie Research

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Petronet LNG
In a lucky ‘Spot’
Event
 Petronet announced a 2QFY11 PAT of Rs1.31bn, growth of 9% YoY and 18%
QoQ. The EBITDA of Rs2.72bn was 11% above our estimates, primarily due
to higher volumes of high-margin spot cargo and mildly lowered costs.
 We are increasing our TP to Rs80 (+14%) due to visibility of spot cargo
demand in the short term; however, we believe that this trend is unsustainable
in the wake of incoming indigenous gas supplies. We maintain Underperform.
Impact
 11.5% QoQ volume growth due to spot cargo import: Petronet imported
multiple spot cargos (total 4.23 TBTUs) in 2QFY11 due to demand from public
sector companies (which act as LNG shippers for the final consumers), in the
wake of shutdown at the Panna-Mukta-Tapti (PMT) fields since 20 July. This
took the overall volumes to 99.8 TBTUs, an increase of 11.5% QoQ (taking
the average utilization of the 11.5 MMTPA Dahej terminal to ~68%). Also, it
was able to negotiate excellent margins for the spot cargos, boosting profits.
 Spot imports are expected to continue in 3QFY11, with plans to import
three spot cargos for November-December delivery. However, the option not
to buy has been kept open in case the PMT fields restart, which would leave
no pipeline capacity for the regassified LNG. Also, a recent rise in spot cargo
rates implies a check on the profitability.
 Lowered internal consumption costs: A recalibration of gas meters
measuring internal consumption has resulted in a reduction to 1.2% (from
1.5%) of throughput, which has driven down operational costs by 30% QoQ.
Earnings and target price revision
 FY11E, FY12E and FY13E PAT increased by 10%, 5%, 2%, respectively; we
are increasing our target price to Rs80 from Rs70.
Price catalyst
 12-month price target: Rs80.00 based on a DCF methodology.
 Catalyst: Restart of PMT fields; Clarity on ramp-up of KGD6 to 80 mmscmd
Action and recommendation
 We believe that Petronet LNG has been fortunate to be in the sweet spot
where demand from industries readying themselves for receiving cheap
indigenous gas are having to buy/use expensive spot cargo LNG in the shortterm,
due to RIL not ramping up KGD-6 production as well as a shutdown in
PMT fields. However, this is expected to be a short-lived rally as LNG will be
displaced immediately by domestic gas as soon as it becomes available.
 The stock is trading at a FY11E P/BV of 3.4x, which we believe is extremely
expensive for an annuity business with a short term, risky growth option. We
recommend a switch to GAIL (Rs504.25, OP, TP: 548) (FY11E P/BV of 3.1x),
which is also a utility but with visibility of high-growth in the next five years
from doubling of transmission volumes at higher than existing tariffs from its
upcoming pipelines.