PETRONET LNG Expansion at Kochi gets in-principle sanction: Edelweiss

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Event: Petronet LNG (PLNG) board has given an in-principle sanction for expanding
the capacity of Kochi Terminal from 2.5 MMT to 5 MMT at an incremental cost of INR
4.5 bn. Thus, the project cost is up from INR 37 bn (2.5 MMT) to INR 41.5 bn (5.0
MMT). The final proposal for capacity expansion of the Kochi project will be
considered for approval at the next board meeting of the company.


Current status: The overall construction of Kochi terminal is running on schedule
and was ~60% complete at the end of Q2FY11. The terminal is expected to achieve
mechanical completion by Q1CY12. It may also be noted that the company had
signed a contract with an Australian subsidiary of Exxon Mobil for importing 1.44
MMTPA from the proposed Gorgon LNG project in Western Australia 2014 onwards for
the Kochi terminal.

Our view: We are maintaining our earnings estimates for PLNG as we had already
factored in the expansion of Kochi terminal to 5 MMT by FY14. Margins for the Kochi
terminal have been pegged at 16% equity IRR. According to our estimates, this
implies re-gasification charges/revenues of INR 77.6/mmbtu for FY13 and INR
46.2/mmbtu for FY14 post expansion.

Upsides to our estimates would come from PLNG tying up additional long
term/medium term supplies of LNG for the Kochi terminal. However, timely
completion of GAIL’s Kochi-Mangalore-Bangalore pipeline and Kochi-Kayakulam
pipeline (expected to be completed in FY13) remains a key risk for the project. We
expect tenders for supplying pipes for the Kochi-Mangalore-Bangalore pipeline to be
awarded in next 2-3 months.

We maintain the fair value of PLNG at INR 135 for March 2012. At INR 113, PLNG is
trading at P/E of 16.7x FY11E EPS and 15.2x FY12E EPS. We maintain ‘BUY’ on the
stock and rate it ‘Sector Outperformer’ on relative return basis.