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Petronet LNG (PLNG.BO): High price to keep LNG as gas of last
resort, gas demand not entirely fungible; retain Sell
Source of opportunity
While we remain confident about substantial pent-up natural gas
demand in India and that gas demand growth will likely outstrip the
ramp-up in domestic gas production in the medium term, rising LNG
price and price sensitivity of end consumers keeps the medium-to-long
term outlook for LNG weak, in our view. Particularly for power plants,
imported coal would be preferred over LNG to lower costs at price
above US$8.5/mmBtu, as per our calculations. Moreover, expensive
LNG would need to blended with cheaper domestic gas to make it
affordable to end consumers, in our view and hence lack of domestic
supply could pose a limitation to significant ramp-up of LNG volume sin
the country.
This likely implies low capacity utilisation, difficulty in passing on
increases in higher regassification charges and low marketing margins
for Petronet LNG (PLNG).
Catalyst
Key catalysts for the stock: 1) Rising oil prices keeps spot volumes below
street expectations, 2) future earnings disappointment as consensus
remains bullish on re-gas charges going up continuously.
Valuation
We increase our 12-m DCF-based target price to Rs110 from Rs100
earlier on account of the change in the ramp-up schedule of the Kochi
LNG terminal, implying a downside of 9%. The stock is currently trading
at close to an all-time high PE multiple, and therefore carries meaningful
downside risk, in our view. We structurally prefer domestic gas stories
over imported LNG ones.
Key risks
Key risks to our target price and investment view include (1) Higher than
expected LNG demand from in-house power plants, (2) higher than
expected spot LNG volumes owing to further disappointment in
domestic gas volumes; and (3) earlier than expected completion of the
Kochi LNG terminal.
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