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Petronet LNG (PLNG)
Energy
Stronger-than-expected 3QFY11 results. PLNG reported 3QFY11 net income at
`1.71 bn (+30% qoq and +105% yoy), significantly above our expected `1.36 bn. The
positive variance was led by (1) higher-than-expected volumes at 120 tn BTU versus our
estimated 103 tn BTU and (2) higher-than-expected re-gasification tariffs at `32.5/ mn
BTU versus our expected `30.4/ mn BTU. We maintain SELL rating on the stock given
potential downside of 19% to our revised 12-month DCF-based target price of `105.
Strong results boosted by sharp growth in volumes (+20% qoq and +25.7% yoy)
PLNG reported 3QFY11 net income at `1.71 bn (+30.3% qoq and +105.3% yoy) versus our
expected `1.36 bn. The strong yoy growth in earnings reflects (1) higher volumes at 120 tn BTU
(+25.7% yoy) and (2) higher re-gasification tariffs at `32.5/mn BTU versus `25.4/mn BTU. We had
estimated volumes at 103 tn BTU and re-gasification tariffs at `30.4/ mn BTU.
Maintain SELL on expensive valuations
We maintain our SELL rating on the stock with a revised 12-month DCF-based target price of `105
(`90 previously) noting (1) the stock offers 19% downside to our fair value of PLNG and (2) the
stock is trading at 14.2X FY2012E EPS. The change in target price reflects (1) roll-forward of DCF
(`4 impact), (2) higher long-term re-gasification tariff assumption at `36.8/mn BTU versus
`35.46/mn BTU previously (`6 impact) and (3) higher re-gasification volumes (`4 impact).
Concerns on acceptability of high-priced imported LNG for price sensitive sectors remain
We have concerns on the acceptability of high-priced LNG in India by price-sensitive sectors like
power. We compute the cost of imported LNG in India (US$10.2/ mn BTU), which is very high as
compared to the cost of domestic gas (US$4.2-5.7/mn BTU). We note that the price of power
generated using spot LNG will be significantly higher compared to power generated using
imported coal. As per an article in Petrowatch, there have been delays in signing PPAs by states of
Kerala and Karnataka to buy power from NTPC’s proposed gas-based Kayamkulam plant due to
high cost of power. We would be cautious about the economics of PLNG’s Kochi project, if
volumes do not ramp up due to lack of demand for high-priced LNG.
Revised earnings for higher volumes in near term
We have revised our EPS estimates for FY2011-13E to `8, `9.1 and `9 from `6.9, `8.3 and `8.7 to
reflect (1) higher spot volumes in FY2011-12E, (2) change in exchange rate assumptions and (3)
other minor changes. We assume total volumes (contracted plus spot) at 8.5 mn tons for FY2011E,
10 mn tons for FY2012E and 10.5 mn tons for FY2013E. We model PLNG’s re-gasification tariff to
increase by 5% in each year in FY2012-13E and remain flat thereafter.
Key highlights from 3QFY11 results
Sharp qoq increase in volumes. PLNG reported a sharp 20% qoq increase in regasification
volumes to 119.7 tn BTU versus 99.8 tn BTU in 2QFY11 and 95.2 tn BTU in
3QFY10 led by lower gas production from RIL’s KG D-6 block.
Moderate qoq increase in re-gasification tariffs. We compute implied re-gasification
tariff at `32.5/mn BTU in 3QFY11 versus `30.4/mn BTU in 2QFY11 and `25.4/mn BTU in
3QFY10.
Qoq increase in other expenditure. PLNG reported other expenditure at `374 mn for
3QFY11 versus `261 mn in 2QFY11. The other expenditure was higher qoq due to
foreign exchange loss of ~`60 mn, which is recoverable from end-users.
Qoq decline in other income. PLNG reported other income at `54 mn for 3QFY11
versus `186 mn in 2QFY11. The other income was lower qoq due to foreign exchange
gain of ~`90 mn in 2QFY11.
Other updates
Revision in re-gasification tariffs. PLNG has revised its re-gasification tariffs by 5%
in January 2011; the current tariff is `33.35/mn BTU versus `31.76/mn BTU
previously.
New contract of 1.1 mtpa. PLNG has recently contracted 1.1 mtpa of additional
LNG supply in FY2012-13E for its Dahej terminal and has also finalized the offtake
arrangements for the same. The management has declined to provide other
details of the new contract.
Kochi terminal. The Kochi project has achieved ~70% completion with expenditure of
~`18 bn incurred till date. The project is expected to complete by 3QFY13E at a cost of
~`37 bn. The company has also received Board approval to expand the Kochi terminal
capacity to 5 mtpa at an additional cost of `4 bn.
Second Jetty at Dahej. The company has awarded contracts for construction of the
second jetty and associated onloading facilities at Dahej in January 2011. The second jetty
will likely be complete by 2QFY14E and will likely cost `9 bn. Petronet LNG can handle
maximum 10.5 mtpa of imported cargo till the completion of the second jetty and will be
able to handle an additional 1.5 mtpa post the completion of the same.
Key assumptions behind our earnings model
We discuss our key assumptions underlying our earnings assumptions below
Volumes. We model contract LNG volumes at 7.5 mn tons, 7.5 mn tons and 8 mn tons
in FY2011E, FY2012E and FY2013E. We have included the new contracted volumes of
1.1 mtpa in spot LNG volumes given limited available information on the same. We now
model spot LNG imports of 1 mn tons in FY2011E, 2.5 mn tons in FY2012E and 2.5 mn
tons in FY2013E versus 0.7 mn tons in FY2011E, 2.1 mn tons in FY2012E and 3 mn tons
in FY2013E previously.
Re-gasification tariffs. We model PLNG’s re-gasification tariff to increase by 5% in each
year in FY2012-13E and remain flat thereafter until FY2020E, the terminal year of our
DCF model (see Exhibit 5).
Exchange rate. We have revised our exchange rate assumptions for FY2012E and
FY2013E to `45.5/US$ and `44/US$ versus `44.5/US$ and `44.5/US$.
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