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We upgrade PLNG from Sell to Buy and raise our TP from Rs57 to Rs150. Lower KG-D6 gas
production has dramatically improved the growth prospects for LNG, especially as new
pipelines become operational. Given a lack of regulation, we also see potential for the annual
escalation in regas tariffs to continue.
LNG growth prospects have soared
Domestic gas supply is declining with production from Reliance Industries’ KG-D6 block
currently at 51mmscmd, compared to our expectation at the same time last year of
89mmscmd. Meanwhile, new pipelines are scheduled to come on stream later this year,
which will connect new customers and increase supply available to existing customers,
thereby raising domestic demand. The resultant gas shortage should increase demand for
imported LNG, allowing PLNG to run its Dahej terminals at close to capacity (with potential
for marketing margins from spot cargoes) and also improve the prospects for the new Kochi
terminal.
Unregulated utility business
The current Dahej regas tariff formula (5% escalation every year) results in high returns (25%
ROE) as actual capital costs/tonne are nearly 30% below the formula estimate. We expect
this escalation to continue, at least over our forecast horizon, given the strong demand for
LNG, PLNG’s competitive capital cost position and the absence of regulation.
Earnings now 27% above consensus
Our EPS estimates over FY12-13F are now 27% above Bloomberg consensus given our
assumptions of rising regas tariffs and near-full capacity utilisation of regas terminals. As has
occurred in earlier years, we believe consensus estimates will rise as the market’s doubts
about the annual tariff escalation recede.
Upgrade to Buy, target price Rs150
Our earlier DCF valuation methodology now appears inappropriate given the range of
possibilities we see for regas tariffs. Bloomberg consensus forecasts show that utilities such
as PLNG are trading at 13-14x FY12F EPS. We now value PLNG at Rs150 (13.6x FY12F
EPS), given our earnings estimates are 27% above consensus. Other than lubricants, LNG is
perhaps the only segment within the Indian oil/gas space that is not regulated by the Indian
government (GOI). Therefore, PLNG could warrant a valuation premium.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We upgrade PLNG from Sell to Buy and raise our TP from Rs57 to Rs150. Lower KG-D6 gas
production has dramatically improved the growth prospects for LNG, especially as new
pipelines become operational. Given a lack of regulation, we also see potential for the annual
escalation in regas tariffs to continue.
LNG growth prospects have soared
Domestic gas supply is declining with production from Reliance Industries’ KG-D6 block
currently at 51mmscmd, compared to our expectation at the same time last year of
89mmscmd. Meanwhile, new pipelines are scheduled to come on stream later this year,
which will connect new customers and increase supply available to existing customers,
thereby raising domestic demand. The resultant gas shortage should increase demand for
imported LNG, allowing PLNG to run its Dahej terminals at close to capacity (with potential
for marketing margins from spot cargoes) and also improve the prospects for the new Kochi
terminal.
Unregulated utility business
The current Dahej regas tariff formula (5% escalation every year) results in high returns (25%
ROE) as actual capital costs/tonne are nearly 30% below the formula estimate. We expect
this escalation to continue, at least over our forecast horizon, given the strong demand for
LNG, PLNG’s competitive capital cost position and the absence of regulation.
Earnings now 27% above consensus
Our EPS estimates over FY12-13F are now 27% above Bloomberg consensus given our
assumptions of rising regas tariffs and near-full capacity utilisation of regas terminals. As has
occurred in earlier years, we believe consensus estimates will rise as the market’s doubts
about the annual tariff escalation recede.
Upgrade to Buy, target price Rs150
Our earlier DCF valuation methodology now appears inappropriate given the range of
possibilities we see for regas tariffs. Bloomberg consensus forecasts show that utilities such
as PLNG are trading at 13-14x FY12F EPS. We now value PLNG at Rs150 (13.6x FY12F
EPS), given our earnings estimates are 27% above consensus. Other than lubricants, LNG is
perhaps the only segment within the Indian oil/gas space that is not regulated by the Indian
government (GOI). Therefore, PLNG could warrant a valuation premium.
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