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Petronet LNG (PLNG)
Energy
LNG from Gazprom, positive for sentiment but not for earnings, valuations.
PLNG has entered into an initial pact with Gazprom for supply of 2.5 mtpa of LNG for
25 years. We view this development as positive as it reduces the uncertainty relating to
the sourcing of gas for PLNG’s terminals at Dahej and Kochi. The terms of the deal are
yet to be worked out between the companies. However, we do not see any upside to
our earnings estimates or valuations for PLNG given our assumption of full utilization at
PLNG’s Dahej and Kochi terminals. We continue to have concerns regarding the
acceptance of high-priced LNG in the domestic market by price-sensitive consumers like
power and fertilizers.
Preliminary agreement with Gazprom for 2.5 mtpa of LNG supply for 25 years
PLNG has signed an initial pact with Gazprom Marketing and Trading Singapore (GMTS) for import
of upto 2.5 mtpa of LNG for 25 years. The final terms of contract, including price, volumes and
time of commencement of supply, are yet to be negotiated between the companies. We see this
development as allaying some concerns relating to sourcing of gas for PLNG.
Pact may render visibility to gas supply but may not result in upside to earnings or valuations
We see the recent potential tie-up of 2.5 mtpa of LNG with GMTS as increasing visibility of gas
supply for PLNG and reducing its dependence on spot LNG. However, we do not see any upside to
our estimates as we already assume full utilization at PLNG’s Dahej and Kochi terminals. Exhibit 1
gives our key assumptions behind our earnings estimates for PLNG. We are surprised by the 4%
spurt in stock price on the back of this news flow as it would not result in upgrades to earnings or
valuations.
Issue of acceptability of high-priced imported LNG in India still remains
PLNG management has not finalized the pricing terms of its proposed agreement with GMTS.
However, we believe that the long -term contract for imported LNG would have linkages to global
crude oil prices. Even assuming crude oil prices at US$100/bbl, we estimate the price of long-term
LNG at US$12-14/mn BTU (fob). Thus, the concern regarding the acceptability of high-priced
imported LNG by bulk consumers like power and fertilizer sectors. Exhibit 2 shows the comparative
cost of power using different fuels at feed stocks. We do not preclude consumption of some
quantities of LNG by industrial units and CGD networks. However, we expect dependence on bulk
consumers to achieve full utilization at PLNG’s Dahej and Kochi terminals.
Retain SELL with target price of `105
We retain our SELL rating on PLNG noting (1) 26% potential downside to our target price of
`105 and (2) expensive valuations given it is trading at 15.2X FY2012E EPS. We estimate EPS of
`15.3 in FY2016E, likely first year of full utilization of Dahej and Kochi terminals upto 16.5 mtpa.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Petronet LNG (PLNG)
Energy
LNG from Gazprom, positive for sentiment but not for earnings, valuations.
PLNG has entered into an initial pact with Gazprom for supply of 2.5 mtpa of LNG for
25 years. We view this development as positive as it reduces the uncertainty relating to
the sourcing of gas for PLNG’s terminals at Dahej and Kochi. The terms of the deal are
yet to be worked out between the companies. However, we do not see any upside to
our earnings estimates or valuations for PLNG given our assumption of full utilization at
PLNG’s Dahej and Kochi terminals. We continue to have concerns regarding the
acceptance of high-priced LNG in the domestic market by price-sensitive consumers like
power and fertilizers.
Preliminary agreement with Gazprom for 2.5 mtpa of LNG supply for 25 years
PLNG has signed an initial pact with Gazprom Marketing and Trading Singapore (GMTS) for import
of upto 2.5 mtpa of LNG for 25 years. The final terms of contract, including price, volumes and
time of commencement of supply, are yet to be negotiated between the companies. We see this
development as allaying some concerns relating to sourcing of gas for PLNG.
Pact may render visibility to gas supply but may not result in upside to earnings or valuations
We see the recent potential tie-up of 2.5 mtpa of LNG with GMTS as increasing visibility of gas
supply for PLNG and reducing its dependence on spot LNG. However, we do not see any upside to
our estimates as we already assume full utilization at PLNG’s Dahej and Kochi terminals. Exhibit 1
gives our key assumptions behind our earnings estimates for PLNG. We are surprised by the 4%
spurt in stock price on the back of this news flow as it would not result in upgrades to earnings or
valuations.
Issue of acceptability of high-priced imported LNG in India still remains
PLNG management has not finalized the pricing terms of its proposed agreement with GMTS.
However, we believe that the long -term contract for imported LNG would have linkages to global
crude oil prices. Even assuming crude oil prices at US$100/bbl, we estimate the price of long-term
LNG at US$12-14/mn BTU (fob). Thus, the concern regarding the acceptability of high-priced
imported LNG by bulk consumers like power and fertilizer sectors. Exhibit 2 shows the comparative
cost of power using different fuels at feed stocks. We do not preclude consumption of some
quantities of LNG by industrial units and CGD networks. However, we expect dependence on bulk
consumers to achieve full utilization at PLNG’s Dahej and Kochi terminals.
Retain SELL with target price of `105
We retain our SELL rating on PLNG noting (1) 26% potential downside to our target price of
`105 and (2) expensive valuations given it is trading at 15.2X FY2012E EPS. We estimate EPS of
`15.3 in FY2016E, likely first year of full utilization of Dahej and Kochi terminals upto 16.5 mtpa.
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