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Petronet LNG Ltd is the biggest beneficiary of the increasingly
gas-starved Indian market due to its derisked business model of
charging fixed tariffs for supplying R-LNG. Petronet enjoys the first
mover advantage in this space with its 10 MMTPA LNG terminal at Dahej.
The company is taking advantage of the favorable economics of this
industry by doubling its capacity to 20 MMTPA by end-FY15. It is
expanding its Dahej capacity by 5 MMTPA and setting up a greenfield
LNG terminal of 5 MMTPA in Kochi. We expect commissioning of the Kochi
terminal by Dec 2012 and expansion of Dahej capacity to 15 MMTPA by
Mar 2015. Significant shortfall in domestic gas supply going forward,
active sourcing of LNG contracts and the first mover advantage combine
to position Petronet as an attractive investment opportunity.
Investment Argument
Petronet LNG is optimally placed to take full advantage of the growing
demand-supply gap (178 mmscmd by FY15) of natural gas in the Indian
market. It has tied up long term supplies of 7.5 MMT from RasGas,
Qatar, 1.44 MMT from Gorgon, Australia and is negotiating supply of
2.5 MMT from Gazprom. The derisked nature of the business stems from
the GSPA which provides for escalation in regas tariff of 5% per
annum, with the tariffs translating into project IRR of 16%. Moreover,
the company purchases spot LNG cargoes on which marketing margins are
also charged and it also provides regasification services to
customers. The locking in of IRR (16%) on long term cargoes, with
additional upside from marketing margin on spot cargoes, result in a
series of sustainable & predictable cash flows from the business.
Going forward, we expect sales CAGR of 35.3% & net profit CAGR of 32%
during FY11-13E owing to higher capacity utilization at Dahej &
commissioning of Kochi. We estimate further capex of Rs 20 bn in Kochi
and Rs 20 bn for expansion in Dahej. We estimate debt to rise from Rs
32.2 bn in FY11 to Rs 46.8 bn in FY13 and free cash flows to improve
from (Rs 3,231.1 mn) in FY12 to (Rs 1,689.7 mn) in FY13.
Valuation
We value Petronet by performing DCF valuation of its existing LNG
terminal at Dahej as well as the upcoming Kochi terminal and capacity
expansion at Dahej. We arrive at a FY13E price target of Rs 220 by
using WACC of 11% and terminal growth of 0% for our DCF valuation.
Higher than expected demand for gas may result in higher marketing
margins, which is an upside trigger for the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Petronet LNG Ltd is the biggest beneficiary of the increasingly
gas-starved Indian market due to its derisked business model of
charging fixed tariffs for supplying R-LNG. Petronet enjoys the first
mover advantage in this space with its 10 MMTPA LNG terminal at Dahej.
The company is taking advantage of the favorable economics of this
industry by doubling its capacity to 20 MMTPA by end-FY15. It is
expanding its Dahej capacity by 5 MMTPA and setting up a greenfield
LNG terminal of 5 MMTPA in Kochi. We expect commissioning of the Kochi
terminal by Dec 2012 and expansion of Dahej capacity to 15 MMTPA by
Mar 2015. Significant shortfall in domestic gas supply going forward,
active sourcing of LNG contracts and the first mover advantage combine
to position Petronet as an attractive investment opportunity.
Investment Argument
Petronet LNG is optimally placed to take full advantage of the growing
demand-supply gap (178 mmscmd by FY15) of natural gas in the Indian
market. It has tied up long term supplies of 7.5 MMT from RasGas,
Qatar, 1.44 MMT from Gorgon, Australia and is negotiating supply of
2.5 MMT from Gazprom. The derisked nature of the business stems from
the GSPA which provides for escalation in regas tariff of 5% per
annum, with the tariffs translating into project IRR of 16%. Moreover,
the company purchases spot LNG cargoes on which marketing margins are
also charged and it also provides regasification services to
customers. The locking in of IRR (16%) on long term cargoes, with
additional upside from marketing margin on spot cargoes, result in a
series of sustainable & predictable cash flows from the business.
Going forward, we expect sales CAGR of 35.3% & net profit CAGR of 32%
during FY11-13E owing to higher capacity utilization at Dahej &
commissioning of Kochi. We estimate further capex of Rs 20 bn in Kochi
and Rs 20 bn for expansion in Dahej. We estimate debt to rise from Rs
32.2 bn in FY11 to Rs 46.8 bn in FY13 and free cash flows to improve
from (Rs 3,231.1 mn) in FY12 to (Rs 1,689.7 mn) in FY13.
Valuation
We value Petronet by performing DCF valuation of its existing LNG
terminal at Dahej as well as the upcoming Kochi terminal and capacity
expansion at Dahej. We arrive at a FY13E price target of Rs 220 by
using WACC of 11% and terminal growth of 0% for our DCF valuation.
Higher than expected demand for gas may result in higher marketing
margins, which is an upside trigger for the stock.
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