Buy Petronet LNG (PLNG.BO) Return Potential: 30% ::Goldman Sachs,

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Buy
Petronet LNG (PLNG.BO)
Return Potential:  30%   Equity Research
Domestic gas delay, incumbent asset give edge; raise PLNG to Buy
Source of opportunity
We upgrade Petronet LNG (PLNG) to Buy from Neutral as we now expect
greater sustainability of its high margins from increased spot LNG
volumes. With D-6 production ramp-up unlikely for another couple of
years, in our view, PLNG, with its incumbent re-gas capacity, is very well
positioned to benefit from the supply-demand gap (about 50 mmscmd by
FY14E) in the Indian gas market. Moreover, the rising difficulty of project
execution and escalating costs give an edge to PLNG’s extant assets and
will help sustain its regas charges and marketing margins over medium
term, in our view, leading to high ROEs of 28% to 35% in FY12E-14E.
Catalyst
1) High margins in coming quarters, likely leading to further consensus
earnings upgrades; 2) likely announcement of LNG procurement deal for
its capacity expansion; 3) news flow on completion of the Kochi terminal;
4) possible delays/cancellations of the other re-gas terminals planned.
Valuation
We revise FY12E/13E/14E EPS by 44%/34%/28% respectively, primarily driven
by our expectations of higher spot LNG volumes and marketing margins of
US$ 0.25-0.45/mmBtu over FY12E-14E. Consequently, we raise our 12-m DCFbased TP to Rs225 from Rs135 earlier, implying 27% upside. We are currently
17%-20% ahead of Bloomberg consensus FY12E-14E earnings.  
We estimate that PLNG stock is currently reflecting no marketing margin
after FY12 (vs. US$0.40/mmBtu in1Q FY12) and no re-gas price increases
after FY14. These look surprising to us given the gas shortage and the
contract allowing 5% annual re-gas charge rise on contracted volumes.
Key risks
1) Higher than expected LNG prices curtailing near term gas demand from
non-priority sectors;2) earlier than expected ramp up in KG-D6 volumes; 3)
delay in completion of Kochi terminal or Dahej jetty expansion.
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Coverage View:  Neutral