Petronet LNG, Flat earnings profile but strong long-term fundamentals:: Daiwa

Flat earnings profile but strong
long-term fundamentals
• Slow processing volume ramp-up at the Kochi terminal, but
capacity utilisation likely to remain high at the Dahej terminal
• We project a flat earnings profile for FY13-15, due mainly to the
capitalisation of the new Kochi terminal
• Raising target price to INR175 but downgrading to Outperform
post good share-price run since May 2012

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■ What's new
Petronet’s new liquefied natural gas
(LNG) regasification terminal at
Kochi is likely to be commissioned by
March 2013, but we expect a slow
ramp-up of LNG-processing volumes
at this terminal.
■ What's the impact
Given that a new LNG market such
as that near Kochi is likely to take
time to develop to its full potential,
we expect modest LNG-processing
volumes for the Kochi terminal in its
initial operating years. As such, we
are reducing our LNG-processing
volume forecasts for the terminal by
70%, 55% and 50% for FY13, FY14
and FY15, respectively.
We expect the company’s Dahej
terminal to continue to operate at high
capacity utilisation levels over FY13-
15, buoyed by demand for imported
gas. Petronet should be able to renew
LNG contracts due to expire in 2013
and maintain sound processing
volumes at the Dahej terminal. Thus,
we forecast LNG-processing volume
for the terminal of 547tbtus for FY13,
559tbtus for FY14, and 567tbtus for
FY15, slightly below our previous
forecasts.
We are raising our FY13E EPS by
8.8% to reflect increases in our
forecasts for its marketing margin to
USD0.8/mmbtu (from
USD0.5/mmbtu) and other income.
While strong marketing margins
should support FY13-15 earnings, we
expect its earnings to plateau over
the period due to the capitalisation
costs for the new Kochi terminal.
■ What we recommend
We are raising our DCF-based sixmonth
target price to INR175 (from
INR170). The long-term fundamentals
of rising gas demand and a declining
gas supply domestically should
continue to favour Petronet’s
business, in our view. A domestic gas
price rise would also be favourable for
Petronet as it would probably increase
the acceptability of, and thus the
demand for, imported LNG in India.
Still, its share price is up by 29% since
18 May 2012, and its FY14E PBR and
PER do not look cheap to us. Thus, we
downgrade our rating to Outperform
(2) from Buy (1).
■ How we differ
Our FY13-15E EPS are 4-23% below
the Bloomberg-consensus forecasts,
which could be due to our lower
LNG-processing volume and
marketing margin forecasts.