Petronet LNG --Growth: Optimized, and unregulated::Macquarie Research

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Petronet LNG
Growth: Optimized, and unregulated
Event
 Petronet announced a surprisingly strong 1Q FY12 PAT of Rs2.57bn (34%
ahead of consensus), for growth of 130% YoY and 24% QoQ. Highest-ever
volumes of 133.4 Tbtus through logistic optimizations and an increase in regas
services used by third parties, healthy marketing margins despite the sharp rise
in LNG prices and lack of regulation on regas margins have buoyed Petronet’s
earnings, especially due to Indian demand growth mismatched with declining
KGD6 production. We believe these triggers shall continue to support the stock
in the near term, despite what we see as a heady valuation of 3.4x FY12E
P/BV. We increase our TP to Rs140 (from Rs111) and upgrade the shares to
Neutral from Underperform.
Impact
 Operable capacity boosted by 1–1.5 MMTPA due to logistic optimization:
The 10 MMTPA nameplate capacity Dahej terminal received 16 cargos in June
and is thus operating at a utilization of ~110%. This was made possible due to
an operable capacity boost of 1–1.5 MMTPA achieved through simultaneous
berthing of loading and unloading tankers at the jetty during high tide (thus
utilization of operable capacity is currently 91%). Using this increase, Petronet
regassified 6 cargos (18.7 TBtus) for GAIL/GSPC. Management indicated that
after the second jetty is built, operable capacity could rise to 12.5 MMTPA.
 Dahej expansion by 5 MMT, East Coast terminal approved by board: The
Petronet board approved the expansion of the Dahej terminal by 5 MMTPA
(expected in 3–4 years at US$0.5bn capex) and feasibility studies for setting
up a US$ 0.9bn greenfield 5 MMT terminal on the East Coast. Petronet is in
discussions with large importers like GAIL/GSPC for equity participation, so
as to lease out the fresh capacity on a long-term basis. The 5 MMT Kochi
terminal is expected to be commissioned by Sept ember 2012, with initial
capacity of 2.5 MMT.
Earnings and target price revision
 FY12–14E PAT estimates increased by 20–35% due to inclusion of additional
1.5 MMTPA operable capacity on account of dual-berthing optimization
(loading and unloading ships at the same time), reduction of price risk on spot
volumes by increasing regas volumes (sourced by GAIL and GSPC) and the
upcoming second jetty (September 2013) to boost capacity to 12.5 MMTPA
(not incorporating expansion of Dahej). TP increased to Rs140 from Rs111.
Price catalyst
 12-month price target: Rs140.00 based on a DCF methodology.
 Catalyst: Regulation of regas margins; clarity on KGD6 ramp-up.
Action and recommendation
 Petronet has enjoyed a 5% escalation on regas margins (for getting 16%
equity IRR) since inception despite lowered costs of expansion boosting
returns to 25%+, due to no regulations on this front as of yet, and this remains
a risk. However, until the time when competition (from cheaper domestic gas
for volumes and from other LNG terminals for margins) forces a check,
Petronet’s status as India’s prime LNG importer could allow it to earn
supernormal returns.