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Its a buy call for Petronet LNG-Target Rs. 220

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Its a buy call for Petronet LNG-Target Rs. 220

For the increasingly gas-starved Indian market, Petronet LNG Ltd is undoubtedly the biggest beneficiary due to its de-risked business model of charging fixed tariffs for supplying R-LNG. It enjoys the first mover advantage in this space with its 10 MMTPA LNG terminal at Dahej and taking advantage of the favorable economics of this industry, the company is planning to double its capacity to 20 MMTPA by end-FY15. It is also expanding its Dahej capacity by 5 MMTPA and setting up a greenfield LNG terminal of 5 MMTPA in Kochi. Commissioning of the Kochi terminal is expected 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 combines to position Petronet as an attractive investment opportunity.

The company 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 n in FY13 and free cash flows to improve from (Rs 3,231.1 mn) in FY12 to (Rs 1,689.7 mn) in FY13.

Our DCF valuation of its existing LNG terminal at Dahej as well as the upcoming Kochi terminal and capacity expansion at Dahej gives us a price target of Rs 220. Higher than expected demand for gas may result in higher marketing margins, which is an upside trigger for the stock.





Written by Fundamental Side

September 5, 2011 at 2:03 pm

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