Buy Petronet LNG; target Rs 203: FinQuest Securities

“Petronet LNG (PLNG), in India's energy security, liquefied natural gas (LNG) remains indispensable. The demand for gas continues to be robust while gas production is likely to remain flat in the medium term, the importance of LNG is only going to increase. Petronet LNG (PLNG) is well poised to cater to the opportunities provided by the widening demand-supply gap of natural gas. We initiate coverage on the stock with a buy rating. India's natural gas demand is likely to grow at a CAGR of 11%-20% while the domestic natural gas supplies are likely to remain flat to declining in the medium term, LNG will hold the key to plug the widening demand-supply deficit. To cater to the increasing demand, PLNG is increasing its regassification capacity from the current 10 mmtpa to more than 25 mmtpa by FY16-17, as the company is increasing its capacity at the Dahej plant coupled with commissioning of the Kochi plant and a 5 mmtpa green-field regassification plant in Gangavaram in Andhra Pradesh.”

“PLNG has signed 7.5 mmtpa long term Supply Purchase Agreement (SPA) with Rasgas, Qatar on take or pay basis and subsequent back to back Gas Sales Purchase Agreement (GSPA) with the GAIL, BPCL and IOC. As per GSPA, the responsibility of volume intake lays with the off takers. Thus, PLNG is effectively shielded from volume risk on the long term contract. Over and above the long term Rasgas contract, the regassification cargoes of GAIL and GSPC coupled with strong demand for spot cargoes ensures strong volume visibility. PLNG has contractual agreement wherein it escalates the regassification margin 5% annually. The company has effectively increased the regassification tariff for the last seven years. Also, the decline in domestic gas production and company's low cost terminal wards off any pressure on the regassification margins. Also, PLNG charges marketing margin on spot cargoes it purchases for customers. For 9M FY12, PLNG has earned marketing margin of ~ Rs. 20-23 per mmbtu on spot cargoes.”

“AT CMP, PLNG is trading at a PE multiple of 10.9x FY13E and 7.7x EV/EBIDTA FY13E. We initiate coverage on PLNG with a Buy rating with a 12-month DCF based target price of Rs 203 per share, implying a potential return of 25.3% from the current levels. We believe, long term LNG tie up, higher than expected marketing margins and Kochi terminal's regassification charges will lead to further upgrades in the stock,” says FinQuest Securities research report.

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