Buy Petronet LNG; target Rs 209: LKP

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Buy Petronet LNG; target Rs 209: LKP

LKP is bullish on Petronet LNG and has recommended buy rating on the stock with a target price of Rs 209 in its January 27, 2012 research report.

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LKP is bullish on Petronet LNG and has recommended buy rating on the stock with a target price of Rs 209 in its January 27, 2012 research report.

"Petronet LNG's Q3 FY12 results beat our expectations due to all-time high capacity utilization of 114% (our estimate: 105%) and was reinforced by marketing margin (implied) of ~Rs 58/mmBtu (our estimate: Rs 28/mmBtu). The company continues to utilize its Dahej terminal to the maximum with sales of 144.9 tbtu, 8.3% ahead of our expectation of 133.9 tbtu. Thus, capacity utilization stood at 114% during Q3 FY12, as against 106% in Q2 FY12. We raise our FY12 capacity utilization estimate to 109% driven by the persistent demand-supply gap of natural gas in India. Strong demand for natural gas has enabled Petronet to earn marketing margin of Rs 58.2/mmBtu on spot cargoes, which was much above our expectation of Rs 27.8/mmBtu. Notably, such a high margin was earned on spot LNG which was priced around $ 14-16/mmBtu during Q3 FY12. We expect the company to continue to earn healthy marketing margins in the near term."

"Total revenue came in at Rs 63,302.6 mn, 17% ahead of our estimates led by higher capacity utilization and high marketing margins. Sales increased 74.5% yo-y on account of sales volumes increasing by 21.1% & blended regas margins higher by 39%. The q-o-q jump of 18% in revenue reflects higher marketing margin of Rs 58.2/mmBtu earned during Q3 FY12, compared to Rs 37.1/mmBtu in Q2 FY12. Q3 FY12 EBITDA stood at Rs 5,572.5 mn, 24.5% ahead of our expectation, driven by higher than expected marketing margin. OPM stood at 8.8%, higher than our estimate of 8.3%, but lower than Q2 FY12 OPM of 9.3%. While depreciation was flat y-o-y & q-o-q at Rs 462.9 mn, interest expense was Rs 344.7 mn which was 24.8% lower q-o-q due to prepayment of debt of Rs 5,000 mn. The steep depreciation of the rupee has necessitated (as per accounting rules) entry of a notional forex loss of Rs 540 mn on the books. Consequently, Q3 FY12 PAT stood at Rs 2,953.9 mn, up 72.9% y-o-y & 13.5% q-oq. EPS for the quarter was Rs 3.9 compared to Rs 3.5 in Q2 FY12."

"The management has indicated that it has not seen high LNG prices acting as a deterrent to demand. Moreover, it does not see customers switching back to liquid fuels once they have started using gas. The company is confident of optimal performance as a result of the huge shortage of gas in the country. We raise our FY12 sales estimate to 10.9 MMT, translating into annualized capacity utilization of 109% (9M FY12 capacity utilization stands at 108%). Hence, our FY12 EPS estimate goes up from Rs 12.4 to Rs 14.2. With the commissioning of the Kochi terminal in FY13, capex requirements of the company are expected to reduce going forward, enabling Petronet LNG to turn free cash flow positive in FY14E. We reiterate BUY with a target price of Rs 209, which translates into a hefty upside of 27.3%," says LKP research report.

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To read the full report click on the attachment