Citi sees 22% upside in Petronet on likely stake buy in Mundra LNG terminal

According to the research firm, this acquisition also could provide a new avenue of growth (beyond the ongoing phase II of Dahej capacity expansion to 17.5 MMTPA); and could improve pricing power given concerns of rising competition.

Assuming Petronet were to buy its stake at book, Citi estimated that the investment could generate a pre-tax return on invested capital of 8-12 percent at a capacity utilisation of 50-60 percent and a regas tariff of USD 0.85-0.9/mmbtu.

The brokerage house, however, sees some uncertainties such as the terminal so far has no agreements in place for either LNG supply or offtake; and limited experience of the other stakeholders in operating LNG terminals.

While expecting the stock to hit a target price of Rs 541, implying 22 percent upside, Citi said its solid volume visibility and undemanding valuations make it preferred gas pick, followed by Indraprastha Gas, Gujarat Gas and Gujarat State Petronet.

According to Citi, the company remains relatively immune to India's broader LNG demand outlook (risks have been transferred to the offtakers) and rising competition from new upcoming regas terminals.

"The worst of Kochi also seems to be behind us, with 75 percent of GAIL's Kochi-Mangalore pipeline under construction, which could boost utilisations from FY20," it said.

Posted by Sandip Das