PLNG might get additional business form RIL as the government has not allowed the Mukesh Ambani led firm to use the KG basin gas for its own use in the first phase i.e. 40 MMSCMD.
This is as per the gas utilization policy approved by the Empowered Group of Ministers, which have given preference to fertilizers, city gas distribution and power plants. RIL requires gas for its own use at its power and petrochemical plants.
However, it is important to note that post the capacity expansion of PLNG to 10 MMTPA it has already signed up long-term contracts of 7.5 MMTPA and other short-term contracts of 0.5 MMTPA. Thus it has ~20% spare capacity which could be given to RIL.
We note that nothing has been finalized yet by RIL and in best-case scenario it could improve PLNG earnings by ~20% in FY10E.
We would like to wait till we get further details form the management as the crucial part is to find LNG supplier at competitive rates.
At Rs51, the stock trades at fair valuations of 1.7x book value, 8.5x earnings and 6.1x cash earnings based on FY10E.
We continue to remain positive on the long term growth prospects of the company due to rising gas demand, doubling of capacity and robust business model in terms of long term back to back contracts for supply and off take of gas thereby eliminating the risk of being able to sell the gas.
However, due to recent sharp run up in its stock price we recommend investors to look for buying opportunities at lower levels and thus we are downgrading Petronet LNG from Buy to ACCUMULATE with unchanged price target of Rs50.