We recently spoke with the management of Petronet LNG (PLNG) to understand the current LNG scenario and are positive about its growth prospects.
The company is in final stages of expanding the Dahej facility to 10 mmtpa. It has already tied up LNG supplies of 7.5 mmtpa from October 2009 (currently ~6.5 mmtpa).
Despite supply of K.G. basin gas by Reliance Industries, we expect India to be short of 89 MMSCMD of gas by the year 2012. This may be met out of LNG thereby giving comfort to the business model of PLNG.
The third largest reserves of gas are in Qatar, world’s largest producer of LNG is looking to increase its total LNG capacity from 31 mmtpa to 77.5 mmtpa of LNG exports by 2010. This would help PLNG to procure further LNG from Qatar going forward.
In FY10E, we expect the company to sell 8 mmtpa of re-gasified LNG as against 6.5 mmtpa in FY09E thereby recording 23.1% volume growth on y-o-y basis. It has firm contracts for 6.5 mmtpa till September 2009. After that it has firm contract for 7.5 mmtpa.
Currently it sells ~1.5 mmtpa to RGPPL, however this contract would expire in September 2009. After this, RGPPL would use cheaper Reliance gas as it has been given priority by Empowered Group of Ministers.
However, the company is already in advanced stages of negotiation for supplying 1.65 mmtpa of RLNG to Pragati power plant at Delhi form December 2009.
We expect net sales of Rs111.8 billion (up 31.7%), EBIDTA margins of 8.4% (as against 9%) and PAT of Rs4.5 billion (down 6.3%). Accordingly we expect PLNG to report EPS of Rs6 and CEPS of Rs8.3 in FY10E.
On the basis of our estimates, the stock at current market price of Rs34 is trading at 5.1x EV/EBIDTA, 5.7x P/E and 4.1x P/CEPS on the basis of FY10E earning estimates.
We have also done a one-year forward rolling band analysis, which revealed that currently the stock is trading at the lower end of the band of 5x-20x one-year forward earning estimates. This makes it attractive at current levels.
Thus we upgrade the stock to BUY with price target of Rs.50 (~47% upside potential).