Shah Investor`s Home (SIHL) has upgraded `Buy` on Petronet LNG with a (Potential Upside 9.6%) price target of Rs 182 as against the current market price (CMP) of Rs 166 in its report dated Feb. 15, 2012. The broking house gave the following rationale:
Robust profitability trend maintained
Q3 FY12 Petronet LNG (Q,N,C,F)* (PLNG) reported net sales and other operating income of Rs 63.3 billion (higher than our exp. Of Rs 61.81billion) up from Rs 53.67 billion QoQ and Rs 36.28 billion YoY. The strong growth in profitability was backed by higher sales volume (up 7.3% QoQ and 21.1% YoY) and higher per unit realisation (up 12.8% QoQ and 56.9% YoY). The EBITDA in the quarter stood at Rs 5.03 billion up by 12.3% QoQ and 45.6% YoY however the EBITDA margin stood at 7.9% down 50bps QoQ and 160bps YoY largely due to incremental sale of high cost spot LNG. The net profit in the quarter stood at Rs 2.95 billion (significantly higher than our exp. of Rs 2.6 billion), up 13.5% QoQ and by 72.9% YoY.
Forex risk on import of LNG passed on to clients
PLNG imports LNG in foreign currency and charges its domestic clients in the same currency, hence the forex risk is been passed onto its client. Further the company has an ECB of USD 150 million; however PLNG has hedged the entire debt and the interest payments. Hence, PLNG does not face any risk due to currency movements.
Robust growth in volume backed by high capacity utilization
In Q3 FY12 the company has done a total of 45 cargoes (Vs. 42 cargoes in Q2 FY12), of which 29 were long term, 9 were spot and 7 were re-gas for GAIL/GSPL which implies a capacity utilization of 115% Vs 106% QoQ on annualized basis. The robust demand for natural gas in India and efficiency of the management lead to the high operating efficiency. The management guided 110% capacity utilization of the Dahej terminal in FY13.
Capacity expansion well on track
The capacity expansion of Dahej terminal from 10MTPA to 15MTPA is well on track and will be operational by 2015. The company has contracted 2.5MTPA of natural gas off take with GAIL and 1MTPA with GSPC for its new terminal at Dahej. The new Greenfield 5MTPA Kochi terminal is expected to be operational by Dec 2012.
Finalised a Greenfield 5MTPA LNG re-gasification terminal at AP
The company has finalised to set up its third Greenfield 5MTPA LNG regasification terminal on the eastern coast of India at Gangavaram port in Andhra Pradesh. Management expects to complete the feasibility study for the terminal by April 2012 and expected the port to commission operation by 2015-16.
Management does not expect a cap on marketing margins
Recently the petroleum ministry has asked PNGRB, the gas regulatory body, to review the marketing margins charged by the gas marketers in India. However, the management expects that with the risk associated with import of LNG on spot rate and short term contracts, the marketing margins for imported gas may not be regulated.
Valuation & Outlook
With the robust demand for natural gas in India and no visibility of ramping up in KG-D6 output we expect PLNG to maintain 110% utilization levels in FY13 and achieve reasonable off take from its new LNG terminals.At CMP the stock is trading at PE multiple of 11.9x its FY13E EPS of Rs.14 (Upgraded from Rs 13.5 earlier). We value the stock at 13x its FY13E EPS of Rs.14 and revise our target price to Rs 182, up from Rs.176 earlier. We upgrade the stock to BUY (from HOLD) with an investment horizon of 12 months and upside potential of 9.6%.
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