Published on 10/01/2018 3:34:38 PM | Source: Kotak Securities Ltd

Buy Petronet LNG Ltd For Target Rs.285.00 - Kotak Sec

Posted in | #Kotak Securities Ltd #Petronet LNG Ltd #Oil and Gas Sector #Broking Firm Views Report


* We believe Petronet's earnings will continue to rise over the next 2-3 years, driven by higher volumes from Dahej LNG regasification terminal and a higher operating rate of the currently stranded Kochi terminal. Construction of the pipeline to evacuate gas from Kochi is progressing well.

* The company is further in the process of expanding capacity of the Dahej LNG terminal from 15 MMTPA to 17.5MMTPA. The expansion is likely to be commissioned in 1QFY19. This will help in meeting the rising domestic gas demand. Recently, it has expanded Dahej capacity by 50% to 15 MMTPA and the same is contracted more than 90% of its capacity giving decent revenue visibility.

* We have introduced FY20E earnings in this note. We expect PLNG’s earnings to grow at a CAGR of 15% over the next three years driven by a volume growth, benefiting from contractual commitments of 17.2 mn tons and commissioning of Kochi-Mangalore pipeline. We expect PLNG to report an EPS of Rs.14.1 for FY18E, an EPS of Rs.15 for FY19E and an EPS of Rs.17.5 for FY20E. We expect FY18E to be driven by acceleration in volume growth, supported by expansion. At CMP, we believe that the stock is reasonably valued at 14.3x FY20E earnings. We maintain BUY on the stock with a price target of Rs.285/- including equity value of 26% stake in Dahej Port. Given that most of the capacity at Dahej is tied-up, there is strong visibility on the free cash flow yield.

* On the other hand, Kochi terminal is operating at sub-optimal utilization given lack of pipeline infrastructure. Management expects quarterly uptick (marginal) in volumes till the Mangalore Kochi pipeline is commissioned and the same is expected by Dec’18. We believe this will significantly ramp-up RLNG volume. GAIL is working on getting approvals for the pipeline and clarity on the pipeline can potentially add to valuations of PLNG.

Key Risks and Concerns

We believe the key risk to our valuation are as follows:

* Geo-political risk: Any gas supply disruption from Qatar can have meaningful impact on the earnings. Though current situation is under control.

* Availability of LNG at reasonable prices on a long term basis has remained a key worry.

* Regulatory risk: Any capping of margins by PNGRB will negatively impact its earnings and growth. However, management has indicated that imported LNG does not fall under the preview of PNGRB.

* Project execution risk.

Valuation & Recommendation

We have introduced FY20E earnings in this note. We expect PLNG’s earnings to grow at a CAGR of 15% over the next three years driven by a volume growth, benefiting from contractual commitments of 17.2 mn tons and commissioning of Kochi-Mangalore pipeline. We expect PLNG to report an EPS of Rs.14.1 for FY18E, an EPS of Rs.15 for FY19E and an EPS of Rs.17.5 for FY19E. We expect FY18E to be driven by acceleration in volume growth, supported by expansion. At CMP, we believe that the stock is reasonably valued at 14.5x FY20E earnings. We maintain BUY on the stock with a price target of Rs.285/- including equity value of 26% stake in Dahej Port. Given that most of the capacity at Dahej is tied-up, there is strong visibility on the free cash flow yield.

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