Buy Petronet LNG Ltd For Target Rs.266 - HDFC Securities
Petronet LNG Ltd., India’s biggest liquefied natural gas infrastructure company, will adopt a three-phase strategy to expand its footprint in the country after the Government of India last month allowed marketing and distribution of LNG by any player. As part of its strategy, Petronet LNG (PLL) plans to install 1,350 LNG filling stations across major national highways in India. PLL plans to set up 50 small scale LNG stations on 5 highways over the next 2-3 years (under Phase-I). It has entered into a MoU with Gujarat Gas to set up 5 stations on the DelhiMumbai highway; IGL will put up 3 stations (total 8 stations on that highway). Another MoU has been signed with IOC for setting up 5 LNG stations in southern India. The company would target 300 stations in Phase-II by 2025 and ~1,000 stations pan India in Phase-III.
PLL’s utilisation levels at Dahej have rebounded to ~103 per cent since June, implying a better earnings outlook from Q2FY21. The demand outlook is robust, especially from the power sector, as LNG prices remain attractive given benign oil prices. Company's volumes are expected to increase further with commissioning of Kochi pipeline post lockdown and further expansion of Dahej facility. Company is likely to expand capacity (by ~2mmtpa) through the addition of storage tanks and a jetty at Dahej terminal by FY23E.
PLL’s earnings visibility remains healthy backed by long-term contracts and expected volume ramp-up at Kochi terminal for the long term. As per the management, Kochi-Mangalore pipeline was expected to be commissioned by Aug end, (earlier it was planned to commission by June 2020 - delayed due to issues in Chandragiri river and Covid lockdown). Post commissioning of this pipeline, we expect significant rampup in utilizations of Kochi terminal from current Q1FY21- 14% to 29% in FY22E and 39% in FY23E. Going forward, we expect PLL’s overall volumes to grow by 7% CAGR over FY20-22E which would be majorly driven by Kochi terminal where volumes are likely to grow by 38% CAGR for the same period.
Valuations and Recommendations:
India is continuing to see a reduction of natural gas supply and rise in demand over the recent past; PLL will be one of the leading beneficiaries as the primary play on increasing usage of LNG. Volumes were impacted during the lockdown, currently Dahej terminal is operating at full capacity. On the new project front, the management indicated the company is planning to set up an import terminal on the east coast. Also, once again PLL’s deal with Tellurian to buy a stake and import LNG has been reinitiated and is under negotiation.
PLL could continue to benefit from healthy demand outlook for LNG due to a widening natural gas deficit and agreements (on either ‘take or pay’ or “use or pay” basis) for most of the capacities signed with strong counterparties. PLL is expected to do well owing to large scale of operations coupled with robust operating profitability, healthy cash generation, healthy debt protection metrics and large cash balance. We remain optimistic on its revenue and profitability trajectory as well as cost rationalisation efforts going forward. Its prudent capital allocation policy (PLL’s strategy of seeking long-term commitments along with 16% IRR threshold), and limited risks to revenues, tariffs and earnings and its stated objective of improving the dividend payout at ~70% (till final decisions are taken on large investments decisions) stand out in its favour. We feel the Base case fair value of the stock is Rs. 246 (12.0xFY22E EPS) and the Bull case fair value is Rs. 266 (13.0xFY22E EPS). Investors can buy the stock at LTP and add on dips to Rs. 203-205 band (10.0xFY22E EPS).
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