India has been a gas starved country for long. The situation has only worsened with 1) declining production at RILâ€™s KG-D6 field, 2) natural decline at ONGCâ€™s high profile fields and 3) robust increase in demand. In such a scenario, LNG imports have partly met the supply deficit and Petronet LNG, countryâ€™s largest importer has been the biggest beneficiary of this. Demand for LNG is expected to remain strong in the country given 1) shortage of power supply, 2) our expectations of a fall in LNG prices on the back of rising global supply and weakening Japanese demand and 3) muted ramp up expected in domestic gas production.
To leverage on this Petronet has embarked on an expansion program whereby 1) it is commencing its new terminal at Kochi with a capacity of 5mtpa in FY14, 2) its expanding capacity at Dahej in two phases a) expansion of marine facilities by end of FY14 and b) increase in regasification and storage capacities by latter half of FY16, 3) new terminal on the east coast at Gangavaram by FY17. Eventually, the company will have a capacity of 25mtpa by end of FY17E as compared to 10mtpa currently.
We like Petronet due to its robust business model wherein it passes any fluctuations in currency and LNG to its customers, thereby protecting its earnings in a gyrating global LNG market. Furthermore, with substantial volumes being locked in through long term contracts with suppliers and consumers, revenue visibility is robust. On the customer side, it has offtake agreements with GAIL, IOC and BPCL. It charges a fixed re-gasification margin (which rise 5% per annum) on the volumes handled and thereby operates in an annuity like business model.
Given the robust business model and expansion of capacity, we expect Petronet to report revenue CAGR of 26% over FY12-14E. Further, with limited threat to re-gasification margins, earnings visibility is also robust. Notably, Petronet RoEâ€™s have sustained above 20% for the last 5 years. With regulatory risks also limited, we maintain our BUY recommendation with a price target of Rs187.
|Y/e 31 Mar (Rs m)||FY12||FY13E||FY14E||FY15E|
|yoy growth (%)||72.0||28.4||24.0||32.6|
|yoy growth (%)||70.6||11.0||(2.3)||29.4|
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