>Petronet LNG (PINC RESEARCH)

Petronet LNG Ltd. (PLL) accounts for 23% of natural gas supply of India and boasts of a Sovereign parentage of GAIL, IOCL, ONGC and BPCL. Considered as an Indian pioneer in import distribution, it regasifies ~6.5 mn mtpa of imported LNG from its facility in Dahej, Gujarat and is a major supplier to GAIL’s HVJ gas pipeline.

Unique business model
PLL’s business model of back to back gas sale purchase agreements insulates the company from sourcing, offtake and exchange rate risks. With the virtue of a short working capital cycle, the company does not require any working capital funding for its growth.

Earnings growth visibility
PLL has growth visibility through its long term sale-purchase agreements and matching offtake agreements with GAIL, IOCL and BPCL, thereby ensuring supply and a ready customer base, which should enable it to register an earnings growth at a CAGR of 14% over next 3 years. As energy consumption is not expected to ebb in the foreseeable time, PLL offers high safety of earnings in these challenging times.

Capacity expansion
It would double its Dahej capacity in Apr’09 to 10 mn mtpa and another 5 mn mtpa terminal, which is under construction in Kochi, should be on stream by H2FY12.

RISKS
* Invocation of force majeure clause by the LNG supplier might result in lower volumes sold by PLL.

* Even though the capacity expansion at Dahej has been completed, PLL has not yet fully tied up with long term supply contracts for the new capacity. An unforeseen spot purchase might impact the profitability.

VALUATIONS
The capacity expansions at Dahej should enable PLL volume growth by 13% in FY10 to 7.4 mn mt and 24% in FY11 to 9.2 mn mt garnering scale in earnings. Hence we initiate coverage on the stock with a ‘BUY’ recommendation and a price target of Rs66 on a 24 month investment perspective.

To see full report: PETRONET LNG