>PETRONET LNG (SWOT ANALYSIS)

Capacity expansion to drive volume growth
Foreseeing huge opportunity with increasing demand-supply mismatch, PLL has chalked out aggressive capex plans to increase its capacity from current 10 MMTPA to ~17.5 MMTPA over the next 3 years with the total capital outlay of ~Rs.54 bn. This would be majorly led by Greenfield expansion at Kochi (5.0 MMTPA – Dec’12) & capacity expansion at Dahej (2.5 MMTPA – FY15) by way of additional jetty. Apart from above, the Company also plans to set-up additional capacity of ~10 MMTPA i.e. 5.0 MMTPA each at Gangavaram & Dahej, taking its total capacity to ~27.5 MMTPA by 2017-18. However considering the long-gestation period, we have not factored in the 10 MTPA expansion in our earnings estimates.


Petronet LNG – ‘Ideally positioned to capture huge opportunity in LNG space’
With increasing gas demand coupled with reducing domestic gas supplies, LNG seems to be the optimal solution to bridge the gap. PLL being the largest established player in the space is well positioned to capture this huge opportunity. Also, Gail being one of its promoters enables the Company to have access to its vast distribution network which not only provides easy access to its clients but also helps in exploring newer markets. Besides, the Company also enjoys the lower capital cost for its Dahej facility compared to current cost of setting up new facilities resulting into lower re-gasification charges which would act as a strong entry barrier for its competitors.


Healthy Balance-sheet coupled with strong operating cash flows provides comfort
Despite huge ongoing capex, the Company has been able to maintain its D/E in comfortable zone (~1x) largely due to its strong operating cash flows, which provides enough room for further leverage. On an average, the Company has been able to generate cash-flows to the tune of ~Rs.7-8 bn every year, which is further likely to improve going ahead. Also the Company has strong return ratios with ROE & ROCE pegged at 34% & 27% respectively. Healthy balance-sheet, strong operating cash-flows coupled with robust return ratios would not only provide better financial stability but would also support huge expansion plan in near future.


OUTLOOK & VALUATION PLL being the largest established player is well placed to capture the huge opportunity in the LNG space which has emerged due to strong domestic gas demand. Aggressive capex plan (10 to 17.5 MMTPA) to meet the increasing gas demand is likely to result in strong volume growth over the next few years. Also strong parental support coupled with capital cost advantage at Dahej provides competitive edge over its peers. Healthy balance-sheet along with strong operating cash-flows not only provides better financial stability but would also support huge expansion plan in future. At the CMP of Rs.147, the stock is quoting at 10.4x and 2.2x its FY14E EPS & BV of Rs.14.1 and Rs.67.6 respectively. Hence, considering the sound business model, huge capacity expansion coupled with strong financials, we maintain our positive outlook on the stock & recommend ‘HOLD’ with a DCF based price target of Rs.167.


To read report in detail: PETRONET LNG
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