Buy Petronet LNG CMP: Rs 61 With a Target: Rs 73

(BSE: 532522 | NSE: PETRONET | ISIN: INE347G01014)

Higher spot cargo volumes continue to drive growth : Petronet LNG (PLL) clocked strong results for Q1FY08 led by higher spot cargo volume sales. Price realisations also improved, but at a slower-than-expected pace, translating into revenues of Rs 15.5bn as against our estimate of Rs 16.8bn. However, higher other income and a reduction in interest expenses brought net profit in line with our estimates at Rs 1.1bn. PLL’s 5% escalation clause in re-gasification charges expanded the EBITDA margin by 67bps YoY to 14%. We expect the company to double its spot cargo imports from 12 to 24 in FY08. Another growth driver will be the commencement of operations at its Dahej terminal in Q4FY08. We maintain our Buy rating with a target price of Rs 73.

Result highlights : Higher spot cargo volumes support 52% YoY topline growth PLL’s net sales increased 52% YoY to Rs 15.5bn in Q1FY08 led by higher spot cargo volumes and improved price realisations. De-bottlenecking initiatives and efficient equipment utilisation have enabled the company to raise production capacity at its Dahej terminal from 5mmtpa to 6.5mmtpa. During the quarter, PLL sold 78.6tbtu of LNG, up 18.5% YoY from 66.4tbtu in Q1FY07, achieving 130% capacity utilisation. The company processed 4.5 spot cargo loads during the quarter. We expect the procurement of spot cargo to double to 24 in FY08 compared to 12 in FY07, which will continue propelling PLL’s growth

Improvement in EBITDA margins… The company recorded a 59% YoY rise in operating profit to Rs 2.2bn in Q1FY08
supported by a 67bps expansion in EBITDA margin to 14% during the quarter. The margin growth was primarily because of higher spot volumes which attract better rates than contracted cargo. PLL’s average selling price rose to Rs 197.3/mmbtu (US$ 4.97) in Q1FY08 compared to Rs 152.3/mmbtu in Q1FY07.

…aided by 5% escalation clause PLL sells LNG at a price which includes the LNG purchase price, shipping costs, exchange rate fluctuations and re-gasification charges. Re-gasification charges are based on an index of Rs 23.7/mmbtu in January 2004 with a clause for 5% escalation every year. PLL’s regasification charges stood at Rs 27.4/mmbtu in Q1FY08 compared to Rs 26.1/mmbtu in the year-ago quarter. Going forward, we expect the escalation clause to sustain margin expansion

Near doubling of net profit in Q1FY08 The company’s net profit increased a healthy 92.6% YoY to Rs 1.1bn on the back of the strong operating performance as well as higher other income and lower interest expenses. Other income rose 119% YoY to Rs 115.9mn in Q1FY08 compared to Rs 52.9mn in Q1FY07, due to higher return from investments. PLL’s interest cost declined 3.6% YoY to Rs 256.7mn in Q1FY08, giving a boost to the bottomline. Consequently, EPS increased to Rs 1.4 in Q1FY08 compared to Rs 0.8 in Q1FY07.

Business update Expansion of Dahej terminal on schedule The company is expanding its Dahej terminal re-gasification capacity to 12.5mmtpa from 5mmtpa at a capex of Rs 16bn. The fresh capacity is scheduled to come online from Q4FY09. The company has stated that the expansion plan is progressing as scheduled.

New Kochi terminal underway PLL is also setting up a 5mmtpa LNG re-gasification terminal at Kochi at a total investment of Rs 26bn, of which 70% will be met through debt and 30% through equity. However, the need for deeper pile work because of unstable soil and the rising price of nickel to be used for the storage tanks may push the project cost up by Rs 4bn. The company expects production to start from Q4FY11. PLL has tied up debt of US$ 250mn during the quarter for funding this terminal and expects to obtain US$ 150mn from Asian Development Bank (ADB) shortly.

Long-term contract to assure uninterrupted supply PLL is likely to enter into a 25-year sales purchase agreement (SPA) with Gorgon Project , Australia , in Q2FY08 to secure the supply of 2.5mmtpa of LNG for its Kochi terminal. In addition, the company has signed a term contract with RasGas of Qatar for the supply of approximately 1.25mn tonnes of LNG (for sale to the Dabhol power plant), apart from its regular 5mmtpa of LNG supply from RasGas. Realisations to strengthen PLL expects to deliver LNG at US$ 5.75/mmbtu to all its consumers in the country. The company has arrived at this price after factoring in the possibility of gas finds by Reliance Industries from the Krishna Godavari basin. Valuation

Maintain Buy with target of Rs 73 At the current price the company is trading at P/E multiples of 9.9x on FY08E and 9.2x on FY09E. The stock has historically traded at a P/E of 12x one-year forward earnings. We expect the company to continue to post strong results going forward, on the back of higher re-gasification charges and increased spot volumes. We maintain our Buy rating with the target price of Rs 73.

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