Emkay Research has upgraded its recommendation on Petronet LNG (PLNG) to BUY from Add, raising its target price by 16% to Rs 425 per share. The outlook remains positive due to strong fundamentals, including attractive valuations and steady operational performance. Despite some concerns over long-term tariff adjustments, management reassures that any changes will be minor. Investors are advised to capitalize on the stock’s growth potential as PLNG is well-positioned for future expansion and profitability.

Key Highlights

Target Price and Upside

Target Price (Rs): 425
Current Market Price (01-Oct-24): Rs 344.1
Upside Potential: 23.4%

Operational Performance

Dahej Terminal Utilization

Q1FY25 saw >110% utilization at the Dahej terminal, driven by power sector demand.
For the remainder of FY25, Dahej is expected to operate at close to 100% capacity, solidifying a full-year run-rate of >100%.
Kochi Terminal Growth

Kochi’s performance is set to improve as demand from Mangalore customers ramps up, further boosting utilization.
ExxonMobil’s second contract (1.2mmtpa) will commence in FY26, contributing significantly to Kochi volumes.

Financial Outlook

Revenue and Profit Growth

Revenue Projections: Rs 552,408 million for FY25E, increasing to Rs 653,910 million by FY27E.
EBITDA: Expected to grow by 8.6% in FY25E and further expand by 10.3% in FY26E and 8.7% in FY27E.
EPS Growth: Revised upwards by 7% for FY26E and 9% for FY27E, as Exxon volumes and higher Kochi tariffs are realized.
Return Ratios

RoE: Projected at 23.8% for FY25E, decreasing slightly to 21.1% in FY27E.
RoIC: Expected to reach a high of 36.7% in FY25E before tapering to 30.7% in FY27E.

Risks and Concerns

Tariff Adjustments

While concerns persist over tariff adjustments at Dahej after the QatarGas contract renewal in CY28, PLNG’s management has assured that any revisions will be minimal, safeguarding minority shareholder interests.
Offtakers, including promoters, are pushing for downward tariff revisions, but the overall impact is expected to be limited.

Valuation and Recommendation

Conservative Assumptions, Solid Valuation

Despite factoring in a potential 10% tariff cut at Kochi and Dahej terminals by FY27 and FY29, respectively, Emkay sees value in PLNG’s stock under conservative assumptions.
The stock is now valued at 15x Sep-26E EPS, shifting from a DCF-based valuation to better reflect medium-term earnings potential.
The 12-month target price of Rs 425 reflects a 23.4% upside from the current market price.

Investment Thesis

With strong operational performance, solid financial projections, and manageable risks, Petronet LNG presents an attractive investment opportunity. Long-term contracts and capacity expansions at Dahej and Kochi provide stable revenue streams, while conservative tariff assumptions ensure a healthy margin of safety. Investors are encouraged to BUY at current levels, capitalizing on both near-term and long-term growth triggers.