Petronet LNG Ltd. (PLL) is playing an important role in natural gas dynamics with ~17% of gas supply in FY10. The company boasts of a Sovereign parentage of GAIL, IOCL, ONGC and BPCL, which are also off-takers of its gas. It has 10 mmtpa re-gasification facility in Dahej, Gujarat and supplies to GAIL’s HVJ gas pipeline.

Risk free business model

PLL’s has back-to-back mirror gas sale purchase agreements for LNG which insulates the company from sourcing, off-take and exchange rate risks. Payment structure ensures a short working capital cycle and hence low working capital funding requirement for its growth.

Growth visibility

Growing demand-supply gap for natural gas in India and slow rampup of domestic gas augur well for increasing demand for imported LNG. Even at higher prices, LNG is economical than other competitive liquid fuels like Naphtha and Fuel oil.

Capacity expansion to grab the opportunity

It has doubled its Dahej capacity to 10 mmtpa (7.5 mmtpa-LT agreements) and putting 5 mmtpa re-gasification terminals at Kochi(1.44 mmtpa-LT agreements), partially operational from Q4FY12 and fully by FY15. Management is planning to further increase capacity at Dahej to 12.5 mmtpa.

RISKS

Any negative regulatory cap on re-gasification charges may dent our profitability. Invocation of force majeure from RasGas, the sole supplier or uneconomical prices of LNG might result in lower volumes.

VALUATIONS AND RECOMMENDATION

At the CMP of Rs118, the stock is trading at P/E of 12.0 & 11.5 and EV/EBITDA of 9.0x and 7.6x respectively for FY12 and FY13. We initiate coverage on PLL with a ‘BUY’ recommendation and a price target of Rs143 based on DCF (upside +22%) with a 12 month time horizon.