Broker's call: Petronet LNG (Buy)

CMP: ₹235.9

Target: ₹263

India’s LNG imports, which clocked 11 per cent CAGR over FY14-18, have slowed down to 4 per cent over FY18-19TD. However, completion of Kochi-Mangalore pipeline and new re-gas capacity and lower spot prices could lead to higher LNG imports. Petronet LNG (PLNG), whose Dahej brownfield expansion (from 15 to 17.5 mmtpa) is on track to be commissioned by June 2019 and Kochi-Mangalore pipeline is expected to be completed by May 2019, could witness higher utilisation at Kochi terminal to 24 per cent with volume growth of 135 per cent y-o-y in FY20E from 12 per cent utilisation in FY18. In FY20, every 4 per cent rise in Kochi utilisation or volume growth of 10TBTU will lead to ₹6 rise in target price of PLNG and drive EPS by 2.4 per cent. The CGD companies could also benefit from lower LNG prices.

Outlook & valuation: We use DCF valuation for PLNG. Using WACC of 12 per cent and zero terminal growth rate, we arrive at an EV of ₹39,300 crore (about $5.6 billion). After deducting net debt of -₹130 crore, we reiterate our target price of ₹263 with ‘buy’ recommendation.

At DPS of ₹5.5/share, stock will yield about 3 per cent dividend in FY20E. We expect PLNG to witness a strong FCF generation of ₹4,200 crore over FY19-FY21. At CMP, the stock trades at 14x on FY20E EPS, which is discount to its long-term average of 15x. We expect incremental volume growth to drive stock re-rating. High earnings visibility and healthy RoE of 20 per cent are the strong positives, in our view.

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