Recent corporate tax benefit behind ~12% rise in EPS for FY20/21e; \ TP raised to Rs 336 from Rs 305; ‘Buy’ maintained.
Petronet LNG (PLNG) arranged a conference call to allay investor concerns about the recently signed MoU with Tellurian, US. PLNG signed a non-binding agreement with Tellurian in the US on 21st Sep’19, which envisages an LNG purchase contract of up to 5mmt. Phase-I (16.6mmt) of the project is expected to be complete by 2023, and PLNG might invest ~$2.5 bn for ~18% stake in the project. The contract is on behalf of PLNG or its affiliates, which can directly participate in equity investment too.
The company reiterated that it would enter into a definitive contract only if it gets back-to-back customers, either from its promoters or other buyers. In the absence of any participation from the affiliates, PLNG might contract for 1- 2mmt of LNG and limit its investment to ~$0.5-1.0 bn (company has cash of ~$0.5 bn as of end-FY19).
The Tellurian liquefaction project at Lake Charles in the US will source gas from the Permian basin, where the wellhead cost of gas is currently at $0.25/mmbtu. Assuming sourcing of gas at $1/mmbtu, along with pipeline, liquefaction and other costs at $1.5-1.8/mmbtu, the landed price in India would be no more than $5.5-6.0/mmbtu. This would be quite economical compared with oil-linked contracts even if oil falls to $50-55/bbl. The contract with Tellurian would also assist PLNG with expiry of its LT RasGas contract in 2028.
India’s gas consumption story
PLNG expects Tellurian gas landed price in India to be under $6/mmtbu. This would facilitate certainty to power consumers, aiding stranded gas-based power plants. PLNG is also planning to retail its own gas with recent MoUs with GUJGA and IGL to set up LNG gas dispensers in their respective GAs. Also, the company is in talks to set up ~10-20 LNG gas dispensers at OMCs’ retail outlets.
Valuation and view
Higher gas adoption from industries and the power sector will likely support volume growth for PLNG. We believe that due to the Kochi-Mangalore pipeline and Dahej expansion, PLNG’s total volume could grow by ~9/7% in FY20/21. We expect Ebitda growth of ~27%/16% in FY20/21. Cash utilisation for the company has been a challenge, though we expect the dividend payout to remain strong. We factor in the recent corporate tax benefit announced by the government, which leads to EPS change of ~12% for FY20/21. As a result, we revise our TP from earlier Rs 305 to Rs 336. The stock trades at 11.0x FY21 EPS of Rs 21.4 and 7.1x FY21 EV/Ebitda. We value the stock using DCF. We reiterate PLNG as our top pick in the sector with an upside of ~33% to the current market price.