Buy Petronet LNG with target of Rs 66: ASK-Raymond

Broking house, ASK-Raymond James is bullish on Petronet LNG. It has recommended buy rating on the stock with a target price of Rs 66.

The ASK-Raymond James report on Petronet LNG:

Investment positives

25-year sales/purchase agreement

?Petronet LNG, PLL is operating a low-risk business model with its sales and purchase of gas being secured through long term contracts and the cost of procuring gas (including shipping costs) being completely passed on to its offtakers.?

Attractive macro outlook

?The dynamics in the domestic gas industry is changing with users willing to pay market rates for gas, considering the inherent economical and environmental advantages of gas over conventional fuels. PLL, operating India's largest re-gasifying terminal (5 mmtpa), would be a key beneficiary of this buoyant demand outlook.?

Spot cargos to drive profitability

?PLL has recently received three spot cargos (3.8% of FY06 volumes) in June and July this year. These spot cargos are in addition to the current capacity of PLL, and contribute directly to its earnings, as there is no additional cost involved. We expect around 8 cargos (10% of FY06 volumes) to arrive at the Dahej terminal in FY07 and around 10-12 cargos every year after that.?

Investment concerns

Margin pressures going forward

?PLL's 25-year gas purchase agreement with RasGas for 7.5 mmtpa of gas was signed at a rate that is much lower than the current prevailing market rates. Going forward, as PLL's capacity expands, we believe that it will be difficult for the company to source gas for incremental capacity at attractive rates, making margin pressures inevitable from FY09 onwards.?

Financials and valuations

19.5% CAGR in earnings

?At the CMP of Rs 48, PLL is attractively valued at 12.5x our FY08E EPS of Rs 3.8 and 10.8x our FY09E EPS of Rs 4.4. We expect PLL's revenues to grow at CAGR of 15.5% over FY06-09 and PAT to grow at a CAGR of 19.5% over the same period.?

Attractive valuations

?The company provides good upside over the long term considering that it would be operating at double the current capacity in FY09 and at 3x its current capacity in FY11. We have arrived at our DCF based price target of Rs 66 based on a WACC of 11.1% and a terminal growth rate of 2%. We recommend a Buy.?

Source:, New Delhi, August 30, 2006
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