Petronet LNG - Blazing growth visibility
By Sunil Damania |
8/1/2011 9:31 AM Monday
Petronet LNG, promoted by four PSUs – GAIL, ONGC, BPCL and IOC, each holding an equal stake totaling to 50% – has been constantly improving its financial performance. This is exemplified in its June quarter performance as well. For the year ended March 2011, the company reported a net profit of Rs 620 cr. Its market cap stands at Rs 13200 cr, all of which translates into a P/E ratio of 21x. Petronet is more like a utility company, and thus we are not very upbeat about the rich valuation that it enjoys.
However, what excites us about the company is that it has great potential, with strong earnings growth visibility. Our confidence in recommending the stock comes from this fact. The scrip has outperformed expectations in the year 2011, with a year-to-date appreciation of 39%. Also, FIIs have turned bullish on this counter, and have been increasing their stake in the company every quarter. At the end of the June quarter, FIIs held 12.37% of the equity, as against 8.52% at the end of June 2010. The total institutional holding in the company stood at 21.56% as of June 2011, against 15.72% in the previous year same period.
Petronet LNG has a simple business model. It imports LNG from Qatar and sells re-gasified gas to its customers. The company operates through its Dahej Jetty in Gujarat, and has a present capacity of 10 mmtpa. It has two revenue streams, of which one is through long term contracts and the second is through the spot market.
With regard to long term contracts, Petronet has tied up with Rasgas of Qatar for supply of 7.5 mmtpa of LNG, which is being lifted by its promoters GAIL, BPCL and IOC. Here every cost is passed through, and hence the company makes money mainly on re-gasification charges. It does not bear or benefit from any fluctuation in the prices of LNG. Hence, this side of the business is more or less stable.
But the real challenge and excitement is in the spot business, where the company has no long term tie-ups on either buying or selling of LNG. This is where it has been able to create an alpha and, in turn, improve its profitability. Last year, it sold a total of 440.35 thousand British Thermal Units (BTU) of re-gasified LNG. Our estimate is that it is likely to sell approximately 475 thousand BTU this year, which is 10% higher than what it sold last year.
Another growth driver is that the company normally increases its re-gasification charges by five% every year. The last price revision was brought into effect in January 2011. We expect that the company will report at least 21% growth in its top line for the current year, with EBITDA in the region of 9.40%. This gives an estimated sales figure of Rs 16000-16100 cr and a net profit in the region of Rs 820 cr.
With no equity dilution expected in the next one year, the forward P/E works out to be 16x. A future growth driver for the company would be its Kochi LNG facility, with a capacity of 5 mmtpa. Petronet LNG is also putting up a second LNG Jetty at Dahej, which would help it to improve its throughput by 2-3 mmtpa. This jetty would be ready by the third quarter of 2013. We are expecting this scrip to hold its ground during volatile times, and it could probably go up to Rs 220 in the next one year.
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