Maintain ‘buy’ on Petronet with a fair value of Rs 310

We interacted with the management of Petronet LNG (PLNG) on aspects such as the current business status and outlook. In addition, we had a detailed discussion on the various prospects for business diversification in the recently published FY21 Annual Report.

The management highlighted that spot prices have risen to abnormal levels of $24–25/mmbtu (i.e., 2x that of long-term contracts) on account of huge demand from China, Japan, and Europe. This has resulted in lower spot cargo orders being placed over the last few months. The company expects spot LNG prices to normalise over the next five-six months. That said, PLNG has tied-up contracts of 16.75 mmtpa (i.e., 95% of the nameplate capacity of 17.5 mmtpa in Dahej), which are cushioning its utilization rates.

The company’s return profile remains strong, with ROE/ROCE at 25–26%/21–23% over FY21–24E. We maintain ‘buy’. As highlighted in its annual report, the company is embarking on a major diversification journey, which we discussed with the management today.

PLNG is exploring an opportunity to set up an ethane/propane import facility at the Dahej terminal – on the back of probable demand from OPAL and GAIL (at the PATA plant). The company has also planned a small petrochemical unit, which would be based on imported propane. The management highlighted that the feasibility study for the aforementioned two projects is to be carried out, along with the probable IRR of the projects.

The company is further evaluating opportunities in harnessing cold energy from the Dahej and Kochi LNG terminals, thus maximising the potential of the regasification terminals and improving energy efficiency.

Kochi LNG terminal’s utilization rate is expected to rise to 30–35% over the next two to three years; tariffs would be negotiated once utilization is ramped up to 45–50%. The stock trades at 9.2x FY23E EPS of Rs 23.3 and 5.3x FY23E EV/Ebitda. We value PLNG on DCF to arrive at a fair value of Rs 310.