Upgraded Petronet LNG to ‘hold on’ – Target Price hiked to Rs.171

 Petronet LNG has been upgraded to ‘hold’ from the earlier ‘reduce’ recommendation and the target price has also been hiked to Rs.171 over one year. In the earlier ‘reduce’ recommendation, the price was expected to drop to Rs.115 level.

 The upgrade is after the robust performance of the company in the last two quarters, beating consensus profit estimates of the market with better than expected profit margin at 20%.

 Responding to positive surprises, the stock has outperformed the market by about 20% in the last six months.

 Earlier, it was assumed that the utilization level of Dahej plant would peak at 100% and the average blended reras margin was expected at USD 0.73 / mmbtu (Million Metric British Thermal Unit).

 As against this, the company achieved utilization level of 120% in June 2011 with a marketing margin of USD1/ mmbtu. Earnings have been revised accordingly.

 Demand for spot LNG is expected to remain strong owing to better economics compared to liquid fuel. Further, expected shortfall in RIL’s KG –D6 volumes in FY12/13 may lower the availability of cheaper domestic gas and this would be advantageous to Petronet LNG.

 During 1QFY12, the company has reported its highest ever PAT of Rs.257 crore, which is 130% higher yoy and 24.4% up qoq. The jump in profit is due to superior marketing margin of around USD1/ mmbtu and better margin from regas services.

 EPS for FY12 has been upgraded by 40%, assuming higher utilization level of 104% for the year, as against 100% in the year before and better marketing margin of USD1/mmbtu.

 Revised target price of Rs.171 is at a P/E multiple of 14 of FY13 expected earnings. This factors a strong earnings growth of 20% over FY11-14.

 The company is likely to enter in to a contract with Qatar for 2-4 mtpa of gas for its Dahej/ Kochi terminals. The entry in to such a contract would be a short term trigger on the stock price.