Emkay Global Financial Boosts Petronet LNG to ‘Buy’ with Target Price of Rs 425

Emkay Global Financial is optimistic about Petronet LNG (PLNG) and has upgraded its recommendation for the stock to a “BUY” rating, raising the target price by 16% to Rs 425 in a report dated October 2, 2024.

The firm has a positive outlook on Petronet LNG due to its stable performance and attractive valuations. While the utilization rate at the Dahej terminal was over 110% in the first quarter, it is expected to cool off in the second quarter. However, Emkay believes that achieving around 100% utilization for the rest of the fiscal year is realistic. The start and ramp-up of Exxon’s second contract, which amounts to 1.2 million metric tonnes per annum (mmtpa) with a higher tariff for Kochi in fiscal years 2026-27, have led to a 7-9% increase in earnings per share (EPS) projections for that period.

Concerns have arisen regarding the tariff outlook following the renewal of QatarGas in 2028, with buyers looking for potential price reductions. However, the management has assured that any adjustments will be minimal and that they will protect the interests of minority shareholders. Emkay has adjusted its valuation method, opting for a price-to-earnings ratio (P/E) approach instead of discounted cash flow (DCF) calculations, valuing PLNG at 15 times the estimated EPS for September 2026.

Steady Core Performance Expected; Exxon Supplies Set to Increase in FY26E

Despite the expected seasonal weakness in Q2, the utilization rate at the Dahej terminal is projected to remain close to 100%. This suggests that for the entire fiscal year, the average utilization will likely exceed 100%. The Kochi terminal is also anticipated to see increased activity from Mangalore customers. As a result, Emkay has slightly raised its EPS outlook for FY25 by 3%. In fiscal years 2026 and 2027, Exxon’s second 1.2 mmtpa contract is set to begin, with an expected contribution of 0.5 mmtpa in FY26 and 1.2 mmtpa in FY27. Additionally, the expansion at Dahej, which will add 5 mmtpa, is scheduled to come online, leading to sustained volume growth for Petronet LNG as it benefits from higher tariffs at the Kochi terminal. Consequently, the EPS estimates for FY26 and FY27 have been increased by 7% and 9%, respectively.

Addressing Concerns About Long-Term Uncertainties

There are concerns about potential adjustments to tariffs at the Dahej terminal and flexibility for buyers after the QatarGas contract is renewed in 2028. However, Petronet’s management has reassured stakeholders that any tariff changes will be minor and will not adversely impact minority shareholders. They also emphasized that the destination clause applies only within Petronet’s terminals—namely Dahej, Kochi, and Gopalpur—ensuring that business remains intact. Emkay believes that while long-term uncertainties are common in many businesses, they should not be overly emphasized. Positive developments, such as LNG Retail and C2-C3 opportunities, are also on the horizon.

Valuation Based on Conservative Assumptions

Petronet LNG has contracts totaling 7.5 mmtpa with QatarGas, 8.25 mmtpa for tolling, and 2.6 mmtpa with Exxon (Gorgon). The 7.5 mmtpa contract carries some tariff adjustment risks, while the other two are expected to see tariff increases. If the Kochi tariff were to be reduced by about 10% in FY27 due to increased volumes from Exxon, and the Dahej 7.5 mmtpa contract were similarly cut by 10% in FY29, with a 2-3% annual tariff increase over the next decade, Emkay’s DCF value for the stock would still rise to Rs 400 from Rs 365. However, the firm has shifted to a P/E-based valuation to lessen reliance on long-term DCF assumptions, arriving at a target price of Rs 425 per share based on a P/E of 15 times the estimated EPS for September 2026. Therefore, Emkay Global has upgraded its rating on Petronet LNG from “Add” to “BUY.”

Conclusion

In summary, Petronet LNG is viewed positively by Emkay Global Financial due to its stable outlook, strong performance, and potential growth from upcoming contracts. With a target price set at Rs 425, the firm believes that the stock holds significant value under reasonable assumptions.