Petronet LNG trades at 9.6x FY27 EPS, compared to its historical one-year forward P/E of 10.4x. Under a variety of bearish scenarios, the brokerage’s DCF-based valuation implies -4% to 21% upside from the current price.
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Motilal Oswal Report
We upgrade Petronet LNG Ltd. to Buy with a DCF-based target price of Rs 410/share. According to our DCF analysis (WACC: 11.2%), at current market price, Petronet LNG is pricing in an unrealistic scenario of a 20% decline in tariff at both the Dahej and Kochi terminals in FY28 with no tariff hike thereafter, and 0% terminal growth.
Additionally, the street narrative that competing terminals are taking away market share has:
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not played out so far as utilization at competitor terminals continues to languish at 14-43%, and
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overlooked Petronet LNG’s strong scale, historical capex, and connectivity advantages.
While concerns around a potential tariff cut in FY28 linger, we highlight that a sharp cut in tariff at Dahej in FY28 can lead to industry-wide pressure, as competing terminals were built at ~2x the capital cost (Dahej capex/mmtpa = ~Rs 5 billion vs ~Rs 9- 11 billion for competitors). This would further increase the relative attractiveness of the Dahej terminal, especially as its expanded capacity comes online.
At 9.7x FY27 P/E and 4% dividend yield, we believe valuations are at absolute rock bottom levels.
We move to a DCF-based target price (earlier 10x FY27 PE) and assume a 10% tariff cut in Dahej and Kochi in FY28, 4% escalation thereafter, 2% terminal growth, and 11.2% WACC, leading to a target price of Rs 410/share. While we build in full capex for the petchem venture, we value it at only 0.5x equity.
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