Petronet LNG: High on energy

Increasing capacity at Dahej and good news on the Kochi terminal are positives

The stock of gas importer and regasifier Petronet LNG has been on a roll, rallying more than 60 per cent over the past year. With good reason. The company’s profit has nearly doubled y-o-y in the nine months ended December 2016 to ₹1,235 crore, after a subdued fiscal 2015-16. The good show was driven by higher volumes — up nearly 40 per cent y-o-y.

This was thanks to the expansion in the mainstay Dahej terminal capacity from 10 mtpa to 15 mtpa and low gas costs that aided demand. Reduced price realisations saw revenue fall about 14 per cent y-o-y in the nine months ended December 2016. But profitability improved sharply due to lower sourcing cost, operating efficiencies and the Dahej terminal operating much above capacity. Operating margin rose to 10 per cent from 4 per cent in the year-ago period, while net margin increased to 7 per cent from 3 per cent.

Healthy demand

The stock’s sharp run-up has pegged up its valuation too. At ₹434, it now trades at about 22 times the trailing 12-month earnings, higher than the average 19 times it traded at in the past three years. But with robust earnings growth, the valuation has moderated from the peak 24-25 times seen in the last year. Investors with a long-term perspective can buy the stock.

One, demand for natural gas in India is expected to continue growing at a healthy pace across user industries, aided by benign prices and the government’s push to the relatively clean fuel. Next, domestic gas supplies that have been stagnating are unlikely to rise rapidly in the near to medium term. So, the share of imported gas — currently about 40 per cent — should rise.

Room for growth

With the Budget cutting Customs duty on liquefied natural gas (LNG) from 5 per cent to 2.5 per cent, imported gas should get cheaper and more price-competitive. Petronet LNG is the largest gas importer and regasifier in the country and stands to benefit.

The company has commenced work last year on further expansion of the Dahej terminal from 15 mtpa to 17.5 mtpa; this is expected to be commissioned in the year 2019. While new LNG plants are being set up on both the East and West Coast, these will still take a few years to materialise.

In any case, expected market expansion should give gas importers enough room for growth.

Also, there is some positive news flow for Petronet’s 5 mtpa Kochi terminal that is now under-utilised due to pipeline connectivity issues. GAIL, which is laying the Kochi-Mangaluru pipeline, has recently indicated progress on the project and is targeting to complete it by December 2018.

This should improve utilisation at the Kochi LNG facility of Petronet and improve volumes.

Petronet continues to benefit from the annual 5 per cent increase in regasification tariffs. It has a strong balance sheet with debt-to-equity ratio under 0.3 times. This gives it adequate leeway to fund expansion plans.

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