On a purple patch

Healthy demand, favourable contracts and expansion plans are positives

The country’s largest gas importer and regasifier Petronet LNG is having a good run, delivering strongly for the second year in a row. After nearly doubling in 2016-17 to ₹1,723 crore, the company’s consolidated profit has grown nearly 23 per cent Y-o-Y in 2017-18 to ₹2,110 crore.

This is thanks primarily to strong volume growth — up 26 per cent in 2016-17 and 16 per cent in 2017-18.

Improved realisations and healthy operating margins (around 12 per cent) have also helped. Return on equity is healthy at over 20 per cent. The company’s performance in the recent March quarter has also been healthy with 18 per cent Y-o-Y volume growth; profit growth at 11 per cent would have been higher but for a tax rate advantage in the year-ago quarter.

Despite the good performance, the Petronet LNG stock has slipped quite a bit from last October, losing more than 20 per cent.

This seems to be on concerns of the company’s volume growth slowing due to higher gas prices. The broader market weakness that followed the recent Budget added to the stock’s troubles.

The fall though presents a good buying opportunity for investors with a long-term perspective. At ₹217, the stock now trades at about 15.5 times the company’s trailing 12-month earnings, lower than the nearly 20 times it has traded at, on average, in the past three years.

The company’s prospects seem bright, with volume growth set to continue, aided by ongoing expansion at the mainstay Dahej terminal in Gujarat and completion of the Kochi-Mangalore pipeline project that will improve the utilisation of the Kochi terminal in Kerala.

While imported gas prices have risen over the past year along with the global commodity rally, the company’s business is unlikely to be impacted. One, natural gas remains price-competitive compared to several alternative fuels.

Next, Petronet has back-to-back take-or-pay contracts for its long-term gas supplies from the Dahej terminal; these make up the chunk of the company’s volumes. Also, the company gets 5 per cent annual price escalation in regasification tariffs for its long-term supplies.

Favourable dynamics

The demand-supply dynamic in the country for imported gas is favourable, with inadequate domestic supplies and healthy demand. Demand should rise at a good pace, with economic growth and the government’s thrust to encourage the use of gas, a clean fuel.

Domestic gas supply could pick up with new discoveries, but it is unlikely to increase at a rapid pace due to low formula-based prices. So, import dependence, currently at about 40 per cent, will likely increase in the coming years.

New liquefied natural gas (LNG) terminals being set up in the country will increase competition in the coming years. But Petronet LNG should be able to retain its leadership position, thanks to its pricing competitiveness and tied-up contracts.

Besides, the company is also looking to pick stakes in upcoming LNG terminals in the country and is also eyeing international expansion opportunities.

The dominant LNG player on the West Coast, Petronet LNG is likely to make a foray on the East Coast too by picking stake in the 5 mtpa (million tonnes per annum) Ennore terminal near Chennai, being set up by Indian Oil. Petronet also has plans to expand operations globally by taking stakes in projects in Bangladesh and Sri Lanka. It is also exploring upstream exploration opportunities in Qatar.

Expansion plans

Petronet’s strong volume growth over the past two years has been primarily due to the expansion in the mainstay Dahej terminal capacity from 10 mtpa to 15 mtpa. Increasing demand and weak domestic supplies have helped the Dahej terminal operate at more than 100 per cent capacity for a long time now. The expansion of the Dahej terminal to 17.5 mtpa is expected to be completed by June 2019; this should mean further pick-up in volumes.

The 5 mtpa Kochi terminal has also shown improving capacity utilisation — from single-digits earlier to about 12 per cent in 2017-18 — thanks to the headway made in laying pipelines, a bugbear for long. Utilisation should increase to 35-40 per cent by 2019-20, by when the Kochi-Mangalore terminal, now progressing well, is expected to be commissioned.

The prospects of LNG as transportation fuel, if it takes off, could also aid the Kochi terminal’s volumes in the future. From losses in earlier years, the company is now making operating profit at the Kochi terminal, which should improve as utilisation improves.

A strong balance sheet — with low leverage (debt-to-equity of 0.15 times) and robust cash levels (more than ₹850 crore) as of March 2018 — gives the company enough headroom to fund its expansion plans.

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