Petronet LNG: Opportunity beckons

Investors with a long-term perspective can buy the stock of Petronet LNG, the country’s largest gas importer and regasifier. The company has been consistently delivering on volumes and profits, including in the recent June 2018 quarter.

After nearly doubling in 2016-17 and growing 23 per cent Y-o-Y in 2017-18, Petronet LNG’s profit rose 34 per cent Y-o-Y in the June 2018 quarter, to ₹587 crore. This has been aided by strong double-digit volume growth — up 26 per cent in 2016-17, and 16 per cent each in 2017-18 and in the recent June quarter.

Growth in volumes and profits should remain healthy, with expansion plans chugging along well and pipeline bottlenecks easing up gradually.

Meanwhile, the stock, despite some recent recovery, is down about 15 per cent since last October. The market weakness this year, coupled with concerns over volume growth due to higher gas prices and impending competition, seems to have taken a toll on the stock.

The fall though presents a good buying opportunity for long-term investors. At ₹235, the stock discounts its trailing 12-month earnings by 15.7 times, lower than the average of about 20 times it has traded at in the past three years. The company’s business prospects remain strong. Volumes over the coming quarters should continue growing robustly, thanks to the ongoing expansion at the Dahej terminal in Gujarat and the completion of the Kochi-Mangalore pipeline project that will improve the utilisation of the Kochi terminal in Kerala.

Expanding capacity

Over the past few years, Petronet increased the capacity of the Dahej terminal from 10 mtpa to 15 mtpa. This resulted in a sharp jump in volumes.

The terminal has been consistently operating at over 100 per cent capacity utilisation due to strong demand for natural gas and subdued domestic supplies.

In the June 2018 quarter, the terminal operated at 111 per cent of its name plate capacity. From 15 mtpa, the Dahej terminal’s capacity is set to further expand to 17.5 mtpa by mid-2019.

This should translate into continued volume growth for the company.

Concerns about the impact on rising gas prices on volume growth seem overdone. Natural gas remains price-competitive compared to several alternative fuels, especially those derived from crude oil that have rallied rapidly this year. Also, Petronet has the inherent advantage of back-to-back take-or-pay contracts for its long-term gas supplies from the Dahej terminal; these account for most of the company’s volumes.

The company also gets 5 per cent annual price escalation in re-gasification tariffs for its long-term supplies. The 5 mtpa Kochi terminal has also shown improving capacity utilisation, thanks to progress in laying pipelines, a long-running problem.

Capacity utilisation that was in single-digits earlier has improved to 12 per cent in 2017-18. This could increase to 35-40 per cent over the next couple of years, by when the Kochi-Mangalore terminal is expected to be commissioned.

Petronet has also participated in the auction for city gas distribution networks, bidding for seven geographical areas. Winning these bids could help it increase the capacity utilisation of the Kochi terminal to a good extent.

Also, if plans for LNG as transport fuel takes off, they could also aid the Kochi terminal’s volumes in the future. As capacity utilisation improves and the terminal posts profits, the company’s financials could get a boost.

Favourable dynamics

Demand for gas in the country is growing at a healthy pace, thanks to its cost effectiveness and the government’s thrust to promote the use of the fuel that is considered cleaner than other fossil-based fuels.

But domestic gas supplies are not keeping pace. So, import dependency is set to increase from the current 40 per cent. This should benefit players such as Petronet LNG. The company’s pricing competitiveness due to relatively lower cost of setting up its terminals and its tied-up contracts should help it retain the competitive edge.

Already the dominant LNG player on the West Coast, the company could make a foray on the East Coast too by picking stake in the upcoming 5 mtpa Ennore terminal near Chennai, being set up by Indian Oil. Petronet. It also plans to take stakes in projects in Bangladesh and Sri Lanka.

A strong balance-sheet with low debt-to-equity ratio of 0.15 times gives it the financial muscle to fund its expansion plans.

The company’s return-on-equity is strong at over 20 per cent. It is also a regular dividend payer and the current dividend yield is about 2 per cent.

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