Petronet LNG: Growth on the horizon - Buy

Expansion initiatives and progress in laying pipelines should boost volumes this year

The stock of Petronet LNG, the country’s largest gas importer and regasifier, has been in a sideways movement over the past year or so, and is now almost at the same level as it was a year ago. From its highs of October 2017, the stock is down about 13 per cent.

Concerns about volume growth being impacted due to higher gas prices and impending competition, and the market weakness that followed the Budget last year took a toll on the stock.

While volume growth remained strong in fiscal 2018 (23 per cent) and in the June 2018 quarter (34 per cent Y-o-Y), it hasn’t helped that volumes shrunk in the recent September quarter (down 1 per cent Y-o-Y) and also in the December quarter (down 9 per cent Y-o-Y).

Along with high gas prices that impacted spot contracts, a high base effect from the earlier year contributed to the dip in volumes. This affected the bottom-line too; profit in the September quarter declined about 4 per cent Y-o-Y and that in the December quarter rose about 7 per cent — this was much slower than the profit growth of 34 per cent in the June quarter and 23 per cent in 2017-18.

Despite the weak show in the previous two quarters, volumes for the nine months ended December 2018 (639 tbtu) have been marginally higher than in the year-ago period (634 tbtu), and profit has grown about 10 per cent Y-o-Y, thanks to the strong performance in the June quarter. While the company’s performance has been tepid in the recent past, investors with a long-term perspective can consider buying the stock. One, valuations seem attractive. At ₹239, the Petronet stock trades at about 16 times its trailing 12-month earnings, lower than the average 19 times it had traded in the past three years.

Next, the company is expected to return to healthy volume growth in the coming quarters, thanks to a few factors. LNG prices have declined sharply over the past few months; this should aid spot contracts.

Next, the ongoing expansion of the mainstay Dahej terminal in Gujarat and the completion of the Kochi-Mangalore pipeline project that will improve the utilisation of the Kochi terminal in Kerala should give a leg-up to volumes.

Capacity expansion

In the past few years, Petronet increased the capacity of the Dahej terminal from 10 mtpa to 15 mtpa. The terminal has been consistently operating at over 100 per cent capacity utilisation due to healthy demand for natural gas and subdued domestic supplies. The Dahej terminal’s expansion is underway and the capacity is set to grow to 17.5 mtpa by the middle of 2019. This should add to volume growth.

The utilisation of the 5 mtpa Kochi terminal has improved from single-digits earlier to the teens now, with progress made in laying pipelines.

This could go up sharply this year with the Kochi-Mangalore pipeline expected to be ready in the next few months. This could make the Kochi terminal operations profitable and boost Petronet’s financials. The terminal’s capacity utilisation could further improve if plans for LNG as transport fuel take off.

Favourable contracts

Natural gas remains price-competitive compared to several alternative fuels. This advantage has increased with the recent decline in LNG prices.

Demand for gas in the country is strong and the government’s thrust to promote the use of the clean fuel will add to the demand. But domestic gas supplies are not keeping pace.

So, import dependency is set to increase from the current 45 per cent or so.

This should benefit players such as Petronet LNG.

While new liquefied natural gas (LNG) terminals are being set up in the country by other players too, Petronet LNG, a first-mover in the sector, should be able to retain its leadership position.

The Dahej terminal has been set up at a relatively lower cost and offers Petronet a competitive advantage.

The company is also looking at acquiring stake in the 5 mtpa Ennore terminal on the East Coast, among other projects.

Also, Petronet has the 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 regasification tariffs for its long-term supplies.

The latest escalation happened in January and should reflect in the March 2019 quarter results. A strong balance-sheet with negligible debt-to-equity gives Petronet the financial muscle to fund its expansion plans.

It is also a regular dividend payer and the current dividend yield is about 2 per cent.

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