Petronet LNG: Stepping on the gas

Gas importer and regasifier Petronet LNG had a stellar June 2016 quarter. Profit shot up nearly 55 per cent year-on-year, despite the 38 per cent dip in sales. Weak realisations due to low gas prices impacted the topline, but the bottomline was bolstered by strong pick-up in volumes and high margins. The volume boost, up 31 per cent year-on-year, was aided by two factors — the commissioning of some facilities as part of the Dahej LNG terminal expansion from 10 mtpa to 15 mtpa, and the shutdown of GAIL’s Dabhol terminal due to the monsoon. Cheap gas supply due to renegotiation of prices last year with Qatar’s RasGas and high margins on spot volumes helped profitability. Operating margin shot up to about 11 per cent from less than 4 per cent in the year-ago period.

The company should continue doing well. The balance part of the Dahej terminal expansion is expected to be completed by October this year, and the company has tied up long-term offtake arrangements for most of this new supply. Work to further expand the terminal capacity to 17.5 mtpa is expected to be complete by 2019.

Demand for gas in India is strong, particularly after the sharp price decline, and stagnating domestic supply is unlikely to pick up significantly due to weak prices. So, the share of imported gas in supplies, currently about 40 per cent, is expected to rise in the coming years. Petronet, being the largest gas importer and regasifier in the country, should benefit.

The company should have little trouble selling its wares despite competition set to intensify with new LNG terminals being set up on both the west and east coast of the country. Petronet is also exploring plans to set up terminals in Bangladesh and Sri Lanka.

While Petronet’s business prospects seem healthy, shareholders can remain invested but avoid further exposure to the stock at this juncture. That’s primarily because of the strong run-up in the stock. Over the past year, the stock price has nearly doubled to its all-time highs, and the valuation seems pricey.

At ₹335, the stock trades at nearly 24 times its trailing 12-month earnings, much higher than the average 17 times it quoted at over the past three years. The positives, at least over the near term, seem to be factored in.

Also, there are some concerns. One, while the Dahej terminal operated at nearly 130 per cent capacity, the 5 mtpa Kochi terminal remains severely under-utilised (in low single digits) due to lack of adequate pipeline connectivity, a result of land acquisition problems. The expansion of BPCL’s Kochi refinery and the moves to get work going on a part of the Kochi-Mangalore pipeline should improve utilisation. But this may take a couple of years. The terminal remains loss-making with high depreciation and interest cost incurred without commensurate revenue. Next, whether there will be an encore of the strong June quarter once the Dabhol terminal starts operations again, needs to be seen.

Also, the high marketing margin on spot gas in the June quarter — likely due to volatility in gas prices — may not be sustainable. Besides, with rising competition, Petronet’s margins could moderate in the long run.

That said, any positive development on the pipeline imbroglio in Kerala and Tamil Nadu could provide a trigger for the stock.

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