DSIJ Mindshare

Petronet LNG - A good buying opportunity

According to a BSE press release, the board of directors of the state-run Petronet LNG has approved the expansion of the Dahej Terminal in Gujarat from 10 MMTPA to 15 MMTPA. This is an extremely positive development for the company, which has been consistently improving its financials and operational performance over time, exemplified by the performance that the company showed in the Sept 2011 quarter.

At a time when most companies saw their financial performance take a hit as a result of an increase in borrowing costs, high inflation and an overall slowdown in economic activity, Petronet managed to post a robust topline and bottomline growth of 76% and 99% on a YoY basis to Rs 5366.87 cr and Rs 260.33 cr respectively. The growth on the bottomline front was despite the fact that the company took a hit of Rs 53 cr from forex losses. Sequentially, the company’s topline grew by 16% in Q2 FY12, though the volumes grew by 1% because of the rise in LNG prices. This shows that the company has been able to pass on the price hikes comfortably.

Moving on to its business, there are some good reasons why we expect Petronet to do well going forward. Looking at its present structure, the company is operating at a utilisation rate of 110%. It is trying to cater to the heavy demand for natural gas in India and compensate for the supply shortfalls as a result of dwindling domestic production from the KG basin. In a recent media interview, the management reiterated the need to increase capacity further and boost supply in order to keep up with the demand. This is where the real positives for the company lie.

Construction of the 2nd terminal at Kochi admeasuring 5 MMTPA capacity seems to be nearing its completion date, and it should be ready by the end of Q3 FY12. Construction of the 2nd jetty at Dahej is expected to be completed by Sept 2013, post which the capacity of Dahej would rise to 12-13 MTPA. The company has also proposed a greenfield expansion of 5 MTPA on the eastern coast, but has not yet provided any clarity on it as of now. As most of the company’s expansion plans are slated to go live over the next couple of years, it is in a favourable position to cater to the growing demand.

As for its LNG supply linkage, Petronet currently has a 7.5 MMTPA long-term contract with RasGas (Qatar), a 1.1 MMTPA short-term contract till FY13 and another 1-year contract of 0.6 MMTPA with GDF Suez. This means that it has overall contracted volumes of 9.2 MMTPA. As for its spot business, it sold a total of 440.35 thousand British Thermal Units (BTU) of re-gasified LNG last year, and as per our estimates, it would sell  10% higher, or approximately 475 thousand BTU this year.

The fact that the company normally increases its re-gasification charges by 5% every year is another growth driver. The last price revision was brought into effect in Jan 2011, and the next revision would be effected shortly.

Among other key triggers, the counter has managed to post YTD returns of 24% on the bourses, as against negative 23% returns by its benchmark BSE 200. Also, the FIIs have been taking a keen interest in the counter. Their stake as of Sept 2011 stood at 14.72%, as against 10.36% in Sept 2010.

In conclusion, the govt.’s strong emphasis on increasing the share of natural gas in India’s overall energy basket would prove to be a growth booster for the company going forward. At a CMP of Rs 157, the counter is trading at 11.42x its annualised EPS of Rs 13.79. With expectations of holding its ground in such volatile times, the scrip presents a good buying opportunity.

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