PETRONET LNG: Growth hurdles cleared, co set for robust future

PETRONET LNG has benefited from reduced domestic production of natural gas during the quarter to December 2010, as reflected by its robust volumes and earnings growth. The company has, in fact, doubled its quarterly profit. Its stock now trades at 19 times its earnings for trailing 12 months, which appears reasonable considering its healthy growth prospects.
Petronet’s sales volumes during the quarter grew about 32% to 111 trillion British thermal units (TBTUs) from 84 TBTU in December 2009 quarter. A monthlong shutdown at Panna-Mukta-Tapti in October and stagnating production from Reliance’s KG basin fields meant that a chunk of demand had to be met through imported natural gas. This resulted in 62% higher net sales for the company at . 3,628 crore. Operating margins improved slightly due to higher scale of operations. Despite other income falling substantially, pre-tax and post-tax profits were twice as against the year-ago period because of stagnant interest and depreciation costs.
The company, which has been a regassifying company, has decided to test the waters in natural gas trading. Petronet LNG will import 1.1 million tonnes of LNG for which there will not be any back-to-back sales agreement with firms such as Gail that offtake it. Since the company will be earning marketing margins besides regassification charges on these volumes, its operating profit margins are expected to inch up in future. Petronet's growth constraints are also easing. The pipeline capacity constraint, which was haunting the company last year, has reduced with the partial expansion of Gail’s Dahej-Vijaypur pipeline. The company is setting up a second jetty, which will help it handle a number of vessels every year. All these will enable the company to extract 25-30% more than the nameplate capacity from its existing facilities.
In 20 months, the company’s Kochi terminal, with a 2.5 million-tonne capacity, will commence operations. Within two to three months of commencement, the capacity will be scaled up to 5 million tonnes. The company has sufficient cash balance to fund its . 1,200-crore capex plan of FY12.
In the current scenario where the US has stopped LNG imports due to the advent of shale gas and new LNG capacities are coming up, Petronet appears comfortable depending on spot cargos or short-term contracts to bridge the capacity-utilisation gap. Petronet LNG imports spot cargos for about $10/MMBTU. The scenario is likely to play out over the next couple of years. This means, Petronet’s future growth outlook is robust.