PETRONET LNG: Steady Earnings, Capacity Hike to Pump Up Show

Growing demand means operating cash flows will remain strong for Petronet. Also, the company has no problems in servicing its debt. The scrip should see a re-rating as the Kochi capacity nears commissioning

    India’s dwindling natural gas production and growing demand will sustain over-utilisation at Petronet LNG’s Dahej terminal. Debottlenecking of its existing terminal and a new terminal at Kochi will add further capacity in next couple of years, while the annual increase in regassification charges will ensure profit growth.
Petronet LNG’s robust business model coupled with undemanding valuations make it attractive for long-term investors. 

BUSINESS Petronet LNG is India’s largest importer of liquefied natural gas (LNG) at its Dahej plant. The company recently expanded the capacity to 10 million tonne per annum (equivalent of 40 million standard cubic meters per day or MMSCMD).
The company has a firm supply contract with Qatar’s RasGas for 7.5 MTPA for which it has a back-toback sales contract. It also imports LNG on a spot basis depending on its ability to market the same in domestic market. Similarly, it also imports cargos on behalf of other importers for a fee.
The company currently charges 35 per MMBTU as regassification charges, which are set to go up 5% every year in January. 

GROWTH DRIVERS India’s domestic natural gas production is dwindling, especially with the KG-D6 block output going down steadily. The East Coast block which was producing at an average rate of 41 MMSCMD in the December 2011 quarter is likely to go down to 36 MMSCMD in the March 2012 quarter and further to 28 MMSCMD in FY13.
Petronet LNG operated its Dahej facility at 115% capacity utilisation in the December quarter. This helped it clock its highest-ever quarterly volumes of 145 trillion BTU or 45 MMSCMD. Non-core sectors (industries excluding power and fertiliser) still find regassified LNG to be a cheaper option when compared to the liquid fuels, which will ensure high capacity utilisation for Petronet even in future. The company’s recent 0.6 MTPA deal with GDF Suez will help in this.
Petronet is setting up a 5 MTPA LNG import facility in Kochi which will be commissioned by the end of this year. When it is fully functional, the facility will grow total capacity by 50%.
The company also plans to add an additional jetty, which will add 5 MTPA of capacity at Dahej along with debottlenecking and brownfield expansion in FY14. It is also studying the possibility to set up another LNG import facility on the East Coast at Gangavaram.
Availability of LNG at reasonable prices on a long term basis has remained a key worry. LNG prices have remained at unreasonably high levels in spite of major LNG export facilities coming up globally. However, things are likely to change with the US becoming a net exporter and European demand slowing down. Petronet’s ability to sign any long-term supply contract could improve visibility to its earnings growth and prove a major trigger for appreciation. 

FINANCIALS Estimating FY12 numbers by annualising numbers for the 9-month period ended December 2011, Petronet’s revenues have grown at a CAGR of 37.2% in the last three years, while net profit is up 27.8% The company’s strong operating cash flows have enabled it to service its debts comfortably while ensuring low-cost funding for new projects. Its debt-equity ratio stood at 1:1 at the end September 2011. 

VALUATIONS The scrip is currently trading at 11.6 times its earnings of the past 12 months. This is undemanding in view of the strong visibility on steady earnings growth. The scrip should see a re-rating as the Kochi capacity nears commissioning. Retail investors should board the bandwagon well in time.