Petronet LNG has gained 31.5 per cent since the closing lows of Rs 122.77 in May. The rise comes on the back of benefits accruing to the company from the steady rise in demand for gas. The supply, however, has been limited, given the falling production from the Krishna-Godavari (KG) basin.
The company’s volumes have risen 6.3 per cent to 135 trillion British thermal units (TBTU), or 2.6 million tonnes, in the September quarter, as compared to 127 TBTU in the June quarter. The company has 10 mtpa capacity at Dahej (Gujarat) and is likely to commission its five mtpa Kochi plant by the March 2013 quarter. However, in the absence of a proper pipeline infrastructure, the contribution from Kochi could remain limited to one mtpa, analysts say. Thus, the benefits from the new capacities will not accrue in the near term.
Given the strong gas demand and benefits of capacity ramp-up accruing over the medium term, consensus analysts’ estimates peg the target price for the stock at Rs 180, according to Bloomberg data. This is about 11 per cent higher than the current market price of Rs 162. In this light, analysts advice that investors with a medium-term perspective could consider the stock on corrections.
Though work at the five-mtpa Kochi terminal is likely to be completed this year (FY13), the non-availability of pipeline infrastructure that is crucial for transmission of gas in the South Indian markets (states of Karnataka and Kerala) will limit the benefit to the company. Analysts see Kerala’s difficult terrain as one of the key challenges; besides, farmers’ compensation, which remain a hurdle.
The company plans to address customers such as NTPC Kayamkulam, BSES Kochi, Kasargod power station, KPCL Bidadi near Bangalore, and Mangalore Chemicals and Fertilizers from this terminal.
Says Vinay Nair, an analyst at Karvy Stock Broking, “Although, the five-mtpa project is on schedule to be commissioned fully by the March quarter, we see many external challenges to ramp up the terminal optimally. We hope for a repeat of the success story in the Dahej Terminal. However, with higher LNG prices, more difficult terrain and relative lower consumer affordability, challenges seem to be galore.”
Rohit Nagraj at Centrum Broking observes the pipeline to evacuate the gas from the terminal is expected to commission only by end-2013. He believes that initially gas will only be supplied to nearby customers.
No impact of regulatory changes
On the positive side, the recent regulatory changes related to marketing margins or to LNG terminal eligibility do not impact Petronet. The petroleum ministry has recently notified the eligibility conditions for registration of LNG terminals, for which the gazette notification was published on October 31.
Under this, the eligibility conditions, among others, include the requirement of common carrier capacity of 20 per cent of short-term (less than five-year contract) uncommitted capacity, subject to a minimum of 0.5 mtpa.
In simpler terms, this regulation is mandatory for new terminals that will have to forego marketing or re-gasification margins for certain part of their spot contracts. This, however, is not likely to impact Petronet LNG. The company’s Dahej terminal has been operational for long and even its Kochi terminal has been registered well before the date of applicability of this eligibility condition.
Analysts at Nomura observe that according to the notification, only entities desirous of establishing or operating an LNG terminal after establishment of the Petroleum and Natural Gas Regulatory Board in October 2007) would have to comply.