Petronet is well placed for more gains

With fresh triggers for gas demand and limited domestic availability, expect earnings momentum to stay healthy

The Petronet LNG stock, which had increased 47 per cent in the past year and more than doubled in the past two years, could see more gains. Reasonable prices of natural gas and rising gas demand continue to benefit Petronet, which imports liquefied natural gas (LNG) and re-gasifies it into saleable gas.  

The firm gas demand in India is seen growing further looking at the environmental concerns and many industrial fuels coming under regulatory spotlight. While some states have revoked ban on usage of petcoke, the hike in import duty on it is likely to force industrial players to switch to gas, a cleaner fuel. Bans on furnace oil usage are already pushing up gas demand from these users. Likewise, demand from the power and fertiliser sectors, too, remains firm and should accrue more benefits to Petronet.

On the other hand, India has limited gas production capacity and no major ramp-up is in the offing. This should translate into increased demand for imported gas, thereby benefiting players such as Petronet. Capacity utilisation at Dahej terminal has remained high and the company is already expanding its capacity to 17.5 million tonnes (mt), which will drive volume. The Kochi terminal, which had remained underutilised due to delays in Kochi-Bangalore-Mangalore pipeline of GAIL, should also see utilisation levels increase, as the pipeline is expected to be commissioned by 2018-end.

Analysts at Kotak Securities expect Petronet’s earnings to grow at a compounded annual rate of 15 per cent over two years, driven by volume growth, benefits from contractual commitments of 17.2 mt and commissioning of Kochi-Mangalore pipeline. Further clarity on pipeline progress can potentially add to valuations of Petronet, they add.

The company recently completed capacity expansion of its Dahej facility from 10 mt to 15 mt. Aided by strong demand (90 per cent of this capacity is contracted), revenue visibility remains strong. Moreover, the LNG off-take assumptions for Petronet’s terminals can get a leg up if gas is included in five per cent GST (goods and services tax) slab. Such a move will increase LNG demand from industrial consumers, say analysts, who feel the stock valuations can get a boost with increase in volume visibility.

As Petronet plans to set up terminals on the east coast (Andhra Pradesh) and internationally (Sri Lanka and Bangladesh), long-term visibility is also improving. The start of renegotiated Exxon Gorgon LNG contracts at lower prices is another trigger. Analysts at Jefferies say the start of the new 1.2-mt contract is some time away precluding immediate upside but the near-term momentum remains solid. The one-year target prices of Rs 285 (Kotak) and Rs 290 (Jefferies) still indicate towards a 13-15 per cent upside for the stock from the current Rs 253 levels.