Petronet LNG: Play on steady volumes & profit growth

Healthy demand drives growth; expansions, better capacity utilisation of Kochi unit to boost profit

Many triggers seem to be falling in place for Petronet LNG, which currently handles the largest imports of liquefied natural gas (LNG) in India and re-gasification of LNG through its existing Dahej and Kochi terminals. Recent news flow has also been positive. While the company is planning to build an LNG import terminal in Sri Lanka in collaboration with Japanese and Lankan companies, is also planning  another terminal at Gangavaram in Andhra Pradesh, which will boost volumes in the long run. It is, thus, not surprising that its share price has also been gaining recently, with the stock among top gainers in the past one month.

Interestingly, even the near-term prospects, which hinge on the existing Dahej and Kochi terminals, look promising. The rising demand of natural gas in India, low gas prices and inadequate domestic supplies are boosting Petronet’s prospects.

With nameplate capacity of 15-million tonne per annum (mtpa) at Dahej and 5 MTPA at Kochi, Petronet handles half of India’s 30- mtpa terminal capacity, as of the end of FY17. Analysts say India’s potential demand for natural gas stood at 128 billion cubic metres (bcm) in FY17, while supply (domestic + imported LNG) stood at only 43 bcm, resulting in the demand-supply gap of 85 bcm. This gap will widen to 102 bcm by FY20 and 162 bcm by FY27. This will ensure that volumes continue to rise. Simultaneously, Petronet is also adding capacity. Any additional capacities by peers, however, is unlikely to lead to substantial increase in competition, say analysts.

Meanwhile, Petronet has benefited after re-pricing of gas contracts with Qatar Gas from the start of 2016. Further, 7.5 mtpa sourced through long-term contracts with Qatar-based RasGas has back-to-back sales arrangement with GAIL, Indian Oil and Bharat Petroleum (BPCL). An additional 8.25 mtpa has been booked as regasification capacities, add analysts at ICICI Securities. Thus, against the existing capacity of 15 mtpa at Dahej, Petronet already has long-term usage contracts of 15.75 mpta, implying 105 per cent utilisation levels. For Dahej, it is expanding capacity by 2.5 mtpa to 17.5 mtpa, which will add to growth.

Notably, the Kochi 5 mtpa terminal, which had remained under-utilised (about 12 per cent capacity in the June quarter) on account of lack of pipeline connectivity, should also see gains. The start of construction work on GAIL’s Kochi-Mangaluru-Bengaluru pipeline, which is estimated to be completed in 2018, will drive the terminal’s volume and utilisation. Likewise, BPCL’s expanded refinery at Kochi will also provide some boost to Petronet’s utilisation to the extent of 1 mtpa as the refinery ramps up.

Thus, analysts at ICICI Securities say Petronet LNG will benefit as the primary play on increasing usage of LNG and long-term volumes will show stable growth and contribute to higher profitability. Analysts at HDFC Securities are also bullish and have initiated a ‘buy’ rating with the target price of Rs 324 on the stock, which closed at Rs 224 on Friday.