Petronet: Near term upside limited

The company continues to benefit from improved gas demand in the country however expansion benefits remain a few quarters away

Despite a better than anticipated profit reported by Petronet LNG for the quarter ending December’12, the stock has failed to impress the street. It continued its sideways movement and underperforms the Sensex. While gas demand continues to remain good pushing its volumes, the anticipated major boost due to capacity expansions is further delayed. The new 5 MTPA terminal at Kochi, that was to be commissioned in March’13 quarter has now been delayed to June’13 quarter. One year consensus target price of Rs 182 as per Bloomberg data too indicates towards only a 12.5% upside from current levels.

Good December’12 quarter performance

Volume of gas sold, after dipping in June’12 quarter to 127 TBTU (Trillion British Thermal units) has continued to rise. During September’12 quarter they grew to 135 TBTU while in December quarter it was 140.6 TBTU maily due to spot volume growth of 11% to 30.5 TBTU. This is due to fall in domestic gas production and expect it to grow further during coming quarters. Higher spot volumes also helped profitability since Petronet earns marketing margins over and above distribution margin. Thus EBIDTA for the quarter at Rs 529 crore grew 5% annually and two% sequentially.

Limited volumes boost over medium term

In the medium term the company will benefit from commissioning of its 5 MTPA Kochi facility, which has been delayed by one quarter. However, the company will not be able to operate at full capacity due to non-availability of pipeline infrastructure in South Indian markets (states of Karnataka and Kerala).

There are however, longer term positives for the company. GSPL (Gujarat State Petronet Ltd)  has booked 2.25 MTPA of re-gas capacity for a period of 20 years which can be supplied from its Dahej terminal. GSPL will take 1.25 MTPA after January’14 post completion of the jetty and a further 1 MTPA will start in early CY16.

Amongst research houses, Nomura is the most bullish with a price target price of Rs 225. “With domestic gas volume declines continuing and LNG demand strong, we think marketing gains will remain high near term” says Nomura.

However increased depreciation and other costs related to Kochi terminal will impact profits in FY14.

Alok Deshpande at Elara Capital observes that “ the stock may continue to move sideways for the next two quarters before it breaks out positively on Kochi commissioning.”

Another word of caution comes from Edelweiss, saying that an expanded from Shell’s Hazira LNG capacity and recently commissioned GAIL’s Dabhol terminal could compete with Petronet for volumes. They have reduced their target price from Rs 200 to Rs191 for the stock.