Petronet LNG has gained more than 32 per cent since the closing lows of Rs 122.77 in May 2012. 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 MT (million tonnes), in the September 2012 quarter, as compared to 127 TBTU in the June 2012 quarter. The company has 10 MTPA capacity at Dahej (Gujarat) and is likely to commission its 5MTPA Kochi plant by March 2013 quarter. However, in absence of a proper pipeline infrastructure, the contribution from Kochi may remain limited to 1MTPA, 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, as per Bloomberg data. This is almost 10 per cent higher than the current market price of Rs 164.
Though the work at 5-MTPA Kochi terminal is likely to be completed in the current fiscal (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 (Kochi – Kanjarkkod – Mangalore – Bangalore) as one of the key challenges; besides farmer’s compensation is among other issues that remains a hurdle.
The company plans to address customers as NTPC Kayamkulam, BSES power 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 5 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 success story in Dahej Terminal. However, with higher LNG price, more difficult terrain, and relative lower consumer affordability challenges seem to be galore.”
On the positive side, the regulatory issues 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 31 October 2012.
Under this, the eligibility conditions, among others, include the requirement of common carrier capacity of 20 per cent of short-term (less than 5 year contract) un-committed capacity subject to minimum of 0.5mmtpa.
In simpler terms, this regulation is mandatory for new terminals that will have to fore go 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 as per the notification, only entities desirous of establishing or operating a LNG terminal after the establishment of the Petroleum and Natural Gas Regulatory Board (PNGRB) (ie. October 2007) would have to comply.
The Dahej terminal of Petronet LNG (2004) and the Hazira terminal of Shell/Total (2005) started operations much before PNGRB was established. Even the upcoming terminals (Kochi and Dabhol) would not be impacted by these notifications. “Both these terminals were planned Much before the regulator was set up” add analysts.