Strong overall performance coupled with good demand outlook and ongoing expansions make the stock a long-term bet.


Petronet LNG has given a healthy return of 35% during the current fiscal, outperforming the Sensex that saw a decline of 10.3% during this period. Though the stock corrected around 5% on regulatory concerns in mid-January, it regained lost ground with strong third quarter performance with analysts suggesting that the marketing margin regulations were not major threat.

A Nomura report suggests that LNG importers like Petronet are virtually out of the regulator’s control. “The PNGRB act requires entities establishing or operating LNG terminals to seek registration. LNG terminals are out of the Purview for regulation of tariffs or third-party access," it states. Analysts at MF Global observe that Petronet markets imported RLNG, unlike domestic gas where the government is owner. Hence, in their view, regulations are a limited and an unlikely threat.

STRONG PERFORMANCE

Petronet’s performance in the December 2011 quarter was above Street estimates. Volumes at 144.9 tbtu (trillion British thermal units) touched an all-time high and were 21% higher year-on-year. Going ahead, the volumes are expected to remain robust. Analysts at Motilal Oswal estimate March 2012 quarter volumes at 142.6 tbtu, leading to total volumes of 556 tbtu in FY12, up 26.3% as compared to FY11.
The capacity utilistion has also improved to 115% in the recently concluded quarter as compared to 95% in the year ago period, and 107% sequentially. Analysts at Citigroup believe that these utilisation levels are sustainable going ahead.

Marketing margins grew at a healthy rate of 39% on a sequential basis at $1.39/mmbtu in Q3FY12, notes a Prabhudas Lilladher report. All this helped the company post a strong revenue growth of 74.5%. With a debt repayment of Rs 500 crore, the interest costs declined 32% y-o-y pushing up profitability and the bottom-line grew a good 72.8%.

STEADY DEMAND

India consumes about 170 million cmd (cubic metres per day) of gas, as per Anand Rathi research reports with a demand-supply gap at around 30 million cmd, which is taken care of through import of LNG. “Considering the better supply situation and strengthening pipeline infrastructure the demand will grow faster," they say.
Between 2008 and 2015, the IEA expects natural gas demand in India to register CAGRs of 9.8%. Thus demand-supply gap may widen. With a fall in production at the Reliance Industries’ fields in the KG basin, importers such as Petronet stand to gain, analysts say.

EXPANSION PLANS

Petronet plans increasing capacity of its Dahej Terminal by additional 5 MMTPA (current capacity of 10 MMTPA) by CY15 that will also ensure optimal utilisation the new jetty. GAIL and GSPL are already planning to tie up for 2.5 MMTPA and 1.0 MMTPA respectively, observe analysts at Citigroup.

The work at Kochi terminal is progressing well and likely to be commissioned by Q3FY12. The company plans to setup a third LNG terminal at Gangavaram port in Andhra Pradesh with the total capacity of 5 MMTPA.

OUTLOOK

Looking at the strong demand prospects, operational and marketing performances as well as ongoing expansions, most analysts have a BUY rating on the stock.

However, investors must note that though the expansion plans are progressing well, the benefit will take time to accrue and the company will operate on present capacity till then. Analysts at Citi expect a flat earnings growth phase for the next two years, as the capitalisation expenses at Kochi and the new jetty at Dahej will likely offset the ensuing volume increase, which they expect to be more gradual at first.

The stock is a good long-term bet, analysts say. The one-year consensus is 9% higher from the current market price of Rs 166.