Petronet LNG, India’s dominant gas importer and regasifier, was on the back foot in the June 2020 quarter; its consolidated revenue was down about 43 per cent y-o-y to ₹4,884 crore and consolidated profit down about 11 per cent y-o-y to ₹500 crore.

This followed a weak March 2020 quarter in which revenue rose only marginally and consolidated profit declined about 20 per cent.

The company’s weak show over the past two quarters though was along the expected lines, with the Covid-induced shutdowns curtailing volumes.

At the flagship Dahej terminal, volumes were down about 17 per cent y-o-y to 181 tbtu (trillion British thermal units) in the June quarter and down about 3 per cent to 206 tbtu in the March quarter.

Capacity utilisation at the Dahej terminal — usually above 100 per cent — fell to 93 per cent in the March quarter and to 82 per cent in the June quarter.

The Petronet LNG stock, like many others, took a sharp knock in March amid the pandemic panic and recovered smartly thereafter, recouping most of its losses. But the stock, now at ₹249, is still below its January 2020 highs.

There could be further upside in the stock, given the company’s good recovery since June (Dahej capacity utilisation is now again 100 per cent) and its sound growth prospects.

Petronet LNG is in a position of strength in an industry with favourable dynamics.

Investors with a long-term perspective can buy the stock.

Its valuation is attractive with trailing 12-month price-to-earnings at about 14 times, compared with the three-year average of about 17 times. Also, the stock’s current dividend yield, based on FY20 dividend, is a neat 3 per cent, and including special dividend, it is 5 per cent.

Favourable factors

Until the pandemic upset the applecart, Petronet LNG was chugging along nicely — with profit growth of 32 per cent y-o-y in the nine months ended December 2019. Thanks to this, the company’s profit grew 21 per cent y-o-y in the full year FY20 to ₹2,703 crore, despite the setback in the March 2020 quarter.

The good growth until December was driven primarily by higher volumes, with the completion of capacity expansion at the Dahej terminal in the June 2019 quarter from 15 mtpa to 17.5 mtpa. More spot contracts due to low gas prices, pick-up in capacity utilisation at the 5 mtpa Kochi terminal and adoption of lower corporate tax rates also helped.

The lockdowns took a toll in the last two quarters, but with the gradual opening up of the economy now, Petronet should be on the growth path again.

Capacity utilisation is back to normal at Dahej, and has picked up at Kochi. There is good scope for increase in the company’s volumes and profits in both the near and the long term.

This is thanks to progress in the laying of pipelines that should improve capacity utilisation at the Kochi terminal and additional expansion planned at the Dahej terminal in the coming years. Gas imports into India will likely increase in the coming years with rising demand, strong government push to increase the share of gas in the energy mix and low domestic production; Petronet LNG as the market leader should benefit from this.

Volumes to grow

The expected commissioning of the Kochi-Mangaluru pipeline by September 2020 should improve the Kochi terminal’s capacity utilisation from about 20 per cent currently to 30-35 per cent by the end of FY21. The low gas price environment due to the global supply glut and weak demand should aid Petronet’s spot gas volumes. Over the next three to four years, the addition of two more tanks (six at present) and a jetty (two at present) at Dahej should boost the terminal’s capacity further.

Demand could further improve if plans for LNG as transport fuel take off. Small-scale LNG for vehicles such as trucks could be a significant growth driver for the company in the long term. Expansion plans in the long term include setting up a terminal on the East coast and in Sri Lanka. A strong balance sheet with low leverage and strong cash levels position it well to fund its expansion plans.

Petronet is looking to enter into long-term contracts to source LNG at rates linked to spot rates.

The company’s deal last year with US-based LNG company Tellurian to acquire stake and buy gas cargoes had raised concerns about sub-optimum capital allocation. The concerns seemed overdone given that the deal is in the nature of a non-binding MoU that has now been extended until December 2020; the buyers’ market in the LNG sector should give Petronet a position of strength in negotiations.