What makes Petronet LNG a good long-term bet

Petronet LNG (Petronet), which imports liquified natural gas (LNG), stores and sells regasified LNG (liquified natural gas) to the domestic market, took a sharp knock in March and June 2020 quarters like many others amid the pandemic lockdown but thereafter, recouped most of its losses.

The company, which is in a niche business and supplies to customers including GAIL, IOCL and BPCL who in turn cater to end-market demand, will be a key beneficiary if the gas pipeline infrastructure in the country improves.

Going ahead, with government’s push to increase the share of gas in India’s energy mix on the back of its relatively lower emissions/ impact on the environment, and Petronet’s expansion plans to cater to the rising gas demand, the company looks well placed to deliver healthy revenue growth.

Petronet’s stock, now at ₹252, is still 10 per cent below its January 2020 highs. It is also attractively valued with trailing 12-month price-to-earnings at about 14 times, compared with the three-year average of about 17 times. The company has also been paying decent dividend in the last couple of years. For FY20, the dividend yield has been close to 3 per cent.

Thus, investors with moderate risk appetite can consider accumulating the stock on dips.

Recovery from Covid-19 impact

Operationally, the company has been growing at a healthy rate in the past few years. In the last three-year period, the revenues of the company grew at 13 per cent CAGR on the back of sales volume growth of nine per cent CAGR. With better realisations, the operating profit margins too improved. The adjusted EPS (earnings per share) also grew by a good 19 per cent CAGR during the same period to Rs 17.75 per share in FY20.

Hit by the Covid-19 lockdown, the company took a knock in the first quarter of FY21. In the June 2020 quarter, the volumes shrank by 16 per cent y-o-y. .

The company recovered smartly once the lockdown measures were eased. The sales volumes in the September 2020 and December 2020 quarters were back to pre-Covid levels to 254 tbtu (trillion british thermal unit) and 235 tbtu respectively, maintaining a flat y-o-y growth. Though the sales in the third quarter were lower sequentially, it is seasonal as the third quarter is generally weak for the company. Inventory gains boosted the operating profit margin in the third quarter which stood at about 19 per cent, significantly higher than recent margins of about 10-12 per cent..

The company operates from two terminals - Dahej LNG terminal at Gujarat and Kochi LNG terminal at Kerala with installed capacities of 17.5 mtpa and 5 mtpa respectively. The Dahej terminal, which generally operates at more than 100 per cent of its nameplate capacity but fell to 82 per cent in the June quarter, operated at 97.3 per cent in the December 2020 quarter. The Kochi terminal’s capacity utilisation was about 20 per cent during the said period . The recent commissioning of the Kochi-Mangaluru pipeline should improve the Kochi terminal’s capacity utilisation to 30-35 per cent by the end of FY21.

Also, the 5 per cent annual price escalation in regasification tariffs for its long-term supply contracts at the Dahej terminal should help the company’s financials; the price escalation happens in January. The company sources LNG under long-term contract from RasGas of Qatar and has sold re-gasified LNG mainly to three intermediate off-takers, namely, GAIL, IOCL and BPCL – which are also promoters of the company owning 50 per cent stake in the company together with ONGC.

Volumes growth

Gas demand in the country is expected to grow at a healthy pace.

The Centre wants to increase the share of the fuel in the country’s energy mix from the current 6 per cent to 15 per cent and is taking many steps towards this, including aggressive expansion of the city gas distribution network across the country. The city gas units, which supply CNG (compressed natural gas) to automobiles and piped natural gas to households for cooking purposes, along the route of the pipeline will add volumes to Petronet.

Demand could further improve if LNG as a transport fuel takes off . The company has been taking up initiatives to develop the small-scale LNG market in the country by promoting LNG as the environment-friendly fuel in road transportation.

After the recent expansion at Dahej plant from 15 mtpa to 17.5 mtpa , the management has announced further expansion to 22.5mmtpa over the next few years.

The above, combined with increased offtake from Kochi (up to 50 per cent utilisation by FY22/23) , could benefit the company in catering to the expected rise in the gas demand.

Further, the company is also in talks with various stakeholders for setting up an LNG terminal in Sri Lanka and has been conducting feasibility studies for a terminal at Gopalpur, Odisha for further capacity enhancement.

A strong balance sheet with current net cash (cash-debt) at about 5 per cent of market cap positions it well to fund expansion plans.