Petronet LNG, India’s biggest gas importer, is in a sweet spot, thanks to the rising Liquified Natural Gas (LNG) demand prospects, as well as the easing global LNG prices. Also, the exemption of customs duty, along with the measures for gas transmission and storage facilities proposed in the Budget, will benefit the company, believe analysts.
In their recent report, analysts at Emkay Global say, “Petronet LNG is the best gas play in the overall oil and gas space due to the demand-supply mismatch, low cost of operations from incumbent re-gasification terminals and timely expansions.” Most analysts are positive about the prospects and expect healthy earnings’ growth in the next three years. They expect earnings to grow 10 per cent next financial year, with acceleration expected in FY14 and FY15, led by the commissioning of new capacities.
Jigar Shah and Vedant Agarwal of Kim Eng Research (a subsidiary of Malayan Banking Berhad), who have Petronet as their top pick in the sector, said in a report dated March 16, “Given the increased cost of the five-million tonne terminal to be built later this year, the earnings per share (EPS) growth should temporarily moderate to nine per cent in FY13 (mainly due to a sharp rise in the interest and depreciation cost on the commissioning of the Kochi terminal in the September 2012 quarter). However, as the utilisation rises, it would return to 25 per cent in FY14 and FY15. We set a target price of Rs 225, based on a price-to-earnings of 14 times FY13.”
| HEALTHY GROWTH | ||||
| In Rs crore | FY11 | FY12E | FY13E | FY14E |
| Net revenues | 13,106 | 21,971 | 26,251 | 33,073 |
| Y-o-Y change (%) | 23.60 | 67.60 | 19.50 | 26.00 |
| Ebitda | 1,125 | 1,904 | 2,293 | 2,865 |
| Y-o-Y change (%) | 40.50 | 69.30 | 20.40 | 25.00 |
| Net profit | 620 | 1,120 | 1,192 | 1,526 |
| Y-o-Y change (%) | 53.18 | 80.68 | 6.51 | 27.98 |
| EPS (Rs) | 8.30 | 14.90 | 15.90 | 20.30 |
| E: Estimated Source: Analyst reports | ||||
A positive Budget
The Budget rang in a few positives for the company. Apart from removing the customs duty on LNG imports (5.15 per cent earlier), it included oil and gas/LNG storage facilities and gas pipelines as sectors eligible for viability gap funding. Analysts believe the duty removal will reduce the cost of gas by $0.50 per million British thermal unit (mBtu). While Petronet is likely to pass through the full benefit to customers, lower prices should further boost demand at a time when the domestic gas production in under pressure.
Thanks to the continued fall in gas output from Reliance’s KG-D6 basin, the availability of domestic gas is likely to dip to 123 million standard cubic metres per day (mscmd) in FY13 from 133 mscmd now, analysts estimate. In contrast, the overall demand for this cleaner and cost-effective fuel is expected to remain firm.
In this scenario, power and fertiliser firms, the key consumers of natural gas, will have to depend more on imported LNG. Amit Rustogi, Ruchi Dugar and Miten Vora, analysts at Antique stock Broking, expect LNG to form 37 per cent of the country’s total gas supply in FY15 from the current 26 per cent. Petronet LNG is well placed to benefit from this growth opportunity. In a bid to capture the higher demand, the company has expedited its expansion plans. Its five-million tonne Kochi terminal project is likely to be commissioned by September and start commercial sales by December. Notably, Petronet has already booked a large part of capacity expansions currently underway at its Dahej terminal (expected to go on stream in FY14). These provide for a strong earnings and utilisation visibility over the medium term.
The road ahead
Analysts like Shah and Agarwal estimate the company to clock volume growth of 15-17 per cent in FY13 and 20-25 per cent each in FY14 and FY15. Firm crude oil prices and falling LNG prices (even if they remain stable at current levels) should only improve LNG’s competitiveness over other fuels.
More From This Section
Also, any change in regulations regarding the pooling of LNG prices and its inclusion in the declared goods category (to cap value-add tax on LNG to four per cent) will be a positive. However, a proposed cap on the gas marketing margin could have an impact on its earnings, albeit marginally, believe analysts. Also, a surprisingly sharp increase in domestic gas output, which looks difficult currently, could impact the company’s fortunes. As of now, the scrip is trading at 11 times FY13 EPS. This appears inexpensive, given its historical range of 10-15 times one-year forward earnings. Most analysts are bullish on the stock (at around Rs 161 currently) and expect upsides of 25-30 per cent (given price targets ranging Rs 200-225).