Petronet LNG’s move to expand capacities to meet the country’s rising demand for gas will help sustain volume growth over the next 3-4 years.
The growing demand for gas as a cheaper source of fuel will keep companies like Petronet LNG (Petronet) in prominence. Petronet imports LNG (liquefied natural gas) and converts it into regasified LNG (RLNG) at its regasification terminal at Dahej, Gujarat. The growing acceptance of RLNG, although priced higher than natural gas, is on the back of the burgeoning demand-supply gap in the country. To tap the rising demand, the company has mulled a capacity expansion plan of 3.5 times from the present 5 MMTPA (million tonnes per annum) by 2012. Petronet’s income comes from the regasification charge, which increases by around 5 per cent every year as per the understanding with the buyers (is due for review in 2009) including GAIL, IOC and BPCL; these companies hold a 12.5 per cent stake each in Petronet. The rising volumes thus, indicate that its financials should grow at a healthy pace in the next few years. Its move to set up a power plant and a solid cargo port is also positive and will help in de-risking its business model.
Demand-driven
The company is scaling up its capacity from 5 MMTPA to 17.5 MMTPA by 2012, in view of the increased domestic demand. According to the estimates of the Eleventh 5-Year plan, the demand for gas in India will be 283 mmscmd in 2012. In the same period, the domestic supply, including the gas extracted from the KG basin, will reach up to 180 mmscmd only. Hence, the country would still continue to depend on imports in the future to fill up this vaccum. Petronet being India’s largest LNG importer will thus, be a major beneficiary.
The company has already obtained 7.5 MMTPA of gas from Qatar-based RasGas through long-term contracts and is actively engaged to secure another 1.5 MMTPA through spot and near-term contracts. Petronet is also in talks with Algeria, Oman, Egypt, Qatar and Trinidad & Tobago to secure long-term contracts in view of its expansion plans.
Expansion overdrive
More From This Section
The projected gas demand-supply mismatch has opened avenues for the company for the future. Consequently, the company has embarked to expand its Dahej regasification plant and construction of another regasification plant at Kochi to meet the requirements within the country. The company is set to double the capacity at Dahej from 5 MMTPA to 10 MMPTA by Q4 FY09. It would be further expanded to 12.5 MMTPA on the completion of second jetty by the end of 2010. The expansion at Dahej will derive the benefit of economies of scale to the company. Thus, Petronet can maintain profitability, despite any under-utilisation of capacity in the initial years.
The first phase of the Kochi terminal (with initial capacity of 2.5 MMTPA) would be completed by Q3 FY12 and subsequently expanded to 5 MMTPA by 2012. Once the Kochi terminal is complete, the company can leverage the Kochi-Bangalore pipeline of GAIL to transport RLNG to nearby regions which currently cannot be serviced due to lack of the pipeline connectivity. The company is engaged with Exxon Mobil to source around 2.5 MMTPA from the Gorgon project (Australia) for augmenting supplies for the Kochi terminal. As the company’s revenues depend on the sales volumes it handles at the terminals, expect earnings to rise in the future with a rise in volumes.
| STABLE GROWTH | |||
| Rs crore | FY 08 | FY 09E | FY 10E |
| Sales | 6,555 | 7,573 | 11,709 |
| Net profit | 475 | 462 | 520 |
| EPS (Rs) | 6 | 6 | 7 |
| P/E (x) | 6 | 6 | 5 |
| P/BV (x) | 2 | 2 | 1 |
| E: Estimates | |||
In addition to the regasification terminals, the company is setting up a 1,200 MW power plant at Dahej in the vicinity of the LNG terminal. The plant proposes to consume around 1.2 MMTPA and would ensure higher capacity utilisation levels after the expanded capacity is put up at Dahej. A solid cargo port is also being built at Dahej in joint venture with the Adani group, in two phases. This port would have facilities to import or export bulk products like coal, steel and fertiliser. The phase-I is likely to be completed by November 2009 and phase-II by 2010.
Inexpensive option
Fertiliser and power industries continue to be major consumers for Petronet. In terms of pricing, LNG is considered to be an economic fuel as compared to other fuel alternatives like naphtha. Liquefaction, shipping and regasification charges, put together, though make RLNG costlier than natural gas. However, due to limited supply of natural gas domestically, the gas deficit will ensure that demand for RLNG remains strong for at least for the next 3-4 years. The government is scheduling many ultra mega power plants, which should ensure that the power sector remains the largest gas consumer.
The demand from the fertiliser sector will also be relatively price-inelastic and getting buyers for its expanded capacities from this sector will not be difficult. Moreover, the combustion of natural gas is environmentally friendly, unlike the other alternative fuels which produce harmful and toxic gases.
Potential risks
The sales were marginally affected in Q2 FY09 as one of high pressure pumps was held up for repair. This is a case of an operational risk, which affected sales volumes by 10 per cent. Good news is that, the pressure pump has been re-commissioned from October 4. Secondly, the five-year fixed price period with RasGas for its supplies is set to expire in January 2009; any significant upward revision in the price may impact profitability in the near-term (till buyers adjust to higher prices). Lastly, timely execution of projects (Dahej and Kochi terminals and power plant construction) is also a requisite to ensure sustained volume growth.
Investment rationale
Strong economic growth has fuelled demand for gas across sectors. Petronet’s effective leveraging of GAIL’s infrastructure and on-track capacity expansions will confirm its position (25 per cent share) in the market place in the future as well. The company is engaging with various suppliers for term contracts, never mind the spot market potential to fall back on, which will ensure effective utilisation of the increased capacities.
Healthy growth in financials and comfortable operating cash flows are an indicator that the company should not find it difficult to finance its expansion plans and new projects. At Rs 37, the stock is trading at around 6 times of its FY09E earnings and can deliver 20-25 per cent annually in the next two years. The dividend yield of around 4 per cent (based on FY08 payout) provides further comfort.