The stock of gas importer and regasifier Petronet LNG is down more than 20 per cent since the beginning of the year. Concerns about under-utilisation of its recently-commissioned Kochi terminal and subdued volumes of higher-margin spot cargoes have taken a toll.
For investors with a long-term perspective though, this presents a good buying opportunity. At Rs 124, the Petronet stock quotes at around 8 times its trailing earnings, lower than levels it traded at in the past (around 12-14 times). Also, the worries surrounding the company, while valid, should ease over time.
Temporary troubles
Following protests by farmers, construction of the Kochi-Bengaluru gas pipeline by GAIL is caught up in a legal dispute with the Tamil Nadu Government. So, over the next year, utilisation of Petronet’s 5 mtpa Kochi terminal is expected to be below 10 per cent — even as the company incurs costs on depreciation and interest. The Kochi terminal received its first LNG cargo this month.
There may be delays in the pipeline construction, but it is unlikely that the project will be shelved, given the big investments made by GAIL and the advantages which local economies can derive from natural gas. A court judgment in favour of GAIL or, failing this, a mutually-acceptable settlement between the parties should see the project revive. This should increase the Kochi terminal’s capacity utilisation over the next two-to-three years. Meanwhile, the Kochi-Mangalore pipeline, which is not under legal challenges, is expected to be completed over the next year or so. This should aid capacity utilisation.
The other concern has been about weak spot cargo volumes at the company’s 10 mtpa Dahej terminal in Gujarat. Petronet earns a chunk of its revenues from regasification charges on long-term contacts with customers. These charges are increased by 5 per cent each year. The company also sells spot cargoes, on which it earns marketing margins in addition to regasification charges. In the recent June quarter, high LNG price resulted in a dip in demand for spot cargoes from sectors such as power. Consequently, Petronet’s profit in the June quarter dipped 17 per cent over the same period last year. Spot gas remains costly at around $13-$14 per mmbtu. This, along with the steep fall in the rupee, may continue impacting demand in the near term.
Capacity expansion
That said, spot gas prices which go through cycles, may not always remain at elevated levels. Also, over the long-term, gas prices globally are expected to decline with exports commencing from the shale-gas rich US and production starting from new giant finds such as the Rovuma asset in Mozambique. This should provide a boost to gas consumption in India where demand for the fuel runs far ahead of supply. With domestic supplies insufficient to meet demand, Petronet, which dominates the gas import market in the country with more than 70 per cent share, will benefit. The Dahej terminal operates at more than 100 per cent capacity.
The second jetty at the Dahej terminal is expected to be operational by the end of the fiscal. This should enable handling of more cargoes. Also, Petronet is expanding the capacity at Dahej from 10 mtpa to 15 mtpa. The expansion is expected to be over by 2016. Besides, the company has initiated work on setting up a new 5 mtpa terminal in the East Coast at Gangavaram, Andhra Pradesh.