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The recent sharp fall in the stock price of Petronet LNG, the country's largest gas importer and regasifier, provides a good buying opportunity for investors with a long-term perspective. At its current price of Rs 124, the stock trades at around 9 times its trailing 12-month earnings. This is much lower than its historical levels.
After a stellar run last calendar, the Petronet stock has been under pressure from various quarters over the past few months. First, a government proposal in January to have the downstream energy regulator, PNGRB, fix marketing margins of gas companies took a toll.
Then, in early April, the Petroleum and Natural Gas Regulatory Board (PNGRB) directed Delhi-based city gas distributor, Indraprastha Gas, to slash network margins and transmission tariffs by almost 60 per cent.
This led to a sympathetic rout of almost all stocks in the natural gas space, including Petronet LNG. Next, a dip in Petronet's March quarter volumes and profits in comparison to its December 2011 quarter added to the stock's pain.
REGULATORY CONCERNS SUBSIDE
But the concerns seem overdone. PNGRB has recently clarified that regulation of marketing margins of gas companies is outside the purview of powers vested with it currently. This removes a major overhang on the industry and on Petronet LNG. In any case, Petronet has been maintaining that regulation of marketing margins would not apply in its case.
The sequential dip in volumes and profits in the March quarter was mainly a result of maintenance activities by some firms in industries such as fertilisers and power.
Despite reduced off-take, Petronet's capacity utilisation in the March quarter was above 100 per cent, suggesting robust demand. Besides, the December 2011 quarter was better-than-usual for the company; hence the sequential dip in March quarter does not mean trouble regarding the company's business prospects. Overall, in FY-12, Petronet's capacity utilisation was a healthy 107 per cent.
VOLUME GROWTH
Demand for imported gas, though costlier than domestic gas, is growing at a healthy pace in India. This is due to the cost advantages of natural gas over competing fuels, and the continuing dip in domestic gas production, primarily from the KG-D6 fields of Reliance Industries.
Petronet has been able to make the most of the opportunity, growing its FY-12 sales and profits by more than 70 per cent. Demand continues to grow, but Petronet currently operates at more than full capacity.
Hence, volumes, while remaining healthy, may not show significant growth in the near term, till new capacities, which are work-in-progress become operational. Petronet is expanding capacity at its Dahej terminal from 10 million tonnes per annum (mtpa) to 15 mtpa. It is also setting up a 5 mtpa plant at Kochi.
The Kochi plant is expected to be commissioned by end-2012. The second terminal at Dahej, which should increase capacity to 12.5 mtpa, is expected to be completed by October 2013, while the full expansion to 15 mtpa should be over by end-2015.
Also, Petronet has signed a term-sheet for setting up a 5 mtpa terminal at Gangavaram port in Andhra Pradesh. Besides, the expanding gas pipeline network in the country, which includes currently under-served regions such as South India, should provide new markets for Petronet and aid its capacity utilisation. All this should translate into robust volume growth for the company in the coming years.
WELL-POSITIONED
Even if domestic gas output in the country picks up, the wide gap between expected demand (434 mmscmd) and domestic supply (203 mmscmd) by 2015 provides enough room for LNG players. Petronet, thanks to its size advantage, should benefit.
The company's comfortable leverage level (debt-to-equity of 0.93) provides adequate leeway to fund expansion plans.
