Petronet LNG

Though Petronet LNG's facing challenges in generating earnings at present,given its future outlook,it looks to be a good bet for the long term

   Petronet LNG's difficulties in generating earnings from its expanded capacity have weighed down on its valuations. However, in a gas-starved country like India, it won't be long before the supporting infrastructure comes up that enables PLNG's assets to generate incremental earnings. In view of the solid asset base that the company has created and its de-risked earnings model, the temporary problems that the company is facing provides an opportunity for long-term investors to enter the stock.

BUSINESS

Petronet LNG (PLNG), 50% owned by four PSU petroleum companies in equal proportions —Gail, BPCL, Indian Oil and ONGC —is India's largest importer of liquefied natural gas with a 10 million tonne plant at Dahej in Gujarat. For this, the company has tied up with Qatar's Ras-Gas to supply 5 mtpa of LNG, which was raised by 50% to 7.5 mtpa with effect from January 2010.

   Thanks to back-to-back sales agreements with its promoter group, it bears no marketing risk. The conversion charges it imposes on regassification of LNG remains its source of earnings. The conversion charges that currently stand at Rs 31.7 per million units are revised up 5% every year. This arrangement typically results in a low operating margin but ensures adequate return on capital.

   The company is currently setting up another 2.5 mtpa greenfield LNG import plant at Kochi at a capital cost of Rs 2,500 crore. It also has a joint venture with Adani Group for a solid cargo port at Dahej.

GROWTH DRIVERS


The company doubled its regassification capacity to 10 million tonne per annum in July 2009. The company has also added another vessel to transport additional LNG in November 2009. Qatar's RasGas has increased LNG supply by 50% to 7.5 mtpa from January 2010.

   The availability of shale gas in the US has reduced its dependence on imported LNG. As a result, the LNG exporters from the Middle East and African countries are looking at Asian region to market their product. A part of this additional LNG is expected to come to India. With PLNG enjoying a significant spare capacity it will be the natural beneficiary of higher LNG volumes. PLNG's Kochi terminal is expected to commission by March 2012, where the capacity utilisation is likely to remain high.

FINANCIALS

PLNG's business is capital intensive — it has spent nearly Rs 3,800 crore in building the 10 MTPA capacity at Dahej over the past seven years. In the past three years, the average return on capital employed remained at 24.9%, which could weaken marginally for FY10, as its additional capacity hasn't earned any income. In the past five years, the company has grown its net sales at a cumulative annualised growth of 40.5%, while the net profit grew at 20%. The company has a history of generating healthy cashflows from operations. Its FY10 numbers were particularly affected by the additional burden of interest and depreciation on the doubled capacity, which hasn't started generating revenues yet. The company reported a 22% fall in net profit after the interest cost jumped 82% and depreciation was up 57% during the year.

   During the March '10 quarter, when the additional volumes started coming in, the company faced challenges in evacuating the regassified gas to its customers — firstly due to the congestion in Gail's pipeline and secondly due to availability of RIL's cheap gas. Although a number of industrial consumers still finds RLNG cheaper to the liquid fuels, the existing pipelines getting choked up with cheaper RIL gas is leaving little scope for PLNG's additional volumes.

VALUATIONS

PLNG's current price is 15.2 times its earnings for FY10. It is currently valued at par with its peers in the natural gas industry. However, this fails to capture the earnings potential of its expanded capacity, which is currently facing challenges due to lack of evacuation infrastructure. Gail's new pipeline capacity in the North India will be the key trigger for the company as it will be able to push more RLNG through it for its consumers. The company is expected to end FY11 with EPS of 7.4. The current price is 11 times its one-year forward earnings. For a company with steady earnings flow, this appears attractive