Stock Review: Petronet LNG

Strong surge in share price has come ahead of increased spot volumes; however, earnings visibility will be key

The share price of Petronet LNG, which is into regasification and supply of liquefied natural gas, has risen around 45 per cent over the past one month. The company, which underperformed peers in the gas business throughout the year, is suddenly catching attention, as some critical parameters have turned positive.

For one, spot volumes are set to rise from the near-zero levels in the previous quarters. The company's revenues are sourced from regasification of LNG through long-term contracts and spot deals. It has 10 million tonnes per annum (mtpa) capacity at Dahej, and is building the Kochi terminal. As far as long-term contracts are concerned, it has already tied up for nine mtpa. Analysts say it has signed back-to-back contracts with off takers. Therefore, it does not bear any price or volume risk associated with long-term contracts and has created a natural hedge.

Spot volumes increased on the back of delay in Reliance Industries KG-D6 gas ramp-up and unavailability of around six mcmd (million cubic metres per day) gas from Panna-Mukta fields after an undersea pipeline leakage on July 20. Analysts said a10 per cent change in spot volumes could have a 2.5 per cent change in earnings per share (EPS) of the company, hence the surge in share price. The other parameter is the Dahej regasification tariff, where a 10 per cent change can boost EPS by around 14 per cent. However, the price of gas for long-term contracts is expected to stabilise with a downward bias in future. Also, the regasification margins are also expected to remain stable.

The company has plans to invest around `5,200 crore till FY14 and expand capacity to 18 mtpa. However, much of these positives have been factored in. The next level of triggers will be in the form of earnings visibility from the spot volumes and the regasification margins that bring in the cash.