Stock Review: PETRONET LNG

PETRONET LNG reported robust volumes and earnings growth as it benefited from the reduced domestic natural gas production during the December 2010 quarter. In fact, its quarterly profit has doubled. The company's scrip now trades at 19 times its earnings for trailing 12 months, which appears reasonable considering its healthy growth prospects. Petronet's sales volumes during the quarter grew nearly 32% to 111 trillion British thermal units (TBTUs) from 84 TBTU last December. A month-long shutdown at Panna-Mukta-Tapti (PMT) in October and stagnating production from Reliance's KG basin fields meant that a chunk of the demand had to be met through imported natural gas. For Petronet, this resulted in 62% higher net sales at . 3,628 crore. The operating margins improved slightly due to higher scale of operations. Although the other income fell substantially, almost flat interest and depreciation costs ensured that the pre-tax and post-tax profits doubled when compared with the year-ago period.

   Petronet, which has always been a regassifying company, has decided to test the waters for trading in natural gas. For the first time, the company decided to import 1.1 million tonnes of LNG, for which there won't be any back-to-back sales agreement with offtakers like Gail. Since the company will be earning marketing margins apart from its normal regassification charges on these volumes, its operating profit margins are expected to inch up in future.

   The company's growth constraints are also easing. The pipeline capacity constraint, which was haunting the company last year, has eased with partial expansion of Gail's Dahej-Vijaypur Pipeline. The company is setting up a second jetty, which will ease constraint in handling number of vessels every year. In 20 months, the company's Kochi terminal, with 2.5 million-tonne capacity, will be ready to commence operations. Within 2-3 months of commencement, the capacity will be scaled up to 5 million tonnes. The company is carrying sufficient cash balance to fund its . 1,200-crore capex plan for FY12.

   In the current scenario, where new LNG capacities are coming up while the US has stopped LNG imports due to the advent of shale gas, Petronet appears comfortable depending on spot cargos or short-term contracts for bridging the capacity utilisation gap. It is importing spot cargos for about $10/MMBTU. This is likely to prevail over the next couple of years, which means Petronet's future growth outlook is robust.