Scrip With A Future - Petronet LNG

The stock market isn't providing any respite, making it essential for you to include defensive stocks in your portfolio. In line with this strategy, we are recommending Petronet LNG (PLNG). This low-price scrip has a CMP of Rs 52.40. Since its IPO, Petronet LNG has grown at a three-year CAGR or compounded annual growth rate of around 50 per cent in the topline. Its bottomline has grown to Rs 474.65 crore in FY08. This contrasts sharply with the loss-making figure of Rs 28.45 crore it recorded in FY05. Petronet LNG has taken several growth measures, which will further improve its standing in the market.

Petronet LNG is into import and re-gasification of liquefied natural gas (LNG). It enjoys the support of the four Navratna PSUs, namely GAIL, IOC, ONGC and BPCL, which have changed the Indian natural gas sector and taken it to the level it finds itself today. It is owing to these PSU promoters that Petronet LNG has performed exceptionally well in the last few years. It imports LNG from Ras Gas, Qatar, and supplies it  to three of its promoter PSUs  GAIL, IOC and BPCL. The best part of this is that the Gas Sales Purchase Agreement (GSPA) will remain in force for 25 years, which ensures a guaranteed offtake from promoters. So, it is clear Petronet LNG would continue to perform in the future but it isn't just that. Petronet LNG, which operates the country's first and largest LNG terminal at Dahej, is running at more than 100 per cent of its installed capacity. It meets 25 per cent of the country's total gas requirements. But, in view of the huge demand-supply gap, it is now doubling its existing capacity at the Dahej terminal to take it from 5 mmtpa to 10 mmtpa. The commercial operations of this terminal would begin in FY10.

Petronet LNG is also setting up another LNG terminal of 5 mmtpa at Kochi, which would be implemented in two phases of 2.5 mmtpa each. The Cochin Port Trust has already allocated 33.1 hectares land for this terminal. On commissioning, this unit Petronet LNG's total capacity would increase to 15 mmtpa. It goes without saying, when these capacities come into play, its revenue inflows will swell. Petronet LNG has already executed loan agreements with Asian Development Bank (ADB)  to the tune of Rs 675 crore  which would be utilized for Dahej project. Its Kochi terminal would also be part financed  to the tune of $300 million by International Finance Corporation (IFC).

Petronet LNG is in discussion with other countries like Oman and Algeria for securing gas supplies. It is also negotiating for long-term LNG supply from Gorgon facility in Australia. This would de-risk its business and reduce its dependence on a single supplier, Ras Gas. The natural gas sector is still in nascent stage in India. There are immense growth opportunities. On the domestic front, the supply of natural gas in FY07 was 86 million metric standard cubic meter per day against demand of 231 mmscmd. This demand is expected to touch 313 mmscmd by 2012 and 391 mmscmd by 2025, thus indicating huge potential for companies like Petronet LNG. In fact, around 45 per cent of the total gas demand in India comes from the power sector and with huge expansions lined up by power companies, the outlook looks buoyant for it. Besides, user industries like steel, chemicals, glass, ceramics, refineries and city gas would keep up the demand for gas in the coming period. That apart, the government, too, is putting emphasis on LNG as an alternative fuel, as it is not only cheap, but also environmentally clean.

In FY08, Petronet LNG's topline increased 19 per cent to Rs 6,555.31 crore (Rs 5,508.95 crore), while profits grew 51 per cent to Rs 474.65 crore (Rs 313.25 crore). Based on these figures, it generates a PE of 8.25x and a market cap-to-sales ratio of just 0.60x. This makes it a good issue to grab for the long term.