Petronet LNG March Quarter Earnings Update

In our earlier update (titled ‘Petronet LNG March Quarter Earnings Review’ dated April 25, 2012), while reporting the initial review on the March quarter results of the state PSU Petronet LNG, we had asked readers to hold the stock as we awaited clarity from the management on the sequential fall in marketing margins and gas volumes and to get a clear picture on the future prospects of the company on its envisaged capex front. 

Post our interaction with the management in a recently conducted conference call we reiterate our ‘hold’ recommendation on Petronet LNG as we remain bullish on the company’s future prospects and the capacity expansion plans which will power it with the ability to meet the benevolent demand of the country. Following are some of the key takeaways from the conference call:

• On the foreign exchange fluctuation expense reported by Petronet LNG in March 2012 quarter amounting to Rs 57.53 crore, the management has refuted all concerns and said that there would be no impact of forex gain/(loss) on company profitability as it is always adjusted in the billing to its customers.

• On the Petroleum and Natural Gas Regulatory Board’s (PNGRB) decision to cap marketing margins and re-gasification charges on LNG and natural gas sales, the management has maintained that at present there is no such regulation or law in place to do so. Also, as the re-gasification charges are agreed upon between the company and its off-takers like GAIL, BPCL and IOC, etc, the regulator has no role in it. If in case the regulator wants to come up with the regulations then they have to come out with an amendment in the PNGRB Act.

• The management has laid out a total capex plan of Rs 1,500 crore for FY13.

• The current global LNG prices are around USD 14 per MMBTU.

• On the capex front, work on the company’s Kochi terminal with capacity of 5 MTPA is well on track and is expected to be completed by December 2012 at a total capex of Rs 4,200 crore. Of the total amount, the company has so far infused Rs 3,000 crore as on March 31, 2012. The terminal is expected to have pipeline connectivity within 60 km and will supply gas to Kochi refinery, FACT and other customers within the range. A pipeline connecting to Karnataka (Bangalore) will be ready by 2HFY14, which will boost the volumes. The company expects volumes to be between 1-1.5 MMT for FY14. The terminal is expected to have 100 per cent capacity utilisation of 5 MMTPA before FY16.

• Construction work on the second jetty at Dahej (Gujarat) at a capex of Rs 900 crore is expected to be completed by September 2013 post which the capacity would rise from the current 10 MTPA to 12-13 MTPA. The company has also approved the expansion plan of Dahej to 15 MTPA with a capex of Rs 3,100 crore, post which the company can handle volumes up to 15-16 MTPA.

• The company has also finalised the location for the third LNG terminal’s greenfield expansion with capacity of 5 MTPA at Gangavaram in Andhra Pradesh. The detailed feasibility report is expected to be complete by April 2013. 

• The company expects total LNG terminal capacity of 25 MTPA by 2015-16.

Based on the above key takeaways from our interaction with the management we get a sense that the counter of Petronet LNG, despite having corrected sharply in the past few days owing to certain regulatory tensions, is still worth investing in. At its current price of Rs 138.6 per share, its PE multiple works out to 9.83x its FY12 EPS of Rs 14.1. At such cheap levels we advise investors to keep adding this stock to their portfolio as we expect volume off-take to improve during the next quarter as fertiliser and power plants will resume their operations post the annual maintenance shutdowns.