The Hindu Business Line : Petronet LNG: Hold

SHAREHOLDERS in Petronet LNG can stay invested for now. The stock has run up sharply in recent months but further gains can be had in the medium term. The company has wiped out its accumulated losses and is doubling the re-gasification capacity at its existing location in Dahej in addition to plans for a new terminal at Kochi.

With demand for natural gas running far ahead of supply, Petronet LNG appears to have bright prospects for growing its revenues and earnings. The only constraint to growth could come from higher LNG prices; while that will not affect its earnings, as LNG costs are passed through to buyers, it may certainly have an impact on demand.

Petronet's second quarter performance with post-tax earnings of Rs 40 crore on a turnover of Rs 945 crore is almost like its first; the next two quarters may also prove identical except for benefits flowing from cost savings. Having almost reached its full capacity of 5 million tonnes per annum, the scope for major growth in revenues and earnings is limited.

Petronet's activity is limited to re-gasification of LNG for which it receives a charge that constitutes its revenues. This charge is subject to a 5 per cent escalation every year, which will provide moderate growth to revenues and earnings. Major growth can come only from higher volumes, which is subject to re-gasification capacity. Alternatively, a foray into marketing of gas can ramp up growth rates. Both these are on the anvil, with the doubling of capacity at Dahej to 10 million tonnes by 2010, with an investment of Rs 1,500 crore. There is unlikely to be a dilution in equity for this with money coming from debt and internal accruals.

While the expansion will provide double the volumes with considerably lower investment, Petronet will have the option of marketing about 2.5 million tonnes of the gas on its own. Now, all its re-gasified LNG is being marketed by its promoter companies — Gail, IOC and BPCL.

When the Kochi terminal goes on stream, by 2011, Petronet will have a capacity of 12.5 million tonnes which will make it a big player in the natural gas industry. Demand for gas, now at about 150 million standard cubic metres a day (MMSCMD), is almost double the available supplies and by 2010 it is expected to touch 300MMSCMD,with supply still lagging behind. Petronet will be nicely positioned to exploit this demand with its expanded capacity.

The key factor in any calculation on Petronet will be access to LNG and its pricing. Though current LNG capacity worldwide is all tied-up, fresh ones are coming up in time for Petronet's expansion. Price, however, is a different issue. Global LNG prices have soared to around $10 per million British thermal unit (MBTU) compared to $2.5 that Petronet now pays to Ras Gas and any new contract will have to be at higher prices.

The success of the expansion will depend on the price Petronet manages to negotiate with its long-term suppliers. Of course, it also has the option of acting as a merchant re-gasifier for LNG sourced by other end-users such as the National Thermal Power Corporation.

In the near term, there could be a major boost to revenues and earnings if Petronet succeeds in accessing another 1.25 million tonnes of LNG on a spot basis for which it is in talks with its supplier, Ras Gas of Qatar. Any such supply will be linked to spot prices and the key will be the price that Petronet manages to get from Ras Gas. Some development on this front is expected by January and assuming that the company manages to tie-up, supplies could begin from April 2006.

Petronet will be able to re-gasify the extra volumes at the existing plant without any further investment. Therefore, the extra volumes, if it comes through, will be a major earnings enhancer.

This could be a positive spur for the stock to move further upwards and investors may do well to watch out for development on this front.

Any investment at current price levels should, however, be made with a long-term perspective.

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