Concerns over long-term growth cast shadow on Petronet LNG

Petronet LNG

Although the near-term prospects of Petronet LNG (Petronet) look encouraging, growth, in the long run, appears a bit grim. The stock performance has also been underwhelming.

The company’s scrip has generated a return of a mere 2 percent in the past month and 4 percent YTD. In the past three years, it is up 16 percent.

Brokerage house Sharekhan said the stock offers a decent dividend yield of 5-6 percent, and it trades at an attractive valuation of 9.4 times its FY24 EPS or earnings per share and 8 times of FY25 EPS given earnings visibility and RoE (return on equity) of 22 percent.

About the company

Petronet imports, stores and sells regasified liquefied natural gas (LNG) in the domestic market. It accounts for around 40 percent of gas supplies in the country and its ports handle around two-thirds of LNG imports.

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Formed as a joint venture (JV) company by the government to import LNG and set up LNG terminals in the country, it involves India's leading oil and natural gas industry players. Bharat Petroleum Corporation Ltd, GAIL (India) Ltd, Indian Oil Corporation Ltd and Oil and Natural Gas Corporation Ltd (ONGC) are promoters of the company and together hold 50 percent stake in Petronet.

The company delivered its all-time-high net profit in the third quarter of FY23 despite inflated LNG prices amid weak demand in international markets. Its operating margin expanded sequentially due to solid cost optimisation strategies to 10.6 percent in Q3FY23 but was down 310 basis points on-year. Profit after tax jumped 52 percent on a quarterly basis, and 3 percent on a yearly basis to Rs 1,196 crore, a record, mainly on the back of high other income.

Interestingly, while domestic institutional investors (DIIs) and public shareholders have been trimming their holdings in the company, foreign institutional investors (FIIs) have been raising their stakes, going to 34.85 percent in December 2022 from 29.31 percent in March 2020.

Improvement in utilisation level

According to Motilal Oswal Financial Services, a further cooling off in LNG prices to around $12 per mmBtu (metric million British thermal units) from a peak of $54 per mmBtu in August 2022 should help improve Petronet’s utilisation levels in the near future.

The management expects capacity utilisation to improve to 80-90 percent in the near term, from the current 81 percent.

The recent moderation in spot LNG prices is also seen improving volume visibility for gas utilities, analysts said. After a full year of volatile and continued high spot LNG prices in CY22 due to the Russia-Ukraine crisis, spot LNG prices declined to $16-20 per mmBtu in January 2023.

“The elevated spot LNG price has impacted LNG demand in India and that is also reflected in lower utilisation at LNG terminals in the country. However, the recent steep fall in spot LNG price if sustained and long-term domestic gas demand drivers (higher demand from CGD [city gas distribution] and fertiliser sectors and the government’s aim to increase the share of gas in India’s overall energy mix to 15 percent by 2030) would drive strong volume growth for over FY24-25 for gas utilities like PLNG (Petronet),” said Sharekhan by BNP Paribas.

In its latest earnings conference call, Petronet pointed out that the high price of LNG was an issue. “So that is causing a worry, but now there is a silver lining that we are getting some price reduced. And in the last two days, I've seen the price has been ranging between $16 and $20. So if that remains the price throughout the year, then we can think of some momentum and augmentation in the process of installation of LNG stations and conversion of trucks to LNG fuel trucks,” said Vinod Kumar Mishra, Director (Finance), at Petronet LNG.

Long-term growth prospects sombre

However, long-term throughput growth prospects remain bleak due to the competitive environment, according to Motilal Oswal Financial Services.

“Long-term growth challenges persist, due to a 25 percent increase in domestic gas supply next year and an 86 percent increase in LNG terminalling capacity over the next few years,” it added.

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The brokerage firm explained that domestic gas supply will rise by about 12 mmscmd (million standard cubic metres per day) from Reliance Industries and 10 mmscmd from ONGC, which could result in India’s LNG demand remaining flat on a year-on-year basis at around 75 mmscmd in 2023, even after assuming 15 percent growth in total gas consumption. Furthermore, it believes India’s LNG terminalling capacity is set to increase by 86 percent over the next few years.

Other concerns

Additionally, Motilal Oswal pointed out that the sustainability of the company’s high return ratios is a concern, which has prompted the brokerage firm to maintain its ‘neutral’ rating on Petronet shares with a target price of Rs 210.

The company held net cash of Rs 3,100 crore as of the first half of FY23. But the brokerage firm said that the utilisation of cash appears to be a worry with announcements of some projects. Additionally, capacity expansion amid rising competitive intensity is seen diluting return ratios, it pointed out.

Motilal Oswal estimates suggest that the ROCE (return on capital employed) for its maiden petrochemical plant could be around 7 percent, which is significantly lower than Petronet’s average ROCE of approximately 20 percent over the past decade. Similarly, ROCE for the ongoing expansion of its terminal at Dahej, Gujarat, and the expansion of the floating storage re-gasification unit at Gopalpur, Odisha, are expected to be around 15 percent and 18 percent, respectively, both assuming utilisation of 60 percent, which still looks challenging considering the competitive intensity.

“PLNG (Petronet) not only suffers from the sustainability of its EPS growth but also a classic Dutch Disease,” Motilal Oswal said while elaborating that the net cash of Rs 3,100 crore has become an eyesore for investors as growth opportunities in LNG terminalling have become bleaker and the company is forced to invest in more volatile areas such as gas-based petrochemicals, compressed biogas as well as LNG trucking.

Technical view

Since October 2022, Petronet has seen an impressively strong upward trajectory, said Ameya Ranadive, Equity Research Analyst at Choice Broking.

Ranadive said, “The stock rose from a low of 195 in Oct to a high of 239 in mid-March, making higher highs and lower lows on a continuous basis. The stock appears to be poised to start wave 5 of the Elliott wave cycle, which might drive the price considerably higher, given that it recently retraced 61.8% of the distance from its high of 239.”

Petronet LNG's daily chart shows that it is trading above its 100 and 200 EMA, indicating a strong bullish trend. Similarly, the weekly chart highlights that the stock is above its short-term, mid-term, and long-term moving averages, with the RSI at 54, an RSI value of 54 suggests that the stock is currently in a neutral zone, and there is still room for further upward momentum, he added.

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Even Chandan Taparia, Vice President, Analyst, Derivatives Motilal Oswal Financial Services pointed out that "Petronet LNG is holding the gains even after the market declines and slow and steady moving upwards from last six months. However, in the last two weeks, it witnessed some profit booking from higher zones but again started taking support near to its 50 DEMA of 220 zones".

Ranadive believes Petronet LNG is a good buy at its current market price of 227, and investors can keep acquiring the stock until it reaches 215. He added that the likelihood of the stock recovering to 244, and even reaching 260 is quite strong.