Stocks for 2018 Issue 5
Petronet LNG Ltd. (PLL) a Government of India initiative is involved in the business of receiving and regasification of Liquified Natural Gas (LNG) from its terminals in Dahej and Kochi. The company is a joint venture between GAIL, ONGC, IOC and BPCL each with a 12.5% stake with 10% held by GDFI and 5.2% held by ADB. The company imports LNG from various sources across the world to cater to the domestic demand for natural gas in India. The Dahej terminal has a capacity of 10 Million Metric Tonnes per Annum (MMTPA) with an expansion going on to achieve 15 MMTPA and the Kochi terminal, nearing its completion is expected to have a 5 MMTPA capacity. There are other sites at which the facilities are being developed viz. Gangavaram in Andhra Pradesh. PLL has a LNG supply contract with RasGas of Qatar (7.5 MMTPA) and Exxon Mobil of Australia (1.4 MMTPA) and a sales agreement with GAIL, IOCL and BPCL. The company has got a credit rating of AA+ indicating strong fundamentals.
The demand for natural gas is expected to reach around 400 Million Metric Standard Cubic Metres per Day (MMSCMD) in 2017-18 from 227 MMSCMD in 2012-13 reaching a CAGR of 12%. The supply is expected to lag behind with 160 MMSCMD in 2017-18 from 101 MMSCMD in 2012-13 reaching a CAGR of 9.64%. The overall energy demand is expected to have a CAGR of 6.5%. PLL is expected to benefit from the mismatch in demand and supply of gas as the deficit would be imported from foreign countries.
The refineries are the largest consumers of LNG with a volume consumption of 36% followed by fertilizer 18%, city gas distribution 15% and power 11%. The competition to LNG mainly comes from Coal.
First Quarter Result Update
PLL reported a 16.83% decline in the consolidated net profit to Rs.225 crores from Rs.271 crores on a year on year basis and a decline of 8.08% from Rs.245 crores on a sequential quarter on quarter basis. The sales increased by 20.11% to Rs.8444 crores from Rs.7030 crores on a year on year basis and a decrease of 0.25% from Rs.8466 crores on a sequential quarter on quarter basis. The EBITDA margin and the net profit margin declined to 4.89% and 2.67% from 6.88% and 3.85% respectively on a year on year basis. The growth outlook for FY14 remains marginally flat to positive.
PLL has achieved a phenomenal CAGR of 36.8% in sales from the year 2008 till the year 2013. The profitability has been in the range of 3.63% to 7.18% of the revenues with a CAGR of 19.35% in the five years from 2008 to 2013. The EBITDA has been in the range of 6.39% to 13.9% of sales with a CAGR of 17.13% in the five year period of 2008 to 2013. The Earnings per Share has grown with a 19.34% CAGR from Rs.6.33 in the year 2008 to Rs.15.32 in the year 2013. The PE multiple of 8.25x FY 2012-13 earnings looks reasonable relative to the industry average of 7.26.
The sales are expected to grow at high rates considering the opportunity in the LNG segment of oil and gas sector in India. The current capacity of 15 MMTPA (10 MMTPA from Dahej and 5 MMTPA from Kochi) would be underutilised till FY 2013-14 given the constraint of the Kochi terminal. The capacity is expected to be 12.5 MMTPA in FY 2014-15, 15 MMTPA in FY 2015-16, 20 MMTPA in FY 2016-17 and 25 MMTPA in 2017-18. According to management estimates the capacity in FY 2021-22 is expected to be 50 MMTPA. Capacity addition and commencement of operations at the Kochi terminal should give further boost to volume growth after FY 2015-16 and onwards. The EBITDA margin and the net profit margin are expected to be under pressure in the near future due to increase in the procurement costs for LNG and high depreciation costs due to large capacity addition. The fixed cost of the underutilised capacity of Kochi terminal is expected to put pressure on the net profit margin. The margins are expected to increase post FY 2015-16 as higher capacity benefits from LNG imports. The company is expected to post a 21.62% CAGR in sales from Rs.316 bn in 2013 to Rs.842 bn in 2018.
Earnings is forecast to grow at 19.25% CAGR over the next five years. The earnings are expected to remain flat in the next two years and grow significantly from FY 2015-16 on the basis of full utilisation of capacity. The stock at Rs.120 is trading at 3.24x FY 2017-18 earnings and given the growth expected in the gas business the stock should receive a higher rating going forward.
The company has debt equity ratio of 0.6 in FY 2012-13 and is expected to reach 1 in FY 2017-18 on account of capacity addition at Dahej in Gujarat and Gangavaram in Andhra Pradesh. The company is expected to leverage its balance sheet going ahead due to necessary capital expenditure in the future.
PLL is a marginally positive free cash flow company due to the company investing for growth. The free cashflows are expected to remain marginally positive on account of investing activities in the regions across India. The free cashflows are expected to be stable over a period of 5 years due to increased borrowing and investing activities in the current situation and near future.
PLL has a good risk return profile as it is reasonably valued at 7.83x FY 2013 earnings with a healthy balance sheet and a consistent dividend track record with a growth business model. PLL will underperform in the next one to two years given the decline in the EBITDA and will start performing post 2015. We recommend a wait and watch and buy at the appropriate time strategy for the stock.
One year relative performance to Sensex
PLL has underperformed the BSE Sensex over the last year on account of decline in the operating profit, operating profit margin, net profit and net profit margin. The decline in margins is mainly due to import of gas at higher prices and large capacity addition in the existing and new facilities across India. The stock reached a 52 week high of Rs.175 on 2nd November 2012 and a 52 week low of Rs.106 on 30th July 2013.
Chart 1. Petronet LNG Relative Performance to BSE Sensex