This report on Petronet LNG was published in Feb 2011. An update is available at Link

Petronet LNG is a gem of a stock that has given equity investors safe and high returns for the last 7 years.

Description and Profile

• Petronet LNG is a PSU created to import, process and sell LNG in the country
• It is a JV between GAIL, ONGC, Indian Oil and BPCL. This helps in all inter company coordination issues
• It owns and operates a LNG terminal at Dahej, Gujarat that imports 10.0 MMTPA (Million Metric Tonne Per Annum) of LNG. It also owns sea vessels that help transport LNG from sources
• The capital/ investment plans of PLNG include:
  • Capacity expansion at Dahej
  • A new LNG terminal at Kochi, Kerala.
  • Plan for forward integration into power plant construction at Dahej, which will use the imported LNG as fuel
  • A longer term plan is for a power plant at Kochi, using LNG
• Imported LNG is regassified and supplied to customers in pipelines – generally operated by GAIL
• The varied customer base includes Power plants, household and commercial piped gas, fertilizer plants, Industrial boiler fuel, etc.
• Turnover in 2010 was Rs 10,600 crores with PAT at 404 crores.
• Sourcing of LNG is in the form of long term agreements with Australia and Qatar. In addition Petronet sources spot cargo of Natural Gas, to boost volumes and utilize capacity

Stock evaluation, performance and returns

• This stock had it’s IPO in March 2004 priced at Rs 15.
• Maiden dividend was paid in 2007. Thereafter dividend has shown a steady to increasing trend
• At CMP of Rs 126 today, the stock has shown a 44% annualized return over the last 7 years!

Petronet LNG stock performance (click to enlarge)

• Revenues have grown steadily.

Quarterly revenues have grown steadily over the last 6 years

• Cash flow and EPS are showing a robust growth rate – see graph. Dip of EPS in 2010 is expected to recover substantially in 2011.

Cash Flow and EPS have grown substantially

• Price and PE chart shows that PE is at upper end of 5 year range. Some expectations are priced in of capacity additions and likely revenue growth.

Price and PE graph

• Price and EPS quarterly graph shows recent spike in price, rising to all time highs

Price and EPS graph

• ROCE is between 15 – 25%
• PEG is at 0.93 – indicates safety and undervalued status

Opinion, Outlook and Recommendation

• India is an energy hungry country, and will remain so for decades
• Gas is cleaner and preferred as fuel compared to coal and oil (polluting).
• Petronet LNG will continue to dominate the gas infrastructure and imports sector due to its PSU and JV status and strong partnerships
• Reliance Industries gas is at a physically distant source, and of insufficient quantity to challenge Petronet LNG as a supplier. In fact the two firms may work together in the future to service customers in respective regions
• By investing in further capacities and downstream businesses, Petronet will be able to leverage it’s cash flows for growth and profitability in the future
• My opinion is that Petronet will continue down the path of solid stock performance and dividends over the next decade
• Invest now and systematically for long term outperformance

Risks:

• A spike in Natural gas prices will be passed on to customers as most are on long term purchase contracts. Spot cargo volumes may be affected, though, and customers may not purchase these incremental volumes
• Pipeline infrastructure from Dahej to customers is a constraint. However this is being aggressively addressed by GAIL
• Current market weakness may take PLNG down temporarily, but expect recovery and solid performance

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com Also see: https://jainmatrix.wordpress.com/disclaimer/