CAPACITY BUILD-UP PLAN

With firm demand outlook and low gas prices, capacity expansions should boost earnings

As the tide turned in its favour in the last financial year, Petronet LNG saw a good year both in terms of volumes and profitability. The renegotiated RasGas prices, which made imported gas competitive, boosted demand. The decline in domestic gas production further helped Petronet, which gets its revenues by largely importing gas and marketing it in the country. Continued capacity expansions also proved handy; it enabled Petronet double its net profit to ~1,235 crore in the first nine months of FY17. The March quarter is also expected to be robust. Not surprisingly, the Petronet stock recently scaled its all-time intra-day high of ~453.65. It closed at ~430.40 on Thursday, a gain of 63 per cent in one year.

The outlook remains firm and there could be more gains ahead, as first, the demand for LNG remains strong. Second, Petronet is seeing gains from expanded capacities providing a volume boost. In fact, the company is planning more expansions which will accrue benefits till FY20.

LNG prices have also declined further over the past few weeks as supply outages in Australia have subsided. As production ramps up further in Australia and the US, more supplies are anticipated in FY18, which could add further pressure on LNG prices. LNG prices have already declined to $5.2 per mmbtu from $9 per mmbtu at the start of 2017; current spot LNG prices are Dahej FY16 Total: Kochi comparatively lower then Brent crude, which makes LNG more competitive than fuel oil, say analysts at Ambit Capital. Global demand-supply trends suggest LNG prices could face further downward pressure in FY18 which should boost off-take with industrial, consumer and refinery/petchem leading the next wave of demand over FY1720, they say. As LNG demand grows, Petronet is also increasing its capacities. It commissioned five million tonnes per annum (mtpa) capacity in October 2016 and another 2.5 mtpa LNG capacity at Dahej in Gujarat is expected in FY19. FY17E FY18E The five mtpa LNG capacity at Gangavaram in Andhra Pradesh is expected to come on stream by FY19/20. For the five mtpa Kochi terminal which remains underutilised currently, volume boost of 0.5 mtpa is expected from the second half of FY18. Also, another 1.5-mtpa demand boost will kick in from FY20 as the Kochi-Mangaluru pipeline comes on stream by FY19-end.

Analysts at HDFC Securities see volumes at the Dahej unit growing from 12.5 mtpa in FY17 to 16.5 in FY18. For the March quarter, Dahej’s volumes are seen growing 10 per cent year-on-year (y-o-y) and regasification margins by five per cent y-o-y. Analysts at Nomura estimate the company’s profits in the March quarter to increase by 60 per cent y-o-y. They expect 98 per cent capacity utilisation of 15 mtpa expanded Dahej capacity as the Kochi utilisation remains low.