Rising spot prices of liquefied natural gas (LNG) could spoil the party for Petronet LNG (Petronet), which has been a favourite of the street post delivering healthy volumes in the latest September quarter. The fact that spot LNG prices are trading closer to its two-year high levels could weigh on LNG demand in India, believe analysts. This in turn could impact Petronet’s volumes as well as financial performance going ahead. Rising LNG prices reduces its competitiveness versus other fuels such as Naphtha and have already started hitting consumption demand. LNG consumption from the power sector, for instance, has declined 41 per cent on a month-on-month basis in October.
“With the restart of Dabhol capacity post monsoons, ShellHazira’s additional freed up capacity and imminent commissioning of the Mundra LNG terminal in FY18, near term upsides to capacity utilisation for Petronet’s Dahej terminal is constrained, in our view,” says Amit Rustagi, analyst at IDFC Securities. Notably, most analysts covering the stock are factoring in 100 per cent capacity utilisation at Petronet’s Dahej terminal in FY18, which could now be at risk.
With gains of about 59 per cent in the past one year, the Petronet scrip has been on a roll so far and commands rich valuation of 17 times FY18 estimated earnings. The valuation does not adequately factor in the risks emanating from rising spot LNG prices, and hence is susceptible to downsides from here on. On the flip side, ramp up in use or pay contracts could provide some support to Petronet’s earnings and cap the earnings downside thereof.
Amongst Petronet’s key expansions, its Kochi pipelines should take another two years at least to complete and could see lower losses once Bharat Petroleum’s Kochi refinery ramps up. Petronet expects its Gorgon (Western Australia) facility to witness full ramp up in July 2017. Analysts at Credit Suisse though believe that given that Gorgon prices are 50-60 per cent higher than spot LNG it will be challenging to sell in the Indian market.
In this backdrop, investors would keenly watch out for management commentary on the demand trends and the outlook from here on. The use or pay contracts lends visibility to Petronet’s earnings and drive expectations of 22-25 per cent compounded annual growth in its earnings over the next couple of years. These expectations, however could be toned down to factor in the recent weakness in consumption demand and weigh on Petronet’s stock price and valuations, believe analysts. A.J. Green Womens JerseyShare This