Fundamental Analysis of Petronet LNG: The energy logistics companies have remained in focus recently with the government announcing a number of plans to meet the growing energy demand in India. Petronet LNG, a public sector undertaking is one such company responsible for handling LNG imports in the country. In this article, we’ll conduct a fundamental analysis of Petronet LNG and see to know if it has a promising future.  

Fundamental Analysis of Petronet LNG

We’ll start our analysis with a quick overview of the business of the company followed by a short section on the gas industry. Next, a few sections on the financials will throw light on the past performance of the stock. In the end, a highlight of the future plans and a summary conclude the article. So without further ado, let us jump in.

Company Overview

Petronet LNG Ltd. (PLL) was set up in 1998 as a joint venture between the four oil and gas giants of India: GAIL (India) Ltd. (GAIL), Oil & Natural Gas Corporation Ltd. (ONGC), Indian Oil Corporation Ltd. (IOCL) and Bharat Petroleum Corporation Ltd. (BPCL). As of the present date, they hold a 12.50% stake each in the company.

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PLL is engaged in the import, storage, and regasification of liquefied natural gas (LNG). The government company fulfills around 40% of the nation’s gas supplies and 2/3rd of the total LNG imports in the country.

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It has two terminals, one at Dahej in Gujarat and the other in Kochi, Kerala. The Dahej Terminal has a capacity of 17.5 MMTPA. The capacity of the Kochi Terminal is 5 MMTPA. 

The company imports LNG from Ras Laffan of Qatar and MARC (Exxon Mobil). The ships which are used to import the LNG are owned by a consortium of different companies. However, they are managed, manned, and operated by the Shipping Corporation of India (SCI).

It counts GAIL, IOCL, ONGC, and BPCL as its only major customers. It signed gas sales and purchase agreements with these oil and gas giants in 2003 and 2010 to sell RLNG to them. In addition to this, it has also entered into contracts with these companies for regasification services and processing of hydrocarbons.

We now understand the business of PLL. In the next section, let us learn more about the gas industry landscape.

Industry Overview

India is a gas deficit country with the imports meeting a majority of the total gas consumption of the nation. 

As for the share in energy demand, the contribution of natural gas to India’s energy mix is a mere 6.7%. Despite that, we were the fourth largest importer of LNG in 2021 with the import figure at 24.02 MT or 6.5% of the worldwide share.

Talking about the future, the outlook for the companies in the sector remains strong as the Union Government plans to increase natural gas contribution to 15% by 2030 in India’s power basket. 

This translates into a big opportunity for players in the natural gas sector as the nation’s domestic gas production can only increase up to a certain extent. Therefore, with the government’s push and demand growth, more infrastructure will be required in the form of import terminals, storage facilities, and regasification terminals.

But it is not the case that only the government’s efforts will bring growth to the industry. Various other pull factors are also in play, such as

  1. Growth of the fertilizer sector (it is a key consumer of natural gas) because of the Make-in-India policy .
  2. Deeper penetration of city gas distribution (CGD) in order to reach 98% of the nation’s households from 88% at present.
  3. The overall growth of the nation’s per capita energy consumption, which is only 1/3rd of the world average is projected to rise.

Summing it up, the coming years look bright for the gas companies in India. Higher imports shall likely fetch higher earnings for gas logistics companies such as Petronet LNG. 

Petronet LNG – Financials

Revenue & Net Profit Growth

Barring FY21 and FY20, the revenues of the company grew in the last six years. Overall, the operating revenues of PLL have increased at a CAGR of 9.81% from Rs 24,616 crore in FY17 to Rs 43,169 crore in FY22. 

On an impressive note, the net profit grew at an annualized rate of 12.20% to Rs 3,438 crore during the same period.  

The table below presents the operating revenue and net profit of the PSU for the last six fiscals. 

Fiscal YearOperating RevenueNet Profit
202243,1693,438
202126,0232,939
202035,4522,703
201938,3952,231
201830,5992,110
201724,6161,723
6-Yr CAGR9.81%12.20%
(figures in crore except for CAGR)

We see above the profits of the company grew even where the income declined. How can that be? We’ll read about this in the next section on the profit margins.

Operating & Net Profit Margins

As discussed earlier, the primary business of the company is to import and sale of the RLNG. Thus, it is the key expense item in the P&L statement. In the pandemic-affected years, even though the sales declined, the margins expanded as the company was able to obtain it at cheaper prices and sell at regular prices. 

In addition to this, the total tax expense was low in FY20 which further helped it to sustain the profit after tax levels.

In the table below, we can see the normalization in the margins of the company in recent years similar to the pre-pandemic period. 

Fiscal YearOPMNPM
2022118
20211711
2020108
201996
2018117
2017117
(figures in %)

Return Ratios: RoCE & RoE

The return ratios tell us how profitable or efficient a business is. Looking at the high Return on Capital Employed (RoCE) and Return on Equity (RoE) of 25.65% and 25.15%, we can say that PLL is a good business from an investment point of view.

The figures below showcase how the return ratios have remained consistent at upwards of 20% each for the last five financial years.

Fiscal YearRoCERoE
202225.6525.15
202125.1224.89
202021.7524.30
201926.0721.80
201824.9721.51
(figures in %)

Debt / Equity & Interest Coverage

Despite being in a capital-intensive industry, Petronet LNG maintains a debt-free status with a nil debt to equity from FY22. Its interest coverage ratio was 17.48 in FY22.

The table below shows the debt-to-equity ratio and interest coverage ratio for the previous five years. 

Fiscal YearDebt / EquityInterest Coverage
20220.0017.48
20210.0115.06
20200.018.87
20190.0133.64
20180.0719.74

Future Plans Of Petronet LNG

So far we looked at previous fiscals’ data for our fundamental analysis of Petronet LNG. In this section, we’ll try to get a sense of what lies ahead for the company and its investors.

  1. The management has set an audacious target of Rs 1 lakh crore in revenues with Rs 10 thousand crore PAT in the next five years. For this, it hopes to deploy investments of Rs 40 thousand crore during the period.
  2. PLL is undertaking a Rs 600 crore brownfield expansion of regas capacity at Dahej from 17.5 MMTPA to 22.5 MMTPA. 
  3. In addition to the terminal capacity expansion, the company is also constructing two LNG storage facilities for a cost of Rs 1,250 crore.
  4. It is building a third beth at Dahej for Rs 1,700 crore to help it fulfill the increasing RLNG demand in the nation. The new jetty will be able to handle ethane and propane both.
  5. Furthermore, PLL is putting sustained efforts to diversify its operations by setting up an LNG storage and regasification terminal on East Coast, compressed bio-gas plants in Haryana & UP, and an LNG re-gasification terminal in Bangladesh. It is at various preliminary stages in these ventures.

Key Metrics Of Petronet LNG

We are almost at the end of our fundamental analysis of Petronet LNG. Let us take a look at the key financial metrics of the stock.

CMP₹230Market Cap (Cr.)₹34,500
EPS₹22.5Stock P/E10.1
RoCE25.65%RoE25.15%
Promoter Holding50%Book Value₹95
Debt to Equity0.00Price to Book Value2.39
Net Profit Margin8.8%Operating Profit Margin11.1%

In Conclusion

We learned during our fundamental analysis of Petronet LNG above that its profits have steadily grown over the years. On top of it, the future of the company looks bright with multiple capital expenditure plans in place to increase the capacity. 

In your opinion, does the current share price of PLL incorporates the future plans? Or is there plenty of headroom for the stock price to grow as the company will commission these new projects? What can be possible hurdles? How about we continue this conversation in the comments below? 

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