Expect 30% rise in Petronet LNG stock

As the economy grows, the country’s energy needs and demand for natural gas also grow rapidly. With the Indian economy expected to grow five times in the next two decades and its population expected to surpass China in the near future, there should be a huge demand for energy. India is heavily dependent on energy imports and thus almost 70% of its energy needs are imported, with natural gas making up about 7% of the total energy consumption. A study has forecast that the demand for gas in India could reach up to 746 MMSCMD in the next 15 years as pipeline networks expand and increase consumer connectivity. The total gas consumed in 2016 was 135.87 MMSCMD, up from 133.37 MMSCMD in 2015. The only reason gas consumption in India is so limited is due to a limited pipeline network and last mile connectivity issues, with an existing pipeline network of 16,121 km and a design capacity of only 383 MMSCMD. A total of 13,821 km of gas pipeline is under construction in India, with 12 pipeline projects, but only one project has been completed, which is awaiting commissioning. The low utilisation is due to declining domestic production, as the expected output from the KG Basin could not fructify due to technical issues and also no major discoveries could be made. LNG is the only other alternative and India being a cost sensitive market has an economic limit to it. Currently, the gas consumption in the country is very uneven, as 80% of the gas consumed is in the northern and western regions, whereas the southern and eastern regions account for a minuscule amount, as they do not have the gas pipeline network. The current gas transmission projects in India, when completed, will establish the network in the east and south to encourage gas consumption. The present government is keen on increasing the share of gas in India’s overall energy basket due to air pollution in its cities and also to reduce crude oil imports by around 10% in the next few years.

Petronet LNG Limited has been set up by Government of India to import LNG and set up LNG terminals in the country. It is one of the fastest growing world-class companies in the Indian energy sector, with terminals at Dahej in Gujarat and Kochi in Kerala. While the Dahej terminal has a capacity of 10 MMTPA [equivalent to 40 MMSCMD of natural gas], the Kochi terminal has a capacity of 5 MMTPA [equivalent to 20 MMSCMD of natural gas]. The company is in the process of building a third terminal in Andhra Pradesh. At the current market price of Rs 225, the Petronet LNG stock trades at a price earnings ratio of 18.31 times FY18 earnings and 16.78 times FY19 earnings, respectively. The earnings per share of the company for FY18 and FY19 are seen at Rs 12.51 and Rs 13.65, respectively. The stock is an excellent fundamental buy for investors with less risk appetite and hence from a nine months’ investment horizon, the Petronet LNG stock can give a 30% price appreciation.

Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.