Petronet LNG Ltd is reaping the benefits of shortage of locally produced gas. Lower domestic gas production has meant improved demand for imported liquefied natural gas (LNG). In fact, in April-August 2016, LNG imports to India have risen about 26% year-on-year, according to Petroleum Planning and Analysis Cell. Considering that domestic gas production is not going to improve overnight, the outlook for LNG is bright. Further, it helps that expected global LNG supply is likely to be more than demand, ensuring lower prices for some more time. In that backdrop, Petronet LNG, a company that imports LNG, finds itself in a sweet spot.

Its share price has surged an impressive 49% so far this fiscal year. Not without reason. For one, the company has brought forward the completion of 5 million tonne per annum (mtpa) capacity expansion at Dahej to October from its earlier guidance of end-2016. That will take the total capacity at Dahej to 15 mtpa.

“Unlike the Kochi terminal, Dahej has uninterrupted pipeline access and the lowest regas charges," pointed out analysts from IIFL Institutional Equities, adding that weak LNG prices will foster speedier terminal ramp-up. “Use-or-Pay contracts and customer advances shield Petronet LNG from volatility in gas prices and demand," said IIFL analysts in a report on 29 September. Under use-or-pay contract, the customer will have to pay even if cargoes are not taken.

If demand remains strong, Dahej could have a volume of 14 mt in FY17, said analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd in a report on 16 September. The brokerage firm’s current FY17 Dahej volume assumption is 13 mt. Each 1 mt in higher volume results in 9% higher earnings per share, according to Nomura.

Petronet LNG’s June quarter results were strong. Capacity utilization at its Dahej terminal increased to as much as 130% during the quarter from 111% in the March quarter. The company processed its highest ever volume in the June quarter. The September quarter, too, is expected to be strong.

Given the above scenario, it is not surprising that the stock has outperformed the benchmark Sensex and the BSE Oil and Gas index so far this fiscal year. Currently, it trades at 22 times estimated earnings for this fiscal year. That’s not cheap.

Moreover, concerns on underutilization of Petronet LNG’s Kochi terminal remain, thanks to pipeline connectivity problems. Completion of the pipelines is essential for the improvement in the performance of the Kochi terminal, although that’s not expected any time soon.