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The work on Kochi-Bengaluru section of the pipelines, to be completed in the next 2-3 years, can lift utilisation levels further.
The work on Kochi-Bengaluru section of the pipelines, to be completed in the next 2-3 years, can lift utilisation levels further.

Petronet’s prospects get a lift from Kochi terminal outlook

Gas supplies from the new Kochi-Mangaluru pipeline can raise utilization levels at Kochi terminal to 30% from 15%

Shares of Petronet LNG Ltd are about 3% lower than their pre-covid highs seen in January 2020. This is despite the fact that the stock has appreciated as much as 52% from the lows seen in March.

There is some good news though. The completion of the Kochi-Mangaluru gas pipeline lifts Petronet’s prospects. Delay in the pipeline’s commissioning meant that Petronet was not able to reap the benefits of its 5 mtpa (million tonne per annum) Kochi terminal. While Petronet’s Dahej terminal (17.5 mtpa capacity) clocking optimum utilization levels kept driving earnings, utilization levels at Kochi remained subdued at about 15%. This can now improve to 30% plus level, with gas supplies commencing from the new pipeline and rising further over time.

“The operational break-even for Kochi terminal is at 25% utilization," said Abhijeet Bora, analyst at Sharekhan. As such, the Kochi terminal can be expected to start contributing to profit. Moreover, in the next 2-3 years, utilization levels can improve further after the completion of the Kochi-Bengaluru section. Bora expects Kochi terminal utilization levels to increase to 50-60% in 2-3 years.

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Meanwhile, with the easing of the lockdown, there has been a sharp recovery in liquefied natural gas (LNG) imports since July. Gas imports were up 12% year-on-year in November, suggests analysts’ data. Petronet intends to expand Dahej capacities by 2 mtpa and take a 5% re-gas tariff hike for Dahej terminal in January 2021 to boost earnings further.

To be sure, there is some concern on increasing spot gas prices now. However, considering 98% of volume comes from long-term and tolling contracts, the impact on Petronet’s margins is expected to be limited in the near-term.

In a report on 6 January, analysts from Jefferies India Pvt. Ltd said, “(Petronet’s) Ebitda per unit has increased 55% over the past decade on operating leverage." The brokerage firm forecasts 11% earnings compound annual growth rate, $1.9 billion of free cash flow and 27% return on equity over FY20-24 (estimated). True, these factors augur well. The Petronet stock trades at about 12 times estimated earnings for financial year 2022, based on Bloomberg data. Valuations don’t appear expensive. Even so, this is close to the long-term trading average, said analysts.

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