Gas importer Petronet LNG Ltd has grabbed investors’ attention lately with the stock rallying 18% in the past two months.
In December, it inked a pact with Gopalpur Ports Ltd to set up the LNG terminal in Odisha. This move marks Petronet’s foray into the eastern India, complementing its existing terminals in Dahej and Kochi. Also, latest media reports state that Petronet is likely to sign a deal this month to extend its long-term LNG imports from Qatar to beyond 2028. This, if materializes, could offer long-term earnings visibility and an annual escalation in re-gasification charges.
But there could be some near-term dampeners. xWorries persist regarding short-term LNG demand in India, amid the enhancement in domestic gas production capacity.
For instance, Adani/Total’s greenfield Dhamra terminal commenced operations last year and continues to ramp up. GAIL’s Dabhol terminal and HPCL’s Chhara terminal are both set to be completed by mid-2024. While the new capacity can boost the supply, the existing terminals like Hazira and Mundra remain under-utilized. The escalating competition, with existing terminals being underutilized and additional capacity in the pipeline, poses a potential drawback and might constrain the company’s pricing influence.
Besides, the implementation of unified pipeline tariffs which aims to improve the viability of other competing LNG terminals, could dilute Dahej’s, Petronet’s largest terminal, locational advantage.
More importantly, the company’s ambitious diversification plans have been a cause for concern. In Q2FY24, Petronet announced its entry into the petrochemical business, diversifying from the core business with a planned capital expenditure of over ₹20,000 crore, up from its earlier guidance of around ₹14,000 crore.
This has raised concerns of mis-allocation of funds into a non-core business. The worry is understood because the petrochemical business is volatile and doesn’t have meaningful synergies with core LNG re-gasification business.
Also, Petronet has no competitive advantage. The Petronet management is confident about the prospects of the petrochemical business, stating that the business environment is likely to be favourable for the petrochemical business by FY30. But considering that petrochemical business such as GAIL, ONGC, IOC and BPCL are struggling to fetch favourable returns, it remains to be seen how this pans out for Petronet.
According to BoB Capital Markets, it is positive that PLNG has approved the investment during the downcycle as the market may take around three years to absorb the new supplies being added over CY21-CY24. However, at this stage, it is difficult to comment whether the market will turn around by FY28-FY29 as there is no longer-term visibility on supply, it added.Ma
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