Petronet LNG Fundamental Analysis and Future Outlook

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Petronet LNG is promoted by GAIL (India) Limited (GAIL), Oil & Natural Gas Corporation Limited (ONGC), Indian Oil Corporation Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL). There are various services offered by Petronet LNG Limited, like regasification, storage and reloading, bunkering, gassing-up and cooling-down facilities and LNG truck loading facilities.

The company’s shares have 52 weeks price band of INR 297-170 and a total market capitalization of INR 348 billion which makes it a Mid-Cap company. The shares have a P/E ratio of 13.19 and a dividend yield of 3.01%.

Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.

  1. Economic Moat
  2. Business Model and Management
  3. Growth Ratios
  4. Profitability Ratios
  5. Cash Flow Ratios
  6. Liquidity and Solvency Ratios
  7. Efficiency Ratios
  8. Valuation Ratios
  9. ROE (Du Pont Analysis)
  10. Future Prospects

(All units are INR Millions except ratios and per share data)

You can also get the complete excel model for learning fundamental analysis by clicking the link below:

1.Economic Moat (★ ★ ★ ☆)

The company operates in an asset-heavy industry in which market dominance comes through scale, capacity, reach and infrastructure. The Dahej terminal has a nominal capacity of 17.5 million tonnes per year (equivalent to 70 million cubic metres per day of natural gas at standard conditions), the Kochi terminal has a capacity of 5 million tonnes per year (equivalent to 20 million cubic metres per day of natural gas). The Dahej terminal is meeting around 40% of the total gas demand of the country.

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The company is in the process to build a third terminal in Gangavaram, Andhra Pradesh. Besides this, the company is also backed by some of the largest Indian PSU’s and has a robust order book. The company is also exploring suitable opportunities within and outside of India to expand its business presence. This overall shows a good economic moat for the company. Therefore this category gets 4 stars in Petronet LNG fundamental analysis.

2. Business Model and Management (★ ★ ★ ★ ★)

Petronet LNG was formed as Joint Venture Company (JVC) having 50% shareholding of leading 4 Oil & Gas PSUs while balance 50% equity is being held by Public, Strategic partners and Financial Institutes. For the year FY 2019 Petronet ranked 50 & 40 in ET 500 and D & B Top 500 Companies of India respectively. To cater the gas requirement of Southern India, Petronet LNG Limited commissioned its second LNG receiving, storage and regasification terminal in Kochi with 5 MMTPA nameplate capacity. The terminal area is situated in the Special Economic Zone (SEZ) of Puthuvypeen near the entrance to Cochin Port.

For sourcing, the company selected Gaz de France as its strategic partner. it has also signed an LNG sale and purchase agreements with Ras Laffan Liquefied Natural Gas Company Ltd, Qatar for the supply of 8.5 MTPA LNG to India. In September 2019, PetroNet signed an MoU with United States-based Tellurian Inc to purchase a stake in the latter’s Driftwood project in Louisiana and to import 5 million tonnes of LNG annually. This overall shows a good business model for the company.

Mr Tarun Kapoor is the Secretary in the Ministry of Petroleum and Natural Gas (MoP&NG) and sits on the board as the Chairman of the company. He is a 1987 batch, Indian Administrative Services Officer. Mr Vinod Kumar Mishra is the Director (Finance) and Mr Shashi Shanker, the Chairman & Managing Director of Oil and Natural Gas Corporation Ltd. (ONGC) is also a nominee Director of ONGC on the Board of Petronet LNG Ltd. This overall shows strong corporate governance in the company. Therefore this category gets 5 stars in Petronet LNG fundamental analysis.

Petronet LNG Fundamental Analysis and Future Outlook

4. Profitability Ratios (★ ★ ★ ☆ ☆)

The gross margin has declined over the recent years due to increasing process costs and inflation-related costs which the company is not able to pass down to its customers. The other margins along with return on assets have seen a cyclical movement over the years. The profitability outlook for the company is also stable for the near future. Therefore this category gets 3 stars in Petronet LNG fundamental analysis.

Petronet LNG Fundamental Analysis and Future Outlook

5. Cash Flow Ratios (★ ★ ★ ★ ★)

The net income margin has shown signs of improvement and the Cap-Ex as a percentage of sales has also decreased. The free cash flow as a percentage of net income has been positive as well. The operating and free cash flow growth has seen fluctuations due to the cyclical nature of the business. Overall the company has a good cash flow position. Therefore this category gets 5 stars in Petronet LNG fundamental analysis.

6.Liquidity and Solvency Ratios (★ ★ ★ ★ ★)

The company has declining long term debt which is only around 25% of the total capital structure. The debt to equity and leverage ratio has been declining over the years and the profitability has also improved. The current and quick ratios are also stable over the years. This overall indicates good liquidity and solvency position for the company. Therefore this category gets 5 stars in Petronet LNG fundamental analysis.

Petronet LNG Fundamental Analysis and Future Outlook

7. Efficiency Ratios (★ ★ ★ ☆)

The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.

Petronet Fundamental Analysis and Future Outlook

Overall the business efficiency has improved significantly as the company expanded its scale and undertook new business ventures. The Inventory days have declined along with the receivables period. The payable days have almost been stable over the years. The cash conversion cycle has decreased from 9.91 days to 5.65 days over the last 10 years. This overall is a good indicator of business efficiency. Therefore this category gets 4 stars in Petronet LNG fundamental analysis.

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Petronet LNG Fundamental Analysis and Future Outlook

8. Valuation Ratios (★ ★ ★ )

The company’s shares have been trading at lower multiples since 2016 due to the cyclical nature of business and reduced growth prospects. Overall the shares have been corrected significantly and remain a good value investment considering the fundamentals and dividend yield of the company. Therefore this category gets 5 stars in Petronet LNG fundamental analysis.

9. ROE 5 way Du Pont Analysis (★ ★ ★ )

The leverage ratio has been declining over the years and the asset turnover has improved recently. The interest burden ratio has also seen stability along with the operating margin increase. The tax efficiency has remained stable for the company. Overall the Return on Equity has been flat over the recent years due to improving the financial position of the company. Therefore this category gets 5 stars in Petronet LNG fundamental analysis.

Petronet LNG Fundamental Analysis and Future Outlook

10. Future Prospects (★ ★ ★ )

Some insights for the coming years from the analysis, management discussions and con calls are as follows.

  • Small-scale LNG has potential for 8–9 mmtpa of consumption for trucks over the next 8–10 years. Negotiations are on with Qatargas over LNG pricing. This overall can improve the top and bottom line for the company.
  • Volumes at Dahej were down year on year as three cargoes were cancelled/deferred due to the COVID-19-led lockdown in March 2020. This, however, has been covered and demand is recovering across the globe. The Dahej terminal is currently operating at ~100% utilization, up from 50–55% in April and May 2020.
  • Expect strong volume growth of 7-8% to continue for FY 2021 and FY 2022, with higher adoption from Power and CGD resulting in volume growth.

Overall the company has solid fundamentals along with improving profitability. The share price may see a sharp increase in the near future due to the upcoming business cycleTherefore this category gets 5 stars in Petronet LNG fundamental analysis.

The overall rating is arrived by taking the average of the above 10 category ratings and rounded up if it is above or equal to 0.5 and rounded down if it is below 0.5.

Overall Fundamental Rating:

PETRONET LNG SHARES (4.5/5)

Therefore it is a 5-star stock

★ ★ ★

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Petronet
Economic Moat ★ ★ ★ ★ ☆
Business & Management ★ ★ ★ ★ ★
Growth Ratios ★ ★ ★ ★ ☆
Profitability Ratios ★ ★ ★ ☆ ☆
Cash Flow Ratios ★ ★ ★ ★ ★
Liquidity & Solvency ★ ★ ★ ★ ★
Efficiency Ratios ★ ★ ★ ★ ☆
Valuation Ratios ★ ★ ★ ★ ★
ROE (Du Pont Analysis) ★ ★ ★ ★ ★
Future Prospects ★ ★ ★ ★ ★
Overall Fundamental Rating ★ ★ ★ ★ ★
Petronet LNG Fundamental Analysis

You can read more about the company on its website!
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(Note: All the research done by me is only for educational purposes and should not be seen as Investment recommendations. I am a Research analyst and not a SEBI registered Investment Advisor. My research completely reflects my personal opinions and not of my employers. Kindly do your own due diligence before Investing)



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