Completion Of Dahej Terminal Expansion And Kochi Pipeline Will Increase Capacity Utilization

Key Takeaways

• Expansion of terminals and pipeline integration could boost capacity utilization, driving revenue growth through higher throughput and improved grid connectivity.
  
• Shifting towards higher-margin spot cargoes and developing a petrochemical complex suggests income diversification and potential earnings growth through vertical integration.
  
• Dependence on spot market volatility, high VAT rates, and expensive expansion plans could negatively affect revenue growth, margins, and financial stability.

Catalysts

Engages in the import, storage, regasification, and supply of liquefied natural gas (LNG) in India.

• The expansion of the Dahej Terminal by 5 million tonnes scheduled for completion around June '25 presents an opportunity for increased capacity utilization, which could drive revenue growth through higher throughput.
  
• There is a potential for increased utilization rates at the Kochi Terminal once the Kochi-Mangalore-Bangalore pipeline section is completed by June '25, enabling greater integration with the National Gas Grid and potentially increasing revenue.
  
• The shift towards securing more spot cargoes driven by expected softer global LNG prices ($7-$8 post-2026) could lead to improved margins as spot cargo volumes are higher-margin compared to long-term contracts.
  
• The development of the petrochemical complex with significant CapEx outlays in FY '25-'26 indicates a future diversification of income streams and potential earnings growth through vertical integration.
  
• Efforts to secure and expand long-term contracts for ethane and propane importation would support growth in revenue by ensuring a steady supply of these products for the petrochemical business segments.

Petronet LNG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Petronet LNG's revenue will grow by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 7.2% in 3 years time.
• Analysts expect earnings to reach ₹45.6 billion (and earnings per share of ₹30.49) by about March 2028, up from ₹36.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹55.4 billion in earnings, and the most bearish expecting ₹36.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, up from 12.3x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 16.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.28%, as per the Simply Wall St company report.

Petronet LNG Future Earnings Per Share Growth

Risks

• Decreased throughput in the Dahej Terminal compared to previous periods could indicate challenges in maintaining growth, potentially impacting future revenue growth.
  
• Lower-than-expected long-term volume commitments and reliance on spot market cargoes expose the company to volatility in spot prices, affecting both revenues and net margins.
  
• Existing contracts face default risks, evidenced by Use or Pay charges, which could impact earnings stability if offtakers continue defaulting or if the company cannot enforce financial recovery.
  
• High VAT rates in Gujarat contribute to a cascading tax impact, affecting competitive pricing and potentially limiting revenue growth in domestic markets.
  
• Large planned CapEx in petrochemicals and terminal expansions may strain financials or not achieve projected utilization rates, affecting long-term earnings and net margins.

Valuation

• The analysts have a consensus price target of ₹325.774 for Petronet LNG based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹425.0, and the most bearish reporting a price target of just ₹235.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹637.4 billion, earnings will come to ₹45.6 billion, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 14.3%.
• Given the current share price of ₹297.5, the analyst price target of ₹325.77 is 8.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.