Dahej And Kochi Expansions Alongside Decisive Contracts Will Boost Revenue And Profitability

Key Takeaways

• Expansion efforts, including terminal upgrades and new projects, aim to boost revenue and profitability through enhanced capacity and increased utilization.
  
• Strategic focus on long-term contracts and infrastructure improvements promises stable future revenues and potentially rising net margins.
  
• Low terminal utilization, high sensitivity to LNG prices, tariff renegotiation concerns, and infrastructure delays may challenge Petronet LNG's revenue and profitability growth.

Catalysts

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

• Expansion projects are underway, including a 5 MMTPA capacity increase at the Dahej terminal expected to complete by March 2025, which could boost revenue through higher throughput.
  
• The commissioning of two additional tanks at Dahej provides operational flexibility and could enhance revenue and profitability by allowing more cargo processing.
  
• With the expected completion of the Kochi-Bangalore pipeline section by early next year, there could be an increase in Kochi terminal utilization, positively impacting revenue growth and margins.
  
• The ongoing petrochemical project, with established project management and licensor contracts, aims to ramp up CapEx in the coming years. This project could create long-term revenue streams and increase earnings.
  
• Petronet's strategic plan to secure long-term contracts and leverage existing contracts like RasGas ensures stable future revenues and potentially stable-to-rising net margins.

Petronet LNG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Petronet LNG's revenue will grow by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.2% today to 7.0% in 3 years time.
• Analysts expect earnings to reach ₹43.6 billion (and earnings per share of ₹29.2) by about December 2027, up from ₹39.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹50.9 billion in earnings, and the most bearish expecting ₹37.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.8x on those 2027 earnings, up from 12.9x today. This future PE is greater than the current PE for the IN Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.94%, as per the Simply Wall St company report.

Petronet LNG Future Earnings Per Share Growth

Risks

• The utilization of Petronet LNG’s Kochi terminal is significantly low at 22%, which, if not improved, could lead to suboptimal asset utilization and impact the company's revenue and earnings potential.
  
• There is potential for higher spot LNG prices during the winter season, which could lead to reduced LNG demand due to price sensitivity in the Indian market, affecting revenue.
  
• The renegotiation of tariffs with offtakers remains a concern, especially considering potential competition from new global LNG contracts at lower prices, which may impact future net margins.
  
• Uncertain long-term demand outlook in the context of ongoing tariff negotiations and future capacity bookings, which, if not favorably resolved, might impact future revenue growth and profitability.
  
• Delays in the construction and commissioning of new infrastructure projects, like the third jetty or expansion of Kochi connectivity, might hinder expected revenue growth and lead to increased capital expenditure without immediate returns.

Valuation

• The analysts have a consensus price target of ₹332.06 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 2027, revenues will be ₹619.2 billion, earnings will come to ₹43.6 billion, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 13.9%.
• Given the current share price of ₹341.2, the analyst's price target of ₹332.06 is 2.8% lower. 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.