Dahej And Gopalpur Projects Will Collapse In India's Energy Mix

Key Takeaways

• The shift toward renewables and alternative fuels threatens Petronet LNG's long-term demand, asset utilization, and earnings growth prospects.
  
• Expanding terminals and facing new competitors amid uncertain demand and rigid contracts increases risks of lower margins and potential value erosion.
  
• Aggressive capacity expansion, diversification into new segments, and long-term supply agreements position Petronet LNG for stable growth and reduced business cycle risk.

Catalysts

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

• The accelerating global transition towards renewables and electrification is likely to structurally reduce LNG demand over the coming decade, risking a persistent decline in Petronet LNG's primary addressable market and pressuring long-term revenue growth.
  
• Ongoing advancements in battery storage and alternative fuels such as green hydrogen may quickly erode LNG's role as a bridging fuel in India's energy mix, directly undermining future throughput volumes and diminishing Petronet's earnings potential from newly commissioned or expanded terminals.
  
• Increasing carbon pricing, ESG regulations, and policy headwinds against fossil fuel imports could make LNG increasingly uncompetitive versus renewables, driving down utilization rates at Petronet's terminals and compressing margins and net profits.
  
• Petronet is committing significant capital expenditure to expand new and existing LNG terminals (such as Gopalpur and Dahej) amid soft sales growth and demand uncertainties from major sectors like power and fertilizer; failure of demand to materialize could lead to underutilized assets, lower returns on invested capital, and long-term value destruction.
  
• Rising competition from new domestic and global LNG terminal operators threatens to compress processing tariffs and narrow margins, while Petronet's reliance on inflexible long-term contracts further limits its ability to pivot away from a structurally challenged LNG market, increasing earnings volatility and downside risk to profitability.

Petronet LNG Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Petronet LNG compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Petronet LNG's revenue will grow by 1.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 7.5% today to 7.2% in 3 years time.
• The bearish analysts expect earnings to reach ₹36.8 billion (and earnings per share of ₹24.58) by about August 2028, down from ₹37.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.0x on those 2028 earnings, up from 11.1x today. This future PE is lower than the current PE for the IN Oil and Gas industry at 17.1x.
• 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 12.75%, as per the Simply Wall St company report.

Petronet LNG Future Earnings Per Share Growth

Risks

• Petronet LNG is undertaking significant capacity expansion, with major projects like the land-based Gopalpur terminal, Dahej expansion from 17.5 to 22.5 MMTPA, and a new third jetty, which will increase regasification volumes and have the potential to drive long-term revenue growth once these assets ramp up.
  
• The company's strategic focus on Eastern India through Gopalpur, backed by rapidly growing pipeline connectivity and expected industrial demand, positions Petronet LNG to benefit from the structural rise in gas consumption, supporting higher top-line and stronger throughput in the long run.
  
• Multiple long-term supply agreements, such as the recent contracts with Deepak Fertilisers and Gorgon Phase 2, provide volume visibility and stable cash flows, which could underpin future earnings and protect net margins from excessive volatility.
  
• Petronet LNG's planned diversification into petchem, compressed biogas plants, and small-scale LNG/bunkering expands its addressable market and adds new revenue streams that can enhance profitability and reduce exposure to pure LNG terminal business cycles.
  
• The management's commentary and market outlook anticipate a doubling of India's LNG demand by 2028–2030 driven by infrastructure buildout, government policy, and affordability of long-term LNG, all of which could result in sustained revenue and net profit growth over multiple years.

Valuation

• The assumed bearish price target for Petronet LNG is ₹240.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Petronet LNG's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹410.0, and the most bearish reporting a price target of just ₹240.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹512.7 billion, earnings will come to ₹36.8 billion, and it would be trading on a PE ratio of 14.0x, assuming you use a discount rate of 12.7%.
  
• Given the current share price of ₹273.25, the bearish analyst price target of ₹240.0 is 13.9% lower.
  
• 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.