Recommendation From Oil Drilling & Exploration Sector
This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.
STRONG PROSPECTS AT ATTRACTIVE VALUATION
HERE IS WHY
Capacity expansion
Strong second quarter numbers
Attractive valuation with higher return ratios
Petronet LNG
Energy demand bears a direct correlation with the country's economic growth; therefore the need for oil and gas is projected to grow with economic growth, which makes the sector quite conducive for investment. Therefore our pick for choice scrip is Petronet LNG Ltd. Petronet LNG was formed as a joint venture by the Government of India and India's leading oil and natural gas industry players to import LNG and set up LNG terminals in the country. GAIL (India) Ltd, Oil & Natural Gas Corporation Limited (ONGC), Indian Oil Corporation Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL) are promoters of Petronet LNG. The company has set up the country's first LNG receiving and regasification terminal at Dahej, Gujarat, and another terminal at Kochi, Kerala. While the Dahej Terminal has a capacity of 17.5 MMTPA, the Kochi Terminal has a capacity of 5 MMTPA. Petronet's Terminals today account for around 40 per cent gas supplies in the country and handle around 80 per cent of LNG imports into India.
In the second quarter of FY20, on a consolidated basis, the total income from operations declined by 12.88 per cent to Rs.9,361.18 crore. Nevertheless, the EBITDA grew by 31.32 per cent to Rs.1,160.48 crore in the September ended quarter of FY20 from Rs.883.72 crore in the same quarter previous year due to reduction in material consumption cost. EBITDA margin too improved in the quarter and stood at 12.39 per cent for the quarter as against 8.22 per cent in same quarter of FY19. Net profit climbed by 90.88 per cent to Rs.1,089 crore in September quarter of FY20 from Rs.572.89 crore in the same quarter of FY19.
On the capacity utilization front, the Dahej terminal was at 105 per cent while capacity utilization for the Kochi terminal was at ~15 per cent. Due to strong cash flows of the company, the expansion of the Dahej project and other capital expenditure was funded entirely with the internal accruals without the need to draw any debt and the company is in final stages of expanding Dahej Terminal Regasification capacity from 15 MMTPA to 17.5 MMTPA, which will cater to increase in gas demand.
Petronet's Kochi-Mangalore pipeline is 98 per cent complete and it will get commissioned by February 2020. It is expected that the commissioning of this pipeline will result in increased margins. Also, the company had submitted a commercial proposal to Petrobangla of Bangladesh to set up a land based 7.5 MMTPA LNG Receiving, Storage and Regasification Terminal at Kutubdia Island. In a recent development, the company announced that it will invest USD 2.5 billion for nearly 20 per cent equity stake in US energy major Tellurian Inc's Driftwood project to purchase 5 million tonnes of gas per annum for the next 40 years.
On the valuation front, the stock of Petronet LNG is trading at a PE of 16.09x FY19 earnings and ROE of 24.45 per cent. The valuation looks attractive than its peer group, hence we recommend our readers to BUY this stock.
