Dahej, Kochi projects are crucial for Petronet’s volumes after a poor Q2

Overall volumes came in at 239 trillion British thermal units (tbtu), up year-on-year but down sequentially as the power sector’s offtake moderated from its Q1FY25 high. Also, H2FY25 volume outlook was muted. However, the expected commissioning of an expansion project at Dahej and the completion of a connecting pipeline at Kochi by March or April 2025 could drive sharp growth in volumes in FY26.

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The capacity utilisation of its liquified natural gas (LNG) terminal at Dahej rose to 98% from 92% last year. Management has projected this will remain at 95-100% in H2FY25. However, the Kochi facility continues to run at a sub-optimal 22% because of the absence of a pipeline to transport gas. About 70% of its capacity is booked through long-term contracts and the rest is utilised on a spot basis, which may provide a higher margin but increases the risk of underutilisation in case of inadequate demand. The near-term demand for natural gas remains strong as prices are moderate and consumption is driven by imports since domestic production is limited, necessitating LNG terminals.

The Dahej capacity-expansion project would increase its total capacity from 22.5 million tonnes per annum (mtpa) to 27.5 mtpa. The company would also benefit from the completion of the pipeline connecting the Kochi terminal with the national gas grid. This would bring down the cost of transportation for consumers in southern India, who are currently procuring gas from northern or western India. “We forecast Ebitda/PAT CAGR (compound annual growth rate) of 11.9%/13.5% during FY24-FY26E on grounds of higher capacity and better utilisation at Kochi," said Systematix Shares and Stocks (India) in an October 24 report.

Use-or-pay charge inflates gross profit

Ebitda declined during the quarter despite an 11% increase in gross profit, largely on account of provisions made against use-or-pay (UoP) receivables. This should be written back partially when Petronet encashes bank guarantees against these UoP payments.

The company permits the use of its terminals for customers to import LNG and re-gasify it for a specified charge. As per the contract, the customer has to pay the UoP charge even if he does not use the terminal. The company has over ₹1,700 crore of receivables as customers did not use the facility in previous years because of the high market price of gas.

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Among other highlights, capital expenditure (capex) for H1FY25 was around ₹670 crore and management expects it to rise significantly as the petchem project takes off in the next few quarters. The large capex on petchem could dampen the return on capital employed (ROCE) before it is completed over the next three or four years. And it could hit the market when there is excess supply, according to a Nirmal Bang Institutional Equities report on October 25.

Meanwhile, Petronet’s stock price has risen 50% so far this calendar year, beating Nifty500’s gain of 17%. The stock is trading at 13.7 times estimated FY25 earnings, according to Bloomberg data. A meaningful re-rating from here depends on the trajectory of volume growth.

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