Petronet LNG Slides as Investors Book Profits After Stellar Rally

Shares of Petronet LNG Ltd, India’s largest liquefied natural gas importer, came under profit-taking pressure on Friday, sliding over 2% after testing a fresh 52-week high earlier in the session.

Stock Gives Up Gains After Testing Fresh 52-Week High

The stock opened at Rs 322.35 and jumped to an intraday high of Rs 323.15, marking a new 52-week peak. However, it quickly reversed course as investors opted to book some gains following Petronet’s stellar 44% year-to-date rally.

As of 3:43 pm, Petronet LNG’s stock price was quoting at Rs 313.85 on the NSE, down Rs 6.85 or 2.14% on the day. A whopping 8 million shares had changed hands by then compared to the company’s 20-day average volume of just 4.6 million.

Firm Remains Top Sectoral Pick Despite Pullback

Despite the intraday pullback, analysts remain bullish on Petronet LNG’s long-term prospects given its position as India’s largest LNG player and the country’s structural growth in gas demand.

Of the 32 brokerages actively covering the stock, 7 have a buy or strong buy rating while 3 more rate it as an outperform. 15 analysts recommend holding the shares, while 9 have an underweight or sell rating, primarily citing valuation concerns after the recent up-move.

Petronet LNG is well-placed to benefit from the global shift towards cleaner energy sources like natural gas. India’s gas consumption is projected to rise at over 6% annually through 2030 as more industries and cities convert to cleaner fuel.

Capacity Expansion to Drive Future Growth

To meet this rising demand, Petronet is aggressively expanding its regasification capacity across multiple terminals. The company’s 5 million ton Gopalpur terminal on the east coast came online in February. Its 11.5 million ton terminal in Gujarat started operations late last year.

With the ramp-up of these new facilities, Broker Nomura expects Petronet’s total operating capacity to increase 28% to over 26 million tons by fiscal 2025 compared to 20.5 million tons currently.

The sellside expects Petronet’s earnings to grow at a double-digit annual clip over the next two years, backed by higher capacity utilization, improved operational efficiency, and better profitability from the start-up of new, lower-cost terminals.

Premium Valuation After Hot Streak

Despite the recent pullback, Petronet LNG’s stock is trading at premium valuations relative to historical averages and its global LNG peers. The company’s trailing price-to-earnings multiple of 13.4x is above its 5-year mean of 11x.

Its 12-month forward P/E of 16x is at the higher end of the 12-16x band most analysts quote as a fair valuation range for Petronet. The stock currently trades at 3x price-to-book value, well above its long-term average of around 2.2x.

This premium valuation is driven by investors’ optimism surrounding Petronet’s promising growth outlook. However, the high multiples increase risks of further volatility and profit-taking in the near-term should the company disappoint on quarterly earnings.

Structural Expansion Mode Underway

To help fund its aggressive multi-year expansion plans, Petronet recently approved raising Rs 2,400 crore through a rights issue of equity shares. The company aims to incur capital expenditures of around Rs 9,500 crore across operational and under-construction terminals.

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This ambitious expansion mode should continue cementing Petronet’s status as India’s leading integrated LNG player with participation across the value chain from imports to regasification and distribution. The firm accounts for over 60% of the nation’s current LNG import capacity.

Petronet also plans to capitalize on the growing global LNG trade by expanding into third-party vessel chartering. In addition, it has been making strategic investments and partnerships to build up its downstream city gas distribution network.

Bright Prospects but Near-Term Drivers Lacking

Looking ahead, most analysts expect Petronet LNG’s stock to continue outperforming the markets over the next 12-18 months given its positive industry dynamics and growth plans. Top brokerages like Citi have a price target of Rs 375 on the stock implying a further 20% upside.

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However, the lack of a near-term trigger or catalyst means the counter may consolidate in a range after its blistering run so far in 2024. A lot will depend on Petronet’s execution in terms of ramping up utilization at its newly commissioned terminals and maintaining profitability.

With global LNG prices having cooled off from last year’s peaks, investors will be keenly watching Petronet’s future earnings releases and management commentary around volume growth, pricing trends, and capital expenditure plans.

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