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Petronet: Lower costs do the trick - Views on News from Equitymaster

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Petronet: Lower costs do the trick
Jan 17, 2008

Performance summary
  • Topline increases by 0.3% YoY during 3QFY08 on the back of marginally higher volume.

  • EBITDA margins expand to 14.7%, from 11% in 3QFY07. Other income rises by 36.5% YoY during the quarter.

  • Bottomline registers a growth of 54% YoY owing to operating margin expansion, higher other income and lower interest expenses.

  • Topline and bottomline grow 21% YoY and 41% YoY respectively in 9mFY08.

Financial snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 15,760 15,811 0.3% 39,701 48,027 21.0%
Expenditure 14,026 13,491 -3.8% 35,212 41,514 17.9%
Operating profit (EBDITA) 1,733 2,321 33.9% 4,489 6,513 45.1%
EBDITA margin (%) 11.0% 14.7%   11.3% 13.6%  
Other income 88 120 36.5% 217 357 64.1%
Interest 276 256 -7.2% 812 774 -4.7%
Depreciation 257 257 -0.3% 769 768 0.0%
Profit before tax 1,288 1,927 49.7% 3,127 5,328 70.4%
Tax 437 617 41.2% 618 1,782 188.4%
Profit after tax/(loss) 851 1,311 54.0% 2,509 3,546 41.3%
Net profit margin (%) 5.4% 8.3%   6.3% 7.4%  
No. of shares (m)         750.0  
Diluted earnings per share (Rs)*         6.14  
Price to earnings ratio (x)*         17.9  
(*on trailing twelve months earnings)

What has driven performance in 3QFY08?
  • During 3QFY08, PLL processed and sold 80.27 trillion British thermal units (TBTU) as compared to 79.49 TBTUs in the corresponding quarter last year, a meager volume growth of 1%. Supplies to the power plant at Dabhol at full swing and the onset of winter placed some constraint on the capacity leading to a reduction in the total sales volume. The company achieved 135% capacity utilization. The work on the expansion of the existing Dahej Terminal from 5 to 10 MMTPA is on schedule and will be commissioned progressively between July 08 and December 2008. The company is in the final stages of selection of EPC Contractor for setting up 2.5 MMTPA (expandable to 5 MMTPA) greenfield LNG terminal at Kochi.

  • The company witnessed a significant improvement in margins in 3QFY08 primarily on the back of a better sales mix. Operating margin expanded by 3.7%. Raw material costs as a % of sales declined to the tune of 3.4%. The economies of scale can be gauged from the fact that other expenditure as a % of sales declined by 0.4% during the quarter.

    Cost break-up
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Raw materials 13,677 13,192 -3.5% 34,267 40,645 18.6%
    % sales 86.8% 83.4%   86.3% 84.6%  
    Staff cost 26 37 42.0% 91 136 49.6%
    % sales 0.2% 0.2%   0.2% 0.3%  
    Other expenditure 323 262 -19.1% 854 732 -14.3%
    % sales 2.1% 1.7%   2.2% 1.5%  
    Total cost 14,026 13,491 -3.8% 35,212 41,514 17.9%
    % sales 89.0% 85.3%   88.7% 86.4%  

  • Other income zoomed up by 37% YoY during the quarter. Interest expenditure declined by 7% YoY, while depreciation was stable. Thus, increased operating income coupled with increase in other income drove the bottomline.

What to expect?
Going forward, we expect volumes growth to continue, especially in light of the deal with RasGas. However, the Sonatrach agreement is likely to take time to be finalised and supplies will commence in 2011. Although the company has done well to increase its capacity through de-bottlenecking, the real growth is likely to come once the planned incremental capacity comes onstream.

On the margins front, they are likely to come under pressure, as new contracts are expected to be signed at higher prices. Also, given the fluctuations in global LNG prices, long-term supply deals are becoming less and less common. The new domestic gas discoveries by companies like Reliance Industries, GSPC and ONGC, and the move to fix KG basin price at around $6 per million British thermal units (mBtu) also raise concerns if re-gasified LNG (R-LNG) will continue to be sold the same way at a delivered price of US$11 per mBtu, as is the case now. The current spot rates globally stands at US$ 13 to14 levels and some even going up to US$ 15 per mBtu. The company is taking rear guard action by venturing into power generation-a 1200 MW power plant at Dahej at an estimated cost of Rs. 30 bn, which could protect its profit margin of around 52 cents on 1 mBtu.

The stock currently trades at Rs 110, implying a price to earnings multiple of 17.9 times its trailing twelve months earnings. Due to the negative implications of the impending shift in the supply structure of gas in India, we continue to maintain our ‘Sell’ view on the stock.

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