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Petronet: Unrelenting pressure on margins - Views on News from Equitymaster

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Petronet: Unrelenting pressure on margins

Jan 20, 2009

Performance summary
  • Topline grows by 56% YoY during 3QFY09 on the back of higher volumes and rupee depreciation.
  • EBITDA margins decline to 8%, from 15% in 3QFY08.
  • Other income rises by 85% during 3QFY09.
  • Bottomline registers a decline of 20% YoY as a result of erosion in operating margins.
  • For 9mFY09, topline grows by 20%, while the bottomline shrinks by 11%.

Standalone financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 15,811 24,730 56.4% 48,027 57,738 20.2%
Expenditure 13,491 22,875 69.6% 41,514 52,143 25.6%
Operating profit (EBDITA) 2,320 1,855 -20.1% 6,513 5,596 -14.1%
EBDITA margin (%) 14.7% 7.5%   13.6% 9.7%  
Other income 120 222 85.2% 357 566 58.5%
Interest 256 255 -0.5% 774 747 -3.5%
Depreciation 257 258 0.7% 768 772 0.5%
Profit before tax 1,927 1,563 -18.9% 5,328 4,642 -12.9%
Tax 617 513 -16.9% 1,782 1,502 -15.7%
Profit after tax/(loss) 1,311 1,051 -19.8% 3,546 3,141 -11.4%
Net profit margin (%) 8.3% 4.2%   7.4% 5.4%  
No. of shares (m)         750.0  
Diluted earnings per share (Rs)*         5.8  
Price to earnings ratio (x)*         6.3  
*On trailing twelve months earnings

What has driven the performance in 3QFY09?
  • Petronet LNG clocked sales volume of 85 trillion British thermal units (tBtu) in 3QFY09, higher than the 3QFY08 volumes by nearly 5 tBtu. It may be recalled that the sales volume was lower during 2QFY09 as one high-pressure pump was de-commissioned for major repair & maintenance work. It has since been re-commissioned.

  • The availability of domestic natural gas is expected to go up in the long term. Imported LNG is a more expensive option compared to domestic natural gas transported by pipeline. However, LNG will remain an attractive option if the timing and quantum of new domestic supplies spreads out over the next few years giving sufficient time for domestic demand to catch up. Moreover, the company plans to import only if it has back-to-back sell agreements.

  • EBITDA margins have declined by 7% on the back of higher raw materials costs, which increased by almost 8% YoY (as a % of sales) during 3QFY09.

  • The company proposes to set up a 1,200-mw power plant in Dahej near its LNG terminal at a capital cost of Rs 35 bn. It has inherent strategic advantages for entering the power generation business, thanks to the availability of ‘cold energy.’ LNG is transported and stored at temperature as low as minus 160 degree celsius. Hence, when it gets regasified, it brings down the temperature of water to zero. This water is then used for cooling in turbines improving their efficiency, extracting 1,200 mw out of 1,050 mw turbines. Besides the savings of 12.5% value-added tax on fuel, this will ensure that Petronet LNG’s power will be the cheapest among all gas-based projects in India.

What to expect?
Going forward, the management expects to maintain volumes growth. Petronet recently doubled the capacity of its Dahej terminal to 10 m tonnes per annum (mtpa). It is building another 2.5 m tonnes a year plant at Kochi. The company gets 5 m tonnes a year from RasGas under a long-term LNG deal, and that will be raised to 7.5 m tonnes from the last quarter of 2009. It will receive 6 additional cargoes from RasGas this year in addition to the long-term and short-term contracts. It has also been trying to procure supplies from Australia's Gorgon project and from Papua New Guinea.

At the current price of Rs 36, the stock is trading at a multiple of 6.3 times its trailing 12 months earnings. Although we believe the implications of the impending shift in the supply structure of gas in India will be negative for the company, the price has corrected downwards to reach attractive levels.

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