Petronet LNG: Interest, depreciation costs hurt - Views on News from Equitymaster

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Petronet LNG: Interest, depreciation costs hurt

Feb 5, 2010

Performance summary
  • Topline declines by 9% YoY during 3QFY10 on the back of lower realisations. Volumes remained flat as GAILís evacuation infrastructure was tied up with Reliance Industriesí D6 gas production.
  • EBITDA margins expand to 9.3%, from 7.5% in 3QFY09 on the back of lower raw material costs (as a percentage of sales).
  • Other income declines by 25% during 3QFY10.
  • Bottomline registers a fall of 21% YoY despite higher margins due to higher interest and depreciation.

Standalone financial snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 24,730 22,446 -9.2% 57,738 82,636 43.1%
Expenditure 22,875 20,358 -11.0% 52,143 76,194 46.1%
Operating profit (EBDITA) 1,855 2,088 12.5% 5,596 6,443 15.1%
EBDITA margin (%) 7.5% 9.3%   9.7% 7.8%  
Other income 222 167 -24.5% 566 647 14.3%
Interest 255 534 109.5% 747 1,328 77.9%
Depreciation 258 466 80.1% 772 1,152 49.2%
Profit before tax 1,563 1,255 -19.7% 4,642 4,609 -0.7%
Tax 513 423 -17.5% 1,502 1,537 2.3%
Profit after tax/(loss) 1,051 832 -20.8% 3,141 3,072 -2.2%
Net profit margin (%) 4.2% 3.7%   5.4% 3.7%  
No. of shares (m)         750.0  
Diluted earnings per share (Rs)*         6.8  
Price to earnings ratio (x)*         10.8  
*On trailing twelve months earnings

What has driven the performance in 3QFY10?
  • Petronet LNG clocked sales volume of 84 trillion British thermal units (tBtu) in 3QFY10, as compared to 85 tBtus in 3QFY09. Volumes remained flat as GAILís evacuation infrastructure was tied up with Reliance Industriesí D6 gas production. It also achieved regasification volumes of 11 tBtus during the quarter.

  • 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 expanded by 1.8% on the back of lower raw materials costs, which declined by 2.1% YoY (as a % of sales) during 3QFY10.

    Cost break-up
    (Rs m) 3QFY09 3QFY10 Change
    Raw materials 22,576 20,026 -11.3%
    % sales 91.3% 89.2%  
    Staff cost 37 41 12.8%
    % sales 0.1% 0.2%  
    Other expenditure 262 291 11.0%
    % sales 1.1% 1.3%  
    Total cost 22,875 20,358 -11.0%
    % sales 92.5% 90.7%  

  • During the quarter, the company incurred higher depreciation and interest charges due to the commissioning of expansion facilities in July 2009.

  • Petronet LNG has taken delivery of a third Vessel 'Aseem' in November 2009. It is meant for transporting additional 2.5 m tonnes per annum (mtpa) of LNG from Qatar and the first loading was completed on 31st December, 2009.

What to expect?
Going forward, the management expects to achieve volumes growth. Petronet recently doubled the capacity of its Dahej terminal to 10 mtpa. It is building another 2.5 m tonnes a year plant at Kochi. The company gets 7.5 mtpa from RasGas under a long-term LNG deal. It has also signed for 1.5 mtpa of supply from Exxon Mobilís share of Australia's Gorgon project.

At the current price of Rs 74, the stock is trading at a multiple of 10.8 times its trailing 12 months earnings. We believe the implications of the impending shift in the supply structure of gas in India will be negative for the company, and as such the stock is fairly valued at the current juncture.

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