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Petronet LNG : Marketing margins decline - Views on News from Equitymaster
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Petronet LNG : Marketing margins decline
Feb 16, 2015

Petronet LNG has announced results for third quarter of the financial year 2014-2015 (3QFY15). The company has reported a 19.4% year on year (YoY) increase in the topline while net profits for the quarter grew by 19.8% YoY.

Performance summary
  • Revenues grew by 19.4% YoY during the quarter.
  • The operating profits for the quarter declined by 2.6% YoY while margins for the quarter stood at 3.0%, down from 3.7% YoY.
  • The net profits for the quarter grew by 19.8% YoY with net profit margins at 1.5%, versus 1.4% in 3QFY14

Standalone performance summary
(Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Sales 93,821 111,985 19.4% 273,198 323,393 18.4%
Expenditure 90,322 108,577 20.2% 262,081 311,217 18.7%
Operating profit (EBDITA) 3,499 3,408 -2.6% 11,117 12,176 9.5%
EBDITA margin (%) 3.7% 3.0%   4.1% 3.8%  
Other income 216 268 24.1% 530 972 83.4%
Interest (net) 783 685 -12.6% 1410 2268 60.9%
Depreciation 1,017 793 -22.1% 2,081 2,337 12.3%
Profit before tax 1,916 2,199 14.8% 8,156 8,543 4.7%
Pretax margin (%) 2.0% 2.0%   3.0% 2.6%  
Tax 560 575 2.7% 2,730 2725 -0.2%
Profit after tax/(loss) 1,356 1,624 19.8% 5,426 5,818 7.2%
Net profit margin 1.4% 1.5%   2.0% 1.8%  
No. of shares (m)         750  
Diluted earnings per share (Rs)*         10.0  
TTM PE*         18.4  
* On a trailing 12 months basis

What has driven performance in 3QFY15?
  • Revenues grew by 19.8% YoY during the quarter. However, there was a sequential decline due to lower capacity utilization this quarter (110% at Dahej terminal ) versus 117% in the preceding quarter. The trading margins declined sequentially but were more in line with the normal margins. One must note that preceding quarter was quite exceptional for the company.

  • The operating margins for the quarter declined to 3.0% from 3.7% in 3QFY14 due to poor spot margins in a declining environment for spot gas prices

    Cost breakup
    (Rs m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
    Cost of materials consumed 89,171 107,272 20.3% 259,151 307,752 18.8%
    as a % of sales 95.0% 95.8%   94.9% 95.2%  
    Employee expenses 106 122 15.2% 271 353 30.3%
    as a % of sales 0.1% 0.1%   0.1% 0.1%  
    Other expenses 1,045 1,184 13.2% 2,660 3,111 17.0%
    as a % of sales 1.1% 1.1%   1.0% 1.0%  
    Total expenses 90,322 108,577 20.2% 262,081 311,217 18.7%
    as a % of sales 96.3% 97.0%   95.9% 96.2%  

  • Net profits for the quarter grew by 19.8% YoY due to lower depreciation and interest expenses, higher other income and lower effective tax rate. Lower effective tax rate was due to the reversal of excess tax provision related to FY 14 (worth around Rs 200 m) this quarter.
What to expect?
As per the management , the expansion at Dahej terminal (from 10 MT to 15 MT) is going as per the schedule and is likely to be completed by November 2016. The management has stated that there is no clarity on the Kochi pipeline issue. For Gangavaram terminal, the company is still working on prospects like consumer commitment and pipeline and actual work is yet to start.

On account of decline in the crude prices, there has been a significant decline in the spot LNG prices, because of which spot LNG is trading at a considerable discount with respect to long term LNG (Ras Gas). However, since the company has back to back contracts with offtakers for the long term Ras Gas, the management is not much worried. It must be noted that the reconciliation for take or pay arrangements happens at the end of the year.

The management has stated that the company has replaced high cost borrowings (+11% cost) with low cost (around 9%) and has been regularly repaying debt. As per the management, post monsoons, GAIL may bring up some volumes at Dabhol terminal which may have slight impact on PLNG volumes.

The company expects additional supplies from Australia to come (in a phased manner) from early 2016. Supplies from US are also expected to come in 2017. Higher supplies are likely to impact prices in a way that will be positive for the end users in a market like India where there is a huge latent demand of gas supplies.

We had recommended investors to Sell the stock of Petronet in August 2014. Since the key issues have not been resolved, we maintain a Sell view on the stock.

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