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Petronet: Robust show - Views on News from Equitymaster
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Petronet: Robust show
Apr 17, 2008

Performance summary
  • Topline increases by 19% YoY during FY08.
  • EBITDA margins increases to 13.2%, from 11.8% in FY07. Other income rises by 46% during the year.

  • Bottomline registers a growth of 52% YoY owing to topline growth, margin expansion, higher other income and lower interest expenses.

  • Topline and bottomline grow 14% YoY and 13% YoY respectively in 4QFY08.

  • The board of directors has recommended a dividend of Rs 1.50 per equity share for FY08.

Standalone financial snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 15,388 17,527 13.9% 55,090 65,553 19.0%
Expenditure 13,397 15,378 14.8% 48,609 56,892 17.0%
Operating profit (EBDITA) 1,991 2,148 7.9% 6,481 8,661 33.7%
EBDITA margin (%) 12.9% 12.3% 11.8% 13.2%
Other income 148 179 20.5% 366 536 46.4%
Interest 259 250 -3.4% 1,070 1,024 -4.4%
Depreciation 252 254 0.7% 1,020 1,022 0.1%
Profit before tax 1,629 1,824 11.9% 4,756 7,152 50.4%
Tax 569 623 9.6% 1,623 2,405 48.2%
Profit after tax/(loss) 1,060 1,200 13.2% 3,133 4,747 51.5%
Net profit margin (%) 6.9% 6.8% 5.7% 7.2%
No. of shares (m) 750.0 750.0
Diluted earnings per share (Rs) 6.3
Price to earnings ratio (x) 12.5

What has driven the performance in FY08?
  • Petronet LNG sold 322 trillion British thermal units (tBtu) of natural gas in FY08, up 11% from the 290 tBtu sold in FY07. For 4QFY08, the company sold 80 tBtu of natural gas, up 9% YoY. The company witnessed a 130% capacity utilisation and sold 30 trillion BTUs more than FY07 (which equals 10 cargoes). As a result, topline increased by 19% YoY during FY08.

  • Bottomline registered a growth of 52% YoY due to the higher capacity utilisation, margin expansion, higher other income and lower interest expenses. Efficiencies of scale are reflected in the decline of raw materials cost as well as other expenditure (as a % of sales).

    Cost break-up
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Raw materials 13,198 15,019 13.8% 47,465 55,664 17.3%
    % sales 85.8% 85.7%   86.2% 84.9%  
    Staff cost 29 73 149.1% 121 210 73.9%
    % sales 0.2% 0.4%   0.2% 0.3%  
    Other expenditure 170 286 68.7% 1,024 1,018 -0.5%
    % sales 1.1% 1.6%   1.9% 1.6%  
    Total cost 13,397 15,378 14.8% 48,609 56,892 17.0%
    % sales 87.1% 87.7%   88.2% 86.8%  

  • The company expects to complete the expansion of the Dahej terminal in phases starting October 2008. Its regasification capacity will also go up to 10 million tonnes, but the tanks will be commissioned by January 2009.

  • Petronet LNG has a long term contract with RasGas for 7.5 m tonnes. As far as short-term contracts are concerned, the company acknowledges that the spot market is tight and availability of LNG cargoes and related price pose problems in bringing in more spot cargoes. However, it has a short-term contract for 1.5 m tonnes, which the company hopes to extend in 2009.

  • The funding for the expansion of the Kochi terminal is almost done. Petronet LNG has signed an agreement with IFC Washington. The company needs Rs 8 bn from the market for their various projects. However, if the power project comes up, they will need Rs 30 bn. The company plans to raise debt for these requirements.

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 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 79, implying a price to earnings multiple of 12.5 times its trailing twelve 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 fair levels.

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