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Petronet LNG: Margins continue to slip
Jul 20, 2009

Performance summary
  • Topline grows by 59% YoY during 1QFY10 on the back of higher volumes.
  • EBITDA margins decline to 7%, from 12% in 1QFY09.
  • Other income rises by 73% during 1QFY10.
  • Bottomline registers a decline of 2.2% YoY due to erosion in operating margins.


Standalone financial snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 16,459 26,124 58.7%
Expenditure 14,541 24,306 67.2%
Operating profit (EBDITA) 1,918 1,818 -5.2%
EBDITA margin (%) 11.7% 7.0%  
Other income 167 288 73.2%
Interest 251 283 13.0%
Depreciation 255 256 0.3%
Profit before tax 1,578 1,567 -0.7%
Tax 522 534 2.3%
Profit after tax/(loss) 1,056 1,033 -2.2%
Net profit margin (%) 6.4% 4.0%  
No. of shares (m)   750.0  
Diluted earnings per share (Rs)*   6.9  
Price to earnings ratio (x)*   9.9  
*On trailing twelve months earnings

What has driven the performance in 1QFY10?
  • Petronet LNG clocked sales volume of 96 trillion British thermal units (tBtu) in 1QFY10, higher than the 1QFY09 volumes by nearly 22%. It also achieved regasification volumes of 3 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 declined by 4.7% on the back of higher raw materials costs, which increased by 5.4% YoY (as a % of sales) during 1QFY10.

    Cost break-up
    (Rs m) 1QFY09 1QFY10 Change
    Raw materials 14,231 24,020 68.8%
    % sales 86.5% 91.9%  
    Staff cost 39 41 6.0%
    % sales 0.2% 0.2%  
    Other expenditure 271 245 -9.5%
    % sales 1.6% 0.9%  
    Total cost 14,541 24,306 67.2%
    % sales 88.3% 93.0%  

  • 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 68, the stock is trading at a multiple of 9.9 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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